The Mortgage That Wasn’t

Posted on August 27, 2008 by Russ

Most of us have mortgages on our homes. Joe Kristan has an excellent write-up on a Tax Court case decided yesterday, where the petitioners had a mortgage, but:
– They recorded the mortgage the morning of the trial;
– They submitted a phony copy of the promissory note as evidence at their trial; and
– The note was full of typographical errors and didn’t appear to be truly notarized.

There’s lots more, and as Joe said, “If you want to deduct mortgage interest, get down to the county courthouse to record the mortgage when you make the loan; don’t wait until the Tax Court trial date.”

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An Exit Tax and a Wealth Tax for Californians?

Posted on August 25, 2008 by Russ

An activist is now attempting to obtain 694,354 signatures to place a wealth tax/California exit tax on the 2010 ballot. This initiative would:
– Impose a one-time tax of 55% on property exceeding $20 million of a California resident or held in California by nonresident;
– Imposes a tax of between 36.5% to 54.3% when a resident dies or leaves California;
– Imposes additional 17.5% tax on total incomes of taxpayers with income exceeding $150,000 if single, $250,000 if married;
– Imposes additional 35% tax if incomes exceed $350,000 if single, $500,000 if married;
– Requires State to acquire shares of specified corporations (i.e. GM, Ford, ExxonMobil, etc.) to influence environmental practices.

The initiative’s sponsor, one Paul McCauley, notes that, “This act proposes to restore a measure of balance in wealth between persons living in California, to salvage the global ecosystem from ongoing destruction and to restore public supervision and influence over the nation’s largest financial institutions.”

First, the proposed initiative is almost certainly unconstitutional as it restricts interstate commerce. Only the federal government can do that; an exit tax (taxing me if I move to, say, Nevada) obviously imposes a restriction on interstate commerce. Further, the initiative appears to me to violate California’s rules that an initiative can only cover one subject.

If somehow Mr. McCauley obtains the signatures needed to place this on the ballot—I’m hopeful that he’ll be unable to find 694,000 Californians who want to destroy the state’s economy—I can’t imagine this initiative passing.

What liberals should consider is that without industry there can be no government revenues. Instead of increasing tax rates California needs to drastically cut tax rates. I don’t see that happening yet that’s the real solution to our budget crisis. Frankly, should Mr. McCauley’s initiative get approved and be found constitutional (a very unlikely prospect), California would go bankrupt as any individual who has such high funds would leave the state (good luck to the FTB trying to collect such funds), venture capital would leave the state, and Arizona, Nevada, Oregon, and Colorado would find themselves with a lot more industry than they currently have.


Hat Tip: Tax Foundation Blog

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Decoding Some Bozos

Posted on August 24, 2008 by Russ

It was a busy week for the bozo side of the tax profession. Three preparers found themselves in hot water, and in one case some customers will be decoded into the mess.

First, from Beaufort, South Carolina, Sally Berry, the owner of Berry’s Bookkeeping and Tax Service allegedly liked sales tax. However, she also allegedly didn’t like to remit it to South Carolina. The South Carolina Department of Revenue also alleges that Ms. Berry underreported the amount of sales tax due on clients’ returns. Ms. Berry faces up to 34 years in prison if convicted on all ten charges that she faces.

Next, Henry Omozee operated HO Tax Services and Accounting Services in Woodbridge, Virginia. He was found guilty on three counts of filing false tax returns. He underreported his own income on his tax returns from 2001 through 2003 to the tune of nearly $85,000 in tax. He could get up to three years at ClubFed when he’s sentenced later this year.

Finally, Sharon Kukhahn had a sure-fire way to avoid income tax. Just buy her “IMF Decoder” and you wouldn’t have to pay income taxes. Only one problem—there’s no such thing and this was yet another phony scheme to avoid taxes. The Department of Justice estimates that the government has lost $4.9 million to this scheme. Ms. Kukhahn received a permanent injunction to stop selling the scheme, and she must provide a list of her customers to the government. So if you paid between $1,750 and $3,195 for her package you’ll get something else in the mail soon—A “Dear Valued Taxpayer Letter” letting you know that your return has been selected for audit.

One final thing about Ms. Kukhahn. She displayed some chutzpah; after the DOJ filed suit against her she told her customers that she had transferred funds to the DOJ to compensate her customers. As you’d expect, there was no transfer of any money and the 328 customers who wrote the DOJ are out of luck. Well, since the DOJ (and likely the IRS) already has their names and addresses they might get some bad luck—they’ll probably be among the first to be audited over this scheme. For as usual if it sounds too good to be true it probably is.

Posted in Tax Evasion | 1 Comment

Fake Priest Had False Returns

Posted on August 24, 2008 by Russ

Earl Wolfe was an unlicensed architect in Jupiter Farms, Florida. That’s one crime in itself. He earned around $750,000 but reported only $600 on his tax returns. The IRS and Department of Justice weren’t appreciative of his efforts, and he has been found guilty of tax fraud.

What did he do with the other $749,400? He allegedly cashed $600,000 at check cashing stores, put some of the money in a Nevada Corporation, and hid some as a priest (Church of the Divine Deduction?). Unfortunately, he wasn’t a priest, and putting his home and motorcycles in his “ministry” wasn’t successful. His co-defendants pleaded guilty earlier this month. Mr. Wolfe will be sentenced later this year and will likely get some time at ClubFed.

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Two From the Not Safe for Work Profession

Posted on August 24, 2008 by Russ

I’ve written in the past that there’s something about Escort Services that somehow get their owners in tax trouble. Late last week two other individuals in related industries pleaded guilty to tax evasion charges.

First, from Eugene, Oregon, comes the story of Janine James. Ms. James, also known as Janine Lindemulder, hails from nearby Huntington Beach. Ms. James has appeared in numerous adult films and adult magazines such as Penthouse. Unfortunately for her, she decided that making a down-payment on a new home in Eugene was more important than paying the IRS. The IRS begged to differ, and she pleaded guilty to intentionally failing to pay her income taxes. She’ll be sentenced later this year, and will likely need to make restitution and could end up making a short stay at ClubFed.

Meanwhile, in Charlotte, North Carolina, there was a rather high-end prostitution ring called Soft Touch Industries run by husband and wife Donald & Sallie Saxon. This wasn’t a small-time ring; revenues were estimated by prosecutors to be around $3 million. Earlier this year a Raleigh cardiologist was charged in the case. On Thursday another individual pleaded guilty. James Smith, owner of Red Clay Industries, used the escort service’s services. However, he decided to charge the expenses to Soft Touch Industries as business expenses. What Soft Touch provided were definitely personal in nature….In any case, Mr. Smith has pleaded guilty to tax evasion and is cooperating with federal prosecutors. He’ll pay $19,000 in back taxes and prosecutors will ask for a light sentence.

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Good Summary of Hyatt Case

Posted on August 20, 2008 by Russ

The Las Vegas Review-Journal has published an excellent summary of the Gilbert Hyatt case and judgments.

Mark Hutchison, Mr. Hyatt’s lead attorney, believes that the Franchise Tax Board will appeal the case. (I agree with him that the case will be appealed.) He’s quoted by the Review-Journal,

[The verdict] sends a clear message that government abuse and over-reaching will not be tolerated by Nevada citizens…I think the message is: If you are going to audit Nevada residents, you had better do so in a fair and impartial manner and not be results-oriented in seeking to grab money from Nevada residents.

Mr. Hyatt was also interviewed by the Review-Journal, and noted that the FTB’s original claim against him (that he was a California resident beyond September 1991) will be reviewed by the California Board of Equalization within two years.

My thanks to reader Darren Hankel to alerting me to this article.

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This Week for the Budget? I Don’t Think So

Posted on August 19, 2008 by Russ

California Assembly Speaker Karen Bass told the Wall Street Journal that she expects to reach a budget compromise this week. I doubt it.

The Democrats are still only arguing to increase taxes. Republicans in the Legislature vow that’s not going to happen. Democrats, including Speaker Bass, say that there’s no spending left to cut because of previous cuts; Republicans say that there’s plenty left to cut and that the Legislature needs to implement permanent spending restrictions.

Does that sound like there’s a compromise that’s imminent?

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Takeout Is Taxable

Posted on August 19, 2008 by Russ

That seems obvious, right? You need to charge sales tax on items that are picked up.

Hopefully it also seems obvious that if you’re a liquor store owner you need to include takeout items in your income. There’s no exemption for takeout items in the Tax Code…but you knew that.

Well, you know that, I know that, but one carryout (liquor store) owner in Toledo, Ohio apparently didn’t know that. Ann Riebe pleaded guilty to one count of Conspiracy to Defrauding the United States. Riebe and another owner took cash that customers paid and allegedly took some of that home with them, or wrote checks and didn’t declare the income. Riebe will only serve one day at ClubFed but will spend ten months under house arrest and will have to make restitution with the IRS.

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10 Years, 2 Cars, 4 Pieces of Property, and $2.7 Million

Posted on August 17, 2008 by Russ

Earlier this year I posted about a complex tax fraud case out of Salt Lake City. Several individuals were accused of helping various other individuals and businesses evade about $20 million in taxes. Three pleaded guilty. One of those who chose to go to trial (and was found guilty), Sandy, Utah attorney Dennis Evanson found out his fate on Friday. The judge sentenced him to 10 years at ClubFed, and he must forfeit his Hummer, Toyota Tundra, four pieces of property, and pay $2.7 million in fines. Mr. Evanson had been found guilty of mail fraud, wire fraud, tax evasion, and assisting in preparation of false tax returns.

The scheme the conspirators used had the usual trappings: foreign entities (in this case, on the Cayman Islands), foreign bank accounts, and fraudulent transactions. During the trial testimony revealed that the conspirators kept 30% of the tax saved.

If you happen to have utilized the services of Mr. Evanson or one of his co-conspirators, you will likely receive a “Dear Valued Taxpayer” letter from the IRS. It appears that the tax you “saved” is more like a mirage.

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$396.08 Million…and the Meter Is Still Running

Posted on August 17, 2008 by Russ

A Las Vegas jury told California’s Franchise Tax Board in no uncertain terms that the FTB’s conduct towards Gilbert Hyatt was reprehensible. I had speculated that the jury would award Mr. Hyatt $250 million in punitive damages; that was exactly how much he received.

Mr. Hyatt had accused the FTB of several torts, including invasion of privacy, outrageous conduct, abuse of process, fraud, and negligent misrepresentation. Earlier, the same jury had awarded $138.8 million in actual damages.

Bill Leonard, a member of California’s Board of Equalization, said that the FTB spent $8.8 million fighting this case to date. If we add that, the $138.8 million of actual damages awarded earlier, and the punitive damages, the total is $396.08 million. Meanwhile, California has yet to receive any of the $7.4 million it assessed Mr. Hyatt (which is now nearly $50 million including penalties and interest). Mr. Hyatt is still fighting that decision.

Interestingly I could only find one news report on this story (the Sacramento Bee story I’ve linked to)—a story that is perhaps one of the most significant tax stories of the year. Mr. Hyatt’s lead counsel, Mark Hutchison, told the Bee, “Government agencies should pause and reflect on the significance of this verdict.” Mr. Hyatt noted, “[I hope] this will prevent other taxpayers from going through the same nightmare that I have had to endure for over a decade.”

The Bee story quotes the FTB’s former lead auditor, Brian Toman: “As far as I know, and I’ve been around a long time, there has never been an award of tort damages against the Franchise Tax Board in any kind of audit.” Well, there’s a good reason for that—Californians cannot sue the FTB for tort damages. California law grants state agencies sovereign immunity from lawsuits such as Mr. Hyatt’s (§860.2 of the Government Code). As noted in my previous post, Mr. Hyatt was able to sue because the actions the FTB took occurred in Nevada.

I fully expect the FTB to appeal the decision though officially no decision has been made. Interest will accrue to Mr. Hyatt during any appeal, so the total could easily exceed half a billion dollars. In the meantime it will be interesting to see if the FTB auditors realize that there is a line that shouldn’t be crossed.

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