Weekend Crime Report

Posted on April 1, 2007 by Russ

A lot has been posted this weekend in the annals of tax crime. We’ll venture from New York to the Gulf Coast to see if the government took a bite out of [tax] crime.

Another of the Ozbay clan has been sentenced. On Wednesday, Birol Ozbay of Schenectady, New York, found that he would receive 121 months (10 years) in prison and must forfeit $6.8 million. That’s basically the same sentence that Ziya Ozbay received in mid-March. The Ozbays didn’t pay their taxes, they structured their transactions, and they didn’t remit withholding tax that was withheld from employees to the government. They scored the rare trifecta of three different kinds of tax fraud. Two more Ozbays await sentencing: Yalcin Ozbay (who was found guilty at trial) and Mustafa Ozbay (who pleaded guilty during the trial).

Meanwhile, a doctor in Louisiana allegedly kept two sets of books. It’s a wonderful way to save on taxes…until you get caught. Garland Miller of Zwolle, Louisiana, was indicted on two counts of income tax evasion. Mr. Miller is also under indictment for theft in state court; he allegedly bilked “tens of thousands of dollars” from a local hospital. Mr. Miller faces up to ten years at ClubFed and up to $500,000 in fines if convicted in federal court for tax evasion.

A woman in Mississippi allegedly found an interesting way to profit from a corporate merger. Instead of closing the old bank accounts (as she was told to do), she allegedly kept them open, and transferred funds into them. She then allegedly moved them to her personal account. Donna Hardy has been charged with twelve counts of bank fraud and five counts of tax evasion. Oh yes, she didn’t report the tax on the stolen money….

Three interesting ways to try to turn an illegal buck. The trouble is that not only can you get in trouble turning the illegal buck, you have to pay tax on it.

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Minnesota Tries for Number 1!

Posted on April 1, 2007 by Russ

Congratulations to Minnesota! No, they’re not in basketball’s Final Four. Rather, Minnesota’s State Senate passed a bill on Saturday to increase the top tax bracket in the state to 9.7%, the highest regular tax bracket in the country. You would need to make over $250,000 to be impacted by the new bracket ($141,250 if single).

The legislation was led by Minnesota’s Democrat-Farm Labor Party (DFL). Luckily for Minnesotans, Governor Tim Pawlenty promises a veto. And it appears that the DFL doesn’t have the votes to override it.

Hat Tip: Tax Prof Blog
News Story: AP

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The Deadline Counts

Posted on March 30, 2007 by Russ

Recently I assisted a client in preparing his paperwork to file a petition at the U.S. Tax Court. In my emails and letters to him, I emphasized,

Make sure you mail the petition and accompanying documents by the deadline using certified mail, return receipt requested.

He did, and even if somehow his petition gets lost, he will have a valid Tax Court petition.

The TaxProf Blog has another story of a taxpayers who was a day late and a dollar (or, in this case, potentially $50,000) short. The taxpayer had a deadline for his Tax Court filing of October 5th. He used UPS to send his petition, but the tracking receipt shows he sent it on October 6th. The petition is dated October 6th.

The IRS petitioned the Tax Court to dismiss the case for lack of jurisdiction. The taxpayer contended that he dropped the petition off at a mail store on the evening of October 5th. The Tax Court noted that it doesn’t matter; it didn’t enter the UPS system until the 6th, and the Tax Court no longer has jurisdiction.

So if you’re approaching the deadline and you’re going to be after the post office closing hours, find a post office that’s open late (in the Los Angeles area, the LAX branch is open late) or find a FedEx office that’s open late (various offices are open to 6:30pm in the L.A. area). But whatever you do, make sure it gets picked up by the deadline or you have just lost your case.

Hat Tip: TaxProfBlog

Case: Raczkowski v. Commissioner, T.C. Memo 2007-72

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$2 Million in Fruad Brings 15 Months and Restitution

Posted on March 30, 2007 by Russ

Superior Electric Company of Ohio had an interesting way to make a profit: they cooked the books. Back in November, two former executives pleaded guilty to defrauding the IRS. Yesterday, John McShane, the former CFO, was sentenced.

Mr. McShane was sentenced to 15 months and ordered to make restitution of $1.62 million.

What did Mr. McShane and the former CEO and co-owner of Superior, Jerry Gemeinhardt, do? They put some of Mr. Gemeinhardt’s personal expenses as company expenses. Things like his yacht and landscaping expenses are some of what they allegedly did.

Mr. Gemeinhardt hasn’t been sentenced yet. I suspect his yacht will soon have a “for sale” sign on it.

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Wisconsin Is No Place to Gamble

Posted on March 29, 2007 by Russ

I grew up in Chicago, and I remember vacationing at Wisconsin Dells as a child. Now Wisconsin, like many states, sports Indian casinos. Gamblers who patronize such casinos are in for a rude surprise when they complete their tax returns.

Wisconsin is one of 10 states that does not allow gamblers to deduct losses on their state tax returns. Daniel Dettwiler had gambling winnings of $99,252.60 which he duly reported on his 2002 federal tax return. He also deducted as a miscellaneous itemized deduction his gambling losses of $41,637.00 on his federal tax return. He did the same thing on his Wisconsin tax return even though Wisconsin doesn’t allow that deduction.

His case went before the Wisconsin Tax Appeals Commission, where he lost. He then appealed to a state court and lost. On Tuesday the First District Wisconsin Court of Appeals ruled on his appeal.

The Court noted,

“Effective January 1, 2000, gambling losses were no longer offset against gambling winnings under the Wisconsin tax code because, effective on that date, Wisconsin no longer permitted as a deduction from Wisconsin taxable income “[m]iscellaneous itemized deductions under the Internal Revenue Code,” see Wis. Stat. § 71.07(5)(a)7 (2003–04), one of which, the Department contends and Dettwiler does not dispute, was the deduction for “wagering losses,” under section 165(d) of the Internal Revenue Code…His contention that he should nevertheless be permitted to subtract from his Wisconsin taxable income the offset permitted by section 165(d) of the Internal Revenue Code is not only circular and without merit, but is wholly contrary to the legislature’s decision to eliminate such offsets effective January 1, 2000.

“The Tax Appeals Commission decision is perfectly logical, appropriate, and correct. Accordingly, we affirm.”

Had Mr. Dettwiler been a professional gambler, he wouldn’t have had a problem; his losses would have been deducted on Schedule C, and his net income would have been reported on his federal (and Wisconsin) tax returns. Of course, he would have been liable for the self-employment tax.

So if you’re going to gamble, you may want to avoid Wisconsin. For the record, here are the other states where gambling is much more of a gamble:

  • Connecticut
  • Illinois
  • Indiana
  • Massachusetts
  • Michigan (first $300 exempt)
  • Minnesota (because of its AMT)
  • Mississippi
  • Ohio
  • West Virginia
  • Wisconsin

Case: Dettwiler v. Wisconsin Department of Revenue

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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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