Judicial Notice (10.28.23): Abandon All Hope
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How was your week? Mine was good. I didn’t have to travel, I made it to the gym a few times, I cooked dinner on three nights, and I hung out with our ridiculously cute baby.
I recorded a new episode of Movers, Shakers & Rainmakers. Zach Sandberg and I interviewed the incredibly insightful Anastasia Boyko, director of non-J.D. programs at the University of Utah’s S.J. Quinney College of Law. I had been wanting to interview Anastasia—a longtime friend, fellow Yale Law School alum, and architect of the Tsai Leadership Program at YLS—for quite some time, and she did not disappoint. Check out the episode for insights into leadership and innovation, which she has been bringing to the legal world for two decades.
Now, on to the news.
Lawyer of the Week: Fani Willis.
The most talked-about lawyer was the new Speaker of the House, Rep. Mike Johnson (R-La.). He graduated from LSU for law school; worked for the super-conservative Alliance Defending Freedom, litigating against abortion and same-sex marriage; and played a prominent role in trying to flip the 2020 election, including recruiting House members to support Texas’s ill-fated challenge to the election procedures of various states not named Texas.
But in terms of lawyers in the news for their work as lawyers, let’s discuss Fani T. Willis, District Attorney for Fulton County, Georgia. I was initially skeptical of her sprawling criminal case against former president Donald Trump and 18 co-defendants. It seemed too ambitious, too broad, too complicated—or, to use a legal term of art, a hot mess. And the idea she floated of taking all 19 defendants to trial at the same time, as early as March 2024, seemed…
But now that Willis has racked up some impressive guilty pleas, rolling up defendants like a private-equity fund picking up medical practices, I might have to confess error. Just days after cutting plea deals with Sidney Powell and Kenneth Chesebro, two leading lawyers in the effort to overturn the 2020 election, Willis obtained a guilty plea from a third member of the so-called “elite strike force team”—Jenna Ellis, who actually coined that term.
Ellis pleaded guilty to a felony charge of aiding and abetting false statements and writings. Like Powell and Chesebro, she was sentenced to probation (read: no prison), ordered to pay a few thousand dollars in restitution, and required to cooperate with the prosecution as the case proceeds. Unlike Powell and Chesebro, Ellis expressed serious remorse, declaring in open court that “if I knew then what I know now, I would have declined to represent Donald Trump.”
Having secured guilty pleas and promises to cooperate from four defendants—Powell, Chesebro, Ellis, and Georgia bail bondsman Scott Hall, accused of conspiring to illegally access voter data—Willis has built significant momentum for her case. I expected the lawyers to be some of the last dominoes to fall, and instead they turned out to be among the first—which suggests that Willis should eventually be able to get a high percentage of the 19 defendants to plead. And as high-level players in the scheme, the attorneys could have incriminating information on Trump.
Would these pleas have happened if Team Trump had covered some or all of these defendants’ attorneys’ fees, just as it’s aiding some defendants and witnesses in the Mar-a-Lago documents case? As Times reporter Richard Fausset explained on The Daily, the threat of crushing legal costs might have induced these defendants to plead (and Ellis publicly wondered over the summer why the MAGA Inc. super PAC wasn’t coming to her rescue). As Fausset joked, “MAGA in this context stands for ‘Making Attorneys Get Attorneys.’”
In other Trump-related legal drama, the Donald faced off in court against his former “fixer,” Michael Cohen. On Tuesday, Cohen testified in Trump’s civil-fraud trial in New York Supreme Court—and Trump was there for it. The following day, when speaking to reporters at the trial, Trump made critical comments about the presiding judge, Justice Arthur Engoron, and “a person who’s very partisan sitting alongside him.” Trump claimed he was referring to Cohen, but Justice Engoron concluded—after taking testimony from Trump—that the reference was actually to the justice’s law clerk, Allison Greenfield. This violated Justice Engoron’s earlier order prohibiting Trump from attacking courtroom staff, so the justice fined Trump $10,000—on top of an earlier $5,000 fine for a Truth Social post about Greenfield. “Don’t do it again,” warned the judge, “or it will be worse.”
Judge of the Week: Justice Clarence Thomas.
Another week, another ethics controversy involving Justice Clarence Thomas. The subject is a familiar one: Justice Thomas’s beloved, 40-foot recreational vehicle (RV), which he bought in 1999 for $267,230. He borrowed the money from a longtime friend, a wealthy healthcare executive named Anthony Welters. Did Justice Thomas pay Welters back?
A new report by Democratic members of the Senate Finance Committee alleges that while Justice Thomas paid some unknown amount of interest to Welters, the justice “did not repay a significant portion of the loan principal.” The report then argues that if Welters forgave some portion of the loan, it would have been a taxable event for Justice Thomas—but “Justice Thomas did not disclose this forgiven debt on his ethics filings, raising questions as to whether Thomas properly reported the associated income on his tax returns.”
Thomas attorney Elliot Berke disputed the report’s claims. “The loan was never forgiven,” he said in a statement. “Any suggestion to the contrary is false. The Thomases made all payments to Mr. Welters on a regular basis until the terms of the agreement were satisfied in full.”
How can the report and Berke’s statement be reconciled? Here’s my thinking:
Berke’s statement declares that “the terms of the agreement were satisfied in full.” But it does not mention any specific terms, and it does not refer explicitly to “the terms of the original, 1999 loan agreement.” And why not? Because the original 1999 loan agreement was amended, i.e., modified by the parties.
As discussed in the report, it was amended in 2004, when the maturity date was extended by ten years, and it was amended again in 2008, when Welters sent a written note to Thomas saying that he would accept no further payments on the loan, “even though he [Welters] had the right to them.” Why? Because, according to Welters, “Thomas had paid interest greater than the purchase price of the bus,” so “Welters did not feel it was appropriate to continue to accept payments.”
This recitation is probably incorrect. As noted by Jo Becker of the New York Times, “[e]ven if Justice Thomas had made all the scheduled annual interest-only payments, that would only amount to a little over $180,000,” not $267,230.
If incorrect, I view it as pretextual—and what was it a pretext for? A gift. Welters, a wealthy and successful healthcare executive, is no dummy. He knew full well that he was gifting Thomas the balance of the loan—and that was his intention. The tax law calls this “donative intent,” i.e., “the conscious desire to make a gift.”
There was nothing legally preventing Welters from making such a gift and Thomas from accepting it. Welters had no pending cases before the Court in 2008, when they amended the agreement to declare the outstanding debt satisfied. Furthermore, they were old friends—dating back to around 1980, more than a decade before Thomas joined the Court—and nothing prevents friends from making gifts to friends, even extremely generous gifts (like the $140,000 that the late Justice William Brennan received from a wealthy developer friend).
Buried in the final footnote, the report acknowledges the possibility of a gift, noting that “[i]n certain cases, a forgiven loan may be recharacterized as a taxable gift.” The report then asserts that “documents reviewed by the Committee indicate that the loan was intended to be established at arm’s length,” and “under federal tax law and regulations, bona fide business transfers are presumed not to be taxable gifts, if they are made at arm’s length and free from donative intent.”
This last part is incorrect. The original 1999 loan might have been “intended to be established at arm’s length,” but that’s not true of the 2008 amendment, which was made with “donative intent.” And how do we know this? Because the 2008 note expressly acknowledges that Welters “had the right” to additional loan payments, but relinquished that right—without any consideration, i.e., without receiving anything in return. Ding ding ding: donative intent.
This was a gift—a very large one—and Justice Thomas should have included it in his 2008 financial disclosure. He should retroactively amend that year’s disclosure, as he has done for other past disclosures, to note it. But as far as I can tell, Justice Thomas did not mess up his taxes or shortchange the IRS. The recipient of a gift is not required to pay tax on the gift or file a gift-tax return; instead, these obligations belong to the giver, in this case, Anthony Welters. (The concept behind the gift tax is that the giver, by making lifetime or inter vivos transfers, is making an end run around the estate tax.)
Did Welters owe any tax on the gift to Thomas? No, since at the time, there was a lifetime gift-tax exemption of $1 million, meaning that Welters could give Thomas up to $1 million during Welters’s lifetime without paying tax. How does the IRS track how much of the exemption has been used up in a particular donor-donee relationship? Through gift-tax returns. So if Welters failed to file a 2008 gift-tax return, then he likely violated the law, making it harder for the IRS to follow whether he exceeded the $1 million limit. But unless he gave Justice Thomas another $750,000 we don’t know about, Welters didn’t deprive the IRS of any revenue, since it was just a paperwork failure. (If you really want to nerd out over all this, see The Federal Gift Tax: History, Law, and Economics.)
At the end of the day, this latest Justice Thomas “scandal” is a lot like the others. There’s an optics issue or an “ick” factor for many folks—including me and my husband Zach, who see it as unseemly for Supreme Court justices to receive six-figure gifts from private citizens—plus a disclosure failure, which should be retroactively remedied. But there was probably no violation of the tax laws—and if there was, it was a de minimis one by Welters, for not filing a gift-tax return.
[UPDATE (2:32 p.m.): I got some pushback on the tax analysis above, so I reached out to a friend of mine who’s a leading tax professor and has been teaching the subject for decades. Wrote my friend: “These two tax professors [Jack Bogdanski and Adam Chodorow] agree with you, and I think they are right.” You can click on the links to read their analyses, but their conclusions are the same as mine: (1) “it was most likely a gift, and there is no tax scandal” (Bogdanski); (2) Justice Thomas had “a legal obligation to disclose the gift, and it does not appear he did” (Chodorow); and (3) “Welters might need to file a gift tax return” (Bogdanski).]
[UPDATE (4:02 p.m.): Further analysis, from a fourth tax professor: “Whether a transfer is a gift is based on the donor’s intent as determined based on all the facts and circumstances. But donative intent or lack thereof at the time of the first transfer does not determine donative intent or lack thereof at the time of a later, related transfer. In my basic federal income tax course, in talking about debt forgiveness income, which we do on the day after we talk about gifts, we address a hypothetical in which the taxpayer borrows money from his brother at Time A, makes payments of principal and interest, and then after a couple of years of payments, at Time B, the brother forgives the debt. And in discussing that hypothetical, we talk about why and under what circumstances the seeming debt forgiveness might instead be better categorized as a gift. I haven't followed all the ins and outs of the situation with Justice Thomas, but I agree with Adam Chodorow that it’s at least plausible that the forgiveness of a debt by a friend after some period of payments would be treated as a gift, and thus excludable from taxable income.”]
[UPDATE (10/30/2023, 2:45 p.m.): Mark Paoletta, a close friend of Justice and Mrs. Thomas, has posted a lengthy Twitter thread about this controversy. There’s some noteworthy information in it: (1) the complete statement issued by Anthony Welters to the New York Times, which quoted only part of it; (2) a clarification on when Welters and Thomas first met, “in 1970s as staffers in Congress”; and (3) the observation that “Thomas recused from the two cases in which his friend’s company had business before Court.” (The recusals took place in 2003 and 2005.)]
Ruling of the Week: Khan v. Doe.
If you testify at a university disciplinary proceeding about being the victim of a sexual assault, should your attacker be able to sue you for defamation? Or to look at it from the other perspective, if you’re falsely accused of sexual assault in a university disciplinary proceeding, should you be able to sue your accuser for defamation?
As with so many legal questions, the answer is, “it depends”—as explained by a notable new Second Circuit ruling, flagged by Howard Bashman of How Appealing and John Ross of Short Circuit. Let’s take a look.
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