Everyone knows that paying employees under the table is a classic tax evading scheme, but what if you do so through a separate company? What if you pay your employees in silver dollars – can you claim that you paid them $1 rather than the value of the silver? Recent cases out of the First and Ninth Circuits confirm that it is tax evasion to (1) operate shell corporations in order to pay employees without withholding taxes and (2) pay employees in coins based upon their face value rather than their fair market value.
In Massachusetts, husband and wife Catherine Floyd and William Scott Dion and co-conspirator Charles Adams were found guilty of having organized and operated three companies for the purposes of conducting two tax evasion schemes. In the first scheme, the defendants offered a payroll service to clients where the clients could pay their employees through one of two companies operated by defendants. Clients could funnel money to be paid as wages to employees through defendants’ company Contract America, which paid employees without withholding taxes. Employees would then appear to be employed by Contract America, thereby allowing the client firm to be shielded from the IRS. For those employees who did not want to participate in the tax avoidance scheme, defendants offered a solution: clients could pay money to Talent Management, another company of the defendants, that would pay the employees and comply with withholding requirements, and the client could still be shielded from the IRS. Contract America and Talent Management were offered together as a tax avoiding arrangement to defendants’ clients. The second scheme involved another entity operated by defendants, Your Virtual Office. With Your Virtual Office, defendants offered banking services for the purpose of hiding client assets from the IRS. For instance, defendants would commingle funds from a number of clients in the same bank accounts in order to conceal the source of funds. One piece of evidence highlighted by the appellate court here was that Your Virtual Office “advertised repeatedly in the newsletter of Save-a-Patriot – an organization dedicated to resisting the IRS.” The appellate court found there was sufficient evidence to affirm the convictions and also upheld the sentences – Dion (84 months), Floyd (60 months), and Adams (48 months). [This case is United States v. Dion et. al, Nos. 12-2229, 12-2231, and the opinion can be found here].
In Nevada, Robert Kahre, Lori Kahre, and Alexander Loglia were found guilty of having conducted a payroll service where they paid employees in coins that were then immediately exchanged for cash. The defendants calculated the wages paid based upon the face value of the coin given to the employee, as opposed to its fair market value. For instance, for an employee who received 10 silver dollars, the defendants claimed he had received $10 in wages. But because each silver dollar had a market value of $50, the government contended that the wages should have been calculated as $500 (10 x $50). When calculated by the coin’s face value, the wages paid were below the filing thresholds, such that W-2s were not issued and tax returns were not filed. Not only did the defendants conduct this “payroll service” at the business owned by Robert Kahre, Wright Painting and Drywall, but they also offered this “payroll service” to other companies for a fee. The amounts at issue were significant. The total tax loss for the payroll service was nearly $52 million. Kahre also faced a personal liability of $16 million for unpaid taxes, which included over $14 million in fees he collected from other employers that participated in the payroll system. The appellate court flatly rejected this system on the singular, nearly unchallengeable premise that “coins are taxable as property when their fair market value exceeds their face value.” The appellate court also upheld Kahre’s sentence of 190 months imprisonment and three years of supervised release. Kahre had also been ordered to pay restitution of over $16 million, of which Lori Kahre (72 months imprisonment) and Alexander Loglia (26 months imprisonment) were jointly and severally liable for nearly $11 million. [This case is United States v. Kahre et. al, Nos. 09-10471, 09-10528, 09-10529, and the opinion can be found here].