This Never Works…

Posted on February 1, 2015 by Russ

If you want to go to prison for tax evasion, there’s an easy method: Withhold payroll taxes and don’t remit them to the IRS or your state tax agency. The government investigates all such actions (or should I say inactions). One New York businessman will likely have some time to think that over.

Patrick White is the owner of R & L Construction in Yonkers, New York. He liked his home and he liked to gamble. There’s nothing wrong with that. He took payroll taxes withheld from his business and used that money for his homes and for gambling. There’s a lot wrong with that, especially when it totals $3,758,000. Mr. White pleaded guilty to one count of failing to pay over payroll taxes to the government. He’ll be sentenced in May.

This is a good time to point out that if you are a business owner, you should check to make sure your payroll taxes are being sent to the IRS. You can do so by using EFTPS. You’re personally liable for those taxes, so it’s worth verifying the money makes its way where it belongs. If you use employee leasing (a PEO), you can’t verify this by EFTPS so you will need to find a different method of doing so.

Posted in Payroll Taxes, Tax Evasion | 1 Comment

Golf or Sentencing?

Posted on February 1, 2015 by Russ

It’s a gorgeous day here in Las Vegas today, a perfect day for a round at one of the many golf courses in town. It apparently was just as nice Wednesday in Colorado when three individuals chose to a play 18 holes rather than get sentenced for 18 counts of tax fraud. They got in front of the judge Thursday. As Joe Kristan reported, they’ll likely have plenty of time to ponder their life when their sentenced in a couple of weeks.

Posted in Tax Evasion | Comments Off on Golf or Sentencing?

Caesars Wins Round One: Chicago, not Delaware

Posted on January 28, 2015 by Russ

Judge Kevin Gross ruled on Wednesday that the bankruptcy case of Caesars Entertainment Operating Company will be tried in Chicago, not Wilmington, Delaware. Caesars’ second-tier creditors wanted the case tried in Delaware; Caesars preferred the Windy City. As Bloomberg reported,

“Ultimately, the overriding consideration is that the debtors chose the Illinois court,” Gross said. Letting the creditors win would be “bad precedent,” he added.

Judge A. Benjamin Goldgar will now have to decide the official start date of the bankruptcy. Is it January 15th (when Caesars filed) or January 12th (when the second-tier creditors filed)? Will the prior-year reorganization of Caesars be undone (which could cause more of Caesars to fall into bankruptcy)? Stay tuned for the next installment of “Fail, Caesar.” Until then, here’s some music for my old home town:

Posted in Uncategorized | 1 Comment

One Good Crime Deserved Another

Posted on January 27, 2015 by Russ

Let’s say you’re involved in a 20-year scheme that has successfully evaded millions of dollars in payroll and income taxes for your largest client. However, you’ve only had minor profits from the scheme. So why not embezzle millions of dollars from that client? Given that the owners of the client are knee deep (or more) in the tax evasion scheme, they’re not likely to say anything.

Yes, this happened.

William Frio was the accountant who prepared tax returns and provided accounting services to Nifty Fifty’s, the nostalgia themed restaurant change in Philadelphia. The owners of Nifty Fifty’s along with Frio began in 1986 to underreport their income, pay employees in cash, skim cash from the business, and basically ignore the law. The scheme worked for nearly 25 years and led to the chain evading over $2.8 million in taxes.

Mr. Frio not only was actively involved in the scheme, he decided to embezzle from the chain to the tune of $4 million. He didn’t report that income on his taxes; yes, illegal income is just as taxable as legal income. To assist with his embezzlement, he structured transactions–another felony. He also lied on loan applications; that’s another felony. He pleaded guilty to all this on Monday; he’ll be sentenced later this year.

When I first reported on Mr. Frio I used one of my favorite lines from J.R.R. Tolkien’s Lord of the Rings: “Oft evil will shall evil mar.” Mr. Frio will likely have plenty of time at ClubFed to read Tolkien: He faces up to 57 years plus restitution to the IRS plus a fine of up to $2.75 million along with criminal forfeiture.

Posted in Tax Evasion | Tagged | 2 Comments

The Form 3115 Conundrum

Posted on January 26, 2015 by Russ

[Accounting Today readers: Here’s a link to Fail, Caesar.]

Form 3115 is the form used to request an accounting method change. For example, if your business is changing from cash to accrual, this form is filed. Many such changes are automatic; you just notify the IRS, file the paperwork, and life moves on. Of course, even the simple is complex: Form 3115 gets filed twice: once with your tax return, and once to either Ogden, Utah or to Washington, DC.

This year there’s a conundrum faced by tax professionals: Do we need to file a Form 3115 for every taxpayer who has equipment, depreciation, rental property, inventory, etc.? And no one seems to know the answer.

The cause of the problem is the new repair/capitalization/property regulations. These new regulations are effective for the 2014 tax year, and specify how certain things are supposed to be done. Why is this a big issue? Because Form 3115 is complex: The IRS estimates it will take 24 work hours to complete one form for one client.

It’s a certainty that companies that manufacture or have inventory will need to file Form 3115 with their returns. But what about someone with a side business? A couple who rents out their old home? There is a 12-page thread on TaxProTalk on this subject and I don’t think anyone there has a good handle on this.

Let’s take a real world example: John and Mary Smith. The Smiths own one residential rental property here in Las Vegas. The property has been depreciated for the last five years. In 2013, they put in a new garage door and are depreciating it. Their tax return is otherwise quite blase: they have wage income, a home mortgage, property tax, and some minor investment income.

I still don’t have a good answer for this. I’d love to hear from other tax professionals on this issue.

Posted in IRS, Taxable Talk | Tagged | 3 Comments

Voluntary Human Egg Retrieval and Damages

Posted on January 22, 2015 by Russ

A very interesting full decision of the Tax Court was released today in Perez v. Commissioner. The issue was whether a woman who had eggs retrieved from her body after undergoing fertility treatments in exchange for compensation could exclude the compensation because of the pain and suffering she went through in the procedure.

Today’s decision was written by Judge Mark Holmes, so it’s very readable for the layman. The petitioner, Nichelle Perez, agreed to undergo treatments so eggs could be taken from her body; in return she received compensation of $10,000. She did this twice in 2009; the egg donation agency issued her a 1099-MISC for $20,000. She didn’t include it as income because under Section 104(a)(2) income from damages from personal injuries and pain and suffering can be excluded from taxation. This is noted in Regulation Sec 1.104-1(c)(1):

Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.

The Court had to decide whether excluding her compensation qualified as damages per this regulation. The regulation notes that damages are required; this causes the Court to look at a Chevron test. Unlike Loving v IRS where the first step of the Chevron test failed, here the Court looked at the second step. I’m going to extensively quote Judge Holmes’ opinion here as there’s no need for paraphrasing:

On this step, we find a regulation invalid only if it is “‘arbitrary or capricious in substance or manifestly contrary to the statute.’” Perez argues that the definition of “damages” in the regulation is invalid because it requires prosecution (or threat of prosecution) of a legal suit as a prerequisite for a payment’s exclusion from income…[citations and footnotes omitted]

Perez very clearly has a legally recognized interest against bodily invasion. But we must hold that when she forgoes that interest–and consents to such intimate invasion for payment–any amount she receives must be included in her taxable income. Had the Donor Source or the clinic exceeded the scope of Perez’s consent, Perez may have had a claim for damages. But the injury here, as painful as it was to Perez, was exactly within the scope of the medical procedures to which she contractually consented. Twice. Her physical pain was a byproduct of performing a service contract, and we find that the payments were made not to compensate her for some unwanted invasion against her bodily integrity but to compensate her for services rendered…

This small change just helped tax regulation keep up with a bit of a shift in American law toward administrative or statutory remedies and away from common-law tort for some kinds of personal injuries. It is not at all arbitrary, capricious, or manifestly contrary to the Code. But it also doesn’t help Perez. We completely believe Perez’s utterly sincere and credible testimony that the series of medical procedures that culminated in the retrieval of her eggs was painful and dangerous to her present and future health. But what matters is that she voluntarily signed a contract to be paid to endure them. This means that the money she received was not “damages”.

We conclude by noting that the result we reach today by taking a close look at the language and history of section 104 is also a reasonable one. We see no limit on the mischief that ruling in Perez’s favor might cause: A professional boxer could argue that some part of the payments he received for his latest fight is excludable because they are payments for his bruises, cuts, and nosebleeds. A hockey player could argue that a portion of his million-dollar salary is allocable to the chipped teeth he invariably suffers during his career. And the same would go for the brain injuries suffered by football players and the less-noticed bodily damage daily endured by working men and women on farms and ranches, in mines, or on fishing boats. We don’t doubt that some portion of the compensation paid all these people reflects the risk that they will feel pain and suffering, but it’s a risk of pain and suffering that they agree to before they begin their work. And that makes it taxable compensation and not excludable damages.

It would be nice if tax professionals could claim part of the fees were damages from the myriad of paper cuts we get each year. Or if I could claim damages for my chipped and fake teeth (yes, I played hockey). That said, Judge Holmes’ decision, as harsh as it may be for Ms. Perez, does seem absolutely right to me. Under the US Tax Code, any accession to income is taxable (unless Congress has exempted it). Ms. Perez willingly signed a contract prior to her procedures for compensation.

Lew Tashioff has more on this. There’s also an interesting discussion on this case from last March at the Faculty Lounge.

Case: Perez v. Commissioner, 144 T.C. No. 4

Posted in Tax Court | Tagged | Comments Off on Voluntary Human Egg Retrieval and Damages

Old Fashioned Theft Leads to New Fashioned Identity Theft

Posted on January 22, 2015 by Russ

A case out of my old home town of Visalia, California lets us know that sometimes there’s just not much you can do to prevent yourself from being a victim of identity theft. Back in 2011 Rebekah Root either stole documents from an IRS office in Visalia or she obtained them. (The original announcement from the DOJ doesn’t make it clear which is the case.) She then proceeded to commit identity theft using those documents.

TIGTA (the Treasury Inspector General for Tax Administration) investigated the theft, and when they found out that the paperwork was used to file returns on those individuals IRS Criminal Investigation joined in finding the culprit. Ms. Root pleaded guilty last year to wire fraud, making a false claim for a tax refund, and aggravated identity theft. She received 45 months at ClubFed for the $50,000 in fraudulent tax refunds she had claimed.

Posted in Tax Fraud | Tagged | Comments Off on Old Fashioned Theft Leads to New Fashioned Identity Theft

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.

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