Taxable Talk

It's been a busy week for the scofflaws.

First up is a dentist from Florence, South Carolina. He is alleged to have added about $1 million in false expenses and loans to his tax returns. If convicted, he faces a maximum fine of $1 million plus 14 years in prison. It's great if you can get away with it....

Meanwhile, another dentist will find himself behind bars. Burton Tucker, of Waynesboro, PA, used offshore trusts to evade about $520,000 in taxes. He'll be making restitution and will spend one year at Club Fed; the government noted that he's cooperating in an ongoing investigation of trusts. It's just been a bad week for dentists, I suppose....

In New jersey, a judge cited that a jeweler has "appalling greed." Licinio Neves, owner of a three-store jewelry chain, will spend up to 6.5 months in Club Fed for his tax evasion, and must make restitution of $470,000. He kept two sets of books, and didn't report the cash sales from his stores in 2001.

Not bad for just a couple of days.

Last month we reported on the tax troubles of Australian actor Paul Hogan. Hogan is in trouble over money sheltered in Swiss bank accounts.

The Sydney Morning Herald reports in Thursday's edition that Hogan has hired an American expert in trusts: Scott Michel of Caplin & Drysdale, a Washington firm of attorneys. Mr. Caplin has written many articles dealing with white collar crime in general, and tax evasion specifically.

The Herald article notes that Hogan invested in "honourable trusts" through Phillip Egglishaw. Egglishaw's brochure, according to the Herald, states, "Trusts are typically used to avoid the following forms of taxation: income tax, capital gains tax, death duties, gift taxes, wealth taxes.... The key is 'secrecy'"

Given that Australia's tax laws require residents to declare their worldwide income (as do those in the US), Mr. Caplin may have his work cut out for him. At least the Herald is reporting that Hogan is only looking at civil penalties because of his ignorance of Australian tax law.

News Story: Sydney Morning Herald

I'm gone for ten days on vacation and return to find that the new news is like an instant replay of the old news. Yet another adult bookstore owner has been indicted on income tax evasion charges.

Jerry Pendergrass owned Metro News, the self described World's Largest Adult Bookstore, and several other adult entertainment entities in Tennessee. Pendergrass allegedly purchased property but didn't record the deed. Then, using the help of two attorneys who have also been indicted, Pendergrass was allegedly able to hide over $300,000 in proceeds from the sale of the property. Pendergrass also allegedly had about $400,000 in phony deductions and had personal expenses paid for by his corporation and not reported as income on his tax returns.

This isn't the first time Pendergrass has been in trouble. Federal tax liens totaling over $565,000 have been filed against him. Pendergrass was convicted in the late 1990s on an obscenity charge, but the conviction was overturned.

News Story: The Chattanoogan

Former Atlanta Mayor Bill Campbell will begin serving his 2 1/2 year sentence on August 21st. Campbell's request to stay free while appealing his sentence was denied last week by Judge Richard Story. Story noted that Campbell "as not shown the existence of a substantial question likely to result in reversal, a new trial, or a reduction in his sentence."

Campbell will serve his sentence at the federal minimum security prison camp in Miami. Campbell, besides prison time, was fined $6,300 and ordered to pay $63,000 in back taxes.

News Story: WISI(AP)

If you're a Native American and reside in California on a reservation, you're exempt from California personal income tax. However, you're not exempt from federal income tax. And that's where this story begins.

The Chumash tribe runs a very successful casino near Santa Ynez, north of Santa Barbara. Tribal members receive quite a bit of income each year, and must remit federal income tax. A few years ago the Chumash were approached by Benecorp LLC. Benecorp presented to the Chumash the "CapNet 7 Financial Models." 32 members of the Chumash are alleged to have saved millions in taxes through "sham management fees," according to this story in the Los Angeles Times. The same story notes that in April 2004, outside experts told the Chumash that the program, "is being administered in a way that is not authorized under current IRS laws."

Without knowing the nuts and bolts of the program, it's impossible for me to determine whether the CapNet 7 Financial Model complies with tax laws or not. I did notice when looking at Benecorp's website that the heart of the plan is a trust. The government alleges that the plan, "[created] sham entities and sham transactions." We've seen that in plenty of trust enforcement actions recently. The Chumash officially severed all links to Kenneth Sorenson, one of the two principals behind Benecorp.

The moral is the usual one. Stephen Drake, the other principal of Benecorp, said in a 2004 interview, that Chumash who learned of the program thought it was too good to be true. That just might be the case.

With an estimated $40 to $70 billion in taxes lost each year because of tax havens, the Senate Homeland Security and Governmental Affairs Committee was naturally quite interested in plugging this hole. Yesterday the panel heard testimony from IRS Commissioner Mark Everson, among others.

The 401-page report issued by the committee The report recommends eight items:

1. U.S. law should presume that offshore trusts and shell corporations are under the control of the Americans directing the use of the assets, when the trusts and shell corporations are located in a jurisdiction designated as a tax haven.

2. U.S. publicly held companies and their insiders should disclose in SEC filings holdings in an offshore trust or corporation.

3. Offshore trust or shell corporations related to a director, officer, or large shareholder of a U.S. publicly traded corporation should treated as an affiliate of that corporation.

4. Require 1099 reporting if a US financial institution opens an account for a foreign trust or shell corporation and determines that the beneficial owner of the account is a
U.S. taxpayer.

5. Loans that are treated as trust distributions under U.S. tax law should be expanded to include loans of real estate and personal property of any kind including artwork, furnishings and jewelry. Receipt of cash or other property from a foreign trust, other than in an exchange for fair market value, should also result in treatment of the U.S. person as a U.S. beneficiary.

6. Require hedge funds to establish anti-money laundering programs and report suspicious transactions to US law enforcement.

7. Enact laws and/or regulations such that taxes on stock option compensation cannot be avoided or deferred by exchanging stock options for other assets of equivalent value such as private annuities.

8. Enact sanctions on tax havens that do not cooperate with US tax enforcement and eliminate US tax benefits for income attributed to those jurisdictions.

Given that both Democrats and Republicans want to reverse this outflow, expect something to pass Congress in the not to distant future.

Hat Tip: TaxProfBlog

New York Times Article
AP Report
Wall Street Journal Article (Paid Subscription Link)