Taxable Talk

Most electrical engineers are intelligent. Perhaps I’m biased: My father was an electrical engineer and my brother has a degree in electrical engineering. This story focuses on an electrical engineer who showed a lack of intelligence in dealing with taxes.

Harold Stanley worked as a consulting electrical engineer. He was paid $971,604 from 2005 through 2009, and he undoubtedly received Form 1099-MISC’s for those years. I’ll let the Department of Justice press release take it from there:

According to court documents, Stanley is a tax defier who failed to file any tax returns for 2005 and 2006. Stanley has participated in “sovereign citizens” groups that believe the federal income tax system is voluntary and that they do not have to pay their fair share in taxes.

For tax years 2007 through 2009, Stanley filed substantially correct returns but left the tax line entry blank and failed to submit any payment. According to court documents, Stanley has not filed a tax return for tax years 2010 through 2015.

Unfortunately for Mr. Stanley, the IRS investigated why he hadn’t filed proper tax returns (or any tax returns for some years). However, it’s his actions once he was being investigated that drew my attention to this case:

Stanley submitted fake money orders for payment to the Internal Revenue Service, returned documents to the Internal Revenue Service claiming that the tax assessments were satisfied because they were “Accepted for Value,” filled out payment vouchers with his name in all capital letters but didn’t submit payment and submitted a false criminal referral to IRS – Criminal Investigation.

After his arrest, Stanley filed a civil suit against the Commissioner of Internal Revenue, an employee of the IRS, and an Assistant United States Attorney. On July 22, 2016, the District Court dismissed the case with prejudice. The court wrote that “by filing his complaint in this court, Mr. Stanley attempted to throw a wrench into his criminal proceedings in the Western District of Missouri and re-present the same arguments that he had previously and unsuccessfully litigated in other federal courts including the United States Tax Court, the Western District of Missouri, and the Eighth Circuit Court of Appeals.”

Mr. Stanley was found guilty of tax evasion back in June. There are a lot of actions I’d consider before sentencing. Mr. Stanley, though, wanted to be nominated for my coveted “Tax Offender of the Year” award, so he chose something I would not have considered:

On June 9, 2016, after the verdict in this case, a claim for damages was filed on behalf of Stanley, alleging that “Chief Magistrate Judge Sarah W. Hayes, Judge Roseann A. Ketchmark & District Attorney Paul Becker trying to collect an IRS debt in violation of 18 USC section 8 and when the 26 CFR states its voluntary and a civil action not criminal.” The claim for damages alleges personal injury in the amount of $55 million.

This past week Mr. Stanley was sentenced to five years at ClubFed; he received a sentencing enhancement for obstruction of justice. I assume that civil actions to recover the tax, penalties, and interest will be forthcoming.

Mr. Stanley was sentenced by Judge Ketchmark—yes, the same judge he sued. I’m sure that went over well with her. A helpful hint to anyone about to be sentenced: Don’t file a lawsuit against the judge! On the bright side, Mr. Stanley does have a far better chance of winning the Tax Offender of the Year award than winning his personal injury claim.

When I think of a law school, I think of a university teaching students how to be attorneys. My cousin is a professor at the University of Chicago Law School; that’s a law school. That’s not what I’m writing about today.

From Point Richmond, California comes the story of Richard Thomas Grant. Mr. Grant was a partner in an engineering firm in Richmond (in the San Francisco Bay Area). Back in 2001, he stopped filing personal tax returns. In 2003, he stopped filing partnership tax returns for his partnership (although he still paid a tax professional to prepare those returns). Mr. Grant joined “Freedom Law School.”

I had never heard of this law school, but perhaps I should have. Back in 2015, Joe Krsitan had this to say about it:

Through its conferences, materials, and service packages, the Freedom Law School promoted various techniques for evading the payment of federal income taxes. The techniques included:

-Minimize financial records.

-Do not give information to the IRS.

-Do not file tax returns.

And it also offered multi-level marketing opportunities!

Freedom Law School notes its victories and, their web site still states,

There is no statute that makes any American Citizen who works and lives in the United States of America liable or responsible to pay an income tax. Individuals only become liable to pay the income tax when they “VOLUNTARILY” file a tax return and the IRS follows their assessment procedures as outlined in the Internal Revenue Code.

Hint: This is still snake oil advice. If you follow it and you make substantial income, ClubFed will be in your future. Mr. Grant likely wishes he had never heard of Freedom Law School. I’ll let the DOJ press release continue with the case:

While the Internal Revenue Service (IRS) attempted to collect unpaid taxes owed by Grant for 2001 and 2002, and attempted to examine Grant’s taxes for subsequent years, Grant, with the assistance of Freedom Law School and its founder, Peymon Mottahedeh, attempted to frustrate the IRS’s actions by, among other things, filing multiple and ultimately unsuccessful law suits in various jurisdictions.

For the charged years 2005 through 2009, Grant’s partnership income was $509,339, $566,741, $486,062, $598,977 and $604,706, respectively.

So what did Mr. Grant do? He hid his funds in a warehouse bank. That only worked for a few years; he then converted his funds to cash and cashier’s checks.

After the federal government shut down MyICIS, Grant used another bank to convert his partnership distributions to cashier’s checks and cash in order to avoid depositing the funds into a bank account and used the cashier’s checks to pay his mortgage and other high-dollar personal expenses. He also used cash to purchase dozens of U.S. Postal money orders to pay other bills and expenses, including utilities, taxes and expenses related to his classic aircraft.

I’m sure his mortgage company issued a Form 1098 to report his mortgage interest paid. Although not noted in the press release, I’m certain IRS Criminal Investigation contacted the mortgage company; they were able to produce the cashier’s checks that were used. And then it was a simple procedure to find out how Mr. Grant paid for those cashier’s checks.

Earlier this year Mr. Grant was found guilty of three counts of tax evasion. Last week he was sentenced to 33 months at ClubFed plus he must make restitution of $402,457.39. He’ll also have to serve three years of supervised release.

Mr. Grant paid “thousands of dollars” in yearly membership fees to avoid timely paying his taxes. That got him…very little unless you want to spend 33 months behind bars.

From time to time I’ve seen stories of individuals using two sets of books: One with the actual numbers and one with the (lesser) numbers used to prepare the tax returns. It’s a great idea…until you get caught. A former owner of a Las Vegas liquor store took the double set of books idea a bit further.

Jeffrey Nowak and Ramzi Suliman owned a chain of liquor stores here in Las Vegas. The stores were successful, but the income reported on the tax returns was inaccurate. Mr. Nowak gave his tax professional the second set of books that left out about $4 million in cash receipts. The Las Vegas Review-Journal reports that there was also a third set of books; that set compared the true and skimmed versions of books. The Department of Justice press release notes, “For tax years 2006 to 2009, Nowak reported a total income tax owed of only $313, when in fact Nowak owed more than $400,000. The total tax loss from the conspiracy is nearly $1 million.”

Mr. Nowak was indicted and tried this past week. He was found guilty of conspiracy to defraud the United States, assiting in filing false corporate tax returns, and tax evasion. He’s looking at a lengthy term at ClubFed when he’s sentenced in November. Mr. Suliman pleaded guilty in 2014; he is awaiting sentencing.

For those wondering: Three sets of books isn’t better than two, and two sets of books isn’t better than one.

Speaking of guilty pleasures, one of my favorite 1980’s songs is Corey Hart’s “Sunglasses At Night.” One New York seller of sunglasses forgot a not-so-minor detail of selling sunglasses, and may be finding his way to ClubFed.

Michael Stern was the owner of Prestige Optical in New York City. He branched out to selling sunglasses (and other glasses) online, collecting $656,780 of sales for 2007 and 2008. Just one minor detail was forgotten by Mr. Stern: Putting those sales on his tax return.

Yes, online income is just as taxable as through a brick and mortar store, and the IRS discovered the omission. He pleaded guilty to two counts of filing a false tax return; he’s already agreed to make restitution to the IRS of $190,781 but he also faces up to three years at ClubFed and a $250,000 fine.

I didn’t remember that the music video of Corey Hart’s “Sunglasses At Night” has a prison theme. It’s definitely apropos here: