Another Offshore Scheme Goes Down the Drain

I’m not a big drinker. The former President and co-owner of Domecq Importers will have 10 years at ClubFed of being a teetotaler after pleading guilty to fraud and tax fraud charges. Domecq Importers was a large liquor importer based in Connecticut.

Michael Domecq had a not-so-good idea. Have some outside vendors (primarily advertising agencies) send in invoices for work that was never done. Then have his company pay the vendors. That’s fraud against his own company.

But Mr. Domecq went a step further. He had the vendors then issue checks to shell corporations controlled by him and his accomplices: Chief Financial Officer Alfredo Valdes, Vice President of Marketing Gabriel Sagaz, and Vice President of Sales Thomas Kaminsky. Those three individuals had already pleaded guilty to various charges.

Did I mention those shell corporations used offshore bank accounts? And that the shell corporations didn’t pay any income tax? That’s tax fraud.

This isn’t Mr. Domecq’s first trouble with the law. He was convicted in the United Kingdom in 2006 of possessing a false Spanish passport and of illegally getting a U.K. drivers license.

Mr. Domecq, as part of his plea agreement, will submit corrected tax returns for 1989 through 2006, and will pay all of the taxes, penalties, and interest. Given that the unreported income is over $7.6 million, Mr. Domecq will be writing out some big checks to the United States Treasury.

It would have been much simpler to just pay the tax in the first place…but somehow that thought never enters the mind of the tax evader.

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What Is It About Strip Club Owners & Tax Evasion?

I’ve reported several times about strip club owners evading taxes (and getting caught). I guess there are a lot of temptations out there…and if you’re going to offer one, you get to thinking about another.

In any case, yet another ex-strip club owner has been convicted of tax evasion. From Jackson, Mississippi comes the story of Jon Adams. Adams used to own the Stardust Cabaret. Back in 1999 Adams attempted to get the zoning changed for his club. And the (then) Jackson City Council President, Louis Armstrong, found his way to prison for accepting a $25,000 bribe.

Adams’ troubles related to understating his income on his tax returns. The government alleged that Adams earned over $500,000 in 1999 and $466,000 in 2000 but that he reported $344,000 less. Oops. And allegedly making a $75,000 down-payment on some property while in bankruptcy didn’t sit well with the jury either.

While Adams faces six years at ClubFed and a maximum of $200,000 in fines, his stay will likely be significantly less. His sentencing is scheduled for October 9th.

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Will the IRS Re-Open Dinosaur Adventure Land?

Jo Hovind fared much better than her husband when she was sentenced last week for 45 tax related charges. Her husband, Kent Hovind, received ten years in prison. Mrs. Hovind was sentenced to one year and a day, and will begin serving her sentence on August 31st. Mrs. Hovind will likely appeal both the convictions and the sentence.

The government got some other items as part of the conviction. Judge Casey Rodgers ordered that the property owned by the Hovinds was forfeited to the government. That includes the now defunct Dinosaur Adventure Land. Will the government reopen it? Will it join other intriguing government owned properties such as the Mustang Ranch and the Bicycle Casino? (For the record, the government sold off the buildings and other physical assets of the Mustang Ranch. The Bicycle Casino was owned by the government for a few years but was sold to private owners.)

Judge Rodgers delivered the moral of the story: “No one can violate the law and then say that they were doing so for the will of God.”

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Neteller Founder Pleads Guilty

One of the two Neteller founders pleaded guilty on Friday to one count of conspiracy. Stephen Lawrence told the Associated Press, “I came to understand that providing payment services to online gambling Web sites serving customers in the United States was wrong.” Lawrence faces up to five years in prison when sentenced on October 29th.

What does this mean for Neteller’s future and its ex-customers in the United States? Almost nothing. Neteller is scheduled to announce its plan for returning millions of dollars in held funds on July 13th. As to Neteller’s future, I said months ago,

“Indeed, it’s clear what’s likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won’t indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It’s also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.”

Nothing that has happened to date in this saga has caused me to change my opinion.

As a reminder, July 2nd is the deadline for filing Form TD F 90-22.1. Remember, mail the form to the Department of the Treasury, not the IRS. If you had more than $10,000 at Neteller (or any combination of foreign bank accounts), you are required to report it. Willful non-reporting is punishable by a fine of $100,000, or 50% of the funds in the foreign accounts, whichever is greater, and can also result in criminal penalties.

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$63,000 Is a Lot Less than $5 Million

Back in February I reported on Mark Kaushansky, the Soviet emigre who admitted evading taxes. At the time, Fred Theiman, Mr. Kaushansky’s attorney, noted, “A lot of assumptions made by the government are perfectly rational, perfectly logical and perfectly wrong.” The IRS said otherwise, and it was up to the judge to decide.

In this case, Mr. Theiman was correct. At least Judge Maurice Cohill determined that the tax evasion was a lot less than the $5 million he had been accused of. The total ended up as $63,000. Mr. Kaushansky also admitted that he was guilty, telling AP, “I was given an opportunity to help hundreds of Russian scientists and their families in dire need…I think I did a lot of good, but in the process I made some mistakes. I admit to those mistakes. I am guilty.” Mr. Kaushansky will also have to pay a $20,000 fine.

Also accused in the scheme was Yevgeny Adamov. Mr. Adamov is the former Russian Energy Minister. Mr. Adamov was arrested in Switzerland in 2005. Although the US requested that he be extradited here, the Swiss government extradited Mr. Adamov to Russia. He’s accused in Russia of abuse of power and fraud. Judge Cohill believes he’ll never be back in the United States to answer those charges.

AP Story: Pravda, Houston Chronicle

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Yagman: “Hoisted by His Own Petard”

The LA Weekly has a great article on the Stephen Yagman case. As I wrote earlier, Mr. Yagman was found guilty on 19 counts of tax evasion, money laundering, and bankruptcy fraud last week.

If you read the Los Angeles Times article on the case, you might have gotten the impression that Yagman was prosecuted because of his past actions against the government. The LA Weekly article ends that myth.

You can read the LA Weekly article here.

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If At First You Don’t Succeed…

We’re taught that if at first you don’t succeed, try, try again. But sometimes it just doesn’t work.

Take the example of Warren Follum. Mr. Follum had asked the Tax Court to review the IRS’ decision to proceed with collecting tax from him for 1990 through 1993.

In those years the petitioner (Mr. Follum) included losses from sports-fishing. The IRS alleged that the petitioner wasn’t in a business but, rather, had non-deductible hobby losses of between $12,000 and $35,000 each year.

Let’s add some complicating factors. When the IRS originally sent Mr. Follum notices of deficiency to his (then) post office box, the mail was returned as undeliverable. Back in 1996, the Tax Court ruled that because Mr. Follum didn’t timely respond to the notice of deficiency (and the IRS did sent the notice to the petitioner’s last known address), the court didn’t have jurisdiction in the case. The Second Circuit Court of Appeals upheld the Tax Court’s decision.

So in 2003 the petitioner filed yet another Tax Court case. The case was remanded back to the IRS appeals office in 2005 for consideration of potentially more liability. Then Mr. Follum brought suit against the IRS in the Western District of New York, asking that their be an injunction against the collection of his taxes. He lost, as that court held that it lacked jurisdiction (it had jurisdiction for a refund claim, but not an allegation of procedural irregularities).

Petitioner then brought a suit in the Eastern District of North Carolina, claiming that the IRS had not sent the notice and demand to his last known address. He lost that suit, as it was dismissed under the doctrine of “res judicata” (when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound “not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.”).

Eventually, the second Tax Court case made its way back to the Tax Court, and today the decision was rendered. The Court had to decide (1) whether petitioner’s claim that the notice and demand were not sent to his last known address is barred by “res judicata”; (2) whether the period of limitations on assessment of the 1990 and 1991 taxes has expired; (3) whether the petitioner engaged in sports fishing for profit; and (4) whether the lien should remain in place.

First, because Mr. Follum had never been able to contest the underlying tax liability, the Court ruled it would look at the tax liability. The Court then upheld the underlying tax (a legal expert would note that “res judicata” appeared to apply; in any event, the Court found petitioner’s underlying arguments about owing the tax at issue to be wrong).

The Court then reviewed whether Mr. Follum was sports-fishing in tournaments for fun or profit. Mr. Follum didn’t keep separate books; he didn’t earn a profit in any year. It didn’t look like he had a plan to earn a profit in future years. It gave the appearance of a hobby, and that’s how the Court ruled.

Finally, the Court noted, “Having reviewed the underlying liability de novo, we find no error. Additionally, we find no error or abuse of discretion by respondent in determining to uphold the filing of the lien against petitioner.”

So the fourth try wasn’t any more satisfying than the first for Mr. Follum. The morale of this tale is that sometimes additional bites at the apple are just as unsatisfying as the first. Also, it pays to keep your address current with the IRS.

Case: Follum v. Commissioner, T.C. Memo 2007-164

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No Evading for Them

Besides Mr. Yagman, several other individuals found their tax evading days ended. We also have a story detailing potential tax problems for a Los Angeles politician’s wife.

We have two from the high tech world. From suburban Pittsburgh comes Pradeep Kumar Walia. Mr. Walia is the former CEO of Atlas Software. Back in 1999, he reported $231,000 of income and paid $65,500 in tax. The problem? His actual tax was about $10,000 more. Oops. Mr. Walia pleaded guilty and will receive probation plus will have to make restitution.

Last year I reported on the saga of the CEO of VaporTech. John Frances Griffin pleaded guilty to two counts of tax evasion last week, and has agreed to forfeit $75,000 worth of personal items. He’s facing a term at ClubFed for his evading tax on $1.1 million of income, plus a likely fine.

>From Providence, Rhode Island, comes the story of an entrepreneur who outdid Mr. Griffin. Neil Stierhoff ran a mail-order electronics business. It was apparently doing quite well, especially as his net after taxes was close to his net before taxes. Of course, that was due to Mr. Stierhoff not paying taxes on $1.2 million of income through allegedly using aliases and cash. He was found guilty last week, and based on federal sentencing guidelines, is looking at about four years at ClubFed.

Moving to Enid, Oklahoma, we get the story of a bookkeeper who created her own W-2 form. That might be all right, if it was accurate, but she missed just a bit of her income. Actually, it might be more appropriate to say that her W-2 recorded just a bit of her income. She, too, pleaded guilty, and Margaret Renee Schram is looking at five years at ClubFed plus restitution of $270,000 to her ex-employer and restitution to the IRS.

Finally, this last story highlights the perils of public office. Rocky Delgadillo is the Los Angeles City Attorney. Recently, his wife has been accused of driving Mr. Delgadillo’s city-provided SUV. Adding an insult to the alleged injury, the Los Angeles Times reported yesterday that Mrs. Delgadillo failed to file California income tax returns for her business and didn’t obtain a Los
Angeles city business license. She has also been accused of having city employees baby-sit her sons during normal business hours. As a hint to any aspiring politicians, I strongly suggest you pay all of your taxes and ensure that all of your businesses have all appropriate licenses. You can be sure that your opponents will check public records in these days of public records being on the Internet.

So a little evasion resulted in probation, but some substantial evasion got time at ClubFed. It’s a lot easier not to evade in the first place, but that temptation is just hard to resist for some.

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Yagman Guilty

Civil rights attorney Stephen Yagman was found guilty on 19 counts of tax evasion, money laundering, and bankruptcy fraud on Friday in Los Angeles. Yagman will be sentenced on September 24th.

Yagman was a considered combative civil rights attorney, and fought many battles with the Los Angeles Police Department and other agencies. Yagman claimed during his trial that he was “targeted” because of his history of fighting US law enforcement agencies. However, it may have been his non-payment of taxes that caused him to be targeted. Yagman, after filing for bankruptcy, had a lavish dinner and bought expensive shoes. That didn’t sit well with the jury.

Yagman is looking at spending a few years at ClubFed.

News Story: Los Angeles Times

Prior coverage: Here and Here

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The AMT May be Unfair, But You Must Pay It

The Tax Court looked at two cases involving the Alternative Minimum Tax (AMT) today. In both cases, the taxpayers impacted by the AMT protested that they shouldn’t have been impacted by the AMT because they either didn’t have preference items or that they’re the kind of people who shouldn’t have to pay AMT.

The Tax Court’s response? Tough.

In the first case, the petitioner had just $121,000 of adjusted gross income (AMI), and he ignored the AMT when he completed his tax return. However, the IRS computers found that he owed an additional $4,176 because of AMT. He had no preference items.

However, if you’re “lucky” enough to have a high enough level of AGI (typically over $100,000), and enough itemized deductions (and our lucky taxpayer had over $35,000), you can get hit by the AMT. Petitioners arguments were restricted to the fact that he worked two jobs to support his family and shouldn’t have to pay AMT because Congress didn’t intend for the AMT to impact the nonwealthy working class.

“The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected…Congress enacted the AMT and we have no authority to disregard them.”

In the second case, our taxpayers did have a preference item—a $342,000 capital gain. But the AMT was never intended to cover taxpayers in their situation, or so they said.

Wrong.

“We also remind petitioners that this Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the alternative minimum tax.”

So yet again the Court saw two cases where the AMT was shown to be unfair. The final score? AMT 2, Honest Taxpayers 0.

I wonder if Congress is aware of the storm that will be unleashed next year if they don’t stop the AMT monster….

Cases: Kamara v. Commissioner, T.C. Summary 2007-103 and Moore v. Commissioner, T.C. Summary 2007-104

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