Taxable Talk

Last week I had a story about a Taco Bell franchisee around the time that the chain had a talking chihuahua. Today I have a story where a tax evader compares himself to a chihuahua.

Bohdan Senyszyn is a CPA who worked for the IRS for 25 years. Back in 1998 Mr. Senyszyn did some accounting work for a New Jersey developer. As part of the work he set up shell companies for the developer so that the developer could hide income. However, the developer cooperated with the IRS which led to the arrest of Mr. Senyszyn. Oh yes, Mr. Senyszyn did one other thing: he skimmed money off the top from the developer and didn't report the stolen money as income. The government put the tax loss at $80,000 on $250,000 of income.

Mr. Senyszyn earlier pleaded guilty to filing phony tax returns, tax evasion, structuring a financial transaction and bank fraud. On Thursday he tried to change his guilty plea to innocent on the tax evasion charge but the judge refused. Mr. Senyszyn then, in asking for leniency, said, "I'm nothing more than a Chihuahua. I run around and bark a lot, but I don't bite anybody."

However, his actions might be taken otherwise. The Star-Ledger reported, "Senyszyn's conduct included writing letters to the prosecution team, government officials, witnesses and the victim, as well as vandalizing a sign on property be longing to the informant in the case, said Assistant U.S. Attorney Thomas Calcagni." Judge William J. Martini told Mr. Senyszyn, "I can't take the risk you're a Chihuahua and find out you're a bulldog." Mr. Senyszyn received 34 months at ClubFed and a $12,500 fine.

There's one certainty: Chihuahuas don't evade taxes but people do.

Fresh off the Wesley Snipes case two actors are having their own tax troubles. Joe Kristan found this story about Joe Pesci. Mr. Pesci besides appearing in movies has his own production company with employees. The regulation involved states, "You must make deposits using EFTPS for all depository tax liabilities for the current year if you made more than $200,000 in aggregate deposits for all types of Federal depository taxes in the year two years before the current year or if you were required to make electronic deposits in the previous year."

Mr. Pesci's production company didn't use EFTPS, and the penalties were upheld.

Meanwhile, actor Nicolas Cage will be fighting the IRS in Tax Court. The TaxProf Blog quotes a story in Forbes:

The IRS says movie star Nicolas Cage used a company he owns to wrongly write off $3.3 million in personal expenses, including limos, meals, gifts, travel and his Gulfstream 1159A turbojet. ... The feds hit Cage both ways, denying Saturn a deduction for the disputed expenses while taxing Cage individually on the perks as salary and "constructive dividends."

Cage's business manager, Samuel J. Levin, says in an e-mail that the expenses were proper as "customary in the entertainment industry" and were partly based on the actor's "security needs."

Mr. Cage's Tax Court case will probably not be heard for many months, with a decision possible in 2009.

Karl James is the former president of Golden West Taco, Inc., one of the largest franchises of Taco Bell (which is based here in Irvine). Back in 2000 Golden West Taco went into Chapter 11 Bankruptcy protection. Yet Taco Bells were doing quite well at the time--remember that chihuahua?

There was a reason the company (and its owner, Karl James) went into bankruptcy. Mr. James "fraudulently diverted" (for the layman, read that as "stole") about $3 million of company funds for his personal use. He transfered assets, including residences in the upscale communities of Rancho Santa Fe and Palm Springs to his nominees, used offshore companies with off the balance sheet accounts, and otherwise obfuscated the books. I should point out that these actions are considered bankruptcy fraud.

Mr. James went a step further. In transferring the assets from his company to himself he created income. And he didn't report that income. In total, he deprived creditors of Golden West Taco of $1,121,829. He committed tax fraud to the tune of $1,169,957 . To his credit, he pleaded guilty and has agreed to make restitution (he's already repaid $2,014,363).

However, he won't be eating at Taco Bell for awhile. He'll be spending three years at ClubFed followed by three years of supervised release. It's a pretty big price to pay for tacos.

News Story: NBC San Diego

Darryl Strawberry, the former major league baseball player, has been in lots of trouble over his life. He's battled drugs, cancer, ex-wives, and baseball players. Today he agreed to settle a tax dispute with the IRS.

Back in 1995 Darryl Strawberry was convicted of tax evasion. He still owes almost the whole debt—$430,000 (he's paid $8,600). He has agreed to reimburse the IRS in full including interest and penalties.


News Story: Newsday (via AP)

Right after Wesley Snipes found out that he'll be sentenced on April 24th, news came out that Wesley Snipes owes $70,000 in back property taxes for his home in Alpine, New Jersey (in suburban Bergen County). The home is in the name of his production company (Kymberlyte Production Services); Snipes sold it to them for $5.6 million in 2002.

The back property tax lien has been sold to Crusader Lien Services. I'd expect this problem to be taken care of, unless Mr. Snipes now also believes that property taxes are illegal....

Hat Tip: Don't Mess With Taxes

Wesley Snipes wasn't the only individual who learned his fate last week. Here are three more cases of tax evasion which all share a common theme.

First, from Upper Makefield, Pennsylvania comes the story of a couple who put business first. Michael and Jacqueline St. Clair had a construction company, MDSC Concrete Contractors. They decided back in 1999 - 2001 to expand their home. Nothing wrong with that. According to phillyburbs.com, they spent $370,000 adding four bedrooms and other rooms to their home. Still ok. They paid their contractors from their business. And that's the problem.

Expanding your home just doesn't cut it as an "ordinary and necessary" business expense. Add to that some other highly questionable deductions on their business returns, a very low income on their personal returns (low enough to qualify for the earned income credit), and you have two who have been found guilty of several counts of tax evasion. Sentencing for them is set for May 1st.

From Benicia in Northern California comes a similar story. Former city councilman and school board member Dirk Fulton pleaded guilty to one count of tax evasion. Mr. Fulton didn't report some of the income he made from various corporate entities on his 1999 personal tax return. Mr. Fulton has agreed to make restitution to the IRS of $115,000, pay a $28,000 fine, and serve five months at ClubFed followed by five months of home confinement.

Finally, from Milpitas comes a man who thought that if he didn't invoice his customers he could forget about the income tax. Dominic Chang owned an auto shop and didn't like taxes. He used two bank accounts—when he issued an invoice the money went to Cal Fed; when an invoice wasn't issued the money went to Wells Fargo. Mr. Chang reported no income from 1999 to 2001. When his return was audited the fraud was discovered. The report in the San Jose Mercury said that at first Mr. Chang told the IRS that the Wells Fargo money was his sister's. However, he later admitted that he lied and he pleaded guilty to three counts of tax evasion. He earned about $460,000 in the three years in question so reporting zero just didn't cut it. While Mr. Chang faces up to 15 years at ClubFed and a fine of $750,000 he'll likely be sentenced to a short term at ClubFed and restitution to the IRS.

So if you get the idea of having your business pay for your personal expenses just remember it works well until you get caught.

Back in November we reported on Robert D'Angelo. Mr. D'Angelo, the former head of the Madison, Wisconsin Overture Center, was facing a variety of charges based on him running two side businesses using city facilities and not reporting the income from the businesses on his tax return. On Friday Mr. D'Angelo pleaded guilty to two counts (one of tax evasion and one of mail fraud) in a plea deal.

The indictment charged that Mr. D'Angelo made about $238,000 from his businesses. While he could face 23 years at ClubFed it's much more likely he'll serve around two years.

However, that's not the end of Mr. D'Angelo's legal troubles. He left the Overture Center when he was accused of sexual harassment. The US Equal Employment Opportunity Commission is still investigating those charges.

Why was Wesley Snipes found not guilty of tax fraud charges? Was it a repeat of the OJ Simpson case? Is this a huge victory for tax protesters?

It's interesting that both prosecutors and defense attorneys praised the jury in Ocala, Florida. (One thing is certain: Wesley Snipes won't be complaining about juries in central Florida anymore.) Ocala.com reported that Robert O'Neill, U.S. Attorney for the Middle District of Florida, said, "The jury did a very good job." Consider that the two purveyors of the Section 861 scheme, Eddie Ray Kahn and Douglas Rosile, guilty of tax fraud. Yes, Snipes was guilty of stupidity (if you believe you don't have to pay taxes...) and tax evasion (the government clearly proved that he didn't file tax returns while he was earning income) but was he the purveyor of a tax fraud scheme?

I hadn't looked at the case in that manner but thinking about it I can see how a jury could decide that Snipes just bought the words of Kahn and Rosile. The verdict is not a repeat of the OJ Simpson case; Snipes was found guilty of three counts of tax evasion and could spend some time at ClubFed. He also faces the possibility of a civil suit by the IRS to recover the taxes. That might not happen, though, because his defense attorney says that Snipes intends to file and pay his taxes.

Is this case a huge win for the tax protester movement? I don't think so. Yes, the government didn't get the "famous" person they prosecuted but they did get the two clear members of the tax protester movement who implemented the scheme. The government's batting average in cases like this is well above .900, and that's very good. As Robert O'Neill said, "We're going to continue to go after those people, and I think you will see more indictments of tax protesters. The IRS will go after all of those taxes."

The jury has reached a verdict in the Wesley Snipes case; it will be read shortly in the courtroom in Ocala, Florida. I'll bring you news of the verdict when I get it.

Richard Hatch, the Survivor winner who thought that 300 million witnesses were wrong to him winning $1 million, had his appeal denied today by the First Circuit Court of Appeals. Mr. Hatch will likely have to complete his sentence of 51 months at ClubFed.

Hatch appealed his conviction on various grounds:

"Hatch argues that the district court violated his Sixth Amendment rights by precluding Hatch's testimony about his alleged discovery during the taping of "Survivor" that the production company, SEG, was "cheating" by giving food to other contestants and otherwise violating its own rules for how the contest would be run. Hatch's discovery of these irregularities, he now says in his appellate briefs and argument, led the show's producer, Mark Burnett, to promise Hatch, in exchange for his silence, that SEG would pay his taxes if he were to win the prize."

There's a problem with this line, though; the Court gave Hatch several opportunities to elicit such testimony. "The court thus opened the door for defense counsel to ask Hatch whether Burnett or someone else at SEG had promised to pay the taxes on the money he won. Hatch's counsel, however, did not follow up with questions of this sort."

Hatch also argued that the Court prevented him from introducing evidence, "...[of] a subjective belief he had no legal duty to pay his taxes, an argument which would negate the element of willfulness required to prove his guilt." The Appellate Court found no evidence of that.

"But without evidence that the producers had agreed to pay Hatch's taxes, the evidence that Hatch had caught those running the show cheating was of no contextual materiality to the revenue violations with which Hatch was charged. The court was well within its discretion to reject further testimony of Hatch's complaints about 'cheating' during the show until the defense furnished evidence of a tax payment promise that made such contextual evidence relevant."

Hatch also argued that the District Court limited his arguments on cross-examination. But that argument held no water; "Here, the district court's limitations on cross-examination in this nine-day trial were thoughtful and far from being excessive."

Hatch also argued that the expert witnesses called (generally, accountants that Hatch had used and IRS agents) should not have been admitted. Here to, though, the Appellate Court disagreed. "Taking each witness in turn, we find no error."

And the final claim made by Hatch on appeal was also turned down: "Lastly, Hatch challenges in the briefest of language his sentence on the grounds that the court erred in the loss finding and in applying a perjury enhancement. Both claims are undeveloped and fail in any event." You may remember that the District Court judge felt that Hatch had lied during his testimony (thus, the perjury enhancement). The Appellate Court has told Hatch that he did indeed lie,

"...the court catalogued many instances in which Hatch had committed perjury, noting that the list was 'a pretty long one' and included lying on the stand about his failure to disclose the income which formed the bases for the charges on which he was convicted and about his alleged failure to read the letter drafted by Wallis regarding the hypothetical Exhibit One which he then submitted for his tax return."

So for the next 27 months or so Hatch will complete his sentence at ClubFed. Hopefully he'll learn from this experience that usually 300 million witnesses are right.


Full Appellate Court Ruling Here
AP Story Here
Link to previous Taxable Talk posts on Richard Hatch

Hat Tip: How Appealing