Hyatt Decision Due Tomorrow (Thursday)

Posted on September 17, 2014 by Russ

The long running battle between Gilbert Hyatt and the Franchise Tax Board of California here in Nevada is likely nearing a conclusion. The Nevada Supreme Court listed the Hyatt case in their list of Forthcoming Opinions. Given that the FTB’s liability is up to $500,000,000 (if the lower court decision is upheld), this is a very important decision.

For those unfamiliar with the case, Gilbert Hyatt moved to Nevada from California. He moved in October 1991, but the FTB held that he didn’t move until April 1992, conveniently after Mr. Hyatt received significant income from patents he held. The FTB assessed tax, penalties, interest, and the civil fraud penalty.

In January 1998, Mr. Hyatt filed a lawsuit against the FTB, alleging that the FTB committed torts during the audit, including invasion of privacy, outrageous conduct, abuse of process, fraud, and negligent misrepresentation. The FTB challenged that Mr. Hyatt could sue the tax agency; California law immunizes the FTB from lawsuits. That portion of the case went to the US Supreme Court; the US Supreme Court ruled in 2003 that he could sue the tax agency.

The case was heard in 2008 here in Las Vegas. Mr. Hyatt won and was awarded $138.8 million of actual damages and $250 million in punitive damages. (Including interest, the amount that Mr. Hyatt is due is up to $500 million.) The FTB appealed; that appeal was heard in May 2012 by the Nevada Supreme Court. (Nevada does not have intermediate courts of appeal.) That’s the decision that will be released tomorrow. I will report on the decision tomorrow (Thursday) afternoon.

Posted in California | Tagged | Comments Off on Hyatt Decision Due Tomorrow (Thursday)

From Owning a Party Mansion to Partying at ClubFed

Posted on September 14, 2014 by Russ

Claude Verbal II wasn’t the most well liked owner of a home in North Raleigh, North Carolina. It seems that the 15,000 square foot mansion wasn’t used as a home; rather, it was a place to PARTY! To be fair, the parties appear to have been operated by Mr. Verbal’s ex-wife, Pamela Verbal. The local HOA probably has nothing to worry about as far as any additional parties. Besides an injunction issued by a local court, Mr. Verbal will need to sell the mansion (if it hasn’t already been sold).

You see, Mr. Verbal pleaded guilty earlier this year to a $6,460,962 tax and health care fraud scheme. He was sentenced last week to 135 months (11 years and 3 months) at ClubFed along with full restitution for one count of conspiracy to defraud the United States, one count of aiding and assisting the preparation of false tax returns, one count of healthcare fraud, and one count of money laundering.

In the tax fraud scheme, Mr. Verbal owned a tax preparation franchise with ten locations in North Carolina. Mr. Verbal and his employees offered customers a unique bonus system: If the return was falsified and the client paid cash, he would get a much larger refund. Mr. Verbal and his employees utilized familiar methods: fake dependents and phony credits. Mr. Verbal bought stolen identities so his scheme could continue.

It’s how the scheme was uncovered that makes this quite interesting. From the DOJ press release:

In November 2010, one of Verbal’s employees informed a U.S. probation officer of the fraudulent practices at NBT’s location on Fayetteville Street. The probation officer informed Verbal of this fraud and he falsely denied knowledge of it. Afterward, Verbal took steps to keep the profitable Fayetteville Street location open and to continue operating as usual, but to also further distance himself from the fraudulent practices. In order to do this, Verbal transferred the electronic filing privileges for that NBT branch to a nominee. Verbal and others jointly persuaded a relative of Verbal who allowed Verbal to use their name to apply for new electronic filing privileges for the Fayetteville Street location. In exchange, Verbal and his wife paid the relative $10,000, and the relative had no role in operating NBT, no professional tax experience and no knowledge of the fraud that was occurring at NBT.

But that’s not all. Besides owning a tax preparation firm, Mr. Verbal owned a Medicaid health provider in North Carolina. Mr. Verbal engaged in healthcare fraud, including changing diagnosis codes, inflating the number of clients treated, billing for services not rendered, and faking assessments.

From both schemes, Mr. Verbal used the proceeds to buy luxury goods and possessions, such as his party house in North Raleigh. Many of the items acquired by Mr. Verbal were seized during the investigation, including nearly $766,000 in cash and a 7-carat diamond ring.

As a reminder to anyone who is offered the chance to get a larger refund by paying in cash and having phony items added to his or her tax return: Don’t do it! If it sounds too good to be true it probably is. Not only is knowingly participating in such activities a crime, sooner or later you could get a “Dear Soon to be Audited Taxpayer” letter from the IRS.

Posted in Tax Fraud | Tagged | 1 Comment

It Never Works, But They Keep Doing It

Posted on September 14, 2014 by Russ

“It amazes me that people who withhold payroll taxes and don’t remit them to the IRS can get away with it.” That’s what my friend, Scott Harker, EA, said to me this morning. Yet time and again I read stories where someone decides to abscond with payroll taxes meant for the IRS. It only works until you get caught, and you’re almost always caught.

Take William Danielczyk, Jr., of Oakton, Virginia. If that name rings a bell, it’s because you remember that Mr. Danielczyk was previously sent to ClubFed for two years for illegally funneling just under $200,000 to Hillary Clinton’s political campaigns back in 2006 and 2008. (Mrs. Clinton had no knowledge of the illegal campaign contributions.) When he was sentenced he remarked, “I’ve always tried to lead by example, and I obviously didn’t do that here.”

It turns out that the campaign finance crimes were small in dollars in comparison to his payroll tax crimes. From mid-2009 through 2011, Mr. Danielczyk didn’t send $2,232,781 to the IRS from employee tax withholdings. He also didn’t send employees’ contributions to 401(k) retirement plans to the custodians; that loss was $186,263. Even after he was indicted for the campaign finance law violations he continued with this scheme! That’s chutzpah.

At least the money went to some good purchases. From the Department of Justice press release:

According to court records, instead of paying Innovative’s employment taxes and pension plan contributions, Danielczyk made a variety of purchases from company accounts. Those purchases included $505,871 for the use of an executive suite in the FedEx Field football stadium in Landover, Maryland, along with $40,000 to sponsor the Virginia Gold Cup, a series of Steeple Chase horse races held in northern Virginia.

Mr. Danielczyk was sentenced to eighteen months at ClubFed, three years of supervised release, and must make restitution of $1.6 million to the IRS.

A hint to anyone who wants to try robbing from payroll withholding: Don’t do it! The IRS investigates 100% of these violations. And it’s a certainty that such malefactions will be discovered–sooner or later (likely sooner) someone will be claiming the withheld payroll tax and the IRS won’t match it (as you took it).

If you’re an employer, this is a reminder that you should use EFTPS to verify that your payroll tax withholding has made it to the IRS. If you use employee leasing (aka PEOs), you have to find another method to verify the withholdings but you should do so. Paying payroll tax once is bad enough; paying it twice is really bad.

Posted in Payroll Taxes, Tax Fraud | 1 Comment

Let’s Give Lois Lerner Credit Where Credit Is Due

Posted on September 10, 2014 by Russ

We don’t know with certainty what Lois Lerner’s role is in the IRS scandal. However, let’s give credit to Ms. Lerner in exposing something that definitely is wrong with the IRS.

It turns out that Ms. Lerner was upset with an unnamed IRS employee who was paid $138,136 a year and was doing “nothing.” The Washington Examiner reported on this in an article on a letter written by House Ways & Means Subcommittee on Oversight Chairman Charles Boustany (R-LA) to IRS Commissioner John Koskinen. Here’s an excerpt of the Examiner’s article:

In a 2011 email recently uncovered by the committee, Lerner wrote to colleagues that she “learned than [an] employee who is assigned to a special project has spent most of the last year doing nothing and reporting to her manager on on timesheets that she has been working on the project full time.” The worker was paid $106,263-$138,136.

Lerner said that “We can’t do anything” about the worker, though some argued for termination, explained Boustany’s letter. Instead, the unnamed worker was given a lower performance rating.

While this will do nothing to help the IRS’s reputation, kudos to Ms. Lerner for trying to stop such activities. As for Congressman Boustany’s letter to Commissioner Koskinen, I’m not holding my breath for any results.

Posted in IRS | Tagged | 1 Comment

Cash & Carry

Posted on September 10, 2014 by Russ

Myong Ho Pak is the owner of Yama Sushi restaurant here in Las Vegas. The restaurant is popular and has done quite well; it features all you can eat sushi. It may have done a bit worse on its 2008 to 2010 tax returns than it really did, though. You see, the owner only included his credit card receipts on his tax return.

It turns out that Mr. Pak’s accountant received his business bank statements but the cash from the business went directly into his personal bank accountant. It’s a good scheme when it works. Unfortunately for Mr. Pak, the IRS discovered the evasion.

Mr. Pak pleaded guilty on Monday to tax evasion, and has agreed to make full restitution to the IRS of $244,045. He’ll be sentenced in December.

Posted in Las Vegas, Tax Evasion | 1 Comment

New Jersey Tries Hail Mary on Sports Betting; Will IRS Intercept?

Posted on September 9, 2014 by Russ

Yesterday, Governor Chris Christie of New Jersey announced that New Jersey would not prosecute any casino or race track that offered sports betting. This is in spite of a federal court ruling that New Jersey’s sports betting law was unconstitutional. My suspicion is that the federal courts will not look favorably on this, and Governor Christie’s actions will be for naught. Indeed, the attorney crAAKer posted on his blog that this is unlikely to succeed.

But let’s assume that somehow the courts allow this. There’s an issue that will put New Jersey at an extreme disadvantage to Nevada’s legalized sports betting: taxes. Specifically, the Excise Tax on Wagering.

Yes, there are a whole bunch of federal excise taxes. And there’s an IRS publication dedicated just to them. One day you might need to know about the tax on arrow shafts (I’m not making this up). But I digress….

The excise tax on wagering is summarized as follows:

IRC 4401(a)(1) imposes a 0.25 percent tax on the amount of any wager authorized under the law of the state in which accepted.

IRC 4401(a)(2) imposes a 2 percent tax on the amount of any wager not described in IRC 4401(a)(2) (i.e., those not authorized by state law).

This doesn’t apply to all betting in the US; it applies to:

IRC 4404 provides that the tax applies to wagers:

• Accepted in the United States, or
• Placed by a person who is in the United States with a U.S. citizen or resident, or in a wagering pool conducted by a U.S. citizen or resident.

As noted in an IRS analysis on this tax, this tax applies just to sports betting (and wagering that involves a sports bet). An interesting issue is whether this tax applies to fantasy sports, such as daily fantasy sports. I suspect it does, but that’s another issue for another day.

So let’s say you place a bet at the Bellagio sportsbook, betting $100 that the Chicago Bears will beat the San Francisco 49ers. Out of the Bellagio’s “juice”–your bet will typically cost you $110 or $120, with the house (Bellagio) keeping that extra money–Bellagio must pay the 0.25% wagering tax. On a bet of $100, that’s $0.25. The Bellagio remits the tax using Form 730.

Now let’s consider if the Borgata Hotel in Atlantic City were to accept the same bet. Again, the federal excise tax clearly applies. However, the tax rate will be the 2% rate rather than the 0.25% rate because New Jersey has not legalized sports betting. Indeed, Governor Christie vetoed such legislation earlier this year. While New Jersey would argue that the previously passed Sports Wagering Act allows for sports betting, federal courts have ruled that it could not be put into effect.

New Jersey argues that federal law sort of allows any state to conduct sports betting. From crAAker’s analysis:

New Jersey seeks to avoid the licensing problem by asserting that the licensing provisions can be severed from the statute. Severability is a common law doctrine which permits a court to invalidate one section of a statute while leaving the remainder in force. In this case, the statute contains an explicit legislative endorsement of severability (Section 5:12A-2(g)), which expresses the legislature’s intent to have a court attempt to enforce the statute in the event the statute was found to violate PASPA and creates a legal presumption in favor of severability.

Since New Jersey has not authorized sports betting–the only law that was passed by New Jersey was not allowed to be put into effect by the federal courts–the higher 2% rate applies. That means that the Borgata would owe $2 to the IRS rather than the $0.25 that Bellagio owes on a $100 sports bet.

A fundamental principle of economics is that all government fees and taxes are passed on to the consumer. The additional $1.75 that a New Jersey sportsbook would have to pay would be passed on to the New Jersey sports bettor. That will make betting more expensive in New Jersey than Nevada. Even if somehow the courts were to allow sports betting in New Jersey, it will be at a higher price to the consumer than in Nevada.

I suspect the courts are going to throw buckets of cold water on the idea of legal sports betting in New Jersey. However, even if they don’t the IRS would make it a bad bet.

Posted in Gambling, New Jersey | 1 Comment

Lies, Deceit, and Nefarious Schemes

Posted on September 7, 2014 by Russ

As a poker player, I know there’s a time to lie. As a tax professional, I know that time is not while preparing your tax return or advising others on taxes. These individuals learned that the hard way.

First, we head to my old stomping grounds. From Orange County, California, comes the case of Kenneth Elliott. Mr. Elliot sold welfare benefit plans (also known as 419(e) plans). When these are legitimate, they provide benefits to employees for things such as health, disability, and long-term care. Legitimate plans allow contributions to be deductible business expenses.

Mr. Elliott’s plans were different. His plans allowed you to both get the tax deduction and, “then later access the full cash value of their plan contributions by taking out loans against the life insurance policies purchased with plan contributions.” That’s not allowed. Mr. Elliott has been barred by a federal court from ever selling and/or operating any purported welfare benefit plans; he must also send a copy of the injunction to his customers.

Next, Randall Due and Donna Kozak were already in trouble. The two had been convicted of tax evasion. (They believe they’re “sovereign citizens” so not subject to income tax. That didn’t work.) Well, there are various things you might do after being convicted. You might find grounds for an appeal; that’s a good idea. You might file liens against the judge, the US Attorney for the District of Nebraska, the Assistant US Attorneys, and an IRS Special Agent (in Criminal Investigations); that will get them! This is a really, really bad idea.

But that didnt’ stop Mr. Due and Ms. Kozak. Both were convicted of filing false liens. They’re looking at lots more time at ClubFed. The best summary of this is simple: Don’t do it!

Finally, from Philadelphia comes the case of Yaser Masso. Mr. Masso did a great job of billing the customers that used his security guards. He didn’t do so well in providing the records of those bills to his accountants. He only understated his income by $2.1 million for 2006 to 2009. Oops.

This was an especially bad problem when the IRS discovered the error. Given that the understatement resulted in a need for $429,000 of restitution, this was a big deal. Mr. Masso was sentenced to 21 months at ClubFed and must make that restitution.

All-in-all, these are three examples to avoid.

Posted in Tax Evasion | 1 Comment

Another Friday: More IRS Revelations

Posted on September 7, 2014 by Russ

Shock of shocks, another Friday and we get more revelations on the IRS Scandal. Of course, if one believes the IRS and the Obama Administration, Lt. Frank Drebin had it right:

Let’s get to the updates:

First, the IRS announced that five of the 82 individuals being questions on the scandal had emails that disappeared. This included Judy Kindell, a former senior adviser to Lois Lerner.

Next, we discover that Lois Lerner’s Blackberry was wiped clean after the IRS was told that the emails were wanted.

Do you know Andrew Strelka–the Andrew Strelka who used to work for the Department of Justice? If you do, Jim Jordan, Congressman from Ohio, would like to hear from you. The DOJ refuses to assist Congressman Jordan and the House Oversight and Government Reform Committee in finding Mr. Strelka. Congressman Jordan gave the DOJ until Friday to send a forwarding address for Mr. Strelka.

Finally, Judicial Watch reports that the IRS had a ‘Secret Research Project’ for conservative donor lists. An excerpt:

Sure enough, these latest emails are treasure trove for truth-seekers about this Nixonian scandal. Contained in the newly released IRS documents is an email from Deputy Associate Chief Counsel Margo L. Stevens that was sent in response to a question from Lerner concerning attempts to return donor lists the IRS had inappropriately obtained. In Stevens’ May 21, 2012, email to Lerner, she wrote:

Lois, I wanted to get back with you with respect to your question whether TEGE [Tax Exempt & Government Entities] could return to those organizations from whom donor names were solicited in questionnaires following their submission of applications for recognition of their tax exempt status (under 501(c)(4)), now that TEGE has reviewed those files and determined that such information was not needed across-the-board and not used in making the agency’s determination on exempt status.

For those who want to say there’s nothing to see here, Lt. Drebin and the Obama Administration thank you. The rest of us owe a debt of gratitude to Judicial Watch; their lawsuit against the IRS has done more to get to the truth then the current Congressional investigations.

Posted in IRS | Tagged | Comments Off on Another Friday: More IRS Revelations

Ohio Small Business Owners Get a Break

Posted on September 7, 2014 by Russ

There’s a new tax deduction in Ohio that gives small business up to a 50% tax deduction on their state income taxes. This includes sole proprietorships, partnerships (and LLCs taxed as partnerships), and S-Corporations. The deduction is taken on Form IT SBD. The deduction is on up to a maximum of $250,000 in business income; this means you can have $125,000 for the maximum deduction. The deduction also can’t exceed a taxpayer’s Ohio Adjusted Gross Income.

More information is available from the Ohio Department of Taxation.

Posted in Ohio | Comments Off on Ohio Small Business Owners Get a Break

$1.25 Billion Attracts Tesla to Nevada

Posted on September 4, 2014 by Russ

As you likely heard, Tesla will be building its new “Gigafactory” at a site in Storey County near Reno in northern Nevada. What attracted Tesla to Reno? About $1.25 billion.

Tesla get a 100% sales tax abatement for 20 years (worth $725 million), a 10-year property tax abatement (worth $332 million), $75 million of transferable job credits ($12,500 on the first 6,000 jobs), a 10-year 100% abatement of Nevada’s modified business tax, $8 million of discounts on electricity, and $120 million of transferable tax credits. (The transferable tax credits can be sold by Tesla to other Nevada businesses.) Tesla is required to invest $3.5 billion in manufacturing and real property according to the Reno Gazette Journal.

While Tesla is a clear winner, and assuming that the economic development forecast comes true (a $100 billion economic impact over 20 years) so are Reno, Storey County, and Nevada, there are definite losers. Some of the Tesla tax breaks will be funded by eliminating other tax breaks:

– Insurance companies headquartered in Nevada will lose a tax break worth $25 million a year;
– The Nevada film credit is being cut from $80 million to $10 million; and
– The Tesla deal includes an express provision allowing Tesla to sell cars directly to consumers, bypassing automobile dealers.

The package, which Jon Ralston reported will be in five separate pieces of legislation, does have to pass the Nevada legislature. Governor Sandoval will be calling a special session of the legislature to start next Wednesday.

In the end, one must ask if the tax hit to Nevada is worth it. Of course, all those jobs are dangling like money to my state’s elected officials. One thing is quite certain: taxes matter, as always.

Posted in Nevada | Tagged | 1 Comment