Fail, Caesar!

Posted on January 19, 2015 by Russ

Last week Caesars Entertainment Operating Company (CEOC) filed for Chapter 11 bankruptcy in Chicago. One week ago, second-tier bondholders filed an involuntary bankruptcy petition in Delaware. A company can only be in one bankruptcy court, so there’s an obvious issue: Which bankruptcy filing will “win”? And what will the future bring to Caesars?

I’m going to do some speculation in this post. Be forewarned that I am not an attorney, so my views are just that: my views on the topic. I was in corporate finance for many years prior to being in tax, so I am familiar with many of the issues involved.

First, not all of Caesars is in the bankruptcy filing. Caesars split into two major entities, and only CEOC is in Chapter 11 (for now). Here’s a handy chart for what’s in and what’s not. Caesars Growth Partners (CGP) did not file for bankruptcy.

However, the second-tier creditors believe that Caesars deliberately made a “good” company (CGP) and a “bad” company (CEOC). A federal judge ruling on a lawsuit in New York gave tacit support to the second-tier creditors when she allowed the lawsuit to continue.

Let’s go through some questions and their probable answers:

1. Why did Caesars file for bankruptcy in Chicago? They are a Delaware corporation headquartered in Las Vegas? In bankruptcy, you can file anywhere you have nexus. Caesars has two casinos in Illinois, so the Northern District of Illinois is a possible choice. Presumably, Caesars looked at the likely judges anywhere in the country they could file (including Courts of Appeal–here, the Seventh Circuit Court of Appeals) and liked the Northern District of Illinois over other choices.

2. Then why did the second-tier creditors file in Delaware> Caesars is a Delaware corporation, so a filing in Delaware is also valid. The second-tier creditors probably did the same analysis as Caesars and liked the Delaware judges and the Third Circuit Court of Appeals.

3. There are two bankruptcies: the involuntary petition in Delaware and the voluntary petition in Chicago. Which one is likely to stand? This is the question today, and it’s a pick-em. There is a burden on the second-tier creditors, but the federal court ruling in New York gave them some advantages. Judge Kevin Gross in Delaware will end up making the initial call. That said, if he rules that the case should be in Delaware, I expect that CEOC will file an appeal.

4. How long will the bankruptcy process take? A long time. While CEOC wanted a prepackaged bankruptcy where most everyone agreed, that just isn’t happening. True, 80% of the senior (first-tier) creditors approve of the restructuring. However, no other class of creditors is happy. While it’s theoretically possible that Caesars will exit bankruptcy in 2015, it’s not likely.

5. Who will profit from the bankruptcy? That’s a question with a sure answer: the lawyers.

6. Why aren’t all of Caesars’ hotels included in the bankruptcy? If you look at the list, some of the hotels are merely operated by Caesars and won’t be included in the bankruptcy even if the second-tier debtholders win. However, it is definitely possible that the bankruptcy could expand and take in more of Caesars than just CEOC.

7. Will this impact the World Series of Poker? It’s not likely to have an impact for 2015, but it definitely could sometime in the future. The WSOP is owned by Caesars Interactive Entertainment, Inc.; that’s not currently part of the bankruptcy filing (but it could be if the second-tier wins out).

8. Could some of Caesars’ properties be sold? Definitely. If this does not end up being a prepackaged bankruptcy, then each tier of debtors will propose a plan. One plan could be to auction various properties, so it’s definitely possible.

9. Why did Caesars file bankruptcy? CEOC has been losing money for years and has over $18 billion in debt. The problems stem from the leveraged buyout that Caesars went through several years ago. At that time, the economy was booming and had things continued at the same rate Caesars would have been fine. That didn’t happen.

10. What will happen to the stockholders of CEOC? That’s another question with a certain answer: Their stock is near worthless.

As 2015 progresses we’ll have a better idea how the reorganization of Caesars progresses. It will have a huge impact here in Las Vegas, and it is likely that things will not work exactly how Caesars management want. We’ll get an early read on this when Judge Gross rules on where the bankruptcy actions will take place.

Posted in Gambling | Tagged , | 1 Comment

Former Mayor (and Current CPA) Learns of Tax Fraud, Joins the Conspiracy

Posted on January 16, 2015 by Russ

This is for the don’t do this at home file for tax professionals. Kenneth Harycki is the former mayor of Stillwater, Minnesota. He’s also a licensed CPA in Minnesota (but probably not for much longer). Mr. Harycki will provide an interesting lesson the next time I teach ethics.

Mr. Harycki provided accounting, tax, payroll, and bookkeeping services to clients. Back in 2007, he provided services to Model Health Care. From the Department of Justice press release:

Within the first few payroll cycles for Model Health Care (Model), a company controlled by the two separately charged co-conspirators, the defendant concluded that while payroll taxes were being withheld from the wages of employees, those taxes were not being paid over to the government. The defendant learned that these co-conspirators had directed that the withheld taxes not be paid to the government and, instead, the taxes would be used for other purposes, including compensating the co-conspirators and their family members and funding other businesses operated by the co-conspirators.

Now, let’s assume you’re a tax professional and you learn that a company is withholding payroll taxes and not paying them to the IRS. Would you:
(a) Tell them that the taxes aren’t being paid, that’s violating the law, and you need to fix this (which could include setting up payment plans with the IRS and Minnesota, or just paying the withheld funds);
(b) Tell them that if they don’t start remitting the withheld funds that he would need to quit the engagement; or
(c) Join the conspiracy.

Choice (c) is not one that most of us would consider. It is, though, the one that Mr. Harycki not only considered but did:

According to the defendant’s guilty plea, on February 18, 2010, HARYCKI created the entity MKH Holdings, Inc., to assume control over bank accounts used to fund businesses operated by the co-conspirators. The entity was used to cause funds falsely reported on income tax returns to be paid to the co-conspirators and others. During the course of the conspiracy, HARYCKI also incorporated other businesses, obtained employer identification numbers, paid for personal expenses, filed false tax returns, and opened and used numerous bank accounts for the benefit of the separately charged co-conspirators in order to avoid payment of taxes.

Given that the tax loss is between $1 million and $2.5 million, Mr. Harycki will be heading to ClubFed.

There’s not much to add to the press release. If I discover a defalcation while preparing a return, it’s my responsibility to tell the client. And if my client tells me he’s going to continue the actions, I’m required to quit the engagement. I’ve had to do this once in my career; if I discovered such a fraud I’d make the easy decision to get out the engagement. Apparently Mr. Harycki’s ethics were a bit different than most CPAs and EAs. My. Harycki has received a nomination for the 2015 Tax Offender of the Year, though.

Posted in Minnesota, Tax Fraud | Tagged , | 1 Comment

Semenza Gets 18 Months

Posted on January 16, 2015 by Russ

Last year I wrote about Lawrence Semenza. Mr. Semenza with the US Attorney for Nevada back in the 1970s. He was the youngest US Attorney at that time and has had a long and successful career since as a defense attorney. Unfortunately, he forgot about the law requiring a tax return to be filed; he didn’t file his corporate or individual returns from 2006 to 2010. He pleaded guilty last year, and was sentenced this week to 18 months at ClubFed. He has already made restitution.

Posted in Nevada, Tax Evasion | Tagged | Comments Off on Semenza Gets 18 Months

If You Do Government Work, It Pays to Treat the Government Well

Posted on January 15, 2015 by Russ

Your salary is taxable, of course. What about your bonus? Of course, that’s taxable. One business owner in Texas thought that wasn’t the case.

Robert Earl Carter is the owner and Chief Executive Officer of Enterprise Advisory Services Inc. From their website, it’s clear they specialize in government work, including contracts at NASA.

When you work with the government, you have to open your books to them. Apparently Mr. Carter forgot about that portion of dealing with the government. It also appears that the NASA Inspector General saw something on the books of EASI.

Back in 2009 Mr. Carter received a bonus check at year-end for $195,000. There’s nothing wrong with that, but there’s a lot wrong with calling it a “reimbursement.” It’s likely that caught the Inspector General’s eye, and that caused a referral to the IRS Criminal Investigation (CI) unit. And when CI discover another $309,821 of bonuses were paid to a company controlled by a family member who returned $286,821 to him one month later an indictment followed. Mr. Carter pleaded guilty two months later.

With a plea deal, you can hope for a sentence less than the maximum. That wasn’t the case yesterday.

It seems that Mr. Carter donated $500,000 of art to Texas Southern University. Mr. Carter claimed that deduction on his 2005 tax return, with carryover deductions extending to 2010. There was one minor problem: Texas Southern hadn’t received any art. Yes, to make a charitable donation you do have to actually donate something. Oops.

Judge Keith Ellison wasn’t amused by this faux pas. He found that Mr. Carter had not accepted responsibility for his criminal conduct and that his sworn testimony regarding the art wasn’t credible; he was sentenced to the maximum three years (36 months). He also was ordered to pay a $75,000 fine.

As always, it’s easier to just pay your taxes in the first place…but that usually doesn’t register with the Bozo tax contingent.

Posted in Tax Evasion | 1 Comment

Waiting for Godot

Posted on January 14, 2015 by Russ

Yesterday, I called the IRS on behalf of a client. The client’s 2013 tax return was not processed correctly, so we had to file an amended return. The client received a CP503 notice demanding payment; however, we believe that she will actually receive a refund. It’s been four months since the amended return was received. It will likely be another four months before the issue is resolved…and it might be longer. The IRS put a 15-week hold on collection activities, so my client’s issue was resolved (for the moment).

But for the taxpaying public it’s gloom and doom this year when dealing with the IRS. IRS Commissioner John Koskinen sent a memo to all employees on Tuesday:

There is no way around the severity of these budget cuts without taking some difficult steps. Congress approved a $10.9 billion budget for us, which means we must absorb a cut of $346 million during the remaining nine months of the fiscal year. But that really amounts to a total reduction of about $600 million when you count another $250 million in mandated costs and inflation. This is the lowest level of funding since 2008, and the lowest since 1998 when inflation is considered.

In the memo, Commissioner Koskinen noted that there will be delays to IT work, less enforcement, and cuts in overtime and temporary staffing. For the public, interfacing with the IRS will get worse:

o Delays in refunds for some taxpayers. People who file paper tax returns could wait an extra week—or possibly longer—to see their refund. Taxpayers with errors or questions on their returns that require additional manual review will also face delays.
o Increasing correspondence inventories. We realize there will be growing inventories in Accounts Management, and taxpayer correspondence will face lengthy delays.
o Taxpayer service diminished further over the phone and in person. We now anticipate an even lower level of telephone service than before, which raises the real possibility that fewer than half of taxpayers trying to call us will actually reach us. During Fiscal Year 2014, 64 percent were able to get through. Those who do reach us will face extended wait times that are unacceptable to all of us.

What this means for you and I is that we have deadlines, but there’s none on the IRS. If you’re going to call the IRS, expect very lengthy hold times; yesterday I was on hold for 101 minutes before speaking with an IRS representative. I expect the hold times to get far worse as we head into Tax Season. If you’re sending mail to the IRS, you will be waiting for a response for weeks to months. Given the volume of mail, this will lead to more individuals mail not being responded to in a timely manner; this will lead to more Tax Court petitions being filed.

Back in December 2013 I sent a letter to the IRS on behalf of a taxpayer who had an issue with an electronic payment. I received the response to that letter last week. Humorously, the IRS had first said they lost my letter. (It was sent certified mail, return receipt, so I knew it was received.) This kind of delay is going to become the norm.

What can the taxpaying public do? First, don’t take out your anger with IRS employees; it’s not their fault. Almost all IRS employees do try their best. As Commissioner Koskinen said, “But I know firsthand the commitment and dedication you and your colleagues have to the nation and to taxpayers, and I know you will continue to do your best even as we are forced to do less than all of us want.” Yes, the IRS partially brought this on themselves with their obfuscating responses to the IRS scandal, but that has nothing to do with the rank and file IRS employees.

Second, document everything. If you mail something to the IRS, send it certified mail, return receipt requested. If you call the IRS, document who you spoke to (especially if the call relates to an examination/audit). At the beginning of any call with an IRS employee, they will state their name and badge number. You may need this information later.

Third, if you work with a tax professional get your paperwork to him or her early this year. This return season would have been challenging without the IRS issues; it will likely be one for the record books (and not in a good way). I expect my firm’s deadlines for clients to be applied to all this year.

Finally, be very patient. The IRS will eventually get back to you. If you have an issue and have to call the IRS, try first thing in the morning (especially if you live on the East Coast) or at the end of the day (especially if you live on the West Coast); avoid calling on Mondays.

I wish I had good news here, but the reality is that dealing with the IRS over the next few months will be a very unpleasant experience.

Posted in IRS | Tagged | 2 Comments

The Second Time Wasn’t the Charm

Posted on January 12, 2015 by Russ

There’s a cliche I like, “If you don’t succeed, try, try again.” In the Bozo world things work a bit differently; for them it should be, “If you don’t succeed, stop!” Today, the Tax Court looked at Joseph Banister, an individual making his second appearance at the court. The petitioner had a B.S. in accounting, a CPA license from California, and worked for the IRS as a special agent in Criminal Investigations. He also wrote a book on taxes. He must know about tax law, right?

Well, his book titled “Investigating the Federal Income Tax: A Preliminary Report” is out of print. There’s likely a good reason for that:

In the book petitioner presented a variety of arguments that he and other citizens were not obligated to pay Federal income tax for reasons including that such payment was voluntary, that the Sixteenth Amendment was not legally ratified, and that Government financing operations are unconstitutional. Petitioner began providing tax consultation services, speaking at conventions throughout the country, operating Web sites, and selling books, CDs, and DVDs setting forth his views on income tax and the Internal Revenue Code.

The petitioner was disbarred from practicing before the IRS in December 2003, largely for advising taxpayers that they weren’t liable for income taxes because the 16th Amendment wasn’t legally ratified (and some other frivolous arguments). He appealed, both administratively and via the courts, and lost the appeals.

He also lost his California CPA license “…because of the conduct that led to his disbarment from practice before the IRS.” He appealed that and also lost those appeals.

Now, let’s move to today’s decision. From 2003-2006 the petitioner made money from consultations, speeches, books, and other activities; however, he never filed returns. The IRS examined the petitioner, but the petitioner didn’t cooperate. Eventually the IRS issued Substitute for Returns with income of between $87,000 and $177,000 for each of the four years.

At trial, the petitioner didn’t deny the income.

Instead, His arguments, his motions, his attempts to conduct discovery, and his cross-examination of respondent’s witnesses at trial have been directed to his claim that the statutory notice was invalid because it was not signed by an authorized person and that, as a result, this Court lacks jurisdiction over his case. In his pretrial memorandum he also asserted that his U.S. income was not subject to tax and that he had no obligation to file tax returns, repeating or restating the arguments that had led to his disqualification to practice before the IRS and his loss of his certified public accountant’s license…

Petitioner has a history of pursuing frivolous arguments and rejecting the conclusions of every agency or court that has considered them. His argument that domestic income is not subject to Federal income tax has been restated by him in various filings, but the same conclusion has been rejected as frivolous in his administrative proceedings and in the Court of Appeals’ opinion sustaining his disbarment by the OPR. No further discussion of petitioner’s stale theories is warranted.

Petitioner was not only accused of failing to file, he was assessed the fraudulent failure to file penalty. That penalty is a whopping 75% of the tax that is due.

The additions to tax for fraud have frequently been imposed on taxpayers like petitioner “who were knowledgeable about their taxpaying responsibilities * * * [and] consciously decided to unilaterally opt out of our system of taxation…Because petitioner refused to testify, he has shown no plausible nonfraudulent explanation for his behavior.”

Ouch. But that was not all:

Petitioner was warned of the possibility of a penalty under section 6673 if he persisted in his frivolous contentions. He has presented neither evidence nor arguments showing a reasonable dispute as to the income, tax, penalties, or additions to tax determined in the statutory notice. Under these circumstances, section 6673(a)(1) provides for a penalty not in excess of $25,000 when proceedings have been instituted or maintained by the taxpayer primarily for delay or where the taxpayer’s position is frivolous or groundless. Petitioner has been undeterred despite loss of his privilege to practice before the IRS, loss of his license as a certified public accountant, and other losses in litigation. Adding a penalty to his substantial tax debt may not dissuade him. However, serious sanctions also serve to warn other taxpayers, particularly those that he purports to counsel, to avoid pursuing similar tactics.

Yes, he was assessed a $25,000 penalty for being frivolous.

I don’t know if the petitioner has any other cases floating around the IRS or the Tax Court. If he does, he might want to change his tune. I can guarantee that the third time won’t be the charm, either. He did earn one other item today: The first nomination for the 2015 Tax Offender of the Year.

Case: Banister v. Commissioner, T.C. Memo 2015-10

Posted in Tax Court | 1 Comment

FTC Sponsors Tax Identity Theft Awareness Week

Posted on January 10, 2015 by Russ

Coincidentally (see the previous post), yesterday I received an email from Lisa Lake, Director of Consumer & Business Education of the Federal Trade Commission (FTC). She was highlighting the FTC’s Tax Identity Theft Awareness Week. Happily, this is not a how-to for individuals looking to commit identity theft; rather, it’s a campaign to raise awareness of how consumers can protect themselves from tax ID theft and IRS imposter scams.

Here’s what Ms. Lake wrote:

I thought Taxable Talk readers would like to know about Tax Identity Theft Awareness Week, an initiative led by the Federal Trade Commission taking place January 26-30, 2015.

Identity theft is the largest complaint category at the FTC and, within that category; tax identity theft has emerged as the largest subcategory. IRS imposter scams and similar ruses are a new twist targeting taxpayers. As of August 2014, Treasury Inspector General for Tax Administration (TIGTA) had received over 210,000 complaints with victims losing about $11 million to these scams. The Federal Trade Commission (FTC)’s Sentinel data also shows a significant spike with tens of thousands of these complaints in 2014.

IRS imposter schemes typically work like this:

• Someone calls or emails pretending to be from the IRS
• Scammers rig caller ID to make it look like IRS is calling (may have DC 202 area code)
• Scammers may know the last 4 digits of your SSN
• They may use fake IRS badge #s
• They ask people to wire money or put it on a money card
• Scammers may threaten arrest, deportation or loss of driver’s license
• Sometimes they make a follow-up call pretending to be from DMV or police, also rigging caller id

Your newspaper can help raise awareness about how consumers can protect themselves from tax ID theft and IRS imposter scams. The Federal Trade Commission’s (FTC) Tax Identity Theft Week website (ftc.gov/taxidtheft) provides your readers with tools to do that. We also want to let consumers know how to file a complaint with the FTC; we hope you share the complaint link www.ftc.gov/complaint and the toll-free number 1-877-FTC-HELP with your readers, as well.

Also, there will be a free webinar hosted by the FTC on during Tax Identity Theft on January 27, 2015, at 2pm EST. Consumers can visit ftc.gov/taxidtheft to register and get more information.

I’m all for anything that will put a bite into identity theft. Hopefully this will make a difference.

Posted in Tax Fraud | Tagged , | 1 Comment

Tax Fraud on the Wholesale

Posted on January 10, 2015 by Russ

Out of New York City comes allegations of wholesale tax fraud. Seven individuals were arrested on Thursday and charged with conspiracy to defraud the US, conspiracy to commit wire fraud, and aggravated identity theft. Some of the defendants were charged with subscribing to a false tax return. The allegations show a scheme that took inside information and allowed widespread tax fraud. Here’s how it supposedly worked.

One of the defendants worked for the New York City Human Resources Administration as a fraud investigator. He allegedly sold names, dates of birth, and social security numbers to the other members of the conspiracy. They allegedly used their tax practice in the Bronx to prepare thousands of returns with the Earned Income Tax Credit using the stolen identities. This gave individuals a higher refund…and allowed the conspirators to allegedly pocket some of the proceeds. The scheme supposedly ran from at least 2009 to 2014. The conspirators were quite brazen; they allegedly continued with their conspiracy even after search warrants were executed on their business. (Hint: That was not a good idea.)

The scheme intertwined two areas of tax fraud: The Earned Income Credit and identity theft. Both have been repeated topics on this blog.

If found guilty the defendants are looking at terms at ClubFed.

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Tuition for Children Is Not a Business Expense

Posted on January 9, 2015 by Russ

But we already knew that, right? Nor are home improvements are your home itself. A Florida doctor learned that the hard way.

Dr. Krishna Tripuraneni pleaded guilty this week to evading tax on $18,128,066 million of income. Dr. Tripuraneni provided his tax professional with profit and loss statements used to prepare his returns for his businesses (he has a professional corporation and a partnership) and his personal return. The P&L’s had inflated expenses and, thus, understated his income from 2004-2008.

Not stated in the DOJ press release is that Dr. Tripuraneni has made restitution on about $10.2 million of the $11.8 million in tax and penalties he owes.

A helpful hint to potential fraudsters out there: Conspicuous consumption is not a good idea. Even better, skip the tax fraud. As I’ve said many times before (and will say many times in the future), it’s always a lot easier to just pay your taxes in the first place.

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The Tax Court Looks for $1,410 in Dividends

Posted on January 7, 2015 by Russ

Today I generated my first 1099s for clients. The Tax Court looked at a case where the petitioners said they didn’t receive three $470 dividends. The issuer said they sent the checks and a Form 1099-DIV. Who was right?

In the case of information returns, the burden of proof can shift to the IRS.

If a taxpayer asserts a reasonable dispute with respect to any item of income reported on a third-party information return and the taxpayer has fully cooperated with the Secretary, the Secretary has the burden of producing reasonable and probative information concerning that deficiency in addition to such information return.

But the Court never looked at that as it based its decision on “the preponderance of the evidence.”

The only evidence that the IRS had was a letter from Computerserve (the registered agent for BNSF, the company that might or might not have issued the dividends) that said they were issued and that a 1099-DIV was sent to the petitioner.

Petitioner husband has made numerous unsuccessful attempts in recent years to contact Computershare and Wells Fargo regarding various matters relating to his BNSF stockholdings, including payment of the disputed dividends…

Petitioner husband testified that petitioners did not receive the disputed dividend payments in 2009 or a Form 1099-DIV reporting those payments and that he does not recall having negotiated any checks. His testimony included details regarding the acquisition of BNSF by Berkshire Hathaway and his persistent but unsuccessful attempts to make inquires with Computerserve and Wells Fargo about the disputed dividend payments. He called the phone number provided in the February 28, 2014, letter, but was unable to speak to anyone regarding that
letter…

Petitioner husband has devoted a substantial amount of time to contest the relatively small amount of tax liability at issue here, and he testified consistently, clearly, and with considerable conviction in explaining the negative–that he did not receive the disputed dividend payments. He has persuaded us that he did not receive the disputed dividend payments in 2009.

I suspect that the petitioner had documentation of his phone calls to Computerserve and Wells Fargo. If you do ever find yourself in such a situation, keep good records of your attempts to obtain information.

In any case, this case does show that when there’s an incorrect information return (a 1099) it is possible to dispute it and win. It would have been a lot easier for the petitioners if they could have reached someone at Computerserve or Wells Fargo and explain their situation but we have to treat life as it is, not as we want it to be.

Case: Ebert v. Commissioner, T.C. Memo 2015-5

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