The nomination of Richmond Judge James E. Sheffield to become Virginia's first black U.S. judge appeared doomed yesterday with the disclosure of Internal Revenue Service allegations that he once used funds of his legal clients as his own.
A highly placed source said Sheffield volunteered the information to the IRS as a defense against charges that he had failed to report a total of $108,000 as income between 1967 and 1975.
If proved, the practice of using clients' funds -- known as commingling of funds -- is grounds for disciplinary action and possible disbarment by state bar authorites, said the source, who added that "I don't think Sheffield will ever return for the continuation of his confirmation hearing."
The judge, who sits on Richmond's circuit court, abruptly halted his confirmation hearing Aug. 26 when he was about to be questioned about three criminal investigations conducted by the IRS. Details of those investigations were not made public then and Sheffield, the only black to sit on a court of record in Virginia, said only that he wanted an opportunity to study the IRS records that members of the Senate Judiciary Committee had. s
The allegations against Sheffield had been called trivial by some of his supporters, but some Senate sources said the latest disclosures are extremely serious and almost certainly will lead to a State Bar investigation of the judge.
One source said two of the clients involved in the alleged commingling were the Church Hill Economic Development Corp. and the Greater Richmond Development Corp., "both organizations that were dedicated to building housing for blacks in the inner city," the source said.
The IRS investigation reported that Sheffield said he repaid the money to his clients by borrowing from other sources, after deducting the legal fees he charged them. The $108,000 was spread over three years, in the amounts of 14,000, $39,000 and $55,000, the source said.
Sheffield, who spent yesterday afternoon in Washington reviewing the judiciary committee file on the charges, last nigh denied he had commingled his clients' funds but would not discuss the charges in detail.
"We are going to write a letter to the Senate Judiciary Committee and ask them to do some things about checking into these charges," Sheffield said. "All of these allegations were looked at by the Department of Justice before my nomination and they saw no reason to oppose it."
Sources close to Sheffield said he was disappointed that the commingling allegations had become public this week. The sources said Sheffield believed he had a pledge from the committee that the allegations would be kept secret until he had had a chance to review them and respond to them publicly.
A source, close to the Senate Judiciary Committee, was critical of the Justice Department's role in approving the nomination."Justice should never have allowed the confirmation process to begin" the official said.
The IRS dropped all three investigations into Sheffield's tax returns, citing the availability of records and the illness of a key witness, according to one source.
Senate Judiciary Committee sources have hinted for some time that Sheffield's tax problems went beyond the decision not to prosecute him.
One person said tha commingling of funds was outside the jurisdiction of IRS regulations and that the agency was barred by its own rules from passing the information along to others.
Long before any eithical questions were raised about Sheffield, his nomination had been in trouble for political reasons.
President Carter had nominated Sheffield as part of his desire to place more minorities and women in the federal judiciary.
Sheffield's nomination has been opposed by Sen. Harry F. Byrd Jr., the Democrat-turned-independent who is Virginia's senior senator.
Byrd has contended that his opposition has nothing to do with Sheffield's race, or even with the president's goal of desegregating the judiciary, but with the disregarding of the president's own guidelines about how nominees should be picked.
To take the process out of politics, Carter urged that each senator establish judicial nominating commissions to seek out the best qualified persons, and Byrd argued that is just what happened in Virginia.
The two nominating commissions in Virgina, appointed by Byrd, came up with the names of 10 white males as possible candidates for four new U.S. judgeships in the state. The Carter administration selected three of those men for other judgeships, but then went outside the list to name Sheffield.
Some Senate Republicans have been hoping to stall a number of Carter's judicial nominations, expecting that GOP presidential nominee Ronald Reagan will be elected in November.
"We can't lose and the Democrats can't win," if Sheffield insists on going ahead with his confirmation hearing, one congressional Republican said yesterday. Under his scenario, if the hearing resumes, Sheffield will be rejected, thereby casting a bad light on a Carter nominee; and if the nomination dies quietly -- as many expect -- the Republicans may have a chance to pick their own nominee next year.