Paul L. Caron

Wednesday, July 8, 2009

Judge Sotomayor's Law Practice: A Tax Dodge?

New York Times:  Little Information Given About Solo Law Practice Run by Sotomayor in ’80s, by Serge F. Kovaleski:

Judge Sotomayor has explained very little about one facet of her legal life: Sotomayor & Associates, the solo law practice she ran out of her Brooklyn apartment for several years in the 1980s.

In her questionnaire, Judge Sotomayor says she was the “owner” of Sotomayor & Associates, which she described as a consulting business she operated on the side from 1983 to 1986. During this period, she also worked, first for the Manhattan district attorney’s office and then as a member of Pavia & Harcourt, a large firm in Manhattan. ...

White House communications officials said the judge no longer had copies of the tax returns that listed the income, and any deductions, that she attributed to her outside work.  ...

White House spokesman Ben LaBolt ... said that Ms. Sotomayor came up with the name when she was filling out her tax returns. “It was necessary to list a name for the practice on her tax returns,” he said.

Tax experts say there was nothing in the law that requires a lawyer, or any other self-employed person, to create a corporate name to report income, or deductions, on the standard form, known as a Schedule C. Just one’s own name will do. But Mr. LaBolt pointed out that the 1983 copy of the form asked the filer to list his or her “business name.” “Significant time was not spent in choosing a name,” he said.

(Hat Tip:  InstaPundit:  "So maybe that on-the-side private law practice was just some sort of a tax dodge. That would make it okay, right?")

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Ummm... is there anything in the story that serves as a basis for your headline's insinuation? or are you just repeating Glenn Reynolds' speculation?

Posted by: scarpy | Jul 8, 2009 6:29:57 AM

Did Sotomayer have income as a sole proprietor when she worked at the DAs office or at P&H or was this between jobs? Also did she show on her Schedule C a home office deduction and did she produce a net loss? I think we need to know the answers to those questions. I have a problem with her using the terms Associates as her business name but at this point that is trivial.

Posted by: Clinton | Jul 8, 2009 7:23:23 AM

So long as it was a legal tax dodge, what's the problem?

Posted by: rosignol | Jul 8, 2009 7:35:30 AM

Scarpy is right, the only time insinuation is allowable is if the target is a Republican. See Andrew "Demento" Sullivan re:Trig Palin, or Dan "But It's Printed on Real Paper" Rather re: GW Bush\TANG, or Clarence Thomas re: Confirmation Hearing, or, well, I could go on until the sun burned out, but you get the point...

Posted by: zipity | Jul 8, 2009 7:45:01 AM

So what you're saying is that expenses that couldn't be deducted as an employee or that would only be itemized deductions as an employee could be fully deducted on a schedule C and reduce AGI?

I guess the question would be whether she had significant revenue from the Schedule C business and whether or not she turned a profit. Start-ups often don't earn a profit in the early years. How many years did she report business income?

As much as I dislike Sotomayor this seems to be one of those things that could be interpreted either way.

Posted by: mike | Jul 8, 2009 7:46:20 AM

"White House communications officials said the judge no longer had copies of the tax returns..."

Doesn't the IRS have copies of these tax returns? Whenever I refinance my mortgage, part of the standard list of documents that I sign is a form 4506, to order back copies of my tax return.

Posted by: Bob | Jul 8, 2009 7:48:33 AM

I really have a hard time following the point either here, or in the NRO bit.

Maybe you lawyers are just too smart for us rubes. I don't see anything here.

Posted by: Sean | Jul 8, 2009 8:26:49 AM


Sotomayor did lie about how many associates she had. At least to anyone who saw her letterhead or business name. So giving her some scrutiny and asking 'tax dodge"? is appropriate.

As you note, it's just speculation because we haven't been given any information about this business. We don't even know how many clients she had or that it was kosher with her DA.

And really, it an Obama appointee actually did pay their taxes, it would be newsworthy in and of itself. Obama and Sotomayor brought this on itself.

We all know there are many liberal women who are smarter and better versed on the basics of the law than this judge... recently rebuked to some extent unanimously by the Court. The sad reason that Obama picked Sotomayor over them is not that she's a woman or hispanic, but because she can be controlled. In the same way her doppleganger, Harrier Miers was controllable in a way Alito isn't.

Posted by: Deirdre Ewing | Jul 8, 2009 8:27:10 AM

Two questions:

1) Is there a mechanism by which this could be used to dodge taxes, and
2) Would the tax reform act of 1986 have eliminated it (thus obviating the usefulness of said firm)?

Posted by: Calvin | Jul 8, 2009 8:43:41 AM

Scarpy - Per the White House spokesman (presumably speaking on her behalf), she came up with the business while filing her tax return, so we know it was tax-motivated. Do you think she created the business in order to increase the amount of taxes that she paid? That seems unlikely.

Posted by: William Dexcente | Jul 8, 2009 8:48:02 AM

“Any one may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which will best pay the Treasury. There is not even a patriotic duty to increase one’s taxes.”

Lerned Hand in Helvering v Gregory, 69 F. 2d 809 (1934)

Posted by: NotALawyer | Jul 8, 2009 12:08:56 PM

The NYT article linked makes it clear that while she was an assistant DA, office policy forbade employees from earning outside income, tho she could give legal advice for free.

Thus, either (1) She was earning money unethically on the side, or, more likely, (2) She was not earning income but was illegally deducting expenses such as, perhaps, a home office.

I'll repeat commentor Bob's question:

"Doesn't the IRS have copies of these tax returns? Whenever I refinance my mortgage, part of the standard list of documents that I sign is a form 4506, to order back copies of my tax return."


Ms. Sotomayor’s outside work was approved, she said through a spokesman, by the Manhattan district attorney’s office, which has a policy that governs such work. Although the White House said Judge Sotomayor earned income in 1983, a spokeswoman for the district attorney’s office, Alicia Maxey Greene, initially said that the office did not allow prosecutors to charge for outside work. Generally, they were only allowed to help friends and family for free on a case-by-case basis.

Several former members of the office said they remembered the policy as being quite clear. “We were expressly prohibited from having a law practice on the side,” said Katharine Law, a friend of the judge who worked with her at the time.

But District Attorney Robert M. Morgenthau said subsequently that his spokeswoman had been wrong and that the office had been quite liberal at the time in approving outside work by staff, even if they charged fees.

Posted by: Eric Rasmusen | Jul 8, 2009 1:16:59 PM

As the owner of a small tax return preparation business and an Enrolled Agent, it is against the IRS law for me to advertise my business using the word "& Associates" next to my name in order to give it the appearance of there being more tax preparers in my business besides myself.

Posted by: Taxpreparer | Jul 8, 2009 2:03:13 PM

do the laws in her state permit her to practice in two separate legal capacities--i think not

Posted by: bob | Jul 8, 2009 2:40:54 PM

It is common practice (don't know why, but it is) for sole practitioners of law to use the "& Associates" tag. Lead lawyers with associates commonly omit the tag, and just say "Law Offices of So-and-So".

This means nothing in of itself. Strange she would have a side practice while serving as an ADA; someone should check into the actual rule at the time - the conflicting "recollections" are troublesome.

Posted by: Associates | Jul 8, 2009 2:47:17 PM

Hmmm. In Kansas, it's a violation of the ethical rules pertaining to attorneys to say that you practice with "So-and-so and Associates" if there are, in fact, no associates. Wonder if the good Judge committed an ethical violation in New York.

Posted by: TM | Jul 8, 2009 3:25:35 PM

Unless she actually employed "Associates," using "Associates" in the firm name is a violation of professional ethics.

Posted by: Scoff | Jul 8, 2009 4:17:20 PM

I see this as a problem with respect to her employment by the law firm, not by the DA's office. A lawyer who is employed by a law firm has an obligation to practice under the law firm's umbrella. Fees paid by clients should be paid to her employer, not to the lawyer individually. What she did appears to be the diversion of a corporate opportunity to her own benefit.

Posted by: yclipse | Jul 8, 2009 4:57:29 PM

Does this surprise anyone?

Posted by: PatriotK | Jul 8, 2009 5:43:55 PM

Judge Sotomayor should fit right in with all the other sleezy characters Obama has picked so far. With this administration, failure to pay taxes is always a plus - and of course the press never finds fault with any liberal - they're given a special pass, just like Teddy Kennedy received after Chappaquidic.

Posted by: Jim | Jul 9, 2009 8:27:43 AM

There is also a legal ethics issue arising from naming her solo law practice "Sotomayor & Associates."

In most states (I do not know specifically about NY), attorneys cannot name their practice "& Associates" unless they have at least one attorney associate working for them.

Posted by: Neal | Jul 9, 2009 11:54:10 AM