The IRS announced today that based on a request from Russia last August that most of the US-Russia Tax Treaty will be suspended beginning August 16, 2024. One impact: Russians who have gambling income in the US that’s subject to withholding (for example, poker tournaments) will be facing 30% withholding from August 16th onward. That does not impact this year’s World Series of Poker (currently running at the Horseshoe and Paris casinos here in Las Vegas), but will impact the 2025 WSOP.
Archive for the ‘International’ Category
US-Russia Tax Treaty Mostly Suspended Beginning August 16th
Friday, June 21st, 2024The 2023 Tax Offender of the Year
Friday, December 29th, 2023So many try every year for my award–The Tax Offender of the Year. It’s not really something to be proud of; after all, to win this award you need to commit really big tax fraud or a series of Bozo-like actions (ideally, both). As usual, there are plenty of candidates but there can only be one “winner.”
Just missing out of the top three were Ali Jaafar and Yousef Jaafar of Watertown, Massachusetts. They came up with the not-so-brilliant idea of unlawfully claiming 14,000 winning Massachusetts lottery tickets, laundering the $20 million in proceeds, and lying on their tax returns. They each get to spend five years at ClubFed and make restitution of $6,082,578 and must forfeit their profits on the scheme.
Also just missing the top three was Las Vegas resident Scott Lawrence. Mr. Lawrence operated a real estate business that did quite well from 2009 through 2019; he just didn’t want to pay the $1,905,325 in taxes he owed. He elected to deliberately thwart efforts to levy his bank account and caused his attorney to send a misleading letter to the IRS; he then deliberately paid his taxes using an overdrawn bank account. He’ll enjoy a year and a day at ClubFed and must make restitution.
Coming in third place was Stephen Schechter, a resident of Monaco. Mr. Schechter is an investment advisor and is doing quite well. Back in 2011 he sold an apartment in Monaco for about €14,000,000. Now, that wasn’t all profit–but quite a bit was. Unfortunately, that sale didn’t make it onto his 2011 tax return. Nor were various foreign financial accounts where the money went noted on his FBAR (FinCEN Form 114, the Report of Foreign Bank and Financial Accounts). Somehow, the interest and dividends from those accounts also didn’t make it onto his returns. Mr. Schechter pleaded guilty to concealing over $5,130,000 in income from the IRS.
Walter “Terry” Douglas Roberts II, of Flat Rock, North Carolina just missed out on the brass ring. Mr. Roberts is an appraiser, and he did lots of appraising of conservation easements. The IRS looks at Syndicated Conservation Easements as part of their “Dirty Dozen” tax scams. Now, not all conservation easements (or syndicated conservation easements) are scams; many are legitimate. However, when you admit to fraudulently inflating the values of the easements by “…not following normal appraisal methods, making false statements and either personally manipulating or relying on knowingly manipulated data to reach a targeted appraisal value – communicated to him by co-conspirators…,” you’re looking at a problem. And when those 18 appraisals end up having fraudulent tax deductions totaling $466,961,000 and a tax loss of $129 million, you’re talking big tax fraud. He has to make restitution of that $129 million plus spend 12 months at ClubFed.
Back in 2004, Congress passed the “American Jobs Creation Act of 2004.” Included within this law was a biodiesel tax credit. It was extended through various other legislation and allows a tax credit for the production of various biodiesel fuel. The tax credit $1.00 per gallon of biodiesel and renewable diesel fuel.
Various businesses began throughout the United States to take advantage of this credit and produce environmentally “good” diesel fuel. One such company was Washakie Renewable Energy, founded by Jacob Kingston. As noted on their website,
Committed to producing fuel that is sustainable, clean-burning, and domestically accessible, Washakie Renewable Energy (WRE) is the most significant producer of biofuel in the Intermountain West region. By operating the largest seed crush press in the US, and relying on recycled waste materials like used kitchen grease and cooking oil, Washakie Renewable Energy produces over ten million gallons of biodiesel annually.
The biodiesel produced by WRE is the only alternative fuel to complete the EPA’s study under the Clean Air Act regarding emissions and health effects. In comparison to conventional diesel, biodiesel produces only 14% of the greenhouse gases, 33% of the hydrocarbon emissions, and 53% of the particulate matter, while also being quickly biodegradable and less toxic than common table salt.
Washakie Renewable Energy’s commitment to conscientious resource management includes distributing several useful byproducts of its biodiesel operation, including high-quality animal feed and refined glycerin.
That seems great, doesn’t it? A business making money, giving back to the community, and helping the environment. What could be wrong with that? Let’s just say that you can only sell 100% of something and follow along with what happened.
The conspiracy began in 2010 and continued through 2018 and involved multiple fraudulent schemes. One involved purchasing biodiesel from the East Coast of the United States (which had been produced by others who had already claimed the renewable fuel tax credit) and exporting it to foreign countries, including Panama, then doctoring transport documents to disguise and import the biodiesel as “feedstock.” Washakie used this false paperwork to claim it had produced biodiesel from the feedstock to support its filing of fraudulent claims for IRS biofuel tax credits. Washakie also fraudulently obtained millions of EPA renewable identification numbers that were then sold for approximately $65 million. Later, Dermen and the Kingstons conspired to purchase millions of gallons of biodiesel and rotate it though the U.S. shipping system to create the appearance that qualifying fuel was being produced and sold by Washakie. Washakie applied for and was paid by the IRS over $300 million for its claimed 2013 production and over $164 million for its claimed 2014 production. Evidence at Dermen’s trial showed that, to further create the appearance of legitimate business transactions, Dermen and the Kingstons schemed to cycle their and other co-conspirators’ fraud proceeds in more than $3 billion in financial transactions through multiple bank accounts.
I can’t say it was all a scam; however, it appears to have mostly been a scam. Lots of the biodiesel they produced had already been produced and the biodiesel tax credit already taken. So Washakie had low production costs (after all, they didn’t really produce it), a high profit margin, and lots and lots of refundable renewable fuel tax credits. Indeed, the individuals involved: Lev Dermen, Jacob Kingston, Isaiah Kingston, Rachel Kingston, and Sally Kingston caused over $1 billion in fraudulent tax credits with $511 million paid to Washakie.
Where did that money end up? A 150-foot yacht named the Queen Anne (seized in Lebanon and sold for over $10 million in Cyprus), $700,000 of land in Belize that was going to go for a casino, a 2010 Bugatti Veyron (worth $1.8 million), a Lamborghini and Ferrari, and a $3.5 million mansion; investments in other businesses; and, of course, millions sent to friends and family.
The individuals involved attempted to hide their actions by moving money to various countries outside the United States (primarily Turkey and Luxembourg). Mr. Dermen also made an assurance to Jacob Kingston: “…Dermen falsely assured Jacob Kingston that Kingston and his family would be protected by Dermen’s “umbrella” of corrupt law enforcement and immune from criminal prosecution.” Oops.
Lev Derman (the president of Washakie) was found guilty back in 2020 of conspiracy to commit mail fraud, conspiracy to commit money laundering, and money laundering. Jacob Kingston pleaded guilty in 2019 to various fraud and tax charges. Isaiah Kingston and the other members of the Kingston family likewise pleaded guilty in 2019.
Mr. Dermen, who is 56, was sentenced to 40 years (essentially a life sentence), Jacob Kingston received 18 years with other members of the Kingston family receiving between six and 12 years at ClubFed. Dermen was also ordered to make restitution of $442.6 million and to pay a money judgement of $181 million. Jacob and Isaiah Kingston were each ordered to pay $511 million in restitution to the IRS. Meanwhile, the Department of Justice is continuing efforts to seize various assets to satisfy the $511 million in restitution.
A helpful hint to all: The Producers is a great play (and movie), but (a) don’t try to sell more than 100% of something and (b) conspicuous consumption while committing fraud usually doesn’t end well. Lev Derman and the Kingston Family are worthy winners of the 2023 Tax Offender of the Year award.
That’s a wrap on 2023. I wish all of you and your families a happy, healthy, prosperous and safe New Year!
Bozo Tax Tip #8: Use a Foreign Trust to Avoid Taxes!
Wednesday, April 5th, 2023One of the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.
First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are generally ignored.) Survivors’ trusts are another useful vehicle. Grantor trusts, another asset protection vehicle, are useful. Special Needs Trusts are extremely useful. There are plenty of ‘good’ trusts.
But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.
And those are the domestic trusts.
The foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts. They work great until the IRS finds out about them. Yes, you have to report moving money into them.
But I’m smarter than the IRS, and they’ll never catch my trust set up in Luxembourg, Liechtenstein, or the Isle of Man. Well, you will spend thousands to set up your trust, and if the IRS does catch on–and in these days where governments are exchanging tax information, this can (and does) happen–your foreign trust will have served only one purpose: It will have enriched the promoters who set it up.
Remember: If it sounds too good to be true it probably is. A trust set up to evade taxes is just that.
Answering to a Higher Authority
Wednesday, August 10th, 2022Robert Brockman, the 2020 Tax Offender of the Year, passed away last weekend. Mr. Brockman was facing a 39-count indictment for tax fraud and related charges; his trial was set for this coming February. Mr. Brockman’s attorneys argued that he was incompetent to stand trial due to dementia; however, the judge had ruled him competent. The criminal case is now moot—Mr. Brockman is answering to a higher authority; the civil case will continue against his estate (the IRS attempting to obtain back taxes, penalties, and interest).
My condolences to his family.
When Bad Recordkeeping Helps You (And Bad News for Some Canadian Professional Poker Players)
Monday, July 18th, 2022As we previously reported, the Canada Revenue Agency (CRA) thought that Jonathan Duhamel, the winner of the Main Event of the World Series of Poker (WSOP) in 2010 was a professional gambler, and that he conducted himself as a professional gambler. Thus, his gambling winnings should be subject to Canadian income tax. Mr. Duhamel argued that poker is a game of chance and not subject to tax in Canada, and that even if it were a game of skill Mr. Duhamel did not conduct himself as a professional poker player. The case was tried in front of the Tax Court of Canada last November, and a decision was released late last month. (I am indebted to a friend of mine who speaks French for translating the key points of the decision — his translation runs 40 pages.)
The evidence as presented to the court showed that Mr. Duhamel was bad at recordkeeping. He apparently only kept track of his tournament results, and never tracked cash games (even though he played lots of cash games). For a Canadian who doesn’t want to be considered a professional gambler, bad recordkeeping appears to be a plus as this was a factor that influenced the court.
(Of course, if you are an American—and this blog caters to Americans—a warning is needed. Bad recordkeeping is not what you want to do as either an amateur or a professional gambler in the United States. All gamblers in the United States must pay tax on their winnings, and a gambling log is a must. But I digress….)
The Court noted (as translated) [1]:
Because the evidence shows that chance is a very important element in poker game results, that Mr. Duhamel’s poker game activities do not demonstrate an ability to generate profits, that the probability Mr. Duhamel’s ruin in his poker gambling business is well over 50% (but less than 87%), that Mr. Duhamel does not act like a serious businessman in his poker gaming activities, that Mr. Duhamel has not developed any system for managing or mitigating risks in connection with his poker gaming activities and that the financial results of his tournaments do not show any consistency or progress in the results, the Court concludes, on a balance of probabilities, that Mr. Duhamel’s poker gaming activities are not carried on in a sufficiently commercial manner to constitute a source of business income for the purposes of the Act. Accordingly, the net earnings from Mr. Duhamel’s poker gaming activities should not be included in the calculation of his income under sections 3 and 9 for the 2010, 2011 and 2012 taxation years.
The court looked at the activities of Mr. Duhamel, and found that he acted as an amateur; for Mr. Duhamel, this decision is excellent news. Mr. Duhamel won in part because he didn’t act like he was in business.
However, there is bad news implicit in this decision for some Canadian professional poker players: It’s clear that there are Canadian poker players who consistently make their living from poker, and who would likely be considered professional gamblers if the CRA were to look at their activities. I don’t practice in Canada, but I would advise any Canadian professional poker player to seek advice from a Canadian tax professional who understands gambling activities and this decision.
[1] This paragraph in French reads, “Puisqu’il ressort de la preuve que le hasard est un élément très important dans les résultats au jeu de poker, que les activités de jeu de poker de M. Duhamel ne démontrent pas une capacité de générer des profits, que la probabilité de ruine de M. Duhamel dans le cadre de ses activités de jeu de poker est bien supérieure à 50 % (mais inférieure à 87 %), que M. Duhamel n’agit pas comme un homme d’affaires sérieux dans le cadre de ses activités de jeu de poker, que M. Duhamel n’a mis au point aucun système de gestion ou d’atténuation des risques dans le cadre de ses activités de jeu de poker et que les résultats financiers de ses tournois ne démontrent aucune constance ni progression dans les résultats, la Cour conclut, selon la prépondérance des probabilités, que les activités de jeu de poker de M. Duhamel ne sont pas exercées de manière suffisamment commerciale pour constituer une source de revenu d’entreprise aux fins de la Loi. Conséquemment, les gains nets tirés des activités de jeu de poker de M. Duhamel ne doivent pas être inclus dans le calcul de son revenu aux termes des articles 3 et 9 pour les années d’imposition 2010, 2011 et 2012.”
Bozo Tax Tip #7: Only Income Earned Outside the United States Is Taxable
Thursday, April 7th, 2022A few days ago I was explaining to a client the basics of the US Tax Code: All income is taxable unless Congress exempts it; nothing is deducible unless Congress allows it. That’s the basics.
My office is in Las Vegas, Nevada. I’m a US citizen. So I owe US income tax on my earnings, right? Of course I do. But where few willingly go the Bozo contingent jumps in. Here’s a method of avoiding tax on all your income. It’s been used by celebrities such as Wesley Snipes. So let’s use Section 861 of the Tax Code to avoid tax!
Section 861 states that certain items are always considered as income from within the United States. It does not say that income earned in the US is exempt from tax. But tax protesters claim that’s the case; courts, though, basically state, ‘You must be kidding.’ This argument has never been used successfully. In an audit or in court, if you use the Section 861 argument you have no chance of success.
The US taxes its citizens on their worldwide income. That includes the United States. Indeed, if that weren’t the case I’d be out of a job. Mr. Snipes received three years at ClubFed. In the long-run it’s far, far easier to simply pay your tax.
