December 14, 2010
Dean F. Pace is a veteran Los Angeles lawyer with a national practice representing plaintiffs bringing False Claims Act lawsuits against corporate defendants alleged to have cheated federal and state governments. A press release on his firm’s Website crows about his victories in so-called “qui tam” whistleblower cases over a slew of business heavyweights, including Northrop Grumman, FMC Corp. Fluor Corp. and Waste Management.
But now a U.S. Tax Court judge has ruled Pace himself claimed numerous improper deductions on his own 2001 tax return–which was filed a year late. The amount of additional money he might have to cough up is unspecified but not great–possibly not much more than $100,000. However, the potential for embarrassment is much greater, especially given a judicial finding upholding Internal Revenue Service penalties against Pace on accuracy-related issues and the fact he represented himself and his wife, who is a co-party.
Pace–whose listed office email address actually contains the words “false claims act”–said the ruling was “a very convoluted opinion” that “does not state the facts in the record” correctly. He said he was considering asking the Tax Court for reconsideration but had not yet made a decision.
In a highly entertaining 38-page opinion full of droll understatements and ironic conclusions, Judge Mark V. Holmes ruled for the IRS on 84% of the disputed issues by dollars. In what might be a Tax Court first, the opinion begins with a four-page description of the colorful, 1,000-year history of the Roman Catholic organization now known as the Sovereign Military Order of Malta (flag pictured above). Why? Some of Pace’s claimed deductions and reasoning pertained to his affiliation with the organization, which, the opinion said, had made him a Knight in Obedience. “Pace’s confusion of business, personal and charitable expense is what prompted the IRS to issue a notice of deficiency,” Holmes said.
Much of the litigation centered on Pace’s business use of property, classification of expenses and adequacy of records for 2001. The opinion said he took in more than $1 million in contingency fees that year on more than $2 million in legal settlements.
Take, for instance, his hot car. “While Pace showed that he spent freely on his Jaguar, he failed to demonstrate his business use of the vehicle,” Holmes wrote. “His appointment book does not record the number of miles driven and rarely, if ever, describes the business purpose for a particular entry. Many entries–illegible or containing a single word–fail to describe the purpose of the expense. The credit-car statements prove that Pace spent money on gasoline and car washes, but there is nothing to indicate that these expenses had a business purpose.” The judge added, “Sophisticated attorneys like Pace should know better.”
According to the opinion, Pace similarly failed to document the business purpose of meals and travel. While noting some of the credit card statements made for “engaging reading,” the judge upheld the IRS’s disallowance of $6,800 of “office expense” deductions claimed for prescriptions, clothing, credit-card fees and religious items. Concerning the medications, Pace had testified at trial, “If Dean Francis Pace is not healthy to conduct, a practice [the firm] doesn’t exist.” But the judge said such personal expenses weren’t deductible.
On his 2001 return, Pace claimed a $35,000 deduction for California state income taxes. Holmes upheld the IRS’s decision to nix that on grounds there was no evidence Pace actually paid that amount during that calendar year.
In an apparent effort to avoid income-limitations and phase-outs, Pace tried to deduct as Schedule C business expenses about $200,000 in charitable contributions. Roughly one-third was to the Sovereign Military Order of Malta, to which, Pace testified, “We even take an oath that we will devote our time, talent and treasure.” While finding Pace’s “grand tour through the Order’s medieval and early modern history engaging,” Judge Holmes said none of these expenses could be written off against business income.
Not on his 2001 return but at trial, Pace tried to take a $50,000 bad-debt loss, producing a check for that amount from a former client who fired him and stopped payment. “Pace never reported the $50,000 check as income,” Holmes ruled. “He can’t claim a loss for unpaid fees if they were never included in gross income.”
Holmes upheld an unspecified willful-late-filing penalty and most of a 20% accuracy-related penalty (which Pace, in what the judge called a “novel defense,” blamed on the IRS for not settling the case in advance of trial). However, Holmes rejected the IRS’s call for additional penalties due to negligence or delay from pressing groundless claims. While noting the case led to a week-long trial and a 760-page transcript–both very unusual in Tax Court, where almost all cases are resolved by pre-trial settlement or decided on legal briefs–the judge called Pace’s effort permissible “aggressive advocacy.”
The jurist, a seven-year veteran of the Tax Court appointed by President George W. Bush in 2003, concluded his opinion on a philosophical note:
In the best of all possible worlds, perhaps, Pace’s pursuit of the unified life would be recognized and rewarded. See, e.g., Pope Paul VI, Pastoral Constitution on the Church in the Modern World–Gaudium et Spes sec. 43 (December 7, 1965). But the [Tax] Code imposes a more exact and less merciful accounting: business expenses, charitable contributions, and the costs of everyday life must be identified, segregated, and substantiated by reliable documents and credible testimony.