The BLT: The Blog of Legal Times

IRS Fraud Cases Against Tax-Exempt Organizations on the Decline

With more than $3 trillion in assets, tax-exempt organizations are big business. For the Internal Revenue Service, ferreting out criminal tax fraud in the sector is no easy task.

A report released today by the Treasury Department’s Inspector General for Tax Administration details some of the problems the IRS has in managing such cases, which have declined in the past three years and tend to yield low rates of conviction.

In a separate report also released today, the inspector general urged the IRS to crack down on section 527 tax-exempt political organizations that don’t file timely or complete reports.

The IRS estimates there are approximately 1.8 million tax-exempt organizations in the United States. Between 2007 and 2009, the IRS initiated 87 tax-exempt investigations -- less than one-half percent of total investigations during that period. But the report noted that “While the number of cases and the percentage to the total of all investigations has declined, the percentage is consistent with the percentage of tax returns filed by tax-exempt organizations.”

The report also found that tax-exempt investigations are not as successful as other kinds. Defendants in tax-exempt investigations were ultimately convicted or pleaded guilty 35% of the time. The conviction rate for all investigations is about 53%.

The defendants in the successfully prosecuted tax-exempt cases were sentenced to an average of four years and three months in prison, and in total were ordered to pay nearly $41.2 million in tax assessments, fines, restitution, court costs and forfeited property

Victor Song, chief of the Criminal Investigation Division, responded in a letter that the conviction rate for tax-exempt cases is actually 81.8% if measured by the percent of adjudicated cases that result in convictions. He also disagreed with the inspector general’s recommendation to modify how data is tracked.

In the report on tax-exempt 527 political organizations, the inspector general urged the IRS to be more aggressive in fining groups for filing late or incomplete forms. The IG estimated the IRS could collect $5.3 million in additional penalties by doing so.

“The assessment of taxes and penalties for incomplete filings, when appropriate, could lead to increased accountability and disclosure by political organizations,” the report states.

Trial Date Pushed Back in Deadly Metro Train Crash Suit

The case against Washington Metropolitan Area Transit Authority and other defendants over last year's deadly train crash will not go to trial until January 2012, a federal judge said in court Tuesday.

The trial in the suit had been scheduled for September 2011, but Judge Reggie Walton, at the request of the defense lawyers, pushed back the expected start date. Walton continued the trial reluctantly and said he does not intend to postpone it any further. The final National Transportation Safety Board report, which one lawyer called a “blueprint” for the case, was released last month.

Walton’s decision comes amid the addition of new defendants, including a WMATA contractor, ARINC Inc., the Maryland-based communications and engineering company. The plaintiffs allege ARINC was involved in the design and manufacture of an automatic train control system. Walton said in court he did not want to be “unreasonable” to newly named defendants.

The bulk of yesterday’s hearing centered on a dispute between the defense lawyers and plaintiffs’ counsel over the timing of depositions and the production of hundreds of thousands of documents tied to the June 22 crash on the Red Line near the Fort Totten station. Eight passengers and one of the train operators were killed.

A lead attorney for the plaintiffs, Patrick Regan of Washington’s Regan Zambri & Long, said in court yesterday that depositions should begin in October and run through December. He said the plaintiffs’ attorneys are expecting upwards of 30 depositions of WMATA employees, witnesses and non-party emergency responders.

WMATA’s chief counsel, William Gandy, managing partner of the Virginia office of Wilson Elser Moskowitz Edelman & Dicker, said depositions this fall are premature because the defendants are still reviewing and producing documents. Gandy said a complete disclosure of documents is expected by Nov. 1.

Regan called the September 2011 planned trial date a compromise and argued against pushing the case back until 2012. “This is not a complicated case. We know what happened here,” Regan said in court. “The NTSB did an exhaustive report.”

Another status hearing is set for October, and mediation is set for November.

Jack Kilpatrick, the Supreme Court, and Free Expression

Obituaries of conservative commentator James Kilpatrick, who died at the age of 89 on Aug. 15, inevitably focused in part on his role as a Richmond newspaper editor in the "massive resistance" to school desegregation after Brown v. Board of Education in the 1950s. As we wrote in a story in the Supreme Court Insider newsletter last week, that aspect of his past cannot be ignored. (You can sign up to receive the newsletter here.)

But Kilpatrick has also been remembered for more recent, less inflammatory accomplishments in writing about the Supreme Court, as the story indicated, and in his advocacy for freedom of expression.

In his later years, Kilpatrick gave up his conservative column and wrote a regular column about the Supreme Court, which he had once called "the love of my newspaper life." Even before the column, he was long a familiar and friendly face in the Supreme Court press room as he eagerly looked for under-reported cases to write about.

Asked for her thoughts about Kilpatrick, longtime NPR Court and legal affairs correspondent Nina Totenberg offered these comments:

"Jack was proof that people are not necessarily stuck in time. He was such a decent sort by the time I knew him that I really couldn’t fathom his one-time advocacy for segregation. And when we finally had a discussion about it, I realized that he was deeply emabarrassed by the opinions he had once so firmly held. When I met him as a young and nobody reporter, he was endlessly generous and gracious to me. In an era when women were a rarity in the press corps, he was among the few who welcomed me to the beat, helped me, and didn’t make me feel stupid, though I certainly was. He was the quintessential gentleman, and I will miss him very much."

In his writings and in his life, Kilpatrick was also a strong supporter of the First Amendment. He was a founding member of the board of trustees of the Thomas Jefferson Center for the Protection of Free Expression, serving from 1990 to 2004. In mourning his death, the center put this quote from Kilpatrick up on its web site:

"The Idea of individual liberty lies at the very heart of the American dream. In a very real sense, it is our national religion, and like other religions it is fearfully difficult to practice. It is not easy to be a good Christian, a good Jew. The tenets of faith are demanding. Many persons find it impossible to believe deeply—really, truly, to believe—in matters of doctrine. But as professing members of a church they have an obligation to try. So it is with freedom. Do we really believe in it? Really, deeply, believe in it? Do we believe in freedom sufficiently to tolerate the expression of political opinions we find intolerable? We must try."

Alan Morrison, the former director of Ralph Nader's Public Citizen Litigation Group and now an associate dean at George Washington University Law School, recalled a written exchange he had with Kilpatrick as far back as 1976 about freedom of speech.

Kilpatrick had written a column approving of lawyer advertising and of two Supreme Court decisions that were opening up the legal profession and other businesses to competition. Morrison wrote Kilpatrick to note that both cases had been handled by his Nader-affiliated group. "Since it is not often that James J. Kilpatrick and Ralph Nader's Public Citizen are in agreement, I thought I might call that phenomenon to your attention."

A few weeks later, Kilpatrick wrote back indicating this alliance had given him pause. "I confess I had not been aware of your role in Goldfarb [v. Virginia State Bar] and Virginia Pharmacy [Board v. Virginia Consumer Council], two cases I greatly approve of. This has given me something to think about. I sill think I'm right."

The Morning Wrap

Rejected Vaccine: The New York Times reports federal regulators rejected the mandatory vaccination of hens against salmonella on the ground there was not enough evidence to conclude that vaccinating would prevent people from getting sick. In Britain, the vaccination program has been a success. Industry experts say the lack of a mandatory vaccination program in the United States weakens egg safety rules.

Ethics Rule Stands: A federal appeals court has upheld the Indiana state judicial code of conduct, which has come under fire from a right-to-life group, The National Law Journal reports. The ethics rule rule that prohibits judges from identifying their views on abortion. The U.S. Court of Appeals for the 7th Circuit affirmed on a technicality a lower court ruling.

Rise and Fall: The Washington Post examines the history of the former Minerals Management Service and its partnership with the oil industry. MMS, dismantled and reshaped following the oil rig explosion and leak in the Gulf of Mexico, has adopted at least 78 industry-generated standards as federal regulations.

Bridge Collapse Settlement: More than one hundred plaintiffs participating in a novel 17-firm pro bono suit were connected to a $52.4 settlement last weekend in the case over the August 2007 Minneapolis bridge collapse, The National Law Journal reports. The settlement covered the gap between special masters' calculations of each victim's total damages and other payouts. Chris Messerly, a partner at Minneapolis-based Robins, Kaplan, Miller & Ciresi who helped lead bono consortium, conducts a Q-and-A with the NLJ.

Stem Cell Ruling: The U.S. Justice Department is planning to appeal this week's ruling blocking the administration from funding additional embryonic stem cell research.

Arnold & Porter Associate Charged With Possession, Production of Child Pornography

Joshua Gessler, 41, an Arnold & Porter associate in the firm’s Northern Virginia office, has been charged with five counts of possession of child pornography and one count of production of child pornography.

According to a news release from the Fairfax County Police Department, the investigation began after the department received a report that a 15-year-old Centreville-area girl had run away from home. Through the course of the investigation, detectives discovered that Gessler reached out to the girl online. Gessler allegedly met the girl in person and took photos of her that the police department says were “of a sexual nature.” He later allegedly transmitted them electronically.

Gessler’s case has been set for trial on Sept. 9 in the Fairfax County Juvenile and Domestic Relations District Court. Court officials said he was being prosecuted in juvenile court because the victim was a minor.

According to a cached version of his online biography, which Arnold & Porter has since taken down, Gessler was a member of the corporate and securities practice and focused on mergers, acquisitions, asset purchases, joint ventures, private placements, capital markets transactions, and private equity and hedge fund formation and regulation matters. He earned his J.D. from the George Mason University School of Law in 2000. The biography says he was an adjunct professor at George Mason’s law school from 2007 until 2009 and taught securities law and regulation. He was not scheduled to return this fall.

An Arnold & Porter spokesperson declined to comment on the arrest.

Gessler is being represented by Peter Greenspun, a name partner at Greenspun, Shapiro, Davis & Leary in Fairfax. Greenspun did not return calls for comment.

Judge in Roger Clemens Case Wants Spring 2011 Trial

No trial date has been set for the Roger Clemens perjury case, but the federal judge in Washington who was assigned the matter said today he is hopeful the former pitcher will stand trial by spring 2011.

Judge Reggie Walton of the U.S. District Court for the District of Columbia brought up the Clemens prosecution this afternoon at a hearing in an unrelated matter.

When Walton (at left) noted to the lawyers in the courtroom how he’d picked up the Clemens case, one of the attorneys said, loudly, “congratulations.” The remark drew laughter in the crowded room on the sixth floor of the E. Barrett Prettyman U.S. Courthouse in downtown Washington.

Walton called the Clemens case an “intangible” on his schedule and said it is his hope the trial will happen by this spring. He said he should know more about scheduling in the Clemens case in a week or so. An arraignment date has not been set. Clemens was indicted last week on charges that including lying to Congress about steroid use.

The timing of the Clemens trial—if Clemens in fact goes to trial—could impact an unrelated high-profile civil case pending before Walton. In that case, the Washington Metropolitan Area Transit Authority is being sued for last year’s subway train crash that killed nine people and injured more than 75 others. Walton's remarks came today during a hearing in the WMATA case.

Yesterday, Walton issued a gag order in the Clemens case, citing public remarks from certain parties involved in the matter, including Clemens himself.

National Law Journal photo by Diego M. Radzinschi.

Nickles Group Signs National Oilwell Varco

The Nickles Group has registered to lobby for National Oil Varco, a supplier of mechanical components for land and offshore drilling rigs.

The Houston-based company has never before registered to lobby, though it is a member of the American Petroleum Institute, a trade association that represents the oil and gas industry. The registration, filed last week, said the Nickles Group will be lobbying on issues affecting the oil and gas industry and the manufacturing of equipment used in the oil and gas industry. It comes as Congress considers several legislative responses to the BP oil spill in the Gulf of Mexico.

The Nickles Group did not immediately respond to a request for comment. The lobbying team for National Oilwell Varco includes former Sen. Don Nickles (R-Okla.).

Pepper Hamilton Sues FDIC

Philadelphia-based Pepper Hamilton has filed suit against the Federal Deposit Insurance Corp. in federal court, alleging that the agency is trying to improperly downgrade legal fees the firm charged to a Utah bank before the bank was placed in an FDIC receivership.

According to the firm’s complaint, filed in the U.S. District Court for the District of Columbia on Aug. 20, lawyers for Pepper Hamilton provided a wide range of bankruptcy, tax, and corporate governance counseling to Advanta Bank Corp. during an “extraordinary and unusual” time period.

The complaint says that Advanta was the subject of repeated supervisory actions and had some of its major business lines discontinued for supervisory reasons. The complaint also says that almost all of the bank’s directors abdicated their positions and its parent company declared bankruptcy. As a result, the complaint says, the FDIC became “very active” in the day-to-day oversight of Advanta.

The complaint says that Advanta ran up more than $260,000 in legal fees and that much of the work performed by Pepper Hamilton was performed either under the direction of the FDIC or with the agency’s knowledge.

On March 10, the Utah Department of Financial Institutions closed Advanta and appointed the FDIC as its receiver. On April 9, Pepper Hamilton submitted a proof of claim to the FDIC, claiming that the firm was owed $139,232 as an administrative claim and an additional $121, 105 as an unsecured claim, for a total of $260,337. The firm also argues that it is owed interest.

On June 25, the FDIC responded by saying that Pepper Hamilton’s claims for legal fees for services rendered after the receivership date – a total of $5,733 – were denied. The FDIC said the rest of the legal fees, amounting to $254,603, would be allowed as a general unsecured claim, which means that their claim for legal fees had a much lower priority and might not be paid at all.

Pepper Hamilton’s complaint, which is signed by Matthew Foster, a Washington-based associate, alleges that by determining that the legal fees were an unsecured claim, the FDIC had “violated [its] statutory duty to pay all valid claims in accordance with the FDI Act.” The complaint alleges that the FDIC unjustly enriched itself by determining that the fees deserved a lower priority.

The complaint asks that a judge issue an order declaring that Pepper Hamilton’s fees are valid. The complaint also asks that the FDIC-receiver be ordered to pay $206, 530 as an administrative claim, which would ensure that those fees are paid, and $53,807 as a general unsecured claim. In the alternative, the complaint argues, the FDIC’s disallowance of the claims made after the receivership and its deeming other claims as unsecured should be declared void.

Foster and the Pepper Hamilton’s chair, Nina Gussack, did not immediately return calls for comment.

Last week, JPMorgan Chase also filed suit against the FDIC in the district court, alleging that the agency improperly denied JPMorgan’s effort to recoup losses it suffered when a different bank went under.

U.S., Russian Patent Offices Strike Fast-Track Deal

The U.S. Patent & Trademark Office and its equivalent in Russia are launching a one-year pilot program on Sept. 1 to fast-track each other's approved patent applications.

Such "Patent Prosecution Highway Programs" allow patent offices to use each other's work to help process applications more quickly.

The PTO’s pilot program with Russia’s Federal Service for Intellectual Property, Patents and Trademarks of the Russian Federation, or Rospatent, means that an applicant receiving a favorable ruling from one nation's patent office on at least one claim in an application may request that the corresponding application filed with the other nation be fast-tracked for examination.

PTO Director David Kappos in a statement called the program “an important step toward the goal of maximizing reutilization of work done by other offices.”

Rospatent Director General Boris Simonov said the arrangement would help reduce the “backlogs of unexamined patent applications as well as establishing international standards of carrying out patent search and examination.”

The PTO first began patent highway programs in 2006, and has similar arrangements in place with foreign patent offices including Japan, Korea, the European Union, Canada and Australia.

The Morning Wrap

Grounded Rocket: Judge Reggie Walton of Washington federal district court won't stand for any more public comments in the perjury case against former pitching star Roger "Rocket" Clemens, The National Law Journal reports. Walton, expressing frustration about ongoing extrajudicial remarks in the case, yesterday issued a gag order. The Washington Post has this write-up.

Research Funding Blocked: The top federal district judge in Washington yesterday temporarily enjoined the Obama administration from funding human embryonic stem cell research, saying that funding for such programs violate federal law, The National Law Journal reports. Click here for The Washington Post piece and here for The New York Times write-up. The Times reports the ruling came as a shock to the National Institutes of Health and to universities across the country.

Moving On: The National Law Journal is reporting that five Hogan Lovells intellectual property partners have jumped to DLA Piper's Los Angeles office. Hogan Lovells' co-chief executive officer J. Warren Gorrell Jr. said the departures were due to client conflicts.

Bank Settlements Criticized: Federal district judges are increasingly sounding off on settlements between the government and banks, The New York Times reports. Last week, two judges in the U.S. District Court for the District of Columbia criticized deals. In one case, Judge Ellen Segal Huvelle refused to approve an agreement between the government and Citigroup. That same week, Judge Emmet Sullivan grilled Justice Department prosecutors about whether the government had brokered a "sweetheart" deal with London-based bank Barclays.

Diversity Discussions: Dewey & LeBoeuf has been sending letters to general counsel encouraging them to consider outside counsel that can offer teams of diverse partners to work on client matters, The New York Law Journal reports via Law.com. Lawyers said it is rare for law firms to suggest to clients ways in which to promote diversity.