Benchslaps, Biglaw, Paralegals, Pro Se Litigants, Tax Law

Cleary Gottlieb Associate Gets Benchslapped By Tax Court

Shawn Hynes Shawn T Hynes Cleary Gottlieb Above the Law blog.jpgAs the old adage goes, “A lawyer who represents himself has a fool for a client.” And there is some anecdotal evidence in support of that proposition. See, e.g., Elana Glatt / Elana Elbogen (depending upon how you view the merits of her case against her wedding florist).
Here’s another example of what can happen when Biglaw litigators represent themselves. From TaxProf Blog:

The Tax Court today decided Hynes v. Commissioner, T.C. Summ. Op. 2008-1 (1/2/08), a case involving Shawn T. Hynes, a fifth year securities litigation associate in Cleary Gottlieb’s New York City office. The taxable year at issue was 2003, when Hynes was a Penn 3L (he tranferred to Penn after completing his first year at Oregon).

More about the facts of Shawn Hynes’s case, and how he got benchslapped by the Tax Court, after the jump.

Still from Paul Caron’s summary of the opinion:

Before attending law school, Hynes had worked as a paralegal at Cravath and participated in the firm’s qualified pension plan (QRP). In April 2003, he took a $16,263 distribution from the Cravath pension plan, less $3,252 of withheld income tax. After studying for the California bar over the summer, he started work in September as an associate at Simpson Thacher & Bartlett in Palo Alto.

Hynes reported $51,304 of wage income from Simpson Thacher in 2003, but did not report the pension distribution from Cravath. At trial, he conceded that he should have reported the pension distribution but contested the 10% early distribution penalty:

“Petitioner … argues that he should not be held liable for the 10% additional tax on this distribution on the grounds that his request was based on economic hardship, and an exception for such a request exists under § 401(k)(2)(B)(i). Petitioner testified that the costs of his law school education, coupled with the costs associated with his studying for the bar exam, left him with no viable alternative other than to take a premature distribution from his QRP. Petitioner testified that he used the disbursement to pay school loans, pay credit card bills, and provide for his day-to-day living expenses during the summer of 2003.”

On the one hand: C’mon, Your Honor — didn’t you have law school loans? Doesn’t having to subsist on ramen noodles constitute “economic hardship”?
On the other hand: Hynes went to work for Simpson Thacher after taking the bar. As noted in the opinion, STB provided him with a salary advance, to tide him over until his start date.
And it turns out that Hynes’s case had some other problems, as the IRS helpfully pointed out:

Respondent [IRS] argues that while § 401(k)(2)(B)(i) does provide for hardship distributions from qualified pension plans, that section does not exempt a taxpayer from the 10% additional tax that may apply to such a distribution. At trial, petitioner admitted that he did not research the tax ramifications that might result from his request for a hardship distribution beyond looking at § 401(k)(2)(B)(i). Petitioner also admitted that he could have overlooked and/or misunderstood the 10% additional tax exceptions enumerated in § 72(t)(2).

Upon review of § 72(t)(2), we cannot find any exception that would exempt the distribution made to petitioner in taxable year 2003. Moreover, petitioner admits that his argument that the 10% additional tax should not apply is based on a provision pertaining to the request for disbursement and not, as we are concerned with here, the taxation of such a disbursement.

Oops. And the coup de grace:

The Tax Court also sustained a 20% accuracy-related penalty, concluding that “Petitioner’s argument that he did not remember this distribution at the time he filed his 2003 return because of the extraordinary demands of his job as an attorney is without merit.”

If you bill 3000 hours a year, expect sympathy from your family and friends — but maybe not from the U.S. Tax Court.
P.S. Speaking of Cleary Gottlieb, remember Afrogate? Here’s a little postscript on that hair-raising controversy.
Tax Court: Cost of Law School and Studying for Bar Not Sufficient Justification to Waive 10% Tax on Premature Pension Distribution [TaxProf Blog]
Hynes v. Commissioner (PDF) [U.S. Tax Court]
Glamour Attempts To Negotiate Peace Between Blacks, Bitchy Redheads [Jezebel]

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