As The Caesars Turns, Episode 2

September 27th, 2016

Caesars Entertainment Operating Company (CEOC) today announced that they reached a restructuring agreement with its major creditors. The deal will likely allow CEOC to emerge from bankruptcy early in 2017. The settlement must be finalized and will require approval of the bankruptcy court.

“It’s important to recognize that a lot of work needs to be done in the next few weeks. Will there be bumps along the road? Yes. Is this a durable deal? Yes,” said Bruce Bennett, a lawyer for Jones Day representing junior creditors.

The deal will have CEOC merge with Caesars Acquisition Company, with first tier lenders getting about 115 cents per dollar, first lien holders getting 109 cents, and junior debt holders getting between 66 cents to 83 cents on the dollar.

But not everyone is settling. Trilogy Capital Management has $22 million of CEOC’s unsecured bonds and will pursue its lawsuit against the casino giant. The next hearing in Trilogy’s lawsuit against CEOC is scheduled for October 6th in New York. Trilogy is asking for $160 million in the lawsuit. The lawsuit, if it goes to trial, would likely confirm or deny whether Caesars truly split into a “good” Caesars and a “bad” Caesars (as Trinity and others claimed).

Tune in next week to see what happens with Trinity’s lawsuit and whether any other obstacles appear for the closure of the bankruptcy of CEOC.

California Cities Eye Netflix as a Revenue Source

September 25th, 2016

“Don’t tax you, don’t tax me. Tax that fellow behind the tree.” — Russell B. Long

The city of Pasadena, California (home of the Rose Bowl and annual Rose Parade) voted to expand their telecommunications tax to include streaming video services such as Netflix. The tax rate is 9.4%; the tax will begin on January 1, 2017.

The Pasadena Star-News noted,

Councilman Tyron Hampton called the decision “ridiculous” on Friday and said he hopes the council will take up the topic.

“Cable has been a hardship for many families and now we’re going to add a hardship to them,” Hampton said. “Next we’ll be taxing you for streaming music on Pandora. This is ridiculous.”

There is absolutely no truth to the rumor that Pasadena will be bringing up a tax on Pandora at their next city council meeting. (Seriously, I made that up.) But it does show the desperation of California cities to balance their budgets. And the biggest culprit are pension costs.

The crisis dates back to the late 1990s, and the dot-com bubble. California tax revenues were increasing rapidly thanks to the stock market, so everyone drew straight lines going up, up, and up. California legislators and the then Governor Grey Davis forgot this song:

But I digress….

The Howard Jarvis Taxpayer Association isn’t enamored by the new tax, and I suspect a lawsuit is in the future. Still, there’s no doubt in my mind that Californians need to watch their wallets (which is nothing new, and one of the reasons I now reside in Nevada).

As the Caesars Turns

September 22nd, 2016

There have been more developments in the Caesars bankruptcy. First, Caesars Entertainment said it is offering an additional $1.6 billion for junior creditors of Caesars Entertainment Operating Company (CEOC) in the contentious bankruptcy. The stock market reacted favorably to the news Caesars stock went up 21% today.

The underlying issue in the bankruptcy is whether Caesars management deliberately created a “bad” Caesars (CEOC) and a “good” Caesars (everything else). Junior creditors are accusing Caesars of exactly that. Lawsuits on this issue are on hold but unless a court extends an injunction they’ll start moving forward in October.

Earlier this month Judge Benjamin Goldgar ruled that junior creditors are within their rights to have top management at Caesars complete financial disclosure statements. As Bloomberg reported,

Apollo co-founder Marc Rowan, company principal David Sambur and TPG co-founder David Bonderman must provide the information to a committee of dissident creditors who are fighting a reorganization proposal for Caesars, U.S. Bankruptcy Judge A. Benjamin Goldgar ruled. That plan would release the men from any legal liability related to the Las Vegas-based gambling company’s bankruptcy. The bondholders say the men shouldn’t be shielded from lawsuits related to the bankruptcy.

But is $1.6 Billion more enough? Given that an independent examiner said Caesars could be liable for over $5 billion in damages, I suspect junior creditors may be thinking “no.” Caesars management is threatening to put all of Caesars in bankruptcy, with the obvious implication that you might get a lot less if the bankruptcy expands. Perhaps the junior creditors are thinking that this is a sign of desperation; that they’ll get 100% of their debt back by either lawsuits or a full bankruptcy; or that Caesars will increase their offer yet again in the future.

When the bankruptcy began I asked and answered some questions:

How long will the bankruptcy process take? A long time…

Who will profit from the bankruptcy? That’s a question with a sure answer: the lawyers…

Why aren’t all of Caesars’ hotels included in the bankruptcy? If you look at the list, some of the hotels are merely operated by Caesars and won’t be included in the bankruptcy even if the second-tier debtholders win. However, it is definitely possible that the bankruptcy could expand and take in more of Caesars than just CEOC…

Could some of Caesars’ properties be sold?
Definitely. If this does not end up being a prepackaged bankruptcy, then each tier of debtors will propose a plan. One plan could be to auction various properties, so it’s definitely possible.

Nothing has caused me to change my opinions on any of these answers. The soap opera, er, bankruptcy began in January 2015; if you placed a bet on it reaching two years without resolution, your bet looks like a winner to me.

So stay tuned soon for the next exciting episode of “As the Caesars Turns.”

A New Scam: Mailed “IRS” Notices

September 20th, 2016

Something else to be wary of: Imitation IRS notices. Today I saw an “IRS” notice that looked almost real. The notice had the normal headers, and the terminology was just about right. The notice was supposedly from the Austin Service Center, but instead of responding to the Service Center the address for responding was a post office box in Austin. The real key was the request for money. All IRS notices (when a payment is due) ask for the check to be made payable to “United States Treasury.” The phony notice asked for the check to be made payable to “I.R.S.”

For taxpayers, a quick tip: If you have any doubts about the veracity of an IRS notice, call the IRS or your tax professional. If you see that the notice asks you to write a check payable to “I.R.S.” it’s phony.

For tax professionals, make sure you look at clients’ IRS notices. The scammers are trying something new, so we have to be wary. Given that two-thirds of legitimate IRS notices are wrong in whole or in part, we should already be asking our clients to forward to us any IRS notices they receive.

The one good news about this scheme is that it should be easier for IRS Criminal Investigation, TIGTA, and/or the US Postal Inspectors to catch the culprits. Renting a post office box leaves a paper record, so hopefully these fraudsters soon find their way to ClubFed.

The Tax King Goes to Prison

September 14th, 2016

The Tax King—at least, the St. Louis version thereof—is heading to ClubFed. Eyob Tilahun owned the Tax King tax preparation firm in the St. Louis area. He wasn’t charging low prices; his typical fee was $400 to $650. And he asked for tips of $100 to $1000. Sounds like a good business model to me.

Of course, I didn’t mention the other things he did. Let’s head back to the DOJ press release from May:

In the pleading guilty today, Tilahun admitted that Tax King’s return preparers were trained and instructed to increase their customers’ refunds by falsifying certain information on their tax returns. The false information that was placed on the returns included: (1) false Business Income and Schedules Cs which caused the clients to qualify for larger Earned Income Credits (“EICs”); (2) false wages, which again caused the clients to qualify for larger EICs; (3) false education expenses which enabled the clients to qualify for American opportunity education credits; and (4) false information regarding fuel taxes which qualified the clients for federal fuel tax credits.

I think I’ve talked about how all these credits can be used for fraud in the past. Congress might want to consider not having so many tax credits…but I’m likely talking to the converted.

Well, sentencing came up last Friday. Mr. Tilahun will have 38 months at ClubFed to think things over. He’ll also have to make restitution of something over $2 million. Maybe that’s why I haven’t embraced this business model.

For individuals shopping tax professionals, remember that if it sounds too good to be true it probably is. If you make a lot of money, you’re likely going to pay a lot in tax. There is no tax fairy to make your taxes go away.

Extension Deadline for Business Entities; 3rd Quarter Estimated Tax Payment Deadline

September 14th, 2016

Thursday, September 15th is the filing deadline for business returns on extension: C-Corporations (Form 1120), S-Corporations (Form 1120S), partnerships and LLCs that file as partnerships (Form 1065), and trusts (Form 1041). You can either electronically file or mail your returns (it’s a postmark deadline), but if you mail the return use certified mail, return receipt requested so you have proof of filing.

Tomorrow’s also the deadline for making your third quarter estimated tax payments. You can pay electronically (though if you use EFTPS the deadline was Wednesday for the payment to timely post), or you can mail your payment. If you mail the payment, it’s a postmark deadline.

We’re now just 32 days away from the filing deadline for individuals on extension. As I said before, the time for procrastination is over….

The Time for Procrastination Is Over

September 6th, 2016

Labor Day, the unofficial end of summer, has come and gone. It even felt like Autumn this morning here in Las Vegas (it was below 70). For those who filed an extension and have waited to prepare their tax returns, it’s time to get going.

But Russ, you say, the deadline isn’t for another 41 days. Very true. Still, it takes time for you to gather all the information and for your tax professional to prepare the return. It will take time for you to review the return. It’s better to start sooner than later. And if you wait too long, it will be too late.

But Russ, you say, I still haven’t received that last K-1. I understand; my mother’s still waiting for her last K-1. However, why can’t you get everything else ready? It’s easy to add that final K-1 into the return; it’s a lot harder to add in the myriad of other forms, income, deductions, and other information.

Most tax professionals have set deadlines for returns on extension. I can guarantee you that if you drop off your paperwork on October 14th, your tax professional will, at best, charge you an arm and a leg; at worst, your return won’t get done by the 17th. Make a tax professional happy: Get started now, and turn in your information soon.

Once Bitten, Twice Not Shy

September 5th, 2016

Back in 2013, Cedric K. Oliphant was convicted of falsifying a tax return.

Specifically, during his plea hearing today [August 30, 2013], Oliphant admitted he knowingly and willfully included materially false deductions for gifts to charity and for unreimbursed business expenses a client’s 2007 tax return. This tax return alone caused a loss to the U.S. Treasury in the approximate amount of $11,261.

Oliphant also admitted he had knowingly and willfully prepared and filed dozens more false federal income tax returns for other clients for tax years 2006 through 2008 that generated excessive refunds and cause aggregate losses to the IRS of totaling approximately $325,000.

Mr. Oliphant was released on bond awaiting sentencing. A condition of his release was that he stop preparing tax returns. I’m sure you’re ahead of me.

He was sentenced back in 2014:

In handing down the sentence today, Judge Harmon noted that Oliphant had prepared hundreds more tax returns with deductions similar to those described in the plea agreement indicating that actual losses to the National Treasury could be as much as $1 million.

Oliphant had been previously released on bond. However, that bond was revoked when it was determined he violated the conditions of his release by continuing to prepare tax returns after conviction. At that bond hearing on April 10, 2014, evidence demonstrated Oliphant had prepared and electronically filed at least 463 client tax returns during the 2014 filing season.

Fast forward to August 26, 2016 (just a week or so ago); Mr. Oliphant was released from prison. Mr. Oliphant’s troubles apparently weren’t behind him. Remember the accusation of preparing returns when he shouldn’t have been? The US Department of Justice alleges it was quite a bit more than that.

Oliphant had been previously charged and later convicted of preparing dozens of false 2006-08 client tax returns as part of his business – Oliphant Tax Services. He had been permitted to remain on bond during that time under a condition that he have no involvement in the preparation of tax returns other than his own. However, according to the new indictment, Oliphant continued to claim the same false deductions for unsuspecting clients while awaiting sentencing on the previous case.

As part of the scheme, the indictment alleges he changed the name of business to “Tax Services” to allegedly make it appear he had stopped preparing client tax returns and that someone else was the owner of his tax preparation business. Oliphant allegedly attributed the fees to the nominal owner of his tax office but manipulated those tax returns to make it appear the tax office had produced almost no taxable income.

But that’s not all. Mr. Oliphant allegedly used nominees to conceal what was going on:

The indictment also alleges Oliphant established a series of bank accounts in the names of others – including minors with custodians other than himself – so the fees could first be deposited to accounts in the names of the nominal owner of his tax office and others. He then allegedly transferred those fees through these intermediate accounts to accounts in his own name. This scheme enabled Oliphant to conceal his personal use of the fees generated by the business during the course of the prosecution on the first case, according to the charges.

The business allegedly generated $2 million in fees and a total loss to the IRS of another $400,000 or more as charged in the new indictment. As part of the his plea agreement in the earlier case, the losses from those false tax returns exceeded $325,000.

If you sign an agreement not to do something—especially if that agreement is with the government—it’s a very good idea to not do that something. And if you do that something, it’s a good idea to be on the up and up; you know you’re being watched. If these allegations are true, Mr. Oliphant might be heading right back to ClubFed.

Caesars Gets Another Month

August 31st, 2016

Caesars Entertainment Operating Company (CEOC) appealed Judge Goldgar’s decision to US District Court (decisions in a bankruptcy court get appealed to the District Court). Judge Robert Gettleman gave Caesars until October 5th; Judge Gettleman will hold a hearing in Chicago then. As reported in the Las Vegas Review-Journal, Judge Gettleman “…warned CEOC that it faced an ‘uphill’ fight.”

The pause does give time for the two sides to negotiate. That said, the junior creditors who filed $11 billion in claims against Caesars appear unwilling to settle for what Caesars has offered. The claims relate to allegations that Caesars deliberately reorganized to create a “good” Caesars and a “bad” Caesars. A court appointed examiner has already said that the junior creditors are likely to prevail.

Fail, Caesar: The Bankruptcy May Grow

August 28th, 2016

On Friday, Bankruptcy Judge Benjamin Goldgar ruled that an injunction against $11 billion in lawsuits over how Caesars split itself into various units will be allowed to expire on Monday, August 29th. Given that the first of several court rulings in the various lawsuits is due on Tuesday, August 30th there’s a definite possibility that the rest of Caesars will join Caesars Entertainment Operating Company (CEOC) in Chapter 11 bankruptcy.

The dispute is over whether Ceasars (and its private equity owners, Apollo Global Management and TPG Capital) created a “good” (or healthy) Caesars and a “bad” (or unhealthy) Caesars (CEOC being the unhealthy Caesars). CEOC offered $4 billion extra in its reorganization plan if the junior creditors (they’re the ones who were protesting and suing over this dispute) would agree to the offer. While one junior creditor accepted the offer, most did not. Judge Goldgar wondered why the private equity owners weren’t contributing any of their own money to resolve the dispute. My cynical belief is that Apollo and TPG wanted to have their cake and eat it, too.

While CEOC plans on appealing the ruling, that’s a long shot. Given that a bankruptcy court examiner felt that the lawsuits could succeed (with damages as high as $5.1 billion), one possible means out for Caesars is to put the rest of Caesars into Chapter 11.

This coming week will be very critical for the future of Caesars.