Taxable Talk

It's something about prostitution that somehow leads to tax evasion. While perusing my email this evening in Connecticut I noticed yet another guilty plea by a man who charged personal expenses on his corporate tax return. Somehow the IRS did not find as humorous as I do the idea of deducting visits to prostitutes as "necessary and ordinary" corporate business deductions.

John Kelso of Monroe, North Carolina pleaded guilty to tax fraud. He agreed to make restitution of $18,000 and faces up to three years at ClubFed and a fine of $250,000.

My thanks to Joe Kristan for highlighting an interesting and amusing (to me) Tax Court case today: Baisden v. Commissioner. Mr. Baisden is a CPA, and he had a unique way of preparing tax returns:

In an effort to explain his bookkeeping and accounting methods, petitioner explained that since approximately 1998 [Mr. Baisden] had developed for his use and for the use of his clients a novel and insightful tax strategy that may be described generally as follows:

(1) Booked sole proprietorship income would be totally or almost totally offset by the payment by the sole proprietorship of “royalties” to the owner of the business;

(2) the so-called royalties would not be paid directly to the owner but rather would consist of payments by the sole proprietorship of the owner’s personal and family expenses;

(3) the “royalty” payments would be treated as fully deductible by the sole proprietorship, and they would reduce the booked net income of the sole proprietorship
to zero; and

(4) the owner would report “royalties” paid with regard to personal and family expenses as “other income” not subject to employment taxes. The primary savings were apparently intended to be derived from petitioner’s tax strategy through the conversion of sole proprietorship business income subject to self-employment taxes into royalties not subject to self-employment taxes.

I strongly suggest that you never attempt to use the above strategy unless you'd like to find yourself facing fraud penalties.

Mr. Baisden also tried to delay his audit by filing a "spurious complaint" with the Taxpayer's Advocate Office. And I'm only just touching the surface of this case....

On the good side, the Tax Court case was about the IRS assessing fraud penalties and, as you'd suspect, the IRS was upheld. On the better side Mr. Baisden remains under a preliminary injunction to not provide tax advice.

Joe Kristan has more.

An interesting week for tax fraud. There's a typical case out of the San Joaquin Valley, a jailed promoter who may have to spend even longer at ClubFed, and an attorney who admitted that he lied under oath to the IRS and that he gave an incorrect legal opinion on a tax shelter.

First, Michael Gordon of Clovis, California (near Fresno) has had his own software company for several years. Between 2001 and 2004 he had his company pay over $339,000 of personal expenses as business expenses. That's not a good idea, and it became a very bad idea when the IRS caught him. He pleaded guilty to tax fraud last week, and has agreed to make restitution of $211,000 and pay all the taxes, penalties, and interest he owes. He's already paid over $570,000 toward his obligations. Note that appears to be far larger than the actual tax he owes which goes to show the impact of penalties and interest. As usual, it's a lot better (and cheaper) to just pay the tax in the first place. Mr. Gordon will be sentenced in November.

Remember Eddie Ray Kahn? He was a co-defendant of Wesley Snipes. Mr. Kahn is already at ClubFed having been sentenced to ten years. Well, he may be spending even more time there. He was indicted this past week along with four others on counts of mail fraud and conspiracy to defraud the United States. What did these individuals do? They allegedly sold worthless "bills of exchange" and other schemes to promote tax fraud.

The indictment alleges that American Rights Litigators/Guiding Light of God Ministries sold more than 4,000 packages to customers in every state. Their "bills of exchange" were supposedly drawn on the US Treasury for payment of taxes. Unfortunately, there's no such thing. Mr. Kahn allegedly was the ringleader of the group. In any case, no trial date has yet been set.

Finally, Peter Cinquegrani was a partner at Arnold & Porter, a law firm. He was instrumental in designing the PICO tax shelter (Personal Investment Corporation). Back in 2003 he testified under oath to the IRS that the shelter had not been designed to avoid taxes.

One of the issues with "tax shelters" is that they must have some economic substance. A basic rule of tax is that transactions that lack an economic substance are ignored for tax purposes. Well, Ernst & Young was looking to develop tax shelters (including the PICO). Mr. Cinquegrani was the primary drafter of opinions stating that the PICO had an economic purpose.

This past week Mr. Cinquegrani pleaded guilty to conspiracy to commit tax fraud, aiding and abetting tax evasion, and aiding in the submission of false and fraudulent documents to the IRS. He admitted that he lied to the IRS back in 2003. He also admitted drafting a phony consulting contract between Ernst & Young and Bricolage Capital. The North Country Gazette gets to the meat of the issue:

He stated that E&Y’s fee for the PICO transaction was calculated as a percentage of the tax loss the client wished to generate, but E&Y’s engagement letter with each client reflected a much smaller flat fee amount in order to conceal that the true fee was a percentage of the targeted tax loss. Cinquegrani admitted that together with individuals at E&Y and Bricolage, he helped arrange for the large balance of E&Y’s true tax shelter fee to be paid by the client to a Bricolage affiliate, and then for the affiliate to pay E&Y.

Mr. Cinquegrani will be sentenced in December. He may also have to make restitution and pay a fine. Arnold & Porter has settled with the IRS and paid a tax promoter penalty.

Remember what I've been saying for years: If it sounds too good to be true it probably is.