Tim Durham (right) arrives at court in Indianapolis in June to hear the verdict in his trial
Tim Durham started out as an attorney, then left practice for far greener pastures. Highly ambitious, he reportedly made millions through leveraged buyouts. He was a well-known fixture at collector car auctions. Arriving on his private jet — and spending freely — he rapidly amassed a significant collection that included Duesenbergs, Ferraris and a Bugatti Veyron. Durham also owned 75% of Car Collector magazine, and his financial problems were certainly one of the reasons that Car Collector recently folded.
This June, it took only eight hours for an Indianapolis, IN, jury to convict him on all 12 felony counts that were charged — 10 of wire fraud, one of securities fraud and one of conspiracy.
Apparently, much of the jury’s eight hours of deliberations were devoted to the fate of Durham’s two co-defendants, who were convicted of the conspiracy and securities fraud counts but only some of the wire fraud counts. Sentencing is expected in late September, but at age 49, this could be a life sentence for Durham.
The conspiracy conviction carries a maximum prison sentence of five years, but the other 11 convictions carry a maximum of 20 years each, and prosecutors are expected to seek maximum penalties.
The charges arose from his acquisition and operation of Fair Financial Services. Fair had been a factoring company that purchased accounts receivable from businesses at a discount, and profited when the accounts were paid in full.
But Durham’s group changed the business after acquiring it. Rather than using the $200 million they raised from investors to purchase receivables, they instead loaned the funds to themselves and their various business entities. When the loans went unpaid, Fair turned into a Ponzi scheme, taking money from new investors to pay certificates that came due. It is estimated that more than 5,400 parties, many of them small, mom-and-pop investors, lost more than $200 million.
All this kind of makes you wonder why — if he had so little defense, the jury didn’t have to even think much — he went through the effort of a trial. And so much for popular wisdom that a good lawyer can get anybody off on anything.
Montana LLCs hit hot spot
In the July 2012 “Legal Files” (p. 36), guest authors Dale Spradling and John Bennett joined me to report on recent challenges to the use of Montana LLCs to avoid sales taxes. That prompted a very provocative letter from an SCM reader:
To the Editor:
Although I’ve enjoyed the “Legal Files” section of your fine magazine for years, the most recent article was dismaying, to say the least. One of the reasons people have such a low opinion of attorneys is not that they don’t take into consideration the morally right thing to do, but that they never pause to even consider such a concept.
How are the sales taxes collected on vehicles collected by state governments allocated? Primarily to infrastructure needs.
Here you have a Mr. Nabob with his Bazilliona V12. He is quite happy to have me admire his exotic car — a work of art far beyond anything that I will ever own — but that is not enough. No indeed. Mr. Nabob thinks it is right and just — as does the law firm which profits from work on his behalf — that I pay for my share of schools, roads, bridges, and other societal needs that Mr. Nabob uses, but also that I pay for his share as well.
The saying used to be, “I got mine, Jack,” but this philosophy adds “I got mine, Jack, and I want yours as well.”
It takes a rare article to make me a fan of big government, but this piece of moral excrescence does the trick. Far beyond merely catching these amoral scofflaws and fining them for their gross egotism, I would favor a law allowing the confiscation of their Bazilliona V12s and offering them at public auction to help rebuild the crumbling infrastructure of our society.
There would be an auction report that would make captivating reading.
In the meantime, I am stunned by such a blatant example of the sheer greed in the world, and at your own culpability in promoting such an immoral way to look at the privilege of fine car ownership.
Shame on all of you. — David Preston, Bothell, WA
This is a wonderful —and obviously heartfelt — letter. I’m glad Mr. Preston wrote to give us an opportunity to explore the roles played in our society by both taxes and lawyers.
Taxes and duty
The courts have said mixed things about our duties to pay taxes. One of the most famous statements was made by U.S. Supreme Court Justice Oliver Wendell Holmes, when he wrote, “Taxes are what we pay for civilized society.” This observation probably summarizes Mr. Preston’s sentiments quite well.
In an equally famous statement, Judge Learned Hand, writing for the 2nd Circuit Court of Appeals in a landmark tax case that was affirmed by the U.S. Supreme Court, wrote, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”
That may seem to contradict Holmes’ statement, but Holmes also wrote, “The young man knows the rules, but the old man knows the exceptions,” as well as, “This is a court of law, young man, not a court of justice.”
It isn’t clear which portion of “Legal Files” caused Mr. Preston to smell “moral excrescence,” but closer reading of the article suggests the thoughts expressed are not all that outlandish.
Sales tax rules
Sales taxes are imposed only upon sales made within the state. States’ residents are totally free to make out-of-state purchases in states that do not have sales taxes. But if they do so — and then bring the purchased item into their home state — they become subject to a mirror-image use tax. However, use taxes are imposed only on a state’s residents, and only on property actually brought into the state.
“Legal Files” was correct to explain that, if someone were to purchase a car in a non-sales-tax-state and then use it only outside his home state, he would not owe any sales or use tax to his home state. No one should find that very remarkable.
Some states go a step further. Their laws provide that if their residents do just that for a specified minimum time (for example, 12 months in the case of California), they can then bring the car into their home state and not owe use tax. A resident who chooses to do that does not violate either the letter or the spirit of the law. His home state has intentionally chosen to exempt such situations from tax.
States typically allow, but do not require, their residents to license their cars in their home state when their cars are located elsewhere. The unusual fact is that Montana’s legislature purposely adopted a law that allows LLCs formed in Montana to license their cars there — even if the LLCs do not actually carry on any business in Montana. A collector breaks no laws by taking advantage of that alternative. It is allowed under Montana law, and the collector’s home state never requires the car to be registered there unless actually brought into the state.
“Legal Files” also correctly pointed out that the collector who titles a car in a Montana LLC and then drives it in his home state is either out on or over the edge. We cautioned readers that doing this could expose them to criminal charges. The co-authors disagreed about whether such charges would actually stick, but “Legal Files” also pointed out the expense of having to prove the point. That should be recognized as a fair discussion.
Legal and journalistic ethics
Finally, to the role of lawyers.
The lawyer’s ethical job is to advise the client about what the law requires. It is up to the client to decide upon his or her individual moral and political beliefs, and it is inappropriate for the lawyer to impose his on the client.
Even Justice Holmes would agree that people are free to take every available opportunity to legally avoid paying taxes. Lawyers are not required to stop them from doing so because it serves some “higher good.” If legal conduct is perceived to be abusive, the states’ legislatures are free to change their laws. But no one is legally, or even morally, required to do what the legislatures “should have” required but didn’t.
Perhaps the concern is that even if all of this is technically legal, we shouldn’t be telling readers about it, since they wouldn’t do it if they didn’t know they could, and it’s better for the rest of us if they don’t.
While I can understand and accept someone feeling that way, that just isn’t ethically required of lawyers or journalists. If collectors are legally free to do
certain things, we shouldn’t be prohibited from telling them. It’s what they expect us to do, and it’s our job to do it.