A Bad Exchange

Posted on March 20, 2008 by Russ

Section 1031 Exchanges are a tool to defer taxes. Properly done, using a reputable qualified intermediary, they’re a very useful tool in tax planning. Of course, some intermediaries aren’t as reputable as others.

Edward Okun owned 1031 Tax Group LLP, a qualified intermediary. His firm entered bankruptcy some time ago, and in February a bankruptcy court judge denied Mr. Okun’s motion to cancel an agreement he made to sell some of his possessions. Soon he may not have any possessions after being indicted this week.

Mr. Okun is accused of telling clients that their money would be use for §1031 exchanges and then misappropriating $132 million, “to support his lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate, and purchase additional qualified intermediary companies to obtain access to additional client funds.”

He also faces charges of violating the currency transaction reporting requirements by telling employees to put $15,000 on his yacht so he could allegedly deposit it in the Bahamas and of committing perjury. The indictment is asking for all of his remaining assets to be forfeited. He’s also looking at 30 years at ClubFed and substantial fines if he’s found guilty on all counts.

His attorney states, “Ed is confident he will be proven innocent in a court of law.” Mr. Okun has waived extradition and will soon be in Richmond, Virginia where he will await trial.

If you’re interested in pursuing a 1031 exchange, make sure you use a reputable qualified intermediary. Get references, and check them.

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Fake Children Are Hard to Prove

Posted on March 20, 2008 by Russ

Bringing up children is tough. A Bozo tax preparer allegedly had a way to make it slightly easier. She supposedly created phony children to use as tax deductions. Hey, at least they didn’t yell about getting their rooms clean!

Paulina Mohn worked at an H&R Block outlet inside a Wal-Mart in Brooklyn Park, Minnesota from January 2006 through March 2007. She likely had quite a few satisfied clients. Her methods, though, were allegedly from the Bozo school of tax preparers. She was indicted on 22 counts of aggravated identity theft and making false claims on tax forms.

What did she do? She’s alleged to have used fake W-2 forms that had false information, along with allegedly inventing children (and giving them social security numbers out of thin air). Now, the IRS’ computer system isn’t perfect, but they do a good job of matching W-2 income and checking social security numbers.

And we’re not talking a small amount of fraud. Ms. Mohn is alleged to have caused $749,000 of false federal and state tax refund claims. If she’s found guilty on all charges, she’s looking at a lengthy stay at ClubFed.

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Heffner Gets 18 Months

Posted on March 19, 2008 by Russ

Last July I reported on the case of Timothy Heffner of Pittsburgh, Pennsylvania. Mr. Heffner had pleaded guilty to fraud, conspiracy, and tax evasion in a scheme where he “purchased” rare chemicals from Sigma-Aldrich for next to nothing and then resold the same chemicals back to Sigma-Aldrich for their normally high prices. That was very profitable as Mr. Heffner and his co-conspirator made $2.1 million in illegal income. He also committed tax evasion, changing personal expenses into business expenses.

Mr. Heffner enjoyed the fruits of his “success” with fancy cars, an estate in a nice suburb of Pittsburgh, and a yacht. Ultimately, though, neither foray into alchemy was successful as the scheme unraveled with his indictment last year.

To Mr. Heffner’s credit he cooperated fully with the IRS and the Postal Inspection Service following his indictment. “I’ve learned a lot from this experience. It’s been costly and it’s been painful and it never will be repeated,” Mr. Heffner said. “I meant no harm to the government of the United States of America.”

Under federal sentencing guidelines Mr. Heffner was looking at 41 to 51 months at ClubFed. His cooperation paid off; Assistant US Attorney Paul Hull asked the judge to reduce Mr. Heffner’s sentence because of his cooperation. Mr. Heffner has also already paid back most of the money to Sigma-Aldrich (he needs to pay only $139,000 more to the company). Mr. Heffner also has been very active in local charities. Judge Gustave Diamond noted these activities, and sentenced Mr. Heffner to 18 months at ClubFed, completion of restitution to Sigma-Aldrich, a $7,500 fine, and restitution to the IRS…once the IRS figures out how much he owes in back taxes, penalties and interest.

News Story: Pittsburgh Post-Gazette

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Who Owns the Bar?

Posted on March 17, 2008 by Russ

Most individuals put their lease agreements in writing. But not everyone does that. An individual in Maryland leases a bar to a friend with a verbal agreement. He doesn’t tell his accountant about the lease; the accountant believes (wrongly) that the individual is operating the bar. And the individual’s name is on the legal documents as the owner of the bar because his friend had a felony conviction years ago and doesn’t believe he’ll qualify for a Maryland liquor license. The IRS audits the individual. The accountant realizes that there’s an error, and attempts to correct it…but the IRS refuses to accept the corrections. The mess ends up in the Tax Court.

It’s an excellent case to read. “Taxation * * * is eternally lively; it concerns nine-tenths of us more directly than either smallpox or golf, and has just as much drama in it; moreover, it has been mellowed andmade gay by as many gaudy, preposterous theories.” [The quote, from the decision, is actually from H.L. Mencken, “The Dismal Science,” Smart Set, June 1922, at 42.]

Verbal leases are binding. The evidence in the case shows that there truly was a lease between the landlord and the tenant. Their agreement was based on a “swinging door concept”—everything inside was the responsibility of the tenant and everything outside was the responsibility of the landlord and the evidence backed them up.

As to who owned the bar, “Even more telling, however, is that Monk’s [the landlord’s] financial interest–which consisted primarily of his monthly rent payment–wasn’t tied to the profits or losses of Chuck’s Place.” The IRS’ view that the landlord ran the bar ran into some literal evidence, “Maney [the tenant] also testified that he (and not Monk) has the bar’s logo tattooed on his chest. Though the Court did not undertake a visual inspection, we found him credible on this point.”

The Tax Court noted the reality: “In situations like this, where there is written documentation which contradicts the reality of a situation, we disregard the documents to properly tax the person actually earning the income.” So today the petitioner really was the winner. He was just a landlord of a business, not the owner.

Case: Monk v. Commissioner, T.C. Memo 2008-64

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When You’re Getting Your Tax Rebate (Stimulus) Check

Posted on March 17, 2008 by Russ

The IRS today released the schedule of when the stimulus payments will be received:

By Direct Deposit:

Last Two SSN Digits Payment Will be Transmitted By:
00 through 20 May 2
21 through 75 May 9
76 through 99 May 16

By Paper Check:

Last Two SSN Digits Payments will be mailed by:
00 through 09 May 16
10 through 18 May 23
19 through 25 May 30
26 through 38 June 6
39 through 51 June 13
52 through 63 June 20
64 through 75 June 27
76 through 87 July 4
88 through 99 July 11

More here from the IRS.

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The Family that Evades Together…

Posted on March 17, 2008 by Russ

What happens when you start paying personal expenses out of your business and call them corporate expenses rather than salary? Very bad things, and a family in Jackson, West Virginia is accused of that.

Five family members are accused of cheating Uncle Sam out of $9 million. The accused are Eddie Burl Smith, his son Edward Michael Smith, his brother, Donald Paul Smith, Donald’s wife, Judith E. Smith, and their daughter, Jaclyn E. Smith.

They are alleged to have diverted proceeds from three family businesses—Carl E. Smith Inc. (CESI), Carl E. Smith Petroleum Inc. and Carl E. Smith Real Estate Inc—and used the proceeds for personal use.

According to the indictment (which runs 33 pages), Donald Smith used $800,000 to purchase horses. Edward Michael Smith is accused of spending over $300,000 on vehicles.

The defendants are accused of filing false tax returns. Further, they allegedly embezzled pension funds and health care premiums. But we’re only getting started.

Edward Michael Smith is accused in the indictment of burning documents after they were subpoenaed. CESI went into bankruptcy in 2003 but the defendants are accused of diverting funds after the bankruptcy filing into another family business (so there are bankruptcy fraud charges, too). There are charges of money laundering, too. Needless to say, the defendants are looking at very lengthy stays at ClubFed if found guilty on all charges.

As the news report notes, “In 2003, Fayette Circuit Judge John W. Hatcher ruled that Eddie, Edward and Donald Smith illegally depleted $21 million of assets of Carl E. Smith Real Estate Inc., in a case brought by Larry D. Smith, former company treasurer and brother of Eddie and Donald, and other minority owners.”

There are far better ways for a family to stick together than to evade taxes together.

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Heinrich Kieber, Please Come Home

Posted on March 16, 2008 by Russ

Who is Heinrich Kieber? Mr. Kieber is the man who took €4 million from the Bundeskriminalamt, the German Federal Criminal Police, and gave Germany the list of Germans who had bank accounts in the tiny principality of Liechtenstein. The Landespolizei, Liechtenstein’s police, has issued an international arrest warrant for Mr. Kieber.

The statement issued by the Landespolizei states, “The Liechtenstein law enforcement agencies demand his immediate extradition…According to media reports, Kieber received a new identity and travel documents from the German secret services.”

Somehow I think Mr. Kieber will either remain in Germany (where he presumably has protection from extradition to Liechtenstein) or will carefully check his new country’s extradition treaties.

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Seven Times Two Equals….

Posted on March 16, 2008 by Russ

One of my favorite television shows is Get Smart. In the episode called “The Decoy,” Maxwell Smart is brainwashed back to his childhood, is doing multiplication tables, and can’t figure out that 7 x 2 = 14. It’s one thing for a character not being able to complete that equation; it’s another thing for an accountant to not be able to add or subtract correctly…on Form 1040-EZ.

Yet the IRS announced that there were 1,161 errors made on Form 1040-EZ, including “Amounts in the payments section was added incorrectly: 30.” Of course, these were returns done on paper. It’s hard for me to imagine a paid preparer messing up the easiest tax form around. Unfortunately, it’s true.

Joe Kristan has more.

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Democrats’ Oil Tax Dead

Posted on March 13, 2008 by Russ

Political theater occurred last night in Sacramento. The Assembly held a rare evening session, and the Democrats’ oil tax fell to defeat 45-30 (it needed a 2/3 vote to pass). The vote was party line, except for one. Assemblywoman Nicole Parra (D-Bakersfield) voted no.

The Democrats framed the issue as “Save our children, tax the rich low-taxed oil companies.” Republicans called it political theater. Democrats want to increase taxes; there’s no room in the budget to cut spending. Republicans want to cut spending; there’s no room in taxpayers’ pockectbooks to pay for additional taxes.

I think it’s well worth remembering these two themes as we vote this year. Over the last four years spending increased 44% while revenues increased 40%. I think that’s food for thought.

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It’s Just Bad Political Theater

Posted on March 12, 2008 by Russ

As expected, Assembly Democrats introduced AB9. It would add a 6% tax on oil drilling and a 2% tax on oil profits that exceed $10 million. Because it’s a tax the measure requires a 2/3 vote for approval—and it won’t get that.

Assemblyman Chuck DeVore (R-Irvine) told the San Jose Mercury, “It’s just bad political theater. If this bill ever made it into law, it would increase the cost of gas at the pump and . . . increase our reliance on foreign oil from places like Venezuela and Iran.”

Fortunately, Democrats don’t have the votes to pass this measure. You can follow the progress (or lack thereof) of this measure here. State Senator Tom Harman (R-Huntington Beach) has an excellent commentary on what truly ails California. I doubt the Democrats are listening.

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