Taxable Talk

Why would you want to file two individual federal tax returns for one person for one year? Unless you're amending your return, you don't do this...unless you're committing tax fraud.

And from just up the road in Huntington Beach comes the story of an individual who is alleged to have just done that. A federal grand jury indicted James David Richardson with five counts of filing false claims, and one count of obstructing the due administration of the Internal Revenue Service.

Mr. Richardson allegedly filed multiple tax returns for each year between 2000 and 2003, and made false claims asking for $852,278 in refunds he wasn't entitled to. In 2001 he apparently received refunds of $286,345 that is alleged to have come from multiple false claims.

But I do like what he was then alleged to have done. The indictment charges that Mr. Richardson filed a complaint with Congressman David Drier relating to the delay in payment of his allegedly falsely claimed refunds. He also is alleged to have sent a check for $1,990,000 to the IRS that showed amounts of withholding...except that is alleged never to have happened. Oh, the check bounced, too. Now these actions show some chutzpah.

If Mr. Richardson is convicted on all counts, he could face 53 years in prison. He also could be liable for fines and restitution.

News Story Here

...Until they got caught.

Steven and Diane Christensen admitted costing the US government between $4 and $7.5 million in tax revenues. An official of US Bank estimates that they lost $13 million. This couple cut a wide swath through the Salt Lake Valley.

But Diane was sentenced to 41 months at ClubFed and Steven received 37 months on Tuesday, so they won't be bothering Utahans anytime soon. The couple will still need to make restitution to the US government; however, that amount is still to be determined.

News Story: Salt Lake City Tribune

The Tax Court reviewed the case of a couple that enjoyed playing the slots in Atlantic City. The IRS thought that the couple were winners; the couple alleged that they lost. What would the Tax Court say?

Terri and Austin Hartsook won $230,825 playing slot machines in 1999 and $293,750 in 2000. They claimed gambling losses (as an itemized deduction) of the same amounts. The IRS allowed at trial $76,314 of losses in 1999 and $55,750 in 2000. According to the Hartsooks, the IRS disallowed all gambling losses at Harrah's.

The Hartsooks received numerous W-2G's from Harrah's. The Hartsooks used a formula to calculate their losses:

"As we understand the way in which petitioners calculated their claimed gambling losses at Harrah’s, petitioners multiplied the number of minutes between gambling winnings at a $100 slot machine or a $25 slot machine, as reflected on the respective Harrah’s substitute Forms W-2G with respect to Aug. 13 and 14 and Sept. 4, 1999, by the amount that they estimated they would have been able to wager within a minute in such a $100 slot machine or such a $25 slot machine if they had played two coins at one time. Mr. Hartsock testified that he would have been able to wager within a minute $1,200, “give or take $200”, in a $100 slot machine and $300 in a $25 slot machine. Mr. Hartsock testified that petitioners reduced the amount so calculated to reflect that they would not have been constantly wagering in slot machines that they were playing because they would have stopped wagering to light up cigarettes, get drinks, or talk with others."

There's a problem with this. "[The Court is] unwilling to rely on Mr. Hartsock’s self-serving and uncorroborated testimony and the self-serving and uncorroborated workpapers that petitioners prepared in order to establish that they incurred gambling losses at Harrah’s on certain dates during 1999." Additionally, they didn't have any evidence to show gambling losses in 2000.

What should they have had? A contemporaneous logbook would have been a good start. If they belonged to Harrah's slot club, they should have gotten a printout of their wins and losses. (Of course, they'd also have to claim the gambling wins that were not shown on W-2G's.) In any case, not only did they lose on the gambling losses, the Court upheld a negligence penalty.

So the next time you play the slots, we hope all you do is win (so you don't have to worry about the losses). But if you do lose, write it down correctly in a logbook and you should be protected if the IRS knocks on your door.

Case: Hartsook v. Commissioner, T.C. Memo 2006-205

It may be the Jewish New Year (La Shana Tovah for those celebrating), but the tax cheats have been busy over the past few days. We have articles from the East Coast to the West Coast and from Europe.

First, from Providence, Rhode Island comes yet another untrustworthy sole. Eric Messier had been advising the gullible that by creating a "corporation sole" they can avoid taxes. There's no such thing as a corporation sole. He was collecting between $2,500 and $10,000 per soul. (Story here)

Apparently there's something in the water in the Ocean State. This story from the Providence Journal is about Edward Dacey. Mr. Dacey was convicted of not reporting $122,000 earned by marketing a "debt elimination scheme" that, like the corporation sole, isn't worth the paper it's printed on. Mr. Dacey won't have to visit Club Fed; instead, he'll serve five months of home confinement and two years probation.

Closer to home, the Los Angeles Times reported on four tax preparers from nearby Rialto who were inventive. They invented phony deductions, falsified documents for audits, and didn't report about $1.5 million in income from this fraud that impacted over 11,000 clients.

Meanwhile, we go overseas. Holger Geschwindner of Hof, Germany was a "benefactor and supporter" of NBA star Dirk Nowitzki. The German tax authorities allege that Geschwindner earned "substantial amounts" but didn't pay any taxes on that, according to this story from Deutsche Presse Agentur. Tax evasion is a crime in Deutschland, too.

An Amarillo doctor will be visiting Club Fed. Stephen Miller was sentenced this past week to 46 months and ordered to pay $970,000 in restitution for attempting to use sham LLCs and sham trusts to avoid taxes. The money was supposed to end up in the Channel Islands.

A Connecticut doctor pleaded guilty to tax evasion, structuring, and health care fraud. Steven Herman skimmed about $870,000 from his business, and then either purchased $700 money orders himself or had household employees do so. He did this over 80 times in order to avoid federal bank transaction laws (and when you do this to avoid those laws, you're guilty of the crime of "structuring," which is a felony). Adding insult to injury, he also committed health care fraud by billing elective procedures as "medically necessary." As this story notes, Mr. Herman faces up to 25 years in prison, must pay back taxes of $374,810 plus penalties and interest, forfeit $236,117 (the amount of the structuring), and reimburse the health insurance company $150,000. It would have been much cheaper to have paid the taxes in the first place. Of course, that's the case for almost everyone who commits tax evasion.

When you run for Congress, strange things can happen. Consider this story from Knoxville, home of the University of Tennessee. Heath Shuler is a famous former quarterback for the Volunteers. His NFL career wasn't lengthy, but he did earn a nice signing bonus. He and his brother formed Heath Shuler Real Estate (HSRE), and they later sold most of their interest in the business. Shuler is running for Congress. And so the story might have gone, but...

...And it's a big but. The Associated Press happened to find out that HSRE has been "chronically late" in paying its taxes. In fact, they just made a $69,000 late payment. Mr. Shuler, according to the story, is planning on filing a lawsuit to have his name taken off the name of HSRE. I'm not sure how this will be taken in Tennessee politics, but I'm sure he wishes that this story broke in December rather than September.

I was reading Simon Winchester's Krakatoa: The Day the World Exploded and came across the use of the word "humongous." In vulcanism, a humongous volcanic event is truly huge. Why am I including this here? Well, Proposition 1B is a humongous bond proposal.

How large? The bond totals $19,925,000,000. Yes, almost $20 billion dollars. That's a lot of money.

Before I comment further, the goal of the bond measure is laudable: fixing California's deteriorating infrastructure. The bond measure will allow needed improvements to highways, seismic safety, public transit, and other infrastructure items.

There are, however, a lot of issues with this measure. First, to repay the bonds will cost $38,900,000,000. Yes, nearly $40 billion dollars. That's double the GDP of Luxembourg. And when bonds are approved, someone must pay for them.

Frankly, I don't see how this measure can be repaid without a tax increase down the road. I hope I'm wrong, but if this measure is approved our grandchildren will be paying for it in 50 years.

A little over a month ago we wrote about a Tax Court case where the petitioners had admitted fraud, but wanted to get out of paying the §6663 penalty for fraud. At that time we said, "For once you say you committed fraud, you have to live with the result."

Today the Tax Court took up another case that Yogi Berra might say was deja vu all over again. Petitioner Henry Uscinski is an attorney who pleaded guilty to evading his 1996 income taxes by filing a fraudulent 1996 tax return. Mr. Uscinski repaid $1,590,000 in restitution. He further admitted that he had failed to report some funds from a client. So in March 2003 the District Court accepted the plea bargain, sentenced Mr. Uscinski to 42 months at Club Fed for tax evasion, and also imposed a $250,000 fine.

And now it's the IRS' turn. In 2005 the IRS sent a deficiency notice to Mr. Uscinski for his 1996 taxes. Mr. Uscinski, in his petition to the Tax Court, stated,

"Relief requested is to eliminate and cancel all claimed tax due and penalties imposed. The funds upon which said tax and penalties are imposed were received under a claim of right and were subsequently restored to the U.S. Government in full. Accordingly, no tax should be imposed as the funds were restored."

Basically, Mr. Uscinski is asking for "collateral estoppel;" that is, because he was prosecuted criminally, he can't be gone after by the IRS.

The Court stated,

"It is well established that a subsequent guilty plea may be used to establish issue preclusion in a subsequent civil suit where an element of the crime to which the defendant pled guilty is at issue in the second suit....Because the elements of criminal tax evasion and civil tax fraud are identical, petitioner’s prior conviction under section 7201 conclusively establishes the elements necessary for finding fraud under section 6663." [citations omitted]

Mr. Uscinski also contended that by repaying the government, he stopped the underpayment, and is entitled to relief under §1341. The Tax Court noted, "The relief provided under section 1341, however, applies to the year in which the repayment is made and does not affect the taxpayer’s obligation to report as income, in the year of receipt, items received under a claim of right...Because petitioner’s repayments occurred from 1999 through 2001, section 1341 is inapplicable in determining petitioner’s deficiency for 1996, which is the only year at issue in this proceeding."

So the Court holds that the petitioner, Mr. Uscinski, is estopped from denying the unreported income on his 1996 tax return and that some of the underpayment is due to fraud (as defined in §6663. But the Court wouldn't allow full summary judgment to the IRS, stating that Mr. Uscinski can challenge the precise amount of the deficiency. "Consequently, although the current record might leave us in doubt as to petitioner’s prospects for ultimately succeeding in showing error in the notice of deficiency, we shall not deny petitioner an opportunity to present relevant evidence."

So Mr. Uscinski can get another day in court. But it's clear he's facing an uphill battle.

A welcome to those Enrolled Agents who are discovering blogging for the first time. The cover story of the September-October EA Journal is my article, "Should You Blog?" Here's some brief background on the article, and on tax blogging.

Back in June I responded to an email news blast from the National Association of Enrolled Agents (NAEA). They had credited the wrong blogger for a story, and I let them know that there's at least one Enrolled Agent who blogs. This eventually led to my agreeing to write "Should You Blog?"

As I mentioned. in the article, blogging is fun but it's also work. If you decide to blog, do it regularly. Have fun, have your own style, and let me (and the other tax bloggers) know that you're on the scene! I'll enjoy adding new tax bloggers to the blogroll on the right.

I almost labeled this post, "The Shock! The Horror!" Yes, another New Jersey corruption arrest. But my sarcasm quotient is slim when I'm low on sleep (I'm just back from Dallas), and I discover that Jack Westlake, a partner of John Lynch has also pleaded guilty to tax evasion. Mr. Westlake, 76, admitted that he didn't pay tax on $350,000 in taxes in 1999.

Over the weekend there were several stories about tax scofflaws. They fought the law and the law won.

First, a tax preparer in Georgia filed returns electronically. There's no problem with that. However, she filed returns for people who had not hired her to prepare their returns, using numbers made out of thin air (she also filed returns for people who gave her information, but used incorrect information). Amazingly enough, these lucky taxpayers got refunds, deposited into bank accounts of friends of the tax preparer (or the refunds were subsequently turned over to the preparer). The preparer, Lisa Lyle, has pleaded guilty to ten counts of tax fraud and will be sentenced on November 30th according to this article.

Meanwhile, in Shelby County, Michigan (suburban Detroit), Kenneth Heath was convicted of four counts of tax evasion and one count of passing a phony document. Mr. Heath believes in the views of convicted tax protestor Irwin Schiff, and didn't pay federal taxes between 1999 and 2002. That was strike one. Strike two was sending the IRS a "Registered Bill of Exchange." But there's no such thing as a Registered Bill of Exchange. Heath, 69, who faces up to 30 years in prison will be sentenced in December according to this story.

From Utah comes the story of a couple that believed in philanthropy. Both individually and through their business, they gave millions of dollars for the handicapped, an olympic center, and other charitable ventures. They also believed that giving starts at home: they were convicted of tax evasion. They didn't report overseas income of $4 million to their business. The couple, now divorced, will each spend over two years in jail and pay fines of $60,000 and $75,000. They also must pay the $14,000 cost of their jury trial and pay the back taxes of nearly $300,000 according to this story.

Finally, we have two stories from the swamplands (New Jersey). First, a bar owner harbored illegal aliens and was involved in an illegal alien smuggling ring. He forced the aliens to work off their debts in his bar. And he also didn't pay taxes on $750,000 of income from his bar. In the second story, the former president of the State Senate in New Jersey pleaded guilty to fraud and tax charges. John Lynch, who used to be involved in New Jersey's "Democratic Machine," admitted accepting a payment from a company that was attempting to build a park. Besides accepting the $25,000 payment, he failed to declare $150,000 in income. Lynch faces up to ten years in prison and a fine of up to $500,000.

All-in-all, it was a weekend to forgot for these scofflaws.

Californians will have a long ballot to wade through this November. Over the next few weeks, we're going to review all of the tax-related propositions on the ballot, beginning with Proposition 1A.

This is one of five propositions that Governor Schwarzenegger has placed (with the consent of the Legislature) on the ballot. Proposition 1A would require sales tax revenues collected from motor fuel taxes to be used only on transportation improvements. The measure is supported by the Automobile Club, the Highway Patrol, the state police association, the California Chamber of Commerce, and most legislators.

As Bill Leonard, a member of the Board of Equalization, said, "Proposition 1A will let us get started on the backlog of transportation projects, and it will finally put into practice the will of the voters: the taxes we pay at the pump should go to help improve and expand the roads on which we drive." If you're a Californian, consider this when you make your choice in November.

The Tax Court was not in a charitable mood today. Five cases dealing with charitable deductions, all from Pennsylvania, were decided. In all of them, the petitioners were unable to provide proof of the donations and they all lost their cases.

As the Court has stated numerous times, "Deductions are strictly a matter of legislative grace and the taxpayer bears the burden of proving entitlement to the claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)." The Court then states the rules for charitable donations:

Deductions for charitable contributions are allowable only if verified under regulations prescribed by the Secretary. Sec. 170(a)(1). In general, the regulations require a taxpayer to maintain for each contribution of money one of the following: (1) A canceled check; (2) a receipt from the donee; or, in the absence of a check or receipt, (3) other reliable written records. Sec. 1.170A-13(a)(1), Income Tax Regs. Where it is impractical to obtain a receipt, taxpayers must maintain other written records indicating the name and address of the donee, the date and location of the donation, a description of the property, and its fair market value at the time the contribution was made. Id.; sec. 1.170A-13(b)(2)(ii), Income Tax Regs.

In all of these cases, the petitioners supposedly made the donations in cash and had no receipts or other written records that the Court would accept. So the donations were disallowed. To add insult to injury, most of the petitioners had to pay an accuracy-related penalty.

Cases:
Lewis v. Commissioner, T.C. Summary 2006-140
Harrell v. Commissioner, T.C. Summary 2006-141
Warren v. Commissioner, T.C. Summary 2006-142
Muhammad v. Commissioner, T.C. Summary 2006-144
Warfield v. Commissioner, T.C. Summary 2006-145

Like clockwork, about once a month someone challenges in Tax Court the Alternative Minimum Tax. It's unfair, it's too complex, it's just plain old mean...those are just some of the arguments used against the AMT.

There's jut one problem: The AMT is the law, and the Tax Court has held, time after time, that Congress must change it, not the Tax Court. Would today's case be any different?

No.

The petitioners today argued, "...that although they know that the Court has no authority to usurp the role of the Congress, they would like the Court nonetheless to relieve them of their Federal income tax obligations so as to ‘make a statement’ that would spawn a thorough and complete legislative review of the alternative minimum tax."

But they didn't get that response. Instead, the Court noted, "The Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the alternative minimum tax." After citing six precedents, the Court tersely rejected the petitioner's 'argument.'

Case: Falcone v. Commissioner, T.C. Summary 2006-139

Today is the fifth anniversary of 9/11.

Remember those who serve our country in the Armed Forces.

Remember those who have given their lives fighting a tyrannical foe over the last five years.

Remember those who lost their lives on that dreadful day.

Remember.

So said Conrad Black, also known as Lord Black of Crossharbour. Lord Black waived extradition from Canada (his native home) or Great Britain (where he is a Lord) and will face a March 2007 trial on fraud, racketeering, and tax evasion charges.

Mr. Black built Hollinger International, a newspaper publishing company that owned the Chicago Sun-Times among other papers. Mr. Black and three other defendants are accused of selling some of their smaller papers to other companies they owned for less than the fair market value. At the same time, they allegedly received lucrative non-compete agreements.

Mr. Black is free on a $21 million bond. Last month a Canadian judge put Mr. Black and his wife on an allowance...of $45,000 a month. There is now also a restraining order prohibiting Mr. Black from selling various assets.

Former Sun-Times publisher pleaded guilty earlier this year to one count of fraud and is cooperating with prosecutors.

Links:
Chicago Tribune Story
Bloomberg Story
Ottawa Citizen Story

There are lots of ways to become a millionaire. You can build a successful business, have real estate appreciate, and of course inherit money. You can win the lottery. Or you can do it illegally.

One way is to collect $1,078,392.27 in sales tax and not remit that money to the state. That's what Randall Lee Malin is accused of doing in Tennessee. If Mr. Malin is convicted on all charges, he faces 92 years in prison and fines of $181,000.

News Story: Jackson Sun

Walter Anderson, a former telecommunications executive, pleaded guilty to evading $200 million in taxes today. Anderson had apparently hid $450 million in offshore bank accounts in the Channel Islands and elsewhere.

In the not-so-brilliant category, investigators found a copy of the book, Poof! How to Disappear and Create a New Identity while searching his home. Anderson also "forgot" to file tax forms on two paintings he bought that were worth over $1 million.

Although eligible for 80 years in prison (effectively a life sentence for Anderson, who is 52), the plea agreement sets a maximum sentence at ten years. Given that Anderson still disputes some of the allegations, stating that some of the purloined funds would have been used to "privatize space" and for charity, it's no surprise that Anderson is still being held without bail. Sentencing will likely be in January.

MSNBC Story
DOJ Press Release (2005)
TaxProf Blog Story

As mentioned earlier, 2006 saw the end of the Spanish-American War (of 1898)...well, the funding for the war. The telephone excise tax, a "luxury" tax, has ended for most services. Taxpayers will receive refunds with their 2007 tax returns.

The IRS has computed standard amounts for the refunds, based on the number of exemptions on the tax return. You can choose the standard amount (between $30 and $60 dollars) or the actual amount (which will require you gathering phone bills from February 28, 2003 through July 31, 2006). The IRS has an excellent question and answer page. But here are some answers to other questions:

How do businesses get the refund? Businesses will have to figure the actual amount of tax paid, and complete a new IRS Form, Form 8913. Individuals who wish to receive the actual amount paid in tax will also complete this form.

I was charged this tax on my local service, my long distance, my cellular, and my Internet phone service. Which phone services are eligible for the refund? Courts held that whern the tax was based on transmission time, rather than distance, the tax was invalid. This means that the tax applies today only to local telephone service. The tax will be refunded for all other services where it was charged.

Why the specific dates (February 28, 2003 - July 31, 2006)? The Internal Revenue Code has a statute of limitations; the government only has to refund the money that was collected during this time-frame.

I'm still being charged the tax on my long-distance service. What should I do? Call your carrier and complain, and demand an immediate refund of the illegal tax. Then write your Public Utilities Commission and/or the FCC (Federal Communications Commission).

I don't have to file a tax return this year. How do I collect the refund? The IRS announced that there will be a special tax form, Form 1040-EZ-T, for such individuals.

It really took 108 years for the government to stop funding the Spanish-American War? Unfortunately, the telephone excise tax continues on local phone service, so we're still paying to "Remember the Maine!"

...for these individuals.

First up is Minish Mehta of South San Francisco. He'll be spending 15 months at ClubFed. He ran a number of Bay Area parking lots and had a unique method of dealing with the cash collected. If the amount of the deposit were under $10,000, he'd deposit it in his personal account; if it were over $10,000, it went in the company account. In 1999 and 2000, those personal deposits totaled nearly $1 million. The IRS wasn't pleased when they figured out Mehta's scheme. Why $10,000 as the cutoff? That's because no currency transaction report is required on deposits of less than $10,000. However, banks can make such a report if they suspect suspicious activity. The news report doesn't indicate how the IRS found out.

Next is Ronald Isley, the Isley Brothers' lead singer. He's going to be at ClubFed for three years and will have to pay $3.1 million in back taxes. U.S. District Judge Dean Pregerson quoted in an AP Story (via the Washington Post), "The term serial tax avoider has been used. I think that's appropriate."

Charles E. Polk, Jr., a prominent St. Louis attorney, will have 46 months to think over his schemes while at ClubFed. Polk stole funds from the Metropolitan St. Louis Sewer District and evaded taxes according to this story. Former Attorney General John Ashcroft wrote a letter asking for leniency. The plea agreement (Polk agreed to plead guilty to two counts; in return, 21 counts were dismissed) stated that the maximum sentence would be 47 months. Perhaps the one month Judge Stephen Limbaugh didn't sentence Polk for was a result of the letter....

Closer to home, John Archibald will be spending 15 weekends at the Pasadena city jail and will be on probation for five years. Archibald pleaded guilty last week to taking bribes and filing a false California tax return. Archibald took over $100,000 from subcontractors working at the Park LaBrea complex in Los Angeles according to this report. He'll have to make restitution to Casden Properties, the owner of Park LaBrea, and the Franchise Tax Board.

And finally, surfer Sunny Garcia will get to enjoy the swells generated by Hurricane John. Garcia, who was found guilty of tax evasion earlier this year, had sentencing postponed until October 18th according to this story. (As an aside, how often do you think I'll be able to link to the Global Surf News and be on topic?)

So as Labor Day weekend winds down, remember what happens when you illegally evade taxes. You either look over your shoulder for the rest of your life or you find yourself looking through bars.

An interesting story from Las Vegas: It seems that there's a problem with tips, and tip reporting, in Sin City.

The American Gaming Association is very unhappy about the IRS' enforcement of the voluntary tip program. This program allows workers to report set rates of tips, based on where they work and what shift they're on. Tips are a big part of workers incomes in Las Vegas.

The IRS has decided to audit 1000 of the workers who signed up for the tip program; that's what's making the AGA upset. The IRS is likely angry because workers are -- gasp -- underreporting cash tip income! That's unheard of!

In any case, the Vegas tip program agreement ends in just a few months. At that point, the gratuity may become extra.

News Story: Business Las Vegas