"First Lady" Of Tax Fraud

If you were (a) living in Tampa Bay (b) driving a $90,000 car you paid cash for with (c) no visible means of support, would you post the following on Facebook:

“I’m Rashia, the queen of IRS tax fraud. … I’m a millionaire for the record. So if you think that indicting me will be easy, it won’t. I promise you. I won’t do no time, dumb b------.”

Her name is Rashia Tocara Wilson, and it is doubtful that she has ever been the brightest bulb in the room.

According to investigators, Wilson and two men have been under suspicion since 2010, when they were at a motel involved in a drug sting. The police noticed a significant decline in drug-dealing activity thereafter and speculated that many of those involved switched to the easier and more profitable business of tax fraud. 

There was evidence of ID and tax fraud uncovered during the raid. So much so, in fact, that local authorities launched a coordinated year-long effort with federal authorities nicknamed “Operation Rainmaker" for the cash raining down on the suspects. Since the motel raid, Tampa police continued investigating and gathering evidence on the three.

The tax fraud is not particularly complex.  The crook obtains someone's name, Social Security number and date of birth. After making sure that no one has filed a tax return under the social security number, the crook files online using software such as Turbo Tax. The crook obtains a tax refund, perhaps on a prepaid debit card.

Tampa has been deemed the “worst in the nation” for tax refund fraud. Interestingly, Rashia and the two others are considered the “pioneers” of tax fraud in Tampa. Major Ken Morman of the Tampa Police Department stated:

We believe that they are the ones that organized and recruited, they were the pioneers that actually set in the process everyone who is involved in this phenomenon. The vast majority of the people we've interviewed have been linked back to them one way or another.

These are the organizers.  These were the ones that actually structured and directed everybody when this phenomenon started.  

They have a Medicare card in their name.  They have a food stamp card in their name.  And they have $23,000 in cash from the stolen and fraudulent income tax in other's names."  

Wilson and her boyfriend were indicted conspiring to steal more than $1.1 million by filing fraudulent tax returns.

Cyrano de Bergerac, Putin and French Taxes

Have you heard of Gerard Depardieu?

I admit, I previously had not. He is a French actor of some renown. He has played Jean Valjean (“Les Miserables”) as well as Cyrano de Bergerac, owns vineyards as well as a number of restaurants in Paris. He recently has gathered notoriety by publicly (and somewhat vocally) expatriating from France to Belgium, primarily for tax reasons.

We have discussed previously that the new French government is implementing a 75% tax on incomes above (approximately) 1.3 million dollars. Depardieu fired back with the following:

           

I was born in 1948.  I began working at the age of 14 as a printer, as a store handler, then as a dramatic artist. I've always paid my taxes, whatever the level and under all serving governments. At no moment have I avoided my duty. Other, more illustrious people than me have become expatriates or left our country. ... I am leaving because you consider that success, creation, talent, in fact, being different, must be punished."

One would think that he gave away wartime secrets, to hear from government officials.

* Prime Minister Jean-Marc Ayrault said: "I find this quite shabby. All that just to avoid paying tax. Paying tax is an act of solidarity, a patriotic act.

* Labor Minister Michel Sapin said that Depardieu was an example of “personal degradation.”

* Culture Minister Aurelie Filippetti accused Depardieu of “deserting the battlefield in a war against the economic crisis.”

* President Francois Hollande said “When someone loves France, he should serve it.”

QUESTION: Is this the French equivalent of “America, right or wrong” from the Vietnam War era? Didn’t Michael ridicule Archie for this very position on All in the Family?

Depardieu has company. Bernard Arnault, France’s (formerly) richest man and the owner of Christian Dior announced two months ago that he was seeking Belgian nationality. The French newspaper Liberation ran a front page headline saying”Get lost, rich b******!"

Classy.

French conservative (for them) newspaper Le Figaro came to Depardieu’s defense, saying:

It reveals an absence of common sense on the part of a government that is always insulting rich people.

They should reflect on the wisdom of their own actions rather than attacking those who succeed or show some spirit of enterprise. The young people in this country work hard and want to believe in their fortunes. Why would they want to become cash cows of people who insult them? It's desperate. That's the real scandal!"

Depardieu has received public support from Bridgette Bardot and Catherine Deneuve. The support from Bardot was a bit surprising, as she rarely makes public statements and has previously clashed with Depardieu over animal welfare. Depardieu is a vocal supporter of bull fighting.

By the way, Belgium does not have a dirt-cheap individual tax rate. Their top rate is 50%, although I believe that Belgium does not tax capital gains. Belgium certainly does not have an equivalent to the French “wealth” tax, which is levied on those with assets exceeding (approximately) $1.7 million.

Russian President Vladimir Putin has offered Depardieu a Russian passport, saying “"If Gerard really wants to have either a residency permit in Russia or a Russian passport, we will assume that this matter is settled and settled positively."

The Russian individual tax rate is 13 percent. Yes, you read that correctly.

My Take: Borrowing the old saw, a government that robs Gerard to pay Paul can always count on the support of Paul. Gerard however might choose to leave the game – or just leave. What is it about this simple observation about human behavior that every generation of politicians – including ours - seems unable to learn?

Laurel and Hardy Dancing on the Fiscal Cliff

I personally would prefer Laurel and Hardy to what we have up there presently. 

Seasons Greetings

Update on Tiger Zerjav

We recently discussed Tiger Zerjav, who with his father practiced tax in St. Louis, Missouri. Tiger and his dad had attracted IRS attention, and Tiger himself was being pursed for tax fraud. Courthouse News Service (a news service for attorneys and focusing primarily on civil litigation) reported the following this morning:

ST. LOUIS (CN) - A much-sued tax adviser pleaded guilty Thursday to federal tax evasion.  Frank L. "Tiger" Zerjav Jr., 39, of Wildwood, Mo., pleaded guilty to four counts of tax evasion from 2001 to 2004, prosecutors said.

 Zerjav admitted that he funneled his income into several S-corporations and failed to include that income on his tax returns.  

Zerjav admitted that many of the expenses claimed on the S-corporations tax returns were personal and should not have been deducted. Some of the payments were for a condominium at the Lake of the Ozarks, a boat, two Sea-Doo watercrafts and a home entertainment system.

Prosecutors said Zerjav evaded $183,000 in taxes over the four years, though he and the government did not agree on the exact amount of unpaid taxes.

Zerjav faces up to 5 years in prison and a $250,000 fine for each charge. His sentencing is scheduled for March 26, 2013. Twenty-one people, companies or government entities have filed lawsuits against the Zerjavs since 2008, according to the Courthouse News database.

My Take: There is a difference between tax minimization and tax evasion. If you claim accelerated depreciation, or make a stock donation to a charity, or gift part of a business to the children using a family limited partnership, or make a like-kind exchange of real estate, you are still working within the system – albeit working to reduce your taxes. When the conversation includes “omitting income,” one may have crossed the line into fraud. 

Summerlin, Las Vegas and Not Paying Taxes Until 2039

Let me ask you a question, and then we will discuss how taxpayers and the IRS get into high-stakes battles.

Our topic today will be “home construction.” Let’s say that there is a contractor. He buys the land, grades and prepares the dirt, and sends over employees to frame, roof, wrap and finish a house.  Would we say that he is a “home construction contractor?” Yes, we would.

Let’s change this up. Say that he still buys and preps the land, but he sends over subcontractors rather than employees. Is he still a home construction contractor? Yes, we would still consider him as such.

Switch the focus to the subcontractor. Would you consider the roofer to be a home construction contractor? If one allows the terms contractor and subcontractor to be interchangeable for this purpose, then we would say yes. The overall contract is a home construction contract, so arguably any division of such contract would also be a home construction contract. Any slice of a red velvet cake is still cake.

One more. Let’s say that a third party purchases and rezones the land, clears and grades, installs water and sewer lines, builds roads and installs landscaping. He then sells individual lots to homebuilders. What we have described is commonly called a “developer.” Would we consider the developer to be a home construction contractor?

Thus begins the tax issues of Howard Hughes Corporation and its Summerlin development in Las Vegas. This thing is massive, covering almost 35 square miles on the west side of the city.  The development covers an area approximately half the size of the District of Columbia. Summerlin does not expect to sell-out its lots until 2039. Hopefully I will have been long retired and be dipping my feet in an ocean somewhere while enjoying an afternoon mojito.

There are two general tax accounting methods for contractors. One is called the percentage-of-completion method, and the second is called the completed-contract method.

·         Under the percentage-of-completion, one recognizes income as the work progresses. Say that a contract with $5 million estimated profit is 40% complete. The taxpayer reports $2 million in profit ($5 million times 40%) to the IRS. The IRS likes this method.

·         Under the completed-contract, one does not report any income to the IRS until the job is done. In the above example, the taxpayer reports -0- profit, as the job is only 40% complete. The IRS does not like this method as much.

The IRS starts by saying that every contractor must use percentage-of-completion, but it allows a few exceptions to use completed-contract. One exception for completed-contract is for a home construction contract.

Ah, you already see where we are going with this, don’t you?

Howard Hughes Corporation is arguing that it can use the completed-contract because it is a home construction contractor. They are telling the IRS “see you in 2039.” 

The IRS is having none of this. They argue that Howard Hughes Corporation is a home construction contractor the same way The Phantom Menace was a watchable Stars Wars movie. That means that Howard Hughes Corporation defaults to the percentage-of-completion method. The IRS wants its taxes – plus interest and penalties, of course.

Each side has an argument. For example, in Foothill Ranch Company Partnership the IRS conceded that a contract for the sale of land by a developer was a long-term construction contract. In a Field Service Advise dated 5/8/97, the IRS stated that contracts for the sale of land requiring the seller to provide infrastructure or common improvements are construction contracts.

Rest assured that Howard Hughes Corporation has tax advisors who know this.

The IRS in turn determined in TAM 200552012 that a land development company selling lots through related entities did not qualify for completed contract, as the company did not actually build dwelling units. The IRS parsed words in a Code section with the cutting skills of Iron Chef Morimoto, noting that the statute uses the word “and” rather than the word “or.”

            Sigh. Can you believe what I do for a living?

The real estate, especially the development, industry is closely watching the resolution of this case. This is big-bucks. That said, does it make you uncomfortable to take an accounting method – by itself non-controversial – and stretch it to Dali-like and surrealist proportions? This is how tax law too often gets made.

I anticipate that the IRS will assert an argument involving contract aggregation and division. Once the land is implicated with further construction activity, the contracts (land and construction) will be aggregated. The ultimate sale (in our case, the home) will accelerate tax recognition on any underlying contract (in this case, the land). Might be a nightmare for accountants to trace all this, but it makes more sense than Howard Hughes Corporation delaying paying taxes on the sale of Summerlin lots until 2039.