Taxable Talk

So 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!

Robert 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.

Many are called; few are chosen. It’s time once again for that most prestigious of prestigious year-end awards, the Tax Offender of the Year. It takes more than cheating on your taxes; you need to really cheat or do a series of Bozo-like actions. Every year I hope that there are no worthy candidates; as usual, there are plenty.

The United States Congress get a nomination. “The compromise deal that passed for Covid relief could have been done a lot sooner,” the nominator wrote. And she’s absolutely right. But this reminds me of a joke I remember from Get Smart! When asked how long it would take for an appropriation bill for Control to pass, the answer is two months; when asked how long it would take for an emergency appropriation bill to pass, the answer is three months.

The California Department of Tax and Fee Administration (CDTFA) received a nomination. Consider if you sold items through Amazon.com, and you had two sales to California residents in 2014-2016. The CDTFA is coming after you for back sales taxes, penalties, and interest because your products were possibly warehoused in an Amazon warehouse in California. There are many court cases on this, and even the Los Angeles Times–usually a proponent of additional taxes in California–thinks that the CDTFA is nuts. But Congress and the CDTFA didn’t even make the top three.

Finishing in third place was Winfred Fields. Mr. Fields is enjoying a 109-month stay at ClubFed for a brazen tax fraud scheme. Mr. Fields specialized in preparing returns for workers in oil exploration in the Gulf of Mexico. They were paid by US companies, and Mr. Fields filed returns noting that per tax treaties with the United Kingdom, Spain, or New Zealand these workers’ pay was exempt from US taxation. They weren’t, but the IRS processed the returns. He also required the tax refunds to be deposited in his bank account (a violation of Circular 230, the regulations that tax professionals fall under), so he could take his fee off the top. He received $3,097,974 of illicit refunds and kept $1,302,271 for himself.

Coming in second place are Stein Agee & Corey Agee of the Atlanta area. The Agees developed syndicated conservation easements (SCE), and sold those to high-income individuals. For every dollar you contributed to one of their partnerships, you got a $4 tax deduction. If someone came to me with this as a possible investment, I would immediately think there’s a problem. A fundamental rule of taxation is you can only deduct what you pay for, and it’s hard for me to envision how you can get a (say) $40,000 deduction for investing $10,000. But I digress…

We’re not talking about a small tax fraud here. Per the Department of Justice press release, more than $1.2 billion of fraudulent deductions were taken; the Agees received more than $1.7 million in commissions. Stein and Corey Agee both pleaded guilty to one count of conspiracy to defraud the United States; they’re looking at up to five years at ClubFed plus probable monetary penalties.

And, yes, $1.2 billion of fraud is only second place.

In 1970, a company called Universal Computer Systems (UCS) was formed. It began as a regional data processing service bureau, and expanded in the 1980s, mainly providing computer services to automobile dealers. The company was successful, and expanded to have offices not only in the United States but in several other countries.

In 2006, UCS merged with Reynolds and Reynolds, another automobile dealer computer service company. The merger was valued at about $2.8 billion. Robert Brockman, who was CEO of UCS became CEO of the combined company (which took the Reynolds and Reynolds name). Their current products include dealer management systems for inventory, accounting, contracts, and logistics. It remains a successful business.

Mr. Brockman allegedly began having foreign entities to help shelter his wealth. There is nothing wrong with this, provided you appropriately disclose the entities and pay your US taxes based on the Internal Revenue Code. You likely can figure out where this is headed….

Mr. Brockman’s entities, which included trusts and companies in Bermuda, the British Virgin Islands, and Nevis (part of Saint Kitts and Nevis, two islands in the Caribbean). There are bank accounts in these countries and in Switzerland and somehow not all of these accounts allegedly made it onto Mr. Brockman’s annual Reports of Foreign Bank and Financial Accounts (the FBAR).

Mr. Brockman also allegedly filed false tax returns from 2012 – 2018, ignoring capital gains that were made in various transactions (detailed in the indictment). There are also counts of wire fraud, money laundering, and conspiracy. From the Department of Justice press release:

According to the indictment, Brockman, a resident of Houston, Texas, and Pitkin County, Colorado, used a web of offshore entities based in Bermuda and Nevis to hide from the IRS income earned on his investments in private equity funds which were managed by a San Francisco-based investment firm. As part of the alleged scheme, Brockman directed untaxed capital gains income to secret bank accounts in Bermuda and Switzerland. The indictment further alleges that to execute the fraud, between 1999 and 2019, Brockman took measures such as backdating records and using encrypted communications and code words to communicate with a co-conspirator, among other alleged actions.

In addition to the tax offenses, the indictment alleges that, between 2008 and 2010, Brockman engaged in a fraudulent scheme to obtain approximately $67.8 million in the software company’s debt securities. As CEO, Brockman was contractually restricted from purchasing any of the software company’s debt securities without prior notice, full disclosure, and amending the associated credit agreements. The indictment alleges that Brockman used a third-party to circumvent those requirements, to acquire the debt securities, and to conceal from the sellers valuable economic information. The indictment further alleges that Brockman used material, non-public information about the software company to make decisions about purchasing the debt. In addition, Brockman allegedly persuaded another individual to alter, destroy, and mutilate documents and computer evidence with the intent to impair the use of such evidence in a grand jury investigation.

Mr. Brockman has pleaded not guilty, and it should be remembered that these charges are just allegations.

It is clear from the indictment that at least one (probably two) individuals within Reynolds and Reynolds have cooperated with the Department of Justice. Additionally, Robert Smith, the CEO of Vista Equity Partners in San Francisco, admitted his part of the scheme and will be paying $139 million to the United States and will avoid prosecution.

The total alleged fraud is $2 billion.

There are numerous other interesting items within the indictment; here are just a few:

On or about June 3, 2007, BROCKMAN, using his encrypted email system, directed Individual One to purchase a computer program called “Evidence Eliminator” for Individual One’s computers…

On or about October 20, 2011, BROCKMAN, using his encrypted email system, directed Individual One to attend a money laundering conference “if possible under an assumed identity.”…

On or about December 9, 2012, BROCKMAN, using his encrypted email system, directed Individual One to change the scture in which the shares of Point were held, moving them to a “purpose trust” with a “dressed up charitable purpose” to avoid inquiries from banks and “the house” about the ultimate beneficial owners of Point.

Again, an indictment does not mean Mr. Brockman is guilty of the alleged offenses. However, the indictment shows a picture of deliberate disregard of US taxes. Mr. Brockman is facing many, many years and large financial penalties if found guilty of the 39 counts for which he faces trial.

And that’s a wrap on 2020, a dismal year that I hope we don’t have to experience ever again. May all of you have a Happy, Healthy, and Safe New Year.