An interesting week for tax fraud. There’s a typical case out of the San Joaquin Valley, a jailed promoter who may have to spend even longer at ClubFed, and an attorney who admitted that he lied under oath to the IRS and that he gave an incorrect legal opinion on a tax shelter.
First, Michael Gordon of Clovis, California (near Fresno) has had his own software company for several years. Between 2001 and 2004 he had his company pay over $339,000 of personal expenses as business expenses. That’s not a good idea, and it became a very bad idea when the IRS caught him. He pleaded guilty to tax fraud last week, and has agreed to make restitution of $211,000 and pay all the taxes, penalties, and interest he owes. He’s already paid over $570,000 toward his obligations. Note that appears to be far larger than the actual tax he owes which goes to show the impact of penalties and interest. As usual, it’s a lot better (and cheaper) to just pay the tax in the first place. Mr. Gordon will be sentenced in November.
Remember Eddie Ray Kahn? He was a co-defendant of Wesley Snipes. Mr. Kahn is already at ClubFed having been sentenced to ten years. Well, he may be spending even more time there. He was indicted this past week along with four others on counts of mail fraud and conspiracy to defraud the United States. What did these individuals do? They allegedly sold worthless “bills of exchange” and other schemes to promote tax fraud.
The indictment alleges that American Rights Litigators/Guiding Light of God Ministries sold more than 4,000 packages to customers in every state. Their “bills of exchange” were supposedly drawn on the US Treasury for payment of taxes. Unfortunately, there’s no such thing. Mr. Kahn allegedly was the ringleader of the group. In any case, no trial date has yet been set.
Finally, Peter Cinquegrani was a partner at Arnold & Porter, a law firm. He was instrumental in designing the PICO tax shelter (Personal Investment Corporation). Back in 2003 he testified under oath to the IRS that the shelter had not been designed to avoid taxes.
One of the issues with “tax shelters” is that they must have some economic substance. A basic rule of tax is that transactions that lack an economic substance are ignored for tax purposes. Well, Ernst & Young was looking to develop tax shelters (including the PICO). Mr. Cinquegrani was the primary drafter of opinions stating that the PICO had an economic purpose.
This past week Mr. Cinquegrani pleaded guilty to conspiracy to commit tax fraud, aiding and abetting tax evasion, and aiding in the submission of false and fraudulent documents to the IRS. He admitted that he lied to the IRS back in 2003. He also admitted drafting a phony consulting contract between Ernst & Young and Bricolage Capital. The North Country Gazette gets to the meat of the issue:
He stated that E&Y’s fee for the PICO transaction was calculated as a percentage of the tax loss the client wished to generate, but E&Y’s engagement letter with each client reflected a much smaller flat fee amount in order to conceal that the true fee was a percentage of the targeted tax loss. Cinquegrani admitted that together with individuals at E&Y and Bricolage, he helped arrange for the large balance of E&Y’s true tax shelter fee to be paid by the client to a Bricolage affiliate, and then for the affiliate to pay E&Y.
Mr. Cinquegrani will be sentenced in December. He may also have to make restitution and pay a fine. Arnold & Porter has settled with the IRS and paid a tax promoter penalty.
Remember what I’ve been saying for years: If it sounds too good to be true it probably is.
