Taxable Talk

I'm definitely not an expert on oil and gas accounting. That's a very specialized niche, and I only know enough to be dangerous. But one thing I do know is that you can't inflate prices on joint ventures to allow partners to get tax credits. That's tax fraud.

And that's what one Ohio company and two individuals at that company are alleged to have done. The Justice Department has sued Mid-Con Petroleum of Heath, Ohio, and two principals of that firm, Daniel Weddington and James Earl.

Here's how the scheme allegedly worked, according to the indictment (as reported by the Newark Advocate). Mid-Con would sell the interests in wells to customers using a payment plan that would ask for just a little bit down. Customers would then promise to pay the rest from profits from the well. Mid-Con would allegedly cash the payment after the customers received the tax credit on their next year's tax return.

The DOJ news release alleges that Mid-Con inflated prices on the wells by having customers use "sham notes" to pay for most of the purchase price. The customers then allegedly used the inflated price to claim tax credits on intangible drilling costs.

But it gets better. The same intangible drilling costs were allegedly sold to multiple customers so that they could take the credit on the same drilling costs. Think of one oil well, but it got cloned into two or three or more. The DOJ suit alleges that Mid-Con has 200 customers so this is allegedly not a small-time fraud. Indeed, the DOJ believes that these alleged acts have cost the Treasury between $5.4 and $6.9 million.

The DOJ also alleges that Mid-Con has obstructed the IRS investigation into this matter. The DOJ is asking for this alleged scheme to stop. It appears that this "gusher," if there was one somewhere in Ohio, has been capped.

As an author (my third book is due out in late January), one problem that I have faced is coming up with a title. It must be something that attracts your target audience to your book. A Norristown, Pennsylvania attorney allegedly came up with a title to describe the tax fraud he was allegedly committing—Federal Tax Fraud: The Users Guide.

Bernard Bagdis and ten other indivduals were named in a 168-page indictment. Mr. Bagdis, who is accused of not filing a tax return between 1990 and 2006, faces 35 charges: one count of attempting to impede the IRS, seven conspiracy counts, 16 charges of aiding and assisting in the preparation of a false tax return, six counts of failing to file a tax return (I guess the IRS was generous with the other five years), and five counts of not filing a currency transaction report. Mr. Bagdis is facing a very lengthy stay at ClubFed if found guilty on all of these charges.

The indictment alleges that Mr. Bagdis used shell corporations, a phony foreign bank, and a waterproofing company to hide $23 million worth of income allegedly owed by the other defendants; the tax due on that amount would be $4.6 million.

I guess Mr. Bagdis' book may not see the light of day.

News Story: Philadelphia Business Journal

Back in June prominent Los Angeles attorney Stephen Yagman was found guilty of 19 counts of tax fraud, money laundering, and bankruptcy fraud. Yesterday at the sentencing hearing, Yagman's attorney, Barry Tarlow, asked that Yagman be sentenced to teaching morality to undergraduates at UCLA.

I'm not making this up.

UCLA professor Frances Olsen asked Yagman to teach the course. Ms. Olsen, according to her biography, specializes in "legal theory, social change, and feminism." The Wikipedia page on Ms. Olsen states that she is "...a noted member of the school of Feminist Legal Theory." Apparently ethics aren't part of that theory.

For the record, I'll note that Mr. Tarlow believes that the prosecution of Mr. Yagman was a "vindictive prosecution." And that Mr. Tarlow believes prison would be a bad choice for some other reasons: bad health and possibility of being attacked. Vindictive or not, when a person is convicted of 19 felonies he should expect to visit ClubFed rather than teach at UCLA.

Judge Stephen Wilson will likely sentence Mr. Yagman on Monday.

Hat Tip: Patterico's Pontifications

Did you use Archie's Tax and Accounting Service in Jamaica (Queens), New York? If you did, you're likely to be getting a call from the IRS soon. The proprietors of Archie's, Archie and Theodore Pugh, have been permanently barred from preparing tax returns.

What did the Pughs do? They used the "Claim of Right" doctrine to zero out taxpayers' wages. The Claim of Right doctrine is an actual deduction. It occurs when you have income in one year and then find out that you must repay the income in a later year. In that case, you can deduct the income in that later year.

Of course, you're likely a couple of steps ahead of me. The Claim of Right doctrine only is applicable if you have to repay income. If you don't have to repay income then it doesn't apply. (Personally, I've never seen this situation.) The Pughs used the doctrine on most of the returns they prepared, costing the government over $2 million.

Yes, it sounds too good to be true, and it is. If you're ever told of a method to deduct all of your income, check with a reputable tax professional. You'll likely find it's as phony as a $3 bill. Another good resource is the Tax Protester FAQ, which does include the Claim or Right doctrine.

In any case, if you happened to use the Pughs, you will likely have the IRS examine your return to see if it is correct or not. The IRS doesn't know if the Pugh's clients knew of the fraud. Just remember, if it sounds too good to be true it probably is.

The Department of Justice filed a motion this past week in Ocala, Florida accusing Wesley Snipes of using overseas bank accounts in Switzerland, the Isle of Man, and Antigua to hide his funds. They've also accused Snipes of "selling" a business when he maintained full control and of sending frivolous correspondence to the IRS.

While the DOJ isn't charging Snipes with some of these acts, they want to introduce evidence of these acts in Snipes' upcoming trial on filing for a false income tax refund. Snipes has also been charged with conspiracy. The DOJ believes that evidence of these acts will help to persuade a jury of Snipes' illegal conduct.

Last week Snipes asked that his trial be moved from Ocala as the area is too "racist." Snipes may have a lot more to fear from the evidence. The trial is currently scheduled to begin in January.

Many years ago I remember seeing a Peanuts cartoon where Snoopy wrote to the IRS, "Please remove me from your mailing list." As much as you and I would like to not have to deal with the IRS, if you don't file when you should you're guilty of tax evasion. You can't opt out from your responsiblities. Yet for the Bozo wing of tax fraudsters opting out is fine...until they get caught.

Take David Struckman of Renton, Washington. Mr. Struckman co-founded Global Prosperity. Global Prosperity claimed that you could elect to not follow the Tax Code by just renouncing the US government's sovereignty. Global Prosperity sold lots of audiotapes for their purported scheme. Among other things that Global Prosperity suggested was to move your income to offshore accounts, and to hide funds in foreign trusts. Mr. Struckman followed his own advice.

The Seattle Times reported that Mr. Struckman attempted to renounce his Washington state citizenship in 1997, and filed papers in King County (Washington) stating that he was no longer going to follow US laws.

Unfortunately for Mr. Struckman and his other co-founders, the IRS and the Department of Justice wasn't pleased with the scheme. Indeed, all of the co-founders were indicted in May 2004 on multiple charges of tax evasion. And they were all either found guilty or pleaded guilty to various charges. Mr. Struckman fled to Panama to escape prosecution. He was extradidted in 2006 back to the US. He was found guilty of tax evasion and conspiracy to defraud the US government on Friday.

Mr. Struckman faces up to 20 years at ClubFed plus a possible fine of up to $1 million when he's sentenced next March. Mr. Struckman's claim that he acted in good faith and thought he wasn't violating the law doesn't hold water. If he asked any competent accountant he would have been laughed out of the room. Yet he and his other co-founders built a $40 million business selling these phony trusts and bad advice to individuals. The reality is that we all have to pay our taxes. As Richard Morrison, Acting Assitant Attorney General for Tax, said, "People who sell or use these scams can expect serious trouble."

Back in September, Wesley Snipes, accused of filing a false claim for an income tax refund, asked for a change of venue for his trial. He preferred Manhattan to Ocala, Florida. He asked for the change because of travel time from nearby airports to Ocala and because he has a home in New York. Judge William Terrell Hodges denied the motion. Snipes had also earlier charged that his prosecution was racially motivated; the judge denied that and told snipes that it wasn't racial. Rather, he's being prosecuted because he's famous.

Since then, Snipes has gotten a new attorney. But it's back to the same old arguments; Snipes' new attorney, Robert Bernhoft has asked for a change of venue (or alternatively, dismissal of the charges). Mr. Bernhoft complains that Ocala was selected because "...[prosecutors] deliberately chose the most racially discriminatory venue available to the government with the best possibility of an all-white southern jury where Snipes has never resided."

Mr. Bernhoft's charge of inherent racism in Ocala was met by skepticism by both a local prosecutor and a public defender. "That's perhaps the most outrageous claim I've ever heard made in open court," said Chief Assistant State Attorney Ric Ridgway. Chief Assistant Public Defender Bill Miller echoed Mr. Ridgway's views, telling the Associated Press, "I've never filed such a motion in any of my cases. If I felt I needed to, I would have."

Mr. Bernhoft hired a public relations firm to survey citizens in New York and Ocala. The AP noted that one of the questions asked was the views on the confederate flag. Not surprisingly, people in Ocala viewed the flag with more pride than people in New York. Given that Florida was part of the Confederacy, that shouldn't be a shock.

Judge Hodges will eventually rule on the motion. Based on his previous decisions, I expect that the trial will open as scheduled early next year in Ocala.

AP story here

Back in August, I told you the sorry tale of Gene Haas, former CEO of Haas Automation, Inc. Mr. Haas lost a court case and decided to get back at the judge by committing tax fraud. He became a two-time loser when his tax fraud scheme collapsed. In the end, he had agreed to pay the taxes, interest, penalties, and a $5 million fine (the total is about $75 million). Today he was officially sentenced to two years at ClubFed.

Had he just paid the judgment he lost (roughly $30 million) he would still be the CEO of a successful machine tool company. Instead, he's out an additional $75 million and will serve two years at ClubFed.

Two similar cases made the news on Wednesday; two government officials involved in tax trouble because of other crimes they are alleged to have committed.

First, from Huntsville, Alabama, a former director at the Redstone Arsenal is accused of taking kickbacks and has been charged with fraud, bribery, and tax evasion. Michael Cantrell is charged with taking $1.6 million in kickbacks according to US Attorney Alice Martin. "Cantrell corrupted his leadership position by taking $1.6 million in kickbacks to allow certain contractors to perpetrate a massive procurement fraud scheme," according to Ms. Martin.

According to the AP report, Ms. Martin has said that Mr. Cantrell is cooperating with the investigation and that further arrests are expected. Mr. Cantrell faces one count of conspiracy to commit bribery, two counts of bribery and one count of personal income tax evasion. He faces up to 40 years at ClubFed plus fines and possible disgorgement of kickback proceeds.

Meanwhile, from Madison, Wisconsin comes the story of former Overture Center Director Robert D'Angelo. Mr. D'Angelo is accused of 15 charges of mail fraud, 15 charges of wire fraud, four charges of money laundering, and four charges of tax fraud. Trial has been set for February.

Mr. D'Angelo ran two side businesses while heading the Overture Center for the City of Madison. He allegedly ran the side businesses out of city offices (which would violate city policies), and allegedly ordered city employees to help him with his businesses. Additionally, he allegedly used the city's telecommunications equipment in his businesses, and allegedly had city employees send emails and faxes for his side businesses.

Adding potential insult to injury, Mr. D'Angelo also allegedly didn't report any of the income from his side businesses on his tax return (which would be tax fraud, if proven). Needless to say, he's looking at a lengthy stay at ClubFed if he's found guilty.

Here in Orange County we have our own fraud/kickback case making news. Sheriff Mike Carona has been accused of taking bribes and allegedly intimidating witnesses. No tax charges, though...at least for now.

In partnership with committed adult volunteers, girls develop qualities that will serve them all their lives, like leadership, strong values, social conscience, and conviction about their own potential and self-worth.

That's straight from the website of the Girl Scouts of the USA, and there's one former adult volunteer who will likely indeed be committed...to ClubFed.

Holly Barnes of Pace, Florida decided to commit tax fraud and claim some false tax refunds from the IRS. She needed some identities, and chose girls in her Girl Scout troop. She had them sign false medical release statements (which had a place for their social security numbers), and she had all she needed.

So she went on her Bozo scheme, and received $87,000 in tax refunds from the IRS. She continued to file false refund claims even after she was under investigation. Even being charged with 15 counts of identity theft and 19 counts of tax fraud didn't stop her from trying to cash a check two days before her original hearing date! And shoplifting at the local Navy Exchange. That's hubris, stupidity, or both.

Wednesday, Ms. Barnes pleaded guilty to all counts in a Pensacola, Florida courtroom. She asked to be released for a couple of days, but the judge had other ideas. "You received the benefit of the court's trust with the understanding that you would not violate the law," Judge Casey Rodgers told her. "It's unfathomable to me ... that what [the Assistant US Attorney] has represented to the court might have taken place."

Assistant US Attorney Stephen Preisser told the Pensacola News-Journal "The long and short of it is Miss Barnes has violated the conditions of her release." She also pleaded guilty to a new felony theft charge for shoplifting merchandise from the local Navy Exchange.

Ms. Barnes will be held until her sentencing in January. She faces up to 230 years at ClubFed.

News Stories: Pensacola News-Journal, Emerald Coast.com