Taxable Talk

I just finished re-reading Murder by the Book. Written in the 1950's by Rex Stout, the Nero Wolfe novel deals with four deaths and what a certain book ("Put Not Your Trust") has to do with them. If you've never read Stout, do so—he's a wonderful author, and the books written many years ago are still eminently readable.

Coincidentally, two sham trusts crossed my email in-basket this evening. From Kenai, Alaska comes yet another dentist who allegedly decided that a sham trust was a good way to cut his taxes. Here's the alleged scheme according to the Department of Justice.

The accused, Glenn Lockwood, formed a professional corporation. No problem so far. Then he allegedly contracted his services to an Irish company. That company allegedly leased his services to a Nevada company which, in turn, allegedly leased his services back to his own corporation. Of course, the money took a much more convoluted path, with offshore accounts, Nevada real estate development, and sham trusts supposedly thrown into the mix. The DOJ alleges that the loss to the Treasury is $575,000 for tax years 2000-2003. Mr. Lockwood will face four counts of tax evasion, and is looking at ClubFed if found guilty.

Meanwhile, in North Carolina, the DOJ has filed a civil lawsuit accusing two men of creating sham trusts to help customers evade taxes. The accused, Alexander Klosek and Bryan Noel, allegedly targeted wealthy and elderly individuals and attempted to get them to sell their homes and other major assets into sham trusts. It appears to be a pretty big alleged crime; the DOJ estimates the loss to the Treasury at $55 million. The DOJ has asked for an injunction to stop the individuals from selling any more trusts. And you can be fairly certain that a request for their customer list will soon follow so that the IRS can send a heartwarming "Dear Valued Taxpayer" letter to Klosek's and Noel's customers.

In the end, the best kinds of sham trusts are the ones you read about in novels. They cost you $5.95 or so for a paperback. The crimes described above, if proved, could lead to much larger penalties.

The Houston Chronicle has an interesting article about US Attorneys using the tax laws to go after adult business owners.

Pornography, excuse me, adult businesses, are not liked by the government. Back in 2005, then US Attorney General Alberto Gonzales set up a task force targeting the industry. As the article notes, the tax laws are being used where anti-pornography laws can't.

Businesses in industries that have lots of cash have always been targets of the IRS. This is definitely the case for the adult entertainment industry. I've written in the past about cases against strip club owners. Based on the Chronicle article, I'll have plenty more to write about in the future.

Wouldn't it be nice if we could buy a $39.95 package that would terminate our taxes? Tax protester Robert Schulz offered just such a package...until the US government got an injunction against him.

But the IRS had this idea. Wouldn't it be nice to know who bought these packages, and we might want to check and see if they actually filed (and paid) their taxes? So they issued a subpoena to PayPal for the records. And they won at the District Court.

Mr. Schulz appealed to the 8th District Court of Appeals. As Joe Kristan reported today, the Appeals Court upheld the subpoena. Read his entire post; it's excellent. I'll just note one sentence from the Appeals Court ruling: "[W]e conclude that Schulz’s constitutional arguments challenging the IRS’s authority to enforce the tax laws are without merit."

When you sell your home (assuming it's your principle residence), you get to exclude the first $250,000 of income ($500,000 if you're married and filing a joint return). That's a nice tax break. But if you sell investment property, you must pay taxes on the gain. And if that adds up to $6.5 million in real estate sales, someone might notice if you don't file a tax return.

Indeed, that's just what Jorge A. Valdes is alleged to have done. Mr. Valdes, a resident of the Miami area, is accused of selling $6,485,597.88 between 2001 and 2004. However, the Department of Justice alleges that Mr. Valdes has failed to file a tax return since 1992. The government alleges that Mr. Valdes owes tax of about $1.5 million.

Mr. Valdes is facing four counts of tax evasion for his failure to file. If found guilty, Mr. Valdes will be looking at a significant stay at ClubFed.

Press Release Here

In the United States, almost all income is taxable—including illegal income. Yes, if your a thief, you are supposed to report your ill-gotten gains on your tax returns. If you don't, your guilty of tax evasion.

Yes, it's entirely possible to get convicted of embezzlement (usually by your state) and then get convicted for tax evasion (usually by the Department of Justice). And a Kansan is looking at just that scenario.

Michael Slayton, of Tecumseh, Kansas, is accused of embezzling $238,000 from the home health care company he co-founded. Mr. Slayton allegedly pocketed the funds by writing 138 checks to himself, but using a different payee on the company's books. The US Department of Justice alleges that Mr. Slayton also reported incorrect amounts on employment tax forms to help cover up the embezzlement.

All told, Mr. Slayton is looking at three counts of tax evasion, three counts of filing false federal tax returns, and three counts of failure to account and pay withholding and FICA taxes. If convicted, Mr. Slayton is looking at an extended stay at ClubFed.

So if you decide on a life of crime, it's a good idea to not have the IRS on your back. Yes, you should report your illegal income as "Other Income" on line 21 of your Form 1040.

News Story: Topeka Capital-Journal

Joe Kristan of Roth Tax Updates has an update on the Wesley Snipes case. For those of you who don't remember, Wesley Snipes is accused of asking for a fraudulent refund of $12 million. Snipes used tax the argument that only foreign income is taxable (hint to anyone who wants to try that: don't). The IRS wasn't amused, and Snipes is now a Florida courtroom.

When we last reported on Snipes, he had accused the prosecutors of being "racially motivated." The judge denied that motion, and stated:

"From a prosecutor's point of view, especially in tax cases, the primary objective in deciding whom to prosecute is to achieve general deterrence. Here, Defendant Snipes is admittedly a well known movie star, and a person of apparent wealth, whose prosecution has already attracted considerable publicity. By contrast, the Defendant Eddie Ray Kahn does not appear to share Defendant Snipes' notoriety. "Since the government lacks the means to investigate and prosecute every suspected violation of the tax laws, it makes good sense to prosecute those who will receive, or are likely to receive, the attention of the media." United States v. Catlett, 584 F. 2d 864, 868 (8th Cir. 1978) (internal citations omitted); see also United States v. Hastings, 126 F.3d 310, 314 (4th Cir 1997) (no selective prosecution in case against prominent businessman and Republican party leader charged with failure to file income tax returns)."

Wesley Snipes was wrong. If you're famous, and the IRS thinks that you've evaded taxes, you are much more likely to be prosecuted. It also helps (if you want to be prosecuted) when you persist with tax protester arguments after the IRS warns you to stop (which Wesley Snipes did).

So Mr. Snipes will soon go on trial. And if he (and his attorney) continue down this path, he will likely find himself at ClubFed.

Hat Tip: Roth Tax Updates

I was joking with a client today about how the computer age has really cut back on the amount of paper we deal with. Yeah, right. I buy paper by the case at Costco. There's a dermatologist in West Virginia who wishes that good records weren't kept.

David Tolliver has a dermatology practice in Bluefield, West Virginia. On his tax return, he showed income of about $35,000. And that's how he paid his taxes.

But that's what he told the government. He told the truth when he applied for some loans; he noted that his income was between $150,000 and $500,000. Court documents show his income was about $385,000 a year. So what happened to the other $350,000?

The money apparently made its way to some trusts. The trusts, though, were controlled by Dr. Tolliver, and he used the money to buy expensive cars and remodel his home. Somewhere along the way, the IRS and the Department of Justice picked up the scent of a scam.

With a loss to the Treasury in taxes of around $130,000, and a case that was paper-made, Dr. Tolliver pleaded guilty to filing a false tax return. He'll likely have to make restitution, and he's looking at 18 to 24 months at ClubFed. The trust looked so good on the surface as a tax shelter...but it's what's underneath that counts.

News Story: Bluefield Daily Telegraph

Ken Jenne has been a public servant in Florida for many years. After obtaining his law degree, he served in the Florida State Senate from 1978 - 1996, and then was appointed as Sheriff of Broward County in 1998. He was a rising star in the Democratic party.

But then things went wrong. Local10.com reports that he received payments for various items that didn't make their way to his tax return. A surveillance company that serviced the Sheriff's Office made $5500 in payments. His old law firm helped him with loan payments on his car—to the tune of $41,000 from 2002 through 2004. He received two payments from developers totaling nearly $20,000. And then in 2003, Jenne had trouble paying his income tax. His secretary got a $20,000 loan, which was then loaned to Jenne.

That loan became a big issue. When the Florida Department of Law Enforcement questioned the then-Sheriff about the loan, his answer was basically, "What loan?" And then he paid his secretary $21,000 to pay to the developer who gave the loan in the first place to cover the scheme up.

And then the US Department of Justice began investigating. The toothpicks holding up the scheme began to fall down, and Jenne resigned his post yesterday, and agreed on a plea deal today. He has pleaded guilty to three counts of tax evasion and one count of mail fraud. The plea deal will send the former sheriff to ClubFed for nearly two years.

It sure would have been easier to just pay those taxes in the first place...and if he had done so, Ken Jenne might still be sheriff.