Taxable Talk

Gene Haas, of Camarillo, California, owns Haas Automation, Inc., one of the leading CNC (computer numerical control) machine tool companies. They even have a Nextel Cup racing team. Needless to say, Haas Automation is a successful company.

Back in 2000, Haas Automation settled a patent infringement case. Hurco Companies, Inc., of Indianapolis, accused Haas Automation of violating a patent on interactive CNC programming. Hurco convinced a jury that Haas Automation was in violation, and after the judge warned Gene Haas that he could be looking at a $150 million judgment, the companies settled for something in the tens of millions of dollars, according to this article. A senior executive at Haas told Metalworking Insiders Report that there would be no change in operations because of the judgment.

He was wrong.

The New York Times detailed the scheme in today's paper. After Mr. Haas and his company lost the patent case, he was angry with the government and with the judge who presided over the case. Court papers indicate that he decided that some tax fraud was a good way to get back at the government.

So, enlisting the help of his then CFO, John Phillips, the business created a phony company in Nevada called "Supermill," and then paid the phony company from phony invoices. Then Mr. Haas and Mr. Phillips got in a business dispute, Mr. Haas sued Mr. Phillips for $27 million (apparently related to the phony transactions), and Mr. Phillips went to the FBI and told them of the scheme. (Mr. Phillips was not indicted.) It's not a good idea when you commit tax fraud to get a co-conspirator angry enough to go to the FBI.

The DOJ, in a press release announcing Haas' indictment, claimed that the tax fraud was upwards of $20 million. Now, with a $5 million fine added in, penalties, and interest, the total judgment is somewhere around $70 million. And Mr. Haas will be receiving two years at ClubFed.

If you find yourself losing a court case, I strongly recommend that you do not follow Mr. Haas' path, and decide that committing tax fraud is a way of getting back at the judge. Kenneth Barish, an attorney for Mr. Haas, in describing the plea deal, noted, "[u]nder the circumstances, it was a good result." When paying $70 million and getting two years at ClubFed is a good result, you wonder what a bad result would be.

Hat Tip: TaxProf Blog

I remember Hawaii Five-O, the long running police show that starred the late Jack Lord. This post looks at four individuals who allegedly created an illegal tax fraud scheme.

The US Department of Justice filed suit against four individuals and two businesses in Hawaii, alleging that they created a series of sham transactions using business insurance and retirement accounts to create phony tax deductions. The suit alleges that the loss to the Treasury is over $2 million.

The alleged transactions first sent the money to offshore accounts and then moved the money back using, among other methods, sham loans and foreign credit cards. The suit alleges that the individuals got to deduct 100% of the money that was moved but received 80% of it back. That's a neat (and if proved, illegal) trick.

The accused businesses are Bright Enterprises, a Lihue, Hawaii accounting firm and Hawaii Financial Specialists, Inc.. The DOJ is asking for an injunction to stop the practice and, undoubtedly, a list of clients who used this scheme. Remember, if you get a business deduction for an expense, you're supposed to have spent 100% of the money, not 20%.

News Story: Honolulu Star-Bulletin

This past February, Roy Albert Lewis, a Danville, California dentist, was sentenced to two years at ClubFed for hiding $300,000 over ten years. This past week, it was his father's turn.

Leroy Albert Lewis is an oral surgeon, but his medical career likely came to an end last week. He pleaded guilty in May to one count of tax fraud. He was sentenced to two years at ClubFed, plus he must make restitution of $909,527. Leroy Albert Lewis is the father of Roy Albert Lewis.

His attorney said that the elder Mr. Lewis suffered from "hubris and greed." Both Lewises fell victim to secret offshore bank account scheme operated by Tower Executive Resources, Ltd. Joe Kristan reported on Tower back in 2006; Paul Harris, the promoter of Tower, was sentenced to five years at ClubFed. The scheme made the payments look like they were for consulting services. They weren't; it was simple tax fraud.

The younger Mr. Lewis is doing his time in ClubFed in Lompoc. It's quite possible that the elder Mr. Lewis will soon be in a neighboring bunk.

News Story: San Francisco Chronicle

Yesterday I wrote about Dr. Frederick Kriemelmeyer, a dentist in LaCrosse, Wisconsin. Dr. Kriemelmeyer was found guilty today of three counts of filing false tax returns. He'll be sentenced on October 30th. Given that the testimony in the trial ended today, the jury didn't need much time in deciding the verdicts.

And that appears to be understandable, unlike Dr. Kriemelmeyer's use of the English language. As I noted yesterday, Dr. Kriemelmeyer believes in David Wynn Miller's dialect, "In the Truth." He doesn't believe that our current American flag is valid. He doesn't believe that our Tax Code is valid.

Based on federal sentencing guidelines, Dr. Kriemelmeyer is looking at 27-33 months at ClubFed. And no use of language such as this, "FOR THE EDUCATIONAL-CORRECTIONS OF THE MODIFYING-COMMUNICATIONS ARE WITH THESE CLAIMS OF THE FICTIONAL-ADVERB-VERB-USURY WITH THE OPERATIONS/METHODS OF A FICTIONAL-MODIFICATION-LANGUAGE," will lessen his sentence. (That quote was taken from Mr. Miller's website.) And if he tries to lecture a judge in using the English language, I won't be shocked to see him getting the maximum term of 9 years (3 years per count) plus restitution.

While I've been gone for the last two weeks, I collected many stories about tax fraud. Here are just a few of them (if I included all of them, it would fill many pages of this blog).

Two members of a former Florida advertising agency pleaded guilty to conspiracy in a $1.5 million tax fraud. Michael and Michelle Cragan created bogus invoices, with the money mainly going to a third individual, Douglas Haase. Unfortunately for all concerned, the phony invoices were included on the business' tax return. And with Mr. Haase receiving $1.5 million that wasn't included on his tax return, we're not talking peanuts here. Mr. Haase previously pleaded guilty. All are looking at spending time at ClubFed when sentenced (plus restitution).

From Dickson City, Pennsylvania comes the story of Thomas Winnicki and his company Keystone Employee Benefits, Inc. He was in the employee leasing business. So far, so good. His clients paid him over $1 million for employment taxes that he was supposed to remit to the government. But when the business was going through a downturn, he used the $1 million for personal expenses rather than turning it over to the IRS. He pleaded guilty, and will be spending 18 months at ClubFed, and must make restitution of the over $1 million. The $100 "special assessment" he must also pay is the least of his worries.

A father-daughter team is accused of not paying taxes on $3.1 million of income. From Holmdel, New Jersey comes the tale of Anthony Ambrosia and his daughter, Lisa Derosa. The pair allegedly set up bank accounts in the names of children and other family members, and moved over $3.1 million into these accounts. They're also accused of "structuring," deliberately making deposits under the $10,000 federal currency transaction reporting limit. Mr. Ambrosia allegedly made numerous $9,500 deposits. His bank warned him about this, but he allegedly continued doing this. I suspect that the bank issues a Suspicious Activity Report (this isn't mentioned in the news story but appears to be a reasonable conclusion), and the IRS and DOJ followed-up and discovered the alleged misdoings. If convicted, both Mr. Ambrosia and Ms. Derosa are looking at lengthy terms at ClubFed.

Finally, two tax "gurus" won't be peddling their wares any time soon. I earlier reported about the convictions of Wade and Laura Cook. Wade Cook received 88 months—that's 7 years, 4 months—at ClubFed. As Joe Kristan reported,

"Mr. Cook doesn't seem to expect to appear before Judge Zilly again anytime soon:

Asked afterward to comment on the outcome, Cook remarked, "I'm not going to tell you that this judge is an a**hole. I'm not going to say that."

Good thing he showed so much restraint."

Joe also told the story of "We The People." Robert Schulz had been enjoined from providing a tax scheme that caused employees and employers to not withhold from wages. Additionally, the "We The People" webpage must display the injunction. As of now, it doesn't. Of course, expecting a member of the tax protester movement to comply with a ruling that would put him out of business (it's hard to sell a product when the first thing potential clients would see on your webpage is an injunction against selling that product) isn't a good bet. One last point: If you happened to be a customer of "We The People," expect a visit from the IRS in your future. "We The People" is required to turn over its customer list to the government.

So it was not a good week to be a fraudster. And it was an especially bad week for tax protesters, as two of their champions discovered that there is an income tax, and you must pay it.

There are good tax preparers, bad tax preparers, and bozo tax preparers. There have been two recent stories about the latter group—tax preparers, please don't copy their methods.

From San Jose, California, comes the story of Melinda Newens. The former Jackson-Hewitt employee had a neat method of making sure she had a profitable year: she increased the deductions on her clients' tax returns, adding phony deductions. She did this to increase her fees, as she took fees from the refunds (that's a violation of ethics rules). In any case, her scheme collapsed when the IRS found out about it. The loss to the Treasury was over $1 million. Ms. Newens received two years at ClubFed, and has been barred from being a tax professional in the future.

Harold Hunter used to be a tax preparer in Stanton, Mississippi. He'll soon be a ClubFed resident (for ten months). Mr. Hunter was kind to his clients; he, too, invented fraudulent deductions for his clients' returns. He pleaded guilty last year and was just sentenced. As part of his plea agreement, he will also no longer be a professional tax preparer.