Taxable Talk

Recently I assisted a client in preparing his paperwork to file a petition at the U.S. Tax Court. In my emails and letters to him, I emphasized,

Make sure you mail the petition and accompanying documents by the deadline using certified mail, return receipt requested.

He did, and even if somehow his petition gets lost, he will have a valid Tax Court petition.

The TaxProf Blog has another story of a taxpayers who was a day late and a dollar (or, in this case, potentially $50,000) short. The taxpayer had a deadline for his Tax Court filing of October 5th. He used UPS to send his petition, but the tracking receipt shows he sent it on October 6th. The petition is dated October 6th.

The IRS petitioned the Tax Court to dismiss the case for lack of jurisdiction. The taxpayer contended that he dropped the petition off at a mail store on the evening of October 5th. The Tax Court noted that it doesn't matter; it didn't enter the UPS system until the 6th, and the Tax Court no longer has jurisdiction.

So if you're approaching the deadline and you're going to be after the post office closing hours, find a post office that's open late (in the Los Angeles area, the LAX branch is open late) or find a FedEx office that's open late (various offices are open to 6:30pm in the L.A. area). But whatever you do, make sure it gets picked up by the deadline or you have just lost your case.

Hat Tip: TaxProfBlog

Case: Raczkowski v. Commissioner, T.C. Memo 2007-72

Superior Electric Company of Ohio had an interesting way to make a profit: they cooked the books. Back in November, two former executives pleaded guilty to defrauding the IRS. Yesterday, John McShane, the former CFO, was sentenced.

Mr. McShane was sentenced to 15 months and ordered to make restitution of $1.62 million.

What did Mr. McShane and the former CEO and co-owner of Superior, Jerry Gemeinhardt, do? They put some of Mr. Gemeinhardt's personal expenses as company expenses. Things like his yacht and landscaping expenses are some of what they allegedly did.

Mr. Gemeinhardt hasn't been sentenced yet. I suspect his yacht will soon have a "for sale" sign on it.

I grew up in Chicago, and I remember vacationing at Wisconsin Dells as a child. Now Wisconsin, like many states, sports Indian casinos. Gamblers who patronize such casinos are in for a rude surprise when they complete their tax returns.

Wisconsin is one of 10 states that does not allow gamblers to deduct losses on their state tax returns. Daniel Dettwiler had gambling winnings of $99,252.60 which he duly reported on his 2002 federal tax return. He also deducted as a miscellaneous itemized deduction his gambling losses of $41,637.00 on his federal tax return. He did the same thing on his Wisconsin tax return even though Wisconsin doesn't allow that deduction.

His case went before the Wisconsin Tax Appeals Commission, where he lost. He then appealed to a state court and lost. On Tuesday the First District Wisconsin Court of Appeals ruled on his appeal.

The Court noted,

"Effective January 1, 2000, gambling losses were no longer offset against gambling winnings under the Wisconsin tax code because, effective on that date, Wisconsin no longer permitted as a deduction from Wisconsin taxable income “[m]iscellaneous itemized deductions under the Internal Revenue Code,” see Wis. Stat. § 71.07(5)(a)7 (2003–04), one of which, the Department contends and Dettwiler does not dispute, was the deduction for “wagering losses,” under section 165(d) of the Internal Revenue Code...His contention that he should nevertheless be permitted to subtract from his Wisconsin taxable income the offset permitted by section 165(d) of the Internal Revenue Code is not only circular and without merit, but is wholly contrary to the legislature’s decision to eliminate such offsets effective January 1, 2000.

"The Tax Appeals Commission decision is perfectly logical, appropriate, and correct. Accordingly, we affirm."

Had Mr. Dettwiler been a professional gambler, he wouldn't have had a problem; his losses would have been deducted on Schedule C, and his net income would have been reported on his federal (and Wisconsin) tax returns. Of course, he would have been liable for the self-employment tax.

So if you're going to gamble, you may want to avoid Wisconsin. For the record, here are the other states where gambling is much more of a gamble:

• Connecticut
  
• Illinois
  
• Indiana
  
• Massachusetts
  
• Michigan (first $300 exempt)
  
• Minnesota (because of its AMT)
  
• Mississippi
  
• Ohio
  
• West Virginia
  
• Wisconsin

Case: Dettwiler v. Wisconsin Department of Revenue

Walter Anderson, the former telecommunications executive who pleaded guilty to engaging in a $200 million tax fraud, received nine years in prison when sentenced on Tuesday. But Mr. Anderson did get lucky in one respect. Because the plea agreement was poorly written, the judge did not order Mr. Anderson to make restitution. The IRS will have to make a separate case in civil court to recover the money.

Hat Tip: Roth Tax Updates

The 2nd Circuit joined the 3rd, 9th, and 10th Circuit Courts of Appeal today and won't allow a lottery winner to turn ordinary income into a long-term capital gain. We've written about this before (see here and here).

The question for the Court, in this case originally decided at the Tax Court, was whether the right to future lottery winnings can be converted into a capital asset (under Section 1221 of the Tax Code). The "Substitute for Ordinary Income Doctrine" governs this issue; lump sum payments for what would be ordinary income in the future can't be magically changed into a capital gain.

The 10th Circuit came up with the crux of the matter. “[W]hen a party exchanges for a lump sum the right to receive in the future ordinary income already earned or obtained, the amount received serves as a substitute for the ordinary income the party had the right to receive over time. The lump sum is accordingly treated as ordinary income for taxation purposes.” Watkins vs. C.I.R., 447 F.3d at 1272.

So if you do get lucky and win the lottery, congratulations. Just save enough money to pay your taxes.

Case: Prebola v. Commissioner

Hat Tip: TaxProf Blog

As the saga of Neteller, the Isle of Man based financial intermediary, drags on, I've gotten many questions regarding the money that's tied up. For those who are unaware, some of the Neteller money was seized by the US government as it was moving over the wires between Neteller's banks and customers' banks, and some is sitting in customer accounts at Neteller. All of it, though, remains out-of-reach of American customers of Neteller. So the question is, do customers of Neteller have to pay tax on gambling proceeds won in 2006 that are stuck at Neteller?

Yes.

When an American must pay tax on income is governed by the doctrine of "constructive receipt." Suppose you gamble on an online poker site, and you win $1000. However, right when you win that money the poker site goes out of business, and you never collect a penny of the $1000. You've never had access to the money—you never were able to use it. You didn't have constructive receipt of the money.

Now suppose you win $1000 on December 31, 2006, and the money is immediately put in your account. On January 16, 2007, you withdrew the money into Neteller. You immediately requested Neteller to transfer the money into your American bank account. On January 17th that money was either seized or is stuck at Neteller.

That individual has $1000 of gambling income in 2006. The gambler could have withdrew the money on January 1, 2007 or he could have gambled with it on January 1. He had constructive receipt of the money. That he was unlucky in that the money was seized or stuck at Neteller is unfortunate. He or she must pay tax on the $1000.

So what should an individual do who has significant funds stuck at Neteller—so significant that he may not be able to pay what he owes in taxes? Talk to a professional tax advisor now; don't wait until April 10th. Most tax preparers are very busy between now and April 17th. We're not (in general) going to be able to give you specific advice if you wait until the very last minute.

Realize that you owe the money. Find out what your total tax is (including your state income tax, if applicable). Determine what you can afford to pay. Options include going on extension and installment plans. But not filing a tax return (or at least an extension) by April 17th will subject you to the failure to file penalty!

The phrase caveat emptor (let the buyer beware) applies to many offshore entities. The IRS considers online gambling to be just another tax avoidance scheme. They're not going to be very sympathetic to taxpayers using a financial intermediary that serviced offshore online gambling firms.

There's something about strip clubs that brings out the worst in taxpayers. They're a mecca for tax fraud. In January I brought you the story of Dangerous Curves, a Philadelphia area strip club whose owners were accused of tax fraud. Today comes word that one of the owners, Bishop Krabsz, will plead guilty tomorrow to hiding $800,000 of income and paying employees under the table.

The investigation began as an offshoot of a corruption probe of former Philadelphia Councilman Richard Mariano. Also accused are Dangerous Curves' accountant, Enrico Nardini, and the other co-owner, Kevin Rankin. Both Nardini and Rankin have pleaded not guilty.

Once the judge ruled, this headline was inevitable. After all, Janet Nguyen was up by seven votes (that's right, 7) over Trung Nguyen. So a Nguyen was going to win.

Janet Nguyen was down by seven votes and asked for a recount. After the recount concluded, she was up by seven votes. Trung Nguyen, who was now in second place, filed a lawsuit claiming that the recount was done in an illegal fashion. Yesterday, Judge Michael Brenner ruled that the recount was legal and that Janet Nguyen won by three votes. This afternoon Janet Nguyen will be sworn in as Supervisor for Orange County's 1st District. Ms. Nguyen will be the youngest Supervisor and the first Asian-American (and Vietnamese) Supervisor in Orange County's History.

One result that this election reinforces: your vote matters. I'm not in the 1st Supervisorial District, but those four Trung Nguyen supporters who forgot to vote in February are probably very unhappy right now. (For the record, Trung Nguyen is planning on filing an appeal.)

"Renaissance, the Tax People", was, as I previously reported, a multi-level marketing firm specializing in tax. That was the legal part of the business. The illegal part, according to the Department of Justice (and the six individuals who have pleaded guilty to various charges to date) was how it lowered taxes for its clients.

If you used the Renaissance system, you could deduct personal expenses as business expenses! And you could have gotten this system for just $300 to $1200, plus another $100 per month! What a deal!

Just one major problem with that...you can never deduct personal expenses as business expenses. That's fraud, and that's what the Renaissance founders promoted.

The latest to plead guilty is Renaissance's former National Marketing Director, Todd Eugene Strand of nearby Murrieta, California. Mr. Strand admitted that he falsely assured customers that the program was legal. He also agreed that Renaissance defrauded customers of $75 million, and caused a tax loss to the United States of $20 million.

Mr. Strand is looking at a few years at ClubFed, and a possible fine of $500,000. He'll be sentenced in January 2008.

I'm a big fan of Rex Stout, the creator of fictional detective Nero Wolfe. Murder by the Book is prototypical Stout, and is one of my favorites. As a published author, I've gotten to see some of the workings of the publishing industry. The plot in Murder by the Book centers on an unpublished novel titled Put Not Your Trust. And that's where this tax story begins.

Most Americans believe they pay too much in taxes. High income taxpayers think this too. Many find themselves investing in various schemes in an effort to lower their taxes. Sometimes they pay more in fees than they will save in taxes. One of the most popular vehicles—but definitely one that needs to be carefully explored—are offshore trusts.

The idea is to take taxable income and turn it into nontaxable income. Usually these trusts are found in tax havens such as the Cayman Islands or the Isle of Man. Promoters promise the moon, but remember my old adage: if it sounds too good to be true, it probably is.

Americans are taxed on their worldwide income. If you have an offshore trust, it may not file documents with the IRS. But if you look at Schedule B, you will note that there's a question that asks if you are the grantor of an offshore trust. If you are, you need to report it (in most cases).

Ah, you'll just ignore that bit of tax law; the IRS will never catch you. Warning: you've just committed a felony. Of course, the IRS might not catch you, but you won't be happy if they do.

The IRS goes after promoters of these sham trusts. Victor Carlysle Sullivan, Jr. of Albany, GA is the latest to find this out. Sullivan charged between $5,950 and $49,500 to invest in these trusts. He's just been barred from promoting or organizing any more of them. And he has to send the names and social security numbers of his clients to the IRS. If you're one of his "lucky" customers, expect a friendly neighborhood IRS agent to be knocking on your door in the near future.

So put not your trust in offshore trusts, because if it sounds too good to be true, it probably is. And Mr. Sullivan's customers will almost certainly wish they never heard of him. Oh, if you've never read Rex Stout's Nero Wolfe books, pick one up. You're in for a treat.

This weekend's edition of the fraud post features a bozo tax preparer, a contractor who built his dream house with the money he was supposed to send to the IRS, and a temp agency owner who allegedly did a good job withholding taxes but a poor job in sending them to the government.

Let's start close to my home. From nearby Buena Park, California (home to Knott's Berry Farm) comes the story of Yakoob Habib. Mr. Habib pleaded guilty in February to money laundering, tax evasion, and flight while on bail. Mr. Habib was sentenced on Friday to 11 years in state prison.

The news story indicates that Mr. Habib has a history with crime. Back in 2001, he was part of a conspiracy stealing million from California's MediCal program. He pleaded guilty in 2002 and promised to cooperate with the government. Later he decided to flea the United States. His current offense was not reporting $10 million that went through his personal accounts and $18 million that went through his business. Mr. Habib has probably prepared his last tax return.

We all want our dream houses. Athanasios Reglas thought he had a foolproof way of getting his. He created two fictitious companies that billed his Reglas Painting Company for work that was never done. He built his dream home in Ocean City, Maryland and bought a waterfront lot for $400,000. He also transferred money from his shell companies to his personal accounts, and he committed the crime of "structuring" as he hid $873,000 in withdrawals. When he was arrested, the government found $358,000 in cash (which he has agreed to forfeit). He pleaded guilty to tax evasion and will be sentenced in July. Based on federal sentencing guidelines, Mr. Reglas is looking at 3 to 4 years at ClubFed.

Finally, Michael Monahan of Nashua, New Hampshire is alleged to have not paid the government withholding taxes. Mr. Monahan runs a temp agency in Nashua. On Wednesday, Mr. Monahan was indicted on six counts of tax evasion and three counts of mail fraud. Mr. Monahan allegedly had an interesting method of reporting his firm's wages to the government. In 2000, for example, he reported $226,000 in wages and paid $69,000 in taxes. The problem is that he allegedly had an additional $1.9 million in wages. Oops. The IRS alleges that this continued through 2003. The government is also looking Mr. Monahan's partner in the business (who was not named in the indictment). Mr. Monahan faces a long term at ClubFed if he's found guilty on the charges.

There's just no such thing as a free lunch....

With the Democrats now in control in Congress, it's time to watch our wallets. My district in Congress happens to be represented by one of the few accountants in Congress, John Campbell. Congressman Campbell is a CPA, and he's not impressed at all with the Democrats idea of budgeting.

Congressman Campbell maintains his "Green Eye Shade Blog." Last week he wrote about the proposed budget, and called it, "...a sham to the American taxpayer." He believes it is a return to the "tax and spend days of old."

Did anyone really believe that with a Congress controlled by Democrats we would be looking at lowered spending and/or a decrease in taxes?

Pity the poor madam escort service operator accused of being a madam. She has but one tangible asset, or so she says, a phone list of her well-to-do clients in Washington, DC. Why not sell the list to finance her defense?

The government, which alleges that Deborah Palfrey is really a madam, and accuses her of money laundering and racketeering (RICO), says that could damage their case. No sale, said Judge Gladys Kessler in Washington. And further, you can't start lawsuits against potential witnesses. Ms. Palfrey had filed one suit against one of her "escorts," and sued 15 other unnamed escorts. That lawsuit has been effectively stopped.

Meanwhile, Ms. Palfrey still plans to have an unnamed media group look at the 46 pounds of phone records (10,000 pages). Thankfully, it's not me. I'm seeing too many numbers in my day job as is.

The next hearing on the case is set for April 12th.

News Story: San Francisco Chronicle

If you don't pay your taxes, or file a return with all zeroes, things will happen. Eventually, when you owe enough money, an IRS agent will knock on your door (or send you a certified letter). If you keep ignoring them, your money will be garnished.

Or you could do what Robert Lee Cavins, Jr. of Chanute, KS did. He set up trusts: the Cavins Residential Trust and the Cavins Chiropractic Trust. The trusts didn't pay income tax either. Mr. Cavins also took $70,000 and set up a bank account on Antigua (a tax haven). And since Mr. Cavins didn't pay $119,595 of income tax from 1992 through 1994, eventually the IRS would catch up to him.

They did.

Mr. Cavins was found guilty yesterday of tax evasion. He faces up to five years at ClubFed plus a fine of up to $250,000. Yes, Virginia, there really is an income tax.

When you hear that your vote doesn't count, well, think again. Here in Orange County, the First Supervisorial District was without a Supervisor since January, when Lou Correa (elected to the State Senate in November) moved up to Sacramento. Ten candidates ran in the election in February, and the Democrats were hopeful to retain the seat—the Republicans would split the vote.

Indeed, that was the case...well, sort of. The Republicans did split the vote. After the votes were counted, Trung Nguyen (R) led Janet Nguyen (R) by 7 votes. Your vote definitely counts. The Nguyens, by the way, are not related, but are both part of the sizable Vietnamese community of Orange County.

Then there was the (inevitable) recount. And when that was completed, Janet Nguyen was on top by 7 votes. What comes after the recount? The court challenge.

The judge hearing the case, Michael Brenner, noted that California's election law is inconsistent. Hopefully, a ruling will be made soon, so that the district has representation.

Neteller, the beleaguered Isle of Man financial intermediary firm whose two founders were arrested on money laundering charges in the United States, announced that they have come to an agreement with the US Attorney's Office for the Southern District of New York (where the potential prosecution will take place). While it's very unlikely the agreement with the DOJ will be made public, Neteller's press release notes that:

• Within the next 75 days (by June 4th) they will announce a plan for the return of funds of their American customers;



• A consulting firm, Navigant Consulting, Inc., will, according to the press release, "...provide a report to the USAO on the Group’s current financial condition."



• Neteller "is continuing to cooperate with the USAO’s investigation, under the advice of its legal advisers and in accordance with court orders in the Isle of Man"

So what does this mean for a Neteller customer?

1. Neteller is cooperating with the US Attorney's Office (the Department of Justice). What is the DOJ interested in? Money laundering, of course. Large accounts with activity. Individuals (and entities) that haven't reported their foreign bank accounts. Individuals and entities that haven't filed tax returns on income earned overseas.

2. If you have a Neteller account, and you had $10,000 in it at any time during 2006, you should make sure that you mark the box on Schedule B of your tax return that indicates you have a foreign bank account. The IRS will likely, by year-end, have balance information on every Neteller account. You also need to file Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30, 2007.

3. If prior to 2006 you had $10,000 at Neteller and you didn't file the TD F 90-22.1, you should consider filing it today, attaching a note that says you weren't aware of the law requiring notification of a foreign bank account. The penalty for not filing the form is $10,000 (minimum), and it's a felony—you can go to prison for this. Do realize you are likely going to have your tax return audited, but if you're choosing between an audit and jail time, I know which one I'd choose.

4. A client asked me over the weekend when I thought he'd see his Neteller funds. I told him late Summer or Fall. I think a July to September time frame is a reasonable estimate.

So the Neteller saga continues, but the ending is clear. American customers will almost certainly see their funds this year, and the DOJ (and later, the Treasury Department and the IRS) will see Neteller's records this Spring or Summer.

Erle Stanley Gardner would enjoy this plot. A madam, excuse me, an escort service operator, is accused of racketeering and money laundering. She has a list of her customers that she wants to sell. She claims to have given a copy of her list to an unnamed news organization, to help her case (according to her attorney).

Meanwhile the prosecution accuses the escort service operator to really be a madam, and they accuse her and her attorney of intimidating witnesses by suing former employees and customers. They've asked the judge to prevent her from instigating any of these lawsuits. On Monday the judge delayed until Thursday the hearing on whether Deborah Palfrey, the accused, can sell her list.

So is Palfrey a madam who ran a high-class prostitution business serving wheelers and dealers in the District of Columbia, or just an innocent businesswoman who operated, as she told the Washington Times, "[a] legal, high-end erotic-fantasy service [with clients] from the more refined walks of life" in Washington?

News Story: Washington Times

Two diametrically opposed visions of Hollinger, Inc. were presented to jurors in Chicago in opening arguments of the Conrad Black trial. Prosecutors, quoted by Bloomberg, called Hollinger Black's "personal piggy bank." His attorneys, though, claimed "[the] company was stolen out from under him."

And it was only the first day.

Meanwhile, Bloomberg reports that David Radler, Black's former partner, will be the key witness against Black. Radler settled with the SEC and the Sun-Times media group for $72 million last week. In 2005 Radler pleaded guilty to fraud and agreed to cooperate with the government.

News Story: Bloomberg

If you use the postal service, it will cost you $0.41 for first class mail beginning on May 14th. The good news? You will be able to buy a "forever" stamp. The new "forever" stamp will be able to used for first class postage...forever.

The "forever" stamp will not be available in rolls (to discourage businesses from using it), nor will postage meters be able to use it. But you will be able to buy books and sheets of the stamp.

Being the cynic that I am, let's move forward to June 2009, when the Postal Service governors raise the postage rate to $0.43, effective on August 1, 2009. Do you think there will be a sudden shortage of "forever" stamps at that time?

News Story: USA Today

A very interesting article from Reuters on the possibility of a decline in state tax revenues. Reuters speculates on (1) lower capital gains revenues, in states such as California, and (2) declining real estate values, in other coastal states (such as New Jersey) impacting tax collections.

As to California, real estate is not likely to be a major factor in state tax collections. Property tax is paid to each county, and mostly stays with the county and cities within each county. However, the issue to watch is the impact of stock options.

Stock options were, in my opinion, the reason why California tax collections increased in 2006. I suspect that taxes from stock options will not increase in 2007 from 2006 (and likely will decrease). This is just speculation based on a small sample size; however, we will get a much clearer picture by the end of April (when the Franchise Tax Board releases collection numbers for April).

In any case, it will be an interesting April and May for budget writers at the state, county, and local levels.

If I told you that there was a trial attracting a media circus in Chicago, you might wonder about my intelligence. Except for stories in the two daily Chicago newspapers (the Chicago Tribune and the Chicago Sun-Times), this trial might not even be happening. While I have reported on this trial (most recently, on Monday), the Register and the Los Angeles Times have been silent.

It's the Conrad Black trial. As the Tribune reports, the jurors have been selected (but the names aren't being released), and the trial will begin on Monday.

While the trial isn't making news in the United States, it's big news north of the border. Hordes of Canadian media have descended on Chicago to cover the trial. As this story from the Edmonton Sun notes, it's going to be tough sledding for the jury. How would you like to be a juror and be faced with understanding the complexities behind mail fraud, tax fraud, and all the other charges that the defendants are accused of?

Well, I will continue to cover the trial. Because a good media circus makes for some fun during tax season.

Back in November I wrote about the Ozbay family of Schenectady, New York. They didn't commit one piece of tax fraud. No, they committed lots of tax fraud. They didn't pay income tax, they structured their transactions, and they didn't pay withholding taxes to the government that they withheld from their employees.

Ziya Ozbay is the first of the four Ozbays to be sentenced. He got ten years at ClubFed and he must surrender $6.8 million of his ill-gotten gains. Ziya was found guilty along with his son-in-law, Yalcin Ozbay (he will be sentenced on April 13th). Mustafa Ozbay, Ziya's brother, pleaded guilty along with Mustafa's son, Birol Ozbay. Birol will be sentenced on March 28th and Mustafa on April 26th. (News story here.)

Meanwhile, in White Plains, New York, Duane Howell has probably prepared his last tax return for a client. The 72-year old Howell pleaded guilty yesterday to conspiring to obstruct the IRS, preparing false tax returns, and obstructing the IRS.

Mr. Howell falsified expenses on the partnership returns of his clients, adding phony expenses that reduced the liability for his clients. It's not a bad way to attract clients—if you can get away with it. Personally, I don't recommend it as the consequences can be disastrous. For Mr. Howell, he faces up to eight years at ClubFed according to this story.

Well, it's time for an uber-post. We've got plenty of fraud to share, with two practitioners in trouble, an IRS agent, what should be a circus of a trial, and a pilot that may be grounded.

First up comes one from the internal affairs department. An IRS agent is accused of evading $21,000 in taxes. He also allegedly offered other taxpayers by selling deductions from a company that coincidentally shares the same address as the agent. Harry Wilner could face 15 years at ClubFed if he's found guilty, according to this story.

Meanwhile, in Chicago, a CPA has pleaded guilty to three counts of preparing false tax returns. Pepito Guinto added phony medical deductions, charitable contributions, and unreimbursed business expenses to some of his clients (a reported 57 of 4780). His brother, Pablo, has also allegedly committed the same crime. He, though, has fled the United States and is reported (by this news story) to be in the Visayas. Pepito will likely serve three years or so at ClubFed.

Staying in the Windy City, the trial of Conrad Black will soon begin. As I reported last year, Black faces multiple counts of tax fraud, mail fraud, wire fraud, money laundering, obstruction of justice, and RICO. As this news story notes, "It has just about everything a good drama should - power, money, allegations of corruption, a lord and lady of the realm and a self-perceived knight in shining armour who's standing up for his damsel in distress." I'll keep you updated as the trial, scheduled to begin on Wednesday, moves along.

Moving now to South Carolina, a CPA is alleged to have forgotten something important: paying his state income tax. Rex Wicker, of Pawley's Island, is accused of not paying $18,000 in taxes according to this story. If true, he's certainly not setting a good example....

Finally, a pilot for FedEx is in trouble for allegedly filing false tax returns from 2000 - 2004. Michael Mason, of Cordova, TN, is accused of not filing tax returns during the years in question. According to this news story, the indictment accuses Mason of having income of over $1 million in each of those years, and using nominee bank accounts to hide his income. He faces a minimum 30 years at ClubFed if convicted on all counts.

Survivor winner, but court loser, Richard Hatch had his appeal heard in Boston last Thursday. Hatch, convicted on multiple counts of tax evasion, is now serving his four-plus year prison term.

Hatch is arguing that he should have been able to present the argument that he had a deal with CBS and the producers of Survivor—a don't ask don't tell deal. They would pay his taxes and he wouldn't tell about "deals" and cheating that happened on the television show. Hatch and his attorneys are asking for a new trial. CBS denies Hatch's claims. The government counters that Hatch's attorney could have asked this question during the trial but they didn't.

The appeals court ruling will probably come out this summer.

News Story: Fox News

California has a lot of taxes. One of the taxes that most individuals are not aware of is the pesticide tax. As the DPR notes, "California assesses a fee on all pesticide sales, levied at the point of first sale into the state. A “mill” is equal to one-tenth of a cent. This “mill assessment” is 21 mills, or 2.1 cents per dollar of sales. Mill assessment revenues are placed in a special fund used to support the State’s pesticide regulatory program." Of course, the retailers pass this tax on to consumers, but that's another story for another day.

Wal-Mart used to be able to avoid this tax. California changed the law in 2005 so that "big box" retailers can't avoid the tax by having corporate offices in another state. California requires all sellers of pesticides to pay the tax.

Wal-Mart's bill? $1.2 million: $1.09 million from the mill tax, and $110,000 in interest and penalties (according to ISSA). Wal-Mart is pledging to work with the DPR, and given Wal-Mart's push for positive public relations, I'm sure that will be the case.

Given California's looming budget deficit, a million here and a million there can add up.

Last year I wrote about David Richardson of nearby Huntington Beach. Mr. Richardson was indicted on five counts of tax fraud (filing false claims), after filing multiple phony refund claims. But what made Mr. Richardson special was what he did when he didn't get his tax refunds. As I said last year,

"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."

Mr. Richardson was convicted in November. He got the bad news today: five years at ClubFed, and restitution of $286,345. He'll have five years of supervised release when he gets out of ClubFed, too. His chutzpah will likely soon be a thing of the past.

News Story: Orange County Register

CCH's Federal Tax Weekly has an article on the Tschetschot case. My comments are included in the article. There were two major surprises in the decision:

- The IRS conceded that Mrs. Tschetschot was a professional gambler even though she earned $49,000 in wages. This is contrary to the stance that the IRS has taken in most cases and bodes well for part-time professional gamblers.

- It is unusual to read a Tax Court decision where the Court basically asks Congress to change the law.

You can find the article on page 102 of the March 1, 2007 edition of Federal Tax Weekly.

I've criticized California's Franchise Tax Board on several occasions. However, I am going to praise them when they deserve it, and this is one of those times.

The FTB, in the past, has assessed late payment penalties when payments on some e-filed returns were not remitted with the return (on returns with a balance due). The FTB will be sending out refunds for some taxpayers, for tax years 2002-2005, where:

• The return [was] e-filed


• At least 90 percent of the tax due [was] paid by the original return due date.


• The remaining amount due [was] paid within 21 days after we accept the return.

The FTB correctly notes that you are supposed to fully pay your taxes by the due date of your return (not 90% of your taxes). But the FTB has realized that the payment won't always accompany the return, and is rectifying a problem.

As far as we can tell, none of our clients are impacted by this issue. However, if you think you are, please contact our office so we can review your situation.

FTB Notice

The last few days have seen a few interesting stories of fraud and deceit in the tax world. We begin in the heart of Texas, travel to the East Coast, and end up with two stories that have a California connection.


Carl Herrera is a former NBA player with Houston, San Antonio, Vancouver (now Memphis), and Denver. He has also been a member of the Venezuelan National Team. His next gig may be with the ClubFed team; he surrendered to federal authorities last week after being indicted on charges of not paying $554,471 in taxes between 1994 and 1997.

Remember our story on Joe Mammana, the Yardley, PA philanthropist accused of not paying tax on over $4 million? The Associated Press reports that he will admit to the tax fraud in a plea deal next week.

The Fresno Bee has a story this past week about the IRS making some changes in the whistle-blower program. The tip program now offers rewards of up to 30% of what's recovered.

And finally, a story that's not really about taxes. But it's too good to pass up. From the AP headline: "Alleged California madam threatens to sell list of D.C. clients." Deborah Palfrey of Vallejo (north of San Francisco) was indicted last week in Washington for allegedly running a prostitution ring. Her service has, according to the government, employed 132 ladies and generated $2 million in income. Her attorney says it's a legal escort service; the prosecution charges that it's racketeering. She's accused on RICO charges and money laundering. Her attorney notes that Ms. Palfrey only has one asset left to sell to fund her defense: her customer list. I wonder if anyone in D.C. is sweating right now?