Taxable Talk

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.

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.

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.

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

...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.