Washington 2, Indians 0

Municipal bonds are part of many investors portfolios. They’re tax advantaged, as most municipal bonds are tax free. Of course, the issuing agency must follow some rules: the bonds must be for an essential government function.

The Cabazon Band of Mission Indians operates a very successful casino on Interstate 10 just east of Palm Springs, in Indio, California. They used municipal bonds to help fund a new hotel and a convention center.

And then the IRS stepped in. The IRS usually rubber-stamps the tax-exempt status of municipal bonds. However, the IRS has tentatively ruled that these bonds are, “private activity bonds because [the East Valley Transportation Authority] and the Cabazon Band of Mission Indians should not be treated as states where they have not issued their obligations for essential governmental functions.” Reuters has the full details here.

Unless the IRS and the Cabazon Indians can come to an agreement within thirty days, some investors may have a rude surprise. And this is the second time this issue has come up–back in 2005 the IRS notified the Cabazon Indians and California that they would be investigating this issue.

Posted in IRS | Comments Off on Washington 2, Indians 0

Professor Maule on Snipes

Professor Maule of MauledAgain has a great column on the Wesley Snipes case. Among Professor Maule’s excellent points are,

“Snipes is a celebrity. People pay attention to him. Therefore, he has an obligation to set a good example. Although some celebrities do not want to be role models, the very fact that they are celebrities makes them so. I have advice for those who do not want to be role models: avoid the limelight, make a career in something obscure, and lay low. Yes, that course of action will cut your income by 90 percent or more. Such is the price that must be paid.”

and

“The only good thing that can come out of this [the Snipes case] is that the nation’s taxpayers will understand how much fraudulent garbage is being peddled. By that point, only those who truly wish to evade taxes will be signing up with the fraud merchants, as there would be even less reason to believe the “I didn’t know” excuse.”

Read the whole thing here; it’s well worth your time.

Posted in Tax Evasion | Tagged | Comments Off on Professor Maule on Snipes

Wesley Snipes: I’m a Scapegoat

Wesley Snipes sent an email over the weekend to Scott Maxwell, a columnist at the Orlando Sentinel. Maxwell put the highlights of Snipes’ email in his column; the full, unedited email is in his blog. It makes interesting reading for a tax professional.

Snipes first notes, “Like the situation in New York, and Florida , I know this has more to do with a few individuals with access to power, making moves; trying to move up!; and less with some alleged crime against the whole population of the United States of America…It appears I’m to be the scapegoat….”

Given that Snipes is accused of fraudulently claiming refunds of $12 million, it would appear to my eyes that it’s a rather substantial alleged crime against the United States.

Snipes continues, “To be clear, I have no current relationship with Mr. Kahn and haven’t for more than four or five years. I never met Rosile and we never received the “refunds” requested. NOT ONE SINGLE DIME; did the IRS or the Treasury ever send ME.” [emphasis in original]

Well, there’s a problem with Snipes’ denial; he stands accused of fraudulently claiming refunds of $12 million. You don’t actually have to receive the refund in order to commit this crime.

Snipes goes on in his email to cite a website that has two links regarding the Snipes case. The first is to The Smoking Gun and his indictment; the second is to a website that purportedly shows that most income isn’t taxable.

It’s a pity that the truth is almost the exact opposite: almost all income is taxable in the United States. We wrote about this in a previous Snipes post, but we’ll reproduce it again:

“Thus, citizens of the United States generally also are taxed on income earned outside the geographical boundaries of the United States unless they prove that the income is specifically exempted. E.g., sec. 61(a); Cook v. Tait, 265 U.S. 47, 54, 56 (1924).” [From Specking, et. al., v. Commissioner, 117 T.C. No. 9]

The one piece of good news is that Snipes, according to the email, does plan on returning to face the charges. He also is planning on getting good counsel. That looks like a very good idea, as no deal has been done. “There is no deal that has been worked out,” U.S. Attorney’s Office spokesman Steve Cole told the Associated Press on Monday. “The only thing we have discussed is coming back to face the charges.”

Posted in Tax Evasion | Tagged | Comments Off on Wesley Snipes: I’m a Scapegoat

The Third Time Isn’t the Charm

Today, the Tax Court looked at the case of a man who had appeared before the court twice previously. In 2001, “the Court explained to petitioner that taxable income includes money and other goods received in exchange for services and urged petitioner to file returns.” In 2005, he returned to the Court: “[T]he Court again rejected petitioner’s arguments and awarded the United States a penalty pursuant to section 6673 in the amount of $5,000. Leggett v. Commissioner, T.C. Memo. 2005-185.” In this case, the petitioner didn’t file a 2002 tax return but had income from installing air conditioners and from Social Security. Would the third time be the charm?

Hardly.

“The Court shall not further address petitioner’s repeated argument “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984). Therefore, the Court sustains respondent’s determination of petitioner’s 2002 tax deficiency.”

To rub a little salt in his wounds, the petitioner also get penalized three times; a Section 6651(a)(1) penalty for failure to file a return (5% per month up to a 25% penalty); a Section 6654(a) penalty for failure to pay estimated taxes; and a Section 6673(a)(1) penalty for “proceedings instituted primarily for delay or in which the taxpayer’s position is frivolous or groundless. “A petition to the Tax Court, or a tax return, is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.” Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).”

Actually, the petitioner got lucky. In 2005, the Court gave him a $5,000 penalty. In 2006, he gets $6,000. I suspect that if he has another case in 2007, he’ll get $7,000.

Case: Leggett v. Commissioner, T.C. Memo 2006-253

Posted in Tax Court | Comments Off on The Third Time Isn’t the Charm

Just a Pinch of Fraud

Three stories today, all with a recurring theme: fraud. We’ll look at a new but not so good method to sell for less. Then we’ll take a peak at two accountants, and how they made money…for themselves.

Tommy James Hudgins owns Affordable Tires in Chattanooga, Tennessee. He found a way to make sure he beat his competitors’ prices: not remitting the sales tax he collected to the state of Tennessee. He did keep his prices down, but the Department of Revenue wasn’t happy with his methods. He’ll spend two years on probation, and must make restitution of $17,000. He may also face civil penalties, according to this story.

In Baltimore, a longtime accountant pleaded guilty to wire fraud, money laundering, and tax fraud charges. Wilkins McNair, Jr. faces up to 38 years in prison, but will likely serve a significantly shorter sentence through his plea bargain. McNair, in the indictment, was accused of avoiding paying $550,000 in taxes by delaying filing his returns and under-reporting his tax. The Baltimore Business Journal has more on this story.

Finally, a pair that were Washington state tax preparers are alleged to have found a not-so-legal method of earning a living. They made up phony tax returns using relatives’ names, and, according to this story, collected about $40,000 in refunds. The story has an interesting twist. The accused are Kandi Rose Roberts, formerly of Bellingham, Washington, and Ernest Roberts, of Everson, Washington. Ms. Roberts moved to Las Vegas and is now known as “Kandi Kroon.” She’s going to be sent to Seattle for trial, so this is one thing that happened in Las Vegas that won’t stay in Vegas….

Posted in Tax Fraud | Comments Off on Just a Pinch of Fraud

The Structure Fails for this Pharmacist

The drug store. That place where we fill our prescriptions, buy our sundries, and maybe have a malt at the counter.

Saad Kamil Deeb owns Citizens Pharmacy in Welch, West Virginia. According to the US Department of Justice, he allegedly had a side business with his drug store. An illegal gambling business that made $1.7 million in income.

Apparently the IRS got wind of his alleged operation, and wasn’t pleased because he hadn’t included the income on his tax returns. Mr. Deeb also is accused of “structuring,” making cash deposits of less than $10,000 to avoid federal reporting requirements.

The government is beginning forfeiture proceedings against Mr. Deeb, hoping to recover $1.7 million in cash, automobiles, and land that Mr. Deeb owns. And if he’s convicted, he could face 150 years in prison, and a fine of up to $7.5 million.

Story: Charleston Daily Mail

Posted in Tax Fraud | Comments Off on The Structure Fails for this Pharmacist

Certified Tax Blogger


If you take a look at the bottom of the blogroll, you’ll see a new image. We’re one of the founding members of www.taxblogger.org, a confederation of tax bloggers. If you click on the image, you’ll go to the taxblogger.org web site.

At least the company we keep is pretty good….

Posted in Taxable Talk | Comments Off on Certified Tax Blogger

A Reminder About Being Frivolous

Every so often I have to educate my clients that if it sounds too good to be true, it probably is. Today, the Tax Court educated a businessman that S Corporations are flow-through entities: in general, the owners of an S Corporation get the income from the S Corporation and are liable for any tax.

William Tinnerman is the sole stockholder of an S Corporation in Florida. From 1986 through 1998 he used a CPA to prepare his personal and S Corporation tax returns, and all was well. In 1999, he told his accountant to stop preparing his individual tax returns. The accountant still prepared the S Corporation returns.

But Mr. Tinnerman “enhanced” his S Corporation return by adding some verbiage to it:

“The corporation has determined the net income shown on the Schedule K-1 (Form 1120S) does NOT constitute ‘gross income’ as determined by rules set forth in the Treasury Regulations at 26 CFR (4-1-99) Parts 1.61-1(a) and (b) and 1.931-1(b)(1)-(4). Therefore, since there is NO gross income, the net income shown on the K-1 is NOT reportable on your 1040 as taxable income.”

Strike one.

Mr. Tinnerman didn’t make estimated tax payments for 1999 through 2002 nor did he file tax returns for those years. He also amended his 1996 through 1998 returns and changed his income to zero and his tax to zero.

Strike two.

Mr. Tinnerman then bought a sham trust package from Bay Point Enterprises, run by John Ellis and Jeff Pollard. Mr. Ellis was sentenced in 2002 to 10.5 years at ClubFed for marketing sham trusts.

The IRS tried to get Mr. Tinnerman to see the error of his ways. They provided him with a pamphlet, “The Truth About Frivolous Tax Arguments.” Apparently Mr. Tinnerman believed the trust proponents who were serving time rather than the IRS.

Strike three.

The Tax Court was faced with deciding if Mr. Tinnerman owed taxes and penalties for 1999 – 2002. With three strikes against him, it’s not a surprise that the Court found that Mr. Tinnerman owed the tax, a penalty for fraud, failure to file a return, failure to pay the tax shown on the return (here, the substitute for returns prepared by the IRS), and failure to pay estimated taxes.

The Court was sufficently annoyed with Mr. Tinnerman’s frivolty that it imposed a $10,000 penalty for persisting in raising frivolous arguments.

That was strike four.


Case: Tinnerman v. Commissioner, T.C. Memo 2006-250

Posted in Tax Court, Tax Fraud | Comments Off on A Reminder About Being Frivolous

Don’t Try These at Home

There are many ways to save on taxes. Here are some ways to save on taxes that work…until you get caught.

Method #1. Knowingly hire undocumented workers (felony #1), then don’t pay employment taxes on their wages (felony #2). It’s not clear from the article whether or not taxes were withheld from the workers’ wages. But if you’re going to commit two felonies, what’s a third? Unfortunately for Wen Bing Wang, the restaurant owner in Traverse City, Michigan, the IRS caught on to his scheme. He has pleaded guilty to three counts of tax fraud, and could be facing fifteen years in prison. Interestingly enough, three other restaurant owners in the area will, according to the story, be pleading guilty to similar offenses. They shared the same New York based accountant (or perhaps soon to be ex-accountant).

Method #2. Create phony entities, and lower your company’s profits by having them receive some of your income. Then cash the checks at a local sports bar (which doubled as a check cashing service). Then, when you were indicted in 1995, flee to Ireland.

This might have succeeded. Unfortunately for Martin Harty, recently of Ireland but a former resident of the San Francisco Bay Area, he decided to take a vacation in San Francisco. The indictment was still on file so when he went through customs in Atlanta, he was arrested. He pleaded guilty and could face up to three years at ClubFed but is probably looking at 12 – 18 months in prison.

Method #3. Don’t pay your employment taxes. Then declare your company bankrupt, and declare personal bankruptcy. Follow this up by forming a new company in the same business, but have your son run the company. One problem, though: your son is away at college.

This is what Thomas & Vicki Seidel of Salinas, California have been accused of. They were indicted last week on failure to pay taxes and filing phony tax returns. Besides hiding the ownership of their business, they are also alleged to have hid assets, including a wheat farm in Idaho, some real estate, and another business, according to this report.

Method #4. Have your family create bank accounts in their names, while the money is really yours. And don’t declare any of the income from those accounts. Given that David Beagley of Lindon, Utah is accused of not paying $815,000 in taxes, we’re likely talking about some pretty hefty bank accounts.

Method #5. Don’t pay withholding taxes, don’t pay income taxes, and structure your cash transactions to avoid federal reporting requirements. Ziya Ozbay of Schenectady, New York and his son-in-law, Yalcin Ozbay of Saratoga Springs, New York, were found guilty of these crimes last week. Earlier, Mustafa Ozbay and Birol Ozbay pleaded guilty to these offenses (story here).

The Ozbays owned several gas stations in upstate New York. They didn’t file corporate tax returns for several years. They didn’t keep adequate books and records, and they didn’t provide their accountant with even those books and records. They withheld employment taxes from their employees but didn’t remit them. And they deliberately “structured” their cash transactions to hide them from federal reporting requirements. All-in-all, the defendants were found guilty of many felonies, and will be spending a few years at ClubFed.

And there is an interesting conclusion to this story. The gas stations were branded as “USA Gas Stations.” The government is expected to begin forfeiture proceedings against the Ozbays, and will likely end up owning the gas stations. This will definitely bring truth-in-advertising to some USA Gas Stations in upstate New York.

Posted in Tax Evasion | Comments Off on Don’t Try These at Home

Dancing Eunuchs and Other Stories

I’m way behind in my reading of other tax blogs this week. I’ve been busy with personal stuff, and thanking my stars I’m not a tax evader in India.

For India, a nation of chronic tax evaders, has set dancing eunuchs on the scene. My thanks to Joe Kristan of Roth Tax Updates and the TaxProf Blog for the heads up.

Were the Eunuchs successful? According to the Reuters story, absolutely! “Some paid in cash, while others quickly wrote checks. The shock therapy, which we plan to use sparingly, was a grand success,” Atul Prasad, a top official in impoverished Bihar state, of which Patna is the capital, told Reuters Friday.

And as Joe Kristan said, if you don’t know what a eunuch is, well, half the population can’t be one and the other half doesn’t want to be one.

Posted in Tax Evasion | Comments Off on Dancing Eunuchs and Other Stories