Taxable Talk

With Thanksgiving coming this week many look forward to a short work-week. We do need to remember all the things that we should be thankful for—our families, our friends, our health, and our country. Here are some stories about individuals who have a little less to be thankful for.

Remember Aegis Trusts? They were the Palos Hills, Illinois purveyor of sham foreign trusts to shield income from the IRS. The trusts weren’t worth the paper they were printed on, and eventually the IRS caught on. Six individuals, including Michael Dowd of Glenview, Illinois, were convicted of various tax and fraud charges. Mr. Dowd was sentenced this past week to ten years at ClubFed.

Stanley Tollman used to be an executive at Tollman-Hundley Hotels. That entity managed Days Inns in the United States. Mr. Tollman allegedly had an interesting way to save for his retirement: He funneled income into foreign entities, but didn’t pay tax on that. He managed to avoid trial—he was indicted in 2002 but had just left the United States. On Friday he pleaded guilty on a videoconference link (he was in London, England) to a court in Manhattan. He’ll serve a single day of probation. However, Mr. Tollman will be paying $25 million immediately and will make annual payments of $16,018,728 plus interest for each of the next five years for the tax, penalties, and interest he owes. The government has dropped the indictment of Mrs. Tollman who had also been accused of tax fraud.

Seven individuals were sentenced in Valdosta, Georgia for a fuel tax credit fraud scheme. These individuals were involved in claiming that they used diesel fuel off of the highways (in a logging company)…but they didn’t. The logging businesses apparently never existed. The seven pleaded guilty, and with $3.2 million involved in the fraud some were lucky to escape ClubFed. Sentences ranged from home confinement to three years at ClubFed. The two alleged ringleaders, Clinton Basil Hughes and Pamela Hughes, have also pleaded guilty to $5.2 million of fraud. They have yet to be sentenced.

A scheme that’s been tried many times works just fine as long as the government doesn’t find out. Take a little bit of the revenue (preferably cash) and keep it off the company books and just somehow get it into your personal account. Unfortunately, once the government finds out that you’ve committed tax evasion problems do occur. Peter Lebsock, the former manager of Dos Gringos Trailer Park—a suburban Phoenix chan of Mexican restaurant—pleaded guilty to one count of tax evasion. He didn’t report $600,000 of income on his corporate tax returns from 2002 through 2005, and he left off $47,000 in tax on his personal returns for three years. He’ll be sentenced next February and could be spending some time at ClubFed.

Finally, American Boiler, Inc. of Stratford, Connecticut does what you think it would do. They service boilers. Industrial Property Management does what you’d expect, too. James McCarthy is a principal in both. Stavros Ganias is the owner of Taxes International in Wallingford, Connecticut. He prepared the books for Industrial Property Management. Allegedly they decided to divert $1,612,841.20 in money that American Boiler had received in work done for Industrial Property Management and used it for themselves and their families. And that income allegedly didn’t make it on their tax returns (it was supposedly reported as “loans paid”). That’s tax fraud, if proved, and that’s what the government is accusing Mr. McCarthy and Mr. Ganias of (along with two counts each of tax evasion). Given the amount of fraud allegedly involved, Mr. McCarthy and Mr. Ganias are looking at lengthy terms at ClubFed if they are convicted.

Do remember that if you think you’ve discovered a brand new way of evading taxes it’s likely that it’s anything but new, and the government has seen it before. It’s usually a whole lot easier to just pay your taxes now then to get in deep trouble later.

Every so often I get a phone call from someone who tells me, “Now Russ, I know that paying the income tax is completely voluntary and I don’t really have to file.” Or it might go like this: “Russ, I’m a citizen of California and not of the United States so I don’t have to pay income tax.” I’ve been referring individuals to the IRS page on frivolous arguments and Dan Evans’ Tax Protester FAQ.

I now have yet another resource to refer them to. Jon Siegel, Professor of Law at George Washington University, has his own webpage titled, Income Tax: Voluntary or Mandatory? I thank Professor Siegel for his addition to the cause of educating those who continue to believe the malarkey that tax protesters dish out. Professor Siegel even has a blog where he occasionally covers tax cases.

Hat Tip: The Volokh Conspiracy

Two stories tonight, one from Tulsa and one from England; they both illustrate Bozo behavior (or should I spell that behaviour) and one adds some British understatement.

First, let’s go to Tulsa, Oklahoma. Cynthia Michelle Odom was in state prison for “financial crimes.” She decided that a good way to earn some money was to file tax returns for eleven individuals that she befriended while in prison. Well, if she was being helpful that wouldn’t be that big of a deal. But the truth was quite different: She invented income numbers and somehow all those returns got refunds. Did I mention that she hadn’t asked any of her “friends” for permission to file those returns? Presumably the IRS discovered the fraud and identity theft when one of her victims filed their own return. She used refund anticipation loans from various banks (defrauding them) and, of course, the actual refunds defrauded the IRS. She was sentenced to 8 1/2 years at ClubFed, must make restitution of about $128,000, and pay a $2,000 fine. On the bright side she’ll have plenty of time to make some new “friends….”

Let’s cross over the Atlantic and head to Sheffield, England. John Barrett and Edward Kirby-Dorsey ran the Omega Sauna. Now what I consider a sauna is something like this:

Well, this sauna was a bit different. Quite a bit different. The police raided the Sauna and thirteen people were arrested for, “…suspicion of conspiracy to live off immoral earnings.” I like the British way of describing prostitution.

The police then raided the home of Mr. Barrett and found safes containing £270,000. Inland Revenue (the British tax agency) investigated and they found that the true revenues of the business weren’t being reported. The owners were using American methods of avoiding taxation: false books, offshore trusts, and lying on their tax returns. These methods worked just as well as they do in the US when the participants are caught—the two participants pleaded guilty. Mr. Barrett must pay tax of £258,000, a non-payment of tax surcharge of £45,500, prosecution costs of £1,500, defense costs of £10,000, and serve one year in prison. Mr. Kirby-Dorsey’s sentencing was postponed because of his health.