Anderson Gets Nine Years

Posted on March 28, 2007 by Russ

Walter Anderson, the former telecommunications executive who pleaded guilty to engaging in a $200 million tax fraud, received nine years in prison when sentenced on Tuesday. But Mr. Anderson did get lucky in one respect. Because the plea agreement was poorly written, the judge did not order Mr. Anderson to make restitution. The IRS will have to make a separate case in civil court to recover the money.

Hat Tip: Roth Tax Updates

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No Alchemy for Lottery Winnings…Again

Posted on March 28, 2007 by Russ

The 2nd Circuit joined the 3rd, 9th, and 10th Circuit Courts of Appeal today and won’t allow a lottery winner to turn ordinary income into a long-term capital gain. We’ve written about this before (see here and here).

The question for the Court, in this case originally decided at the Tax Court, was whether the right to future lottery winnings can be converted into a capital asset (under Section 1221 of the Tax Code). The “Substitute for Ordinary Income Doctrine” governs this issue; lump sum payments for what would be ordinary income in the future can’t be magically changed into a capital gain.

The 10th Circuit came up with the crux of the matter. “[W]hen a party exchanges for a lump sum the right to receive in the future ordinary income already earned or obtained, the amount received serves as a substitute for the ordinary income the party had the right to receive over time. The lump sum is accordingly treated as ordinary income for taxation purposes.” Watkins vs. C.I.R., 447 F.3d at 1272.

So if you do get lucky and win the lottery, congratulations. Just save enough money to pay your taxes.

Case: Prebola v. Commissioner

Hat Tip: TaxProf Blog

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Neteller and Constructive Receipt

Posted on March 27, 2007 by Russ

As the saga of Neteller, the Isle of Man based financial intermediary, drags on, I’ve gotten many questions regarding the money that’s tied up. For those who are unaware, some of the Neteller money was seized by the US government as it was moving over the wires between Neteller’s banks and customers’ banks, and some is sitting in customer accounts at Neteller. All of it, though, remains out-of-reach of American customers of Neteller. So the question is, do customers of Neteller have to pay tax on gambling proceeds won in 2006 that are stuck at Neteller?

Yes.

When an American must pay tax on income is governed by the doctrine of “constructive receipt.” Suppose you gamble on an online poker site, and you win $1000. However, right when you win that money the poker site goes out of business, and you never collect a penny of the $1000. You’ve never had access to the money—you never were able to use it. You didn’t have constructive receipt of the money.

Now suppose you win $1000 on December 31, 2006, and the money is immediately put in your account. On January 16, 2007, you withdrew the money into Neteller. You immediately requested Neteller to transfer the money into your American bank account. On January 17th that money was either seized or is stuck at Neteller.

That individual has $1000 of gambling income in 2006. The gambler could have withdrew the money on January 1, 2007 or he could have gambled with it on January 1. He had constructive receipt of the money. That he was unlucky in that the money was seized or stuck at Neteller is unfortunate. He or she must pay tax on the $1000.

So what should an individual do who has significant funds stuck at Neteller—so significant that he may not be able to pay what he owes in taxes? Talk to a professional tax advisor now; don’t wait until April 10th. Most tax preparers are very busy between now and April 17th. We’re not (in general) going to be able to give you specific advice if you wait until the very last minute.

Realize that you owe the money. Find out what your total tax is (including your state income tax, if applicable). Determine what you can afford to pay. Options include going on extension and installment plans. But not filing a tax return (or at least an extension) by April 17th will subject you to the failure to file penalty!

The phrase caveat emptor (let the buyer beware) applies to many offshore entities. The IRS considers online gambling to be just another tax avoidance scheme. They’re not going to be very sympathetic to taxpayers using a financial intermediary that serviced offshore online gambling firms.

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The Curves Are Less Dangerous

Posted on March 27, 2007 by Russ

There’s something about strip clubs that brings out the worst in taxpayers. They’re a mecca for tax fraud. In January I brought you the story of Dangerous Curves, a Philadelphia area strip club whose owners were accused of tax fraud. Today comes word that one of the owners, Bishop Krabsz, will plead guilty tomorrow to hiding $800,000 of income and paying employees under the table.

The investigation began as an offshoot of a corruption probe of former Philadelphia Councilman Richard Mariano. Also accused are Dangerous Curves’ accountant, Enrico Nardini, and the other co-owner, Kevin Rankin. Both Nardini and Rankin have pleaded not guilty.

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A Win for Nguyen

Posted on March 27, 2007 by Russ

Once the judge ruled, this headline was inevitable. After all, Janet Nguyen was up by seven votes (that’s right, 7) over Trung Nguyen. So a Nguyen was going to win.

Janet Nguyen was down by seven votes and asked for a recount. After the recount concluded, she was up by seven votes. Trung Nguyen, who was now in second place, filed a lawsuit claiming that the recount was done in an illegal fashion. Yesterday, Judge Michael Brenner ruled that the recount was legal and that Janet Nguyen won by three votes. This afternoon Janet Nguyen will be sworn in as Supervisor for Orange County’s 1st District. Ms. Nguyen will be the youngest Supervisor and the first Asian-American (and Vietnamese) Supervisor in Orange County’s History.

One result that this election reinforces: your vote matters. I’m not in the 1st Supervisorial District, but those four Trung Nguyen supporters who forgot to vote in February are probably very unhappy right now. (For the record, Trung Nguyen is planning on filing an appeal.)

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The Renaissance Is Dead

Posted on March 26, 2007 by Russ

“Renaissance, the Tax People”, was, as I previously reported, a multi-level marketing firm specializing in tax. That was the legal part of the business. The illegal part, according to the Department of Justice (and the six individuals who have pleaded guilty to various charges to date) was how it lowered taxes for its clients.

If you used the Renaissance system, you could deduct personal expenses as business expenses! And you could have gotten this system for just $300 to $1200, plus another $100 per month! What a deal!

Just one major problem with that…you can never deduct personal expenses as business expenses. That’s fraud, and that’s what the Renaissance founders promoted.

The latest to plead guilty is Renaissance’s former National Marketing Director, Todd Eugene Strand of nearby Murrieta, California. Mr. Strand admitted that he falsely assured customers that the program was legal. He also agreed that Renaissance defrauded customers of $75 million, and caused a tax loss to the United States of $20 million.

Mr. Strand is looking at a few years at ClubFed, and a possible fine of $500,000. He’ll be sentenced in January 2008.

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Put Not Your Trust

Posted on March 26, 2007 by Russ

I’m a big fan of Rex Stout, the creator of fictional detective Nero Wolfe. Murder by the Book is prototypical Stout, and is one of my favorites. As a published author, I’ve gotten to see some of the workings of the publishing industry. The plot in Murder by the Book centers on an unpublished novel titled Put Not Your Trust. And that’s where this tax story begins.

Most Americans believe they pay too much in taxes. High income taxpayers think this too. Many find themselves investing in various schemes in an effort to lower their taxes. Sometimes they pay more in fees than they will save in taxes. One of the most popular vehicles—but definitely one that needs to be carefully explored—are offshore trusts.

The idea is to take taxable income and turn it into nontaxable income. Usually these trusts are found in tax havens such as the Cayman Islands or the Isle of Man. Promoters promise the moon, but remember my old adage: if it sounds too good to be true, it probably is.

Americans are taxed on their worldwide income. If you have an offshore trust, it may not file documents with the IRS. But if you look at Schedule B, you will note that there’s a question that asks if you are the grantor of an offshore trust. If you are, you need to report it (in most cases).

Ah, you’ll just ignore that bit of tax law; the IRS will never catch you. Warning: you’ve just committed a felony. Of course, the IRS might not catch you, but you won’t be happy if they do.

The IRS goes after promoters of these sham trusts. Victor Carlysle Sullivan, Jr. of Albany, GA is the latest to find this out. Sullivan charged between $5,950 and $49,500 to invest in these trusts. He’s just been barred from promoting or organizing any more of them. And he has to send the names and social security numbers of his clients to the IRS. If you’re one of his “lucky” customers, expect a friendly neighborhood IRS agent to be knocking on your door in the near future.

So put not your trust in offshore trusts, because if it sounds too good to be true, it probably is. And Mr. Sullivan’s customers will almost certainly wish they never heard of him. Oh, if you’ve never read Rex Stout’s Nero Wolfe books, pick one up. You’re in for a treat.

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Some Fraud

Posted on March 25, 2007 by Russ

This weekend’s edition of the fraud post features a bozo tax preparer, a contractor who built his dream house with the money he was supposed to send to the IRS, and a temp agency owner who allegedly did a good job withholding taxes but a poor job in sending them to the government.

Let’s start close to my home. From nearby Buena Park, California (home to Knott’s Berry Farm) comes the story of Yakoob Habib. Mr. Habib pleaded guilty in February to money laundering, tax evasion, and flight while on bail. Mr. Habib was sentenced on Friday to 11 years in state prison.

The news story indicates that Mr. Habib has a history with crime. Back in 2001, he was part of a conspiracy stealing million from California’s MediCal program. He pleaded guilty in 2002 and promised to cooperate with the government. Later he decided to flea the United States. His current offense was not reporting $10 million that went through his personal accounts and $18 million that went through his business. Mr. Habib has probably prepared his last tax return.

We all want our dream houses. Athanasios Reglas thought he had a foolproof way of getting his. He created two fictitious companies that billed his Reglas Painting Company for work that was never done. He built his dream home in Ocean City, Maryland and bought a waterfront lot for $400,000. He also transferred money from his shell companies to his personal accounts, and he committed the crime of “structuring” as he hid $873,000 in withdrawals. When he was arrested, the government found $358,000 in cash (which he has agreed to forfeit). He pleaded guilty to tax evasion and will be sentenced in July. Based on federal sentencing guidelines, Mr. Reglas is looking at 3 to 4 years at ClubFed.

Finally, Michael Monahan of Nashua, New Hampshire is alleged to have not paid the government withholding taxes. Mr. Monahan runs a temp agency in Nashua. On Wednesday, Mr. Monahan was indicted on six counts of tax evasion and three counts of mail fraud. Mr. Monahan allegedly had an interesting method of reporting his firm’s wages to the government. In 2000, for example, he reported $226,000 in wages and paid $69,000 in taxes. The problem is that he allegedly had an additional $1.9 million in wages. Oops. The IRS alleges that this continued through 2003. The government is also looking Mr. Monahan’s partner in the business (who was not named in the indictment). Mr. Monahan faces a long term at ClubFed if he’s found guilty on the charges.

There’s just no such thing as a free lunch….

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Be Afraid. Be Very Afraid.

Posted on March 25, 2007 by Russ

With the Democrats now in control in Congress, it’s time to watch our wallets. My district in Congress happens to be represented by one of the few accountants in Congress, John Campbell. Congressman Campbell is a CPA, and he’s not impressed at all with the Democrats idea of budgeting.

Congressman Campbell maintains his “Green Eye Shade Blog.” Last week he wrote about the proposed budget, and called it, “…a sham to the American taxpayer.” He believes it is a return to the “tax and spend days of old.”

Did anyone really believe that with a Congress controlled by Democrats we would be looking at lowered spending and/or a decrease in taxes?

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No Sale for Palfrey

Posted on March 22, 2007 by Russ

Pity the poor madam escort service operator accused of being a madam. She has but one tangible asset, or so she says, a phone list of her well-to-do clients in Washington, DC. Why not sell the list to finance her defense?

The government, which alleges that Deborah Palfrey is really a madam, and accuses her of money laundering and racketeering (RICO), says that could damage their case. No sale, said Judge Gladys Kessler in Washington. And further, you can’t start lawsuits against potential witnesses. Ms. Palfrey had filed one suit against one of her “escorts,” and sued 15 other unnamed escorts. That lawsuit has been effectively stopped.

Meanwhile, Ms. Palfrey still plans to have an unnamed media group look at the 46 pounds of phone records (10,000 pages). Thankfully, it’s not me. I’m seeing too many numbers in my day job as is.

The next hearing on the case is set for April 12th.

News Story: San Francisco Chronicle

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