CPA's Notation About Client's Foreign Earnings Is Admissible in Client's Trial

(Parker Tax Publishing October 2021)

A district court held that a single-page document created by a CPA, with respect to a question the CPA asked a client for whom she was preparing a tax return, was admissible in a trial in which the government alleged that the client failed to report foreign income on his tax returns. The admissibility of the document, the court said, could potentially be offered to demonstrate: (1) the client's intent to lie about his foreign income when asked by his accountant; and/or (2) the client's reason for ending his professional relationship with the CPA firm, i.e., a decision to cease using the firm's services after inquiry into foreign earnings that prompted him to lie. U.S. v. Morris, 2021 PTC 301 (E.D. Ky. 2021).

Background

Before 2010, Randolph Morris was a professional basketball player in the National Basketball Association. In 2010, he signed a contract with the Bejing Ducks basketball team and became a player in the Chinese Basketball Association. According to an indictment filed in the Eastern District Court of Kentucky, (1) on October 14, 2010, Morris received two payments under his employment contract totaling $99,942; (2) Morris's employment with the Bejing Ducks continued on a seasonal basis through 2017 and he received salary and bonuses of more than $13 million during that period; (3) Morris filed state income tax returns as a full-time resident of Kentucky using Form 740, Kentucky Individual Tax Return, for tax years 2011 through 2017; (4) Morris filed Form 1040s and 1040As for tax years 2010 through 2017; and (5) although Morris earned income as a basketball player in China, he listed none of that income on his Kentucky Form 740 or IRS Form 1040 or 1040A tax returns. Morris is scheduled to go on trial as a result of the indictment.

Before the trial, Morris and the government reached a stipulation regarding the admissibility of various business records under Rule 803(6) of the Federal Rules of Evidence. In addition, the government asked the court to allow it to admit other documents not subject to the stipulation as business records under Rule 803(6). The government produced Rule 902(11) certifications in connection with these records for self-authentication purposes. The first document the government asked the court to admit was a single-page document created by Morris's accountant during the preparation of his 2010 tax return. The document is a printed online news article captioned "Former Wildcat Randolph Morris Shines in Beijing Debut." The document bears the following handwritten note: "Per Randolph - he did not receive any foreign income untill [sic] 2011 ... MLA 8/18/11 11:00am". The news article was published on December 12, 2010, but ostensibly printed on August 18, 2011, according to the URL line at the bottom of the printed page. The government explained that CPA Miranda Aavatsmark of the Lexington, Kentucky accounting firm Switzer, McGaughey & King, PSC (Switzer) located the article online while preparing Morris's 2010 federal and state tax returns on August 18, 2011. According to the government, Morris had not told Aavatsmark about any 2010 professional basketball earnings in China, and she called him to ask about the article. Aavatsmark's notation on the printed news article reflects that Morris stated during their phone call that he had not received foreign income until 2011. Morris did not return to Switzer for assistance with his subsequent year tax returns.

The government produced the certification of Daniel King, CPA, a "records custodian/employee" at Switzer, which attested to the Rule 803(6)(A)-(C) compliance of the "notes made from conversation with client" and itself demonstrated compliance with Rule 902(11). In addition to the note's compliance with Rule 803(6), the government contended that Aavatsmark's handwritten notation was not hearsay insofar as it was not being offered to prove the truth of the matter asserted by Morris according to the note, i.e., that he did not receive foreign income until 2011, but rather to demonstrate the falsity of this statement. And to the extent Morris objected that the notation was being offered to demonstrate that he provided Aavatsmark the explanation she recorded, the government argued that the notation was an opposing party statement and not hearsay under Rule 801(d)(2) of the Federal Rules of Evidence. The government also argued that the mere presence of the handwritten note on the printed article does not preclude admission as a business record.

Morris objected to the document being admitted. He argued that the government's point about proving the falsity of his statement to Aavatsmark went to the truth of the matter asserted. He also contended that King's certification was suspect because King instructed Aavatsmark how to document her conversation with Morris and because investigators obtained the article and accompanying note from another employee of Switzer, Jenny Morrison. Morris suggested that the document failed to meet the business records exception because it was not a memorandum and it could not be said to have been "maintained in the regular course of business or a regular practice of the firm" due to its uniqueness.

Analysis

The district court agreed with the government that the document was admissible. The court found the government's arguments regarding the admissibility of the accounting firm document persuasive for several reasons. First, the court noted, King certified under penalty of perjury that he was a records custodian, that he was familiar with how the records were created, managed, stored, and retrieved and that it was the regular practice of Switzer to make and maintain such records. Second, the court noted, the certification met the requirements of Rule 902(11) and indicated Rule 803(6)(A)-(C) compliance. Rule 803 of the Federal Rules of Evidence provides exceptions to the rule against hearsay. One of those exceptions is Rule 803(6) which applies to records of a regularly conducted activity (i.e., the business records exception).

Additionally, the court observed, Morris is being charged with filing a false IRS Form 1040 for tax year 2010 because he allegedly did not report foreign income on that return. Thus, if the substance of what Morris purportedly said is at issue in the trial, his remark to Aavatsmark about the lack of 2010 foreign income would be false. It would not, the court said, be offered to prove the truth of the matter asserted and would not be hearsay.

The court found that, if the statement is offered to prove, as Aavatsmark recorded, that Morris made this statement, then it would be an opposing party statement under Rule 801(d)(2)(A). It could, the court said, potentially be offered to demonstrate: (1) Morris's intent to lie about his foreign income when asked by his accountant; and/or (2) Morris's reason for ending his professional relationship with Switzer, i.e., a decision to cease using the firm's services after inquiry into foreign earnings that prompted him to lie. Further, the court said, the presence of the handwritten note on the article did not place it outside the ambit of the business records exception.

The district court noted that, in Hoselton v. Metz Baking Co., 48 F.3d 1056 (8th Cir. 1995), the Eighth Circuit found the written notes of an accountant concerning the non-hearsay statements of another during meetings fell within the business records exception where (1) it was the practice of the accountant to take such notes; (2) the notes were initialed and dated; (3) the accountant was acting in his capacity as accountant and consultant for his client and had duties to his client that would motivate him to make accurate notes and file them properly; and (4) the notes were located in the appropriate file in his office. This demonstrated to the district court that it was not so unique or unusual for accountants to take notes relevant to their clients that such notes necessarily fail to meet the business records exception. Between the substance of the note itself and the Rule 902(11) certification, the court said, the circumstances of Hoselton would pertain to the document at issue. And contrary to Morris's assertions, the court concluded, the document bore no hallmarks of untrustworthiness. Indeed, the court said, the computer-generated date in the URL line of the printed article was the same date as that written by Aavatsmark in the note itself: August 18, 2011. To the court, this provided evidence that Aavatsmark printed the article on that date, called Morris, and recorded his response in an initialed and dated note for the firm's records. The court concluded that Morris had not demonstrated a lack of trustworthiness and thus the article bearing Aavatsmark's note was admissible.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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