Former Chairman of Woodland Park, NJ Democratic Committee Bribes His Way to ClubFed

The IRS has its problems, but accepting bribes isn’t one of them. The former chairman of the Woodland Park, New Jersey Democratic Committee found that out the hard way.

Michael Kazmark didn’t pay his 1997-2005 federal taxes; he owed just under $100,000 (including interest and penalties) by 2010. When you owe a large amount and cannot pay one avenue that’s open to you is an Offer In Compromise (OIC). In an OIC, you ask the IRS to settle your debt for pennies on the dollar. About 15% of OICs make it through and are accepted; it usually takes over a year for the process to play itself out. Mr. Kazmark offered to pay $48,800 of the $98,046 he owed; he sent the required deposit of $9,800 with his OIC application.

Mr. Kazmark wanted to make sure his OIC went through. Now, most of us might consult with a tax professional who could make sure the OIC had the best chance of being approved. Mr. Kazmark had another idea: bribery. From the Information in his indictment:

5. It was part of this bribery scheme that on or about October 5, 2010, in Passaic County, defendant MICHAEL KAZMARK offered, promised to make and made a $1,000 bribe payment to UC1 and UC2 in exchange for their official assistance in transferring MICHAEL KAZMARK’s offer in compromise file to UC2 so that UC2 could accept defendant MICHAEL KAZMARK’s April 18, 2010 offer in compromise.

6. It was a further part of this bribery scheme that on or about October 5, 2010, in Passaic County, New Jersey, defendant MICHAEL KAZMARK offered and promised to make a $17,500 bribe payment to UC1 and UC2 in exchange for their official assistance in accepting defendant MICHAEL KAZMARK’s April 18, 2010 offer in compromise, and thereby resolving defendant MICHAEL KAZMARK’s federal tax liability, for the amount of the check that he had already paid to the IRS, namely $9,760, as opposed to the $48,800 that defendant MICHAEL KAZMARK had initially offered.

Mr. Kazmark pleaded guilty last year; he was sentenced on Friday to two years at ClubFed. He was lucky in that federal sentencing guidelines suggested a three-year term. In any case, bribery is a strategy that is a very poor choice.

Posted in New Jersey, Tax Fraud | 1 Comment

He Cracked the Code (but Won’t be Happy with the Result)

Back in 2007, Peter Hendrickson wrote a book titled Cracking the Code: The Fascinating Truth About Taxation in America. I haven’t read it, nor would I advise you to. Today, Judge Buch of the Tax Court demolished each and every argument in the book.

But I’m starting with the decision rather than the case itself. Steven Waltner challenged the IRS’s collection of a frivolous tax submissions penalty in Tax Court. He paid the IRS so that issue was moot. However, each side asked for sanctions on the other side (that being Mr. Waltner and the IRS) alleging misconduct.

Judge Buch notes,

This case has occupied an inordinate amount of the Court’s time. The Court could have disposed of the entire matter summarily by reference to Crain v. Commissioner or any number of other cases that stand for the proposition that we need not address frivolous arguments. [footnotes omitted]

Well, why does the decision go on for another 40 pages?

The Court has taken the time, however, to address those arguments because Mr. Waltner appears to be perpetuating frivolous positions that have been promoted and encouraged by Peter Hendrickson’s book Cracking the Code: The Fascinating Truth About Taxation in America (2007). Indeed, it appears not merely that Mr. Waltner’s positions are predicated on that book but that his returns and return information have been used to promote the frivolous arguments contained in that book. Consequently, a written opinion is warranted.

It’s not that the IRS didn’t err; they did. It’s what the IRS counsel did after making mistakes that contrasts with what the petitioner (Mr. Waltner) did. I’ll let Judge Buch take it:

Respondent’s counsel sought discovery that went beyond the scope ofthis case, and the Court issued orders excusing Mr. Waltner from responding to those requests. Likewise, respondent’s counsel was evasive in answering some of Mr. Waltner’s discovery requests, and the Court ordered respondent to supplement those responses. In each instance, once the Court ruled, respondent’s counsel cured the defect, through either supplementing his responses or accepting the Court’s determinations that his requests were improper.

Mr. Waltner sought to avoid answering every discovery request.

There’s more, though, a lot more. It appears that the petitioner’s aided a Web site used to market Cracking the Code. The Court then takes 30 pages to demolish the arguments in the book. Here are some additional excerpts of Judge Buch’s opinion:

Cracking the Code is written by Peter Eric Hendrickson. Nowhere in his book does Mr. Hendrickson set forth his credentials, other than on the back cover where he vaguely identifies himself as “researcher, analyst and scholar”. Add to that felon and serial tax evader.

Well, you have a lot of free time to research when you’re at ClubFed.

It is this passage that is quoted at the beginning of Cracking the Code. It is fitting because the book is largely an exercise in twisting the meaning of words into what the author wants them to mean, even if statutes, regulations, and case law define those words otherwise…

Having spent the immediately preceding chapter misinterpreting the word “including”, the author turns to the same Latin phrase discussed above and then proceeds to misinterpret it…

This chapter provides an example of how one illogical conclusion can be used to bolster another…

Turning to the subject of withholding, the author sets forth one of his fundamental, and fundamentally incorrect, positions regarding tax reporting. Having erroneously concluded that the term “employee” includes only government employees (and a few selected others), the author concludes that “this kind of withholding only applies to the pay of federal government workers”…

The positions advocated in Cracking the Code have routinely been rejected, with its author being criminally convicted and its adherents being sanctioned.

I could go on, but I think you get the point; I’m certain Mr. Waltner gets the point. While he only received a $2,500 sanction, he has other Tax Court cases in the pipeline. I also suspect that others are using arguments in Cracking the Code. They may want to rethink that. As Judge Buch stated, “And future litigants are on notice that the positions advanced in Cracking the Code are frivolous and relying on those positions may result in sanctions.”

Case: Waltner v. Commissioner, T.C. Memo 2014-35

Posted in Tax Court | Tagged , | 2 Comments

No Margin for Error

Nevada is known for low taxes. It’s also known for subpar schools and relatively low teacher salaries. The Nevada State Education Association (aka the teachers union) decided that a solution to the problem of subpar schools was a tax on businesses. The NSEA calls it the Education Initiative; opponents call it a fiscal disaster for the state. The initiative will appear on the November ballot and is more commonly known as the Margin Tax.

Interestingly, Jon Ralston, who is probably the leading political commentator here in the Silver State, noted on his blog that both sides (pro and con) paid for a study of its impact. I have a feeling that proponents of the tax aren’t thrilled with what they’re reading. Here are two of the conclusions from the study:

With an effective tax rate approaching 15 percent, Nevada’s effective business tax rate would be materially higher than any other Western state, including, without limitation, California…

The proposed margin tax would take Nevada from below the national average in terms of businesses taxes paid per employee, per $1,000 of personal income and per $1 million of gross state product to among the top five states in the country in each of those categories.

This tax goes into effect at exactly $1 million of gross receipts. It doesn’t take a genius to figure out that this initiative would cause companies to stop growing when their sales neared $1 million.

To date, the only large union in favor of the initiative is the NSEA. I expect that as news of this study spreads that the large casino interests and the unions will either refuse to support the measure or come out against it. While the November election is just over eight months away, this doesn’t look like a good year for Democrats and supporters of new taxes. Given the devastating impact of this proposed new tax, that’s a good thing.

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California State Senator Ron Calderon Indicted on Bribery & Tax Charges

This hasn’t been a good year for Democratic state senators in California. Back in January State Senator Roderick White of Inglewood was convicted of five counts of voter fraud, two counts of perjury, and one count of filing a false declaration of candidacy. His sentencing is scheduled for March. This past week State Senator Ron Calderon of Montebello was indicted in a bribery scandal.

Senator Calderon is accused of 24 counts, including mail fraud, wire fraud, honest services fraud, bribery, money laundering and conspiracy to commit money laundering, and aiding in the filing of a false tax return. From the Department of Justice press release:

The indictment describes a scheme in which Ron Calderon allegedly solicited and accepted approximately $100,000 in cash bribes – as well as plane trips, gourmet dinners and trips to golf resorts – in exchange for official acts, such as supporting legislation that would be favorable to those who paid the bribes and opposing legislation that would be harmful to them. The indictment further alleges that Ron Calderon attempted to convince other public officials to support and oppose legislation.

Another part of the press release states that Senator Calderon took bribes from Michael Drobot. Mr. Drobot used to own Pacific Hospital in Long Beach. The press release goes on to note,

Drobot allegedly bribed Ron Calderon so that he would use his public office to preserve this law that helped Drobot maintain a long-running and lucrative health care fraud scheme…

In another case filed this morning in United States District Court, Drobot has agreed to plead guilty to charges of conspiracy and paying illegal kickbacks. In his plea agreement, Drobot admits paying bribes to Ron Calderon.

We also have the wonder of film credits coming into the picture. Film credits have been a magnet for corruption; such was allegedly the case here:

In another part of the bribery scheme, Ron Calderon allegedly solicited and accepted bribes from people he thought were associated with an independent film studio, but who were in fact undercover FBI agents. Ron Calderon solicited and accepted bribes in exchange for supporting an expansion of a state law that gave tax credits to studios that produced independent films in California.

Mr. Calderon is facing a maximum of 396 years at ClubFed if found guilty on all charges.

Posted in California, Tax Fraud | Tagged | 1 Comment

Taxes and Daily Fantasy Sports: The Duck Test

If it looks like a duck, walks like a duck and quacks like a duck, then it just may be a duck.

So said someone (this quote has been attributed to Walter Reuther among others), and it’s one of those cliches that have an impact in taxes. When something has the elements that make it look like something, generally the Tax Code will make it into that something.

Why am I bringing this up? Because of the popularity of daily fantasy sports sites. These sites allow contests based on the outcome of a day’s games in a sports league. For example, you can take various players in today’s NBA games and play against others who select their own players. Should your ‘team’ do better than your opponents’ teams, you win the contest.

The sites consider themselves to be skill games and contests and not gambling. They issue Form 1099-MISC’s to the winners, and put the income on line 3 (“Other Income”). They do not issue Form W-2G’s (“Gambling Winnings”) to their winners. For individuals who partake in these contests, how should they treat the income?

First, it’s income and must be included on the tax return. All income is taxable unless Congress exempts it; Congress hasn’t exempted daily fantasy sports income. So it must be included on your tax return no matter if you receive a Form 1099 or not.

Let’s say you play three contests, win $2,000 and never lose. You receive a 1099 noting $2,000 of “Other Income.” In this simple case, just include the income as “Other Income” on your tax return (line 21, Form 1040). No mater what the flavor of Other Income is you’ve included it.

Let’s say you make a living playing daily fantasy sports sites. You win $250,000 from various sites, and have $50,000 of losses. With that kind of income you are probably a professional fantasy sports player and should include the income and associated business expenses on a Schedule C. It sure looks like you’re in the profession of daily fantasy sports player–the first instance of the Duck Test.

Now let’s consider Jane. She plays daily fantasy sports occasionally. She receives a 1099-MISC noting her $30,000 of wins. She also has $20,000 of daily fantasy sports losses. For the sake of discussion, we’ll assume she has records proving those losses. Can she take those losses?

If you were to ask the daily fantasy sports sites, they would say no. They operate under the sweepstakes/skill game laws; there is no such thing as losses with skill games.

However, we’re concerned with Jane’s taxes, not a daily fantasy sports site’s taxes. A fundamental principal of US taxation is to look at the activity itself to determine what it is no matter what it calls itself. Ah yes, another instance of the Duck Test.

The tax laws on wagering (aka gambling) are different. You are allowed to take wagering (gambling) losses up to the amount of your winnings (§165(d) of the Tax Code). So we need to determine if daily fantasy sports are a wagering activity.

This is more difficult than you might think; wagering isn’t defined in the Tax Code. However, there are plenty of IRS and Tax Court rulings on this, and all say basically the same thing. For something to be gambling, three elements must be present:
1. A prize;
2. Chance; and
3. Consideration.

Clearly daily fantasy sports have elements 1 and 3. There’s a prize and there’s a cost to enter each event. Is there chance?

Gambling does not have to be 100% chance to be considered gambling. For example, poker is considered gambling under US tax law yet there’s plenty of skill involved with it. (Indeed, I’d argue that skill predominates over luck; however, there’s absolutely an element of luck in poker.) Let’s look at what’s involved with a daily fantasy sports contest. You generally select a team to play in a day’s events. Let’s say you selected Carlos Boozer and Shane Battier for today’s NBA daily fantasy sports contest. Those players scored 8 and 3 points, respectively. On the other hand, had you selected Taj Gibson and Chris Bosh you would have done far better; they scored 20 and 28 points. Yet before a single game who know what each player will score? If you had selected NBA star Lebron James you would normally do quite well; however, he didn’t play today.

There sure looks to me to be at least some elements of chance involved with who you select. While Carlos Boozer averages 14.8 points a game, he had only 8 today. On the other hand, Taj Gibson had 20 while he averages 12.9. Is that skill (that is, against the opponent they faced those players would play differently than their average) or is it luck? It’s probably some of each.

So daily fantasy sports have at least some element of luck. Then from a tax standpoint they sure look to be a form of wagering activity. There’s a prize, chance, and consideration. The Duck Test again: If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck.

So can players on daily fantasy sports sites treat their play like gambling? That’s something worth discussing with your tax professional if you partake in daily fantasy sports.


There’s a corollary to this: Do daily fantasy sports sites violate various gambling laws? (I am not an attorney and the following is just my speculation and not legal advice.) While the Unlawful Internet Gambling Enforcement Act (UIGEA) provides a carve-out for fantasy sports, there are numerous other gambling laws. Additionally, most states have laws on gambling. The daily fantasy sports sites all state they’re legal but I suspect that they probably violate various laws, mostly on the state level.

I looked at two sites. The first stated that the US government and most states consider fantasy sports to be a game of skill (this site doesn’t allow residents of AZ, IA, LA, MT, and WA to play). The second site used basically the same language and prohibits players from the same five states.

Unfortunately, many states look at just an element of chance to determine if something is gambling. And there’s no doubt that daily fantasy sports have such an element. The problem is that these sites are starting to bring in large dollars. That attracts attention, and some state attorney general is going to wonder the same thing that I am. He or she will conclude that the Duck Test applies and that these are gambling sites in violation of his or her state’s laws.

Posted in Gambling | Tagged | 4 Comments

What Are the Tax Impacts of the FullTiltPoker Remission Payments?

In less than one week, many poker players will finally receive their balances that they had at FullTiltPoker when that online poker site was shut down as a result of “Black Friday.” According to the Garden City Group (the claims administrator hired by the US Department of Justice to handle the remission claims), the first payments will be made by the end of February. So how much of the money you receive will be income? Will 1099s be issued?

The answer to the first question–how much of the remission payment you receive is taxable–is “it depends.” This will depend on each individual’s facts and circumstances. I did an interview with CardPlayer last year and talked about some hypothetical cases. Some of this will be a repeat of that article while some of this will be new.

For most individuals, the amount of money you will pay tax on from the remission payments is the amount you receive less the amount you deposited less any money you receive that you’ve already paid taxes on. Let’s take three individuals, all of whom receive their full balances next week.

1. Joe receives $1,700. He earned it all in 2011, starting with a freeroll. He’ll have $1,700 of income that will need to be reported on his 2014 tax return.

2. Russ receives $1,700. He earned it all prior to 2011, and has already paid tax on all the money he’s receiving. He will not owe any tax on the remission.

3. John receives $1,700. He had a balance on January 1, 2011 of $500 (he paid taxes on this in previous years). He withdrew $500 during 2011 (and paid taxes on that). He’ll owe 2014 tax on the $1,200 he receives that he hasn’t paid tax on.

Those are all relatively simple scenarios. I can imagine far more complex ones; indeed, I spoke with someone today who has such a scenario. There are people with disputed balances, “Red Pros,” affiliates and others who still don’t know what they’ll receive. Anyone who doesn’t have a simple, straightforward scenario should consider speaking with a competent tax professional regarding their remission payments.

The other major question is whether or not GCG will issue Form 1099-MISCs to recipients. We don’t know the answer to this, and we likely won’t know until early February 2015. GCG hasn’t said they would (nor have they said they wouldn’t); they’ve been silent on this issue. It may be they simply don’t know. If 1099s will be issued, the deadline for mailing them out will be January 31, 2015.

The problem with issuing 1099s is that for most individuals the amount of money being received will not all be income. Almost everyone deposited something on FullTiltPoker; the return of those deposits is clearly not taxable. I could speculate on whether 1099s will be issued, but it would be just that: speculation. Until GCG makes a pronouncement or we’re one year from today (when 1099s would have been received), we just don’t know. My hope is that 1099s will not be issued because almost every one of them would be wrong. If there is official guidance on this from GCG I’ll update this post with that information.

So we are definitely nearing the end of the FTP remission process. That is definitely good news.

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The Fun With the Two-Month Automatic Extension Continues

I’ve been having issues with clients who take the automatic two-month extension. As I learned years ago, a taxpayer outside of the United States on April 15th gets two extra months to file his return. This is noted in Treasury Regulation 26 CFR § 1.6073-4 (b):

Citizens outside the United States. In the case of a United States citizen outside the United States and Puerto Rico on the 15th day of the 4th month of his taxable year, an extension of time for filing the declaration of estimated tax otherwise due on or before the 15th day of the 4th month of the taxable year is granted to and including the 15th day of the 6th month of the taxable year. For purposes of applying this paragraph to taxable years beginning prior to January 1, 1964, Alaska shall be considered outside the United States.

That seems pretty specific to me. Given the reference to Alaska it’s pretty clear this regulation has been on the books for a long, long time.

It’s also noted in the Internal Revenue Manual. IRM 3.11.3.5.7.3 states:

Edit CCC “N” when the taxpayer is qualified for an automatic two-month extension. A taxpayer qualifies for this special extension if-on the date his/her return is due-the taxpayer meets any of the following criteria:
• Indication the taxpayer lives outside the U.S. and Puerto Rico and main place of work is outside the U.S. and Puerto Rico
• Indication the taxpayer is on military or naval duty outside of the U.S. and Puerto Rico
• Indication of taxpayer “abroad” or “overseas”.
• APO/FPO/DPO address. [emphases added]

I reported this as a systemic issue, and the IRS, after investigating, agreed. However, this got referred up the line and a supervisor told my contact in the systemic issues group that the two month extension apparently doesn’t exist; that it was eliminated when IRC §6073 was repealed in 1984. I pointed out to my contact both the regulation and the IRM. My contact didn’t know what the impact was on a regulation when the overlying code section is repealed. I said that since the regulation is still on the books, and regulations do carry the force of law, it’s valid. She said she’s referring this back to the supervisor along with the regulation and the IRM section.

In any case, it’s another step backwards after what I thought was a step forward. Meanwhile, to date all my clients who have been hit with erroneous penalties have had them removed…eventually.

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Tax on the Run Owners Run to ClubFed

Here’s a scheme for you: The government has set up this new tax credit worth thousands of dollars. What if we find some impoverished individuals, have them fill out tax returns claiming this credit, and we pocket all that cash? We’ll just phony up some other parts of the return to make it look real. They’ll never catch us!

As an aside, this sort of thing happens with all refundable tax credits. It’s one of the reasons why they attract fraudsters like moths are drawn to bright lights.

Yes, this really happened…except for the part about never being caught. Jason Altman, his brother Jarrod, and Emanuel Harrison owned Tax on the Run, a tax preparation business in Dallas, Texas. They got the bright idea about the First Time Homebuyer’s Credit and did recruit individuals to file tax returns for the credit. They invented Schedule C’s (sole proprietorships) for those individuals so it looked like they made money (enough to afford a house) and then added in the homebuyer’s credit. Amazingly enough, all of those returns had refunds. They also had these clients obtain refund anticipation loans. Once the loan was approved, they drove the taxpayer to a check cashing business where their refund check was cashed. The members of the conspiracy took most of the money. None of the clients qualified for the homebuyer’s credit.

Jason Altman and Emanuel Harrison had already received 7 years at ClubFed. Jarrod Altman was luckier: He received eight months of home confinement as part of three years of probation on Friday. The trio used intermediaries to recruit impoverished taxpayers; the intermediaries are also heading to ClubFed. Everyone involved must also make restitution to the IRS.

Hopefully, our Congresscritters won’t invent new refundable credits. Wait, isn’t there something new this year with medical care?

Posted in Tax Fraud | 1 Comment

Utopia Is Dead

A perfect place. That’s what comes to my mind when I hear the word “utopia.”

Vincent and Mary Giamo had a different idea; Utopia was their nightclub in Orchard Park, New York (near Buffalo). It was quite successful as they followed a formula that is illegal but helps with taxes: They kept two sets of books. One set was accurate, and showed they would owe $1.2 million in taxes to the IRS. The other set shockingly showed they didn’t owe that money. This scheme works quite well…until you’re caught.

And the Giamos were caught, tried, and convicted of tax evasion charges. Vincent received 12 months at ClubFed; his wife, Mary, received probation. They must also make restitution of another $671,840 to the IRS (they’ve already paid $550,000). They are also facing civil charges.

As usual, it’s a whole lot easier to just pay your taxes in the first place…but that though rarely occurs to the Bozo mind.

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Texas’s Gain Is California’s Loss

Today a client asked me about where to relocate her company headquarters. Her computer engineers aren’t thrilled with the current location, and would like to move to either California or Texas. I explained the decision has a cost difference of $165,000.

Currently, there’s a small office in California with one employee. The business, which is an S-Corporation, is taxed on the personal level (as almost all S-Corporations are). The business is profitable.

California uses a one-factor sales test to determine the percentage of income attributable to the state. Most of the sales of the company are not to California; she only owes a small amount of tax to California based on the income. Her California tax bill today is more of an annoyance than anything else.

However, if the company’s headquarters moved to California, then all sales not attributable to a state the company does business in would be attributable to California. In running an estimate for 2014, that amounts to an additional $170,000 she would owe in California tax.

On the other hand, Texas doesn’t have a state income tax. If the company’s headquarters moves to Dallas, her tax bill won’t change. Her engineers may like the Bronze Golden State slightly more than the Lone Star State; however, my client is a businesswoman who understands math.


This is a true story, and there’s no doubt in my mind that what I told my client has been duplicated by hundreds of accountants throughout the country. Taxes matter, as always.

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