[authors: Nicholas J. Nastasi and Allison B. Newhart]
On March 28, 2012, six officers of a New York-based environmental services company pleaded not guilty to charges that they conspired to defraud the Internal Revenue Service (“IRS”). The case is United States v. Deluca et al., Western District of New York, No. 11-CR-169-A. Interestingly, only the officers of the company, and not the company itself, were indicted. The fact that the company was not indicted suggests that the conduct of the officers was clearly outside the scope of their employment and that the investigation did not otherwise uncover any bad conduct directly attributable to the company. In fact, the indictment of the individual officers may have stopped the officers’ individual bad conduct before the company became implicated in the scheme. This case shows that the United States continues to focus significant effort on investigating and cracking down on potential tax law violations, regardless of whether those violations are attributable to individuals or to companies.
Sevenson Environmental Services, Inc., is a company based in Niagara Falls, New York that provides remediation services for sites that are contaminated with hazardous waste. Six officers of Sevenson, including the President and Chief Executive Officer, along with five Vice Presidents, are charged with conspiring to defraud the United States out of taxes. They are also charged with subscribing to a false tax return and aiding and assisting in the preparation of a false tax return.
The superseding indictment contains a total of 12 counts. The six officers are charged with conspiracy involving creating, operating, and participating in a scheme of tax fraud. They allegedly arranged a scheme in which the company would provide compensation to some employees in the form of paying for personal goods and services, falsify documents relating to the goods and services and then fail to report the value of the goods and services in the bonus amounts that it reported to the IRS.
In addition to the conspiracy charge, the superseding indictment contains charges of subscribing to a false tax return and aiding and assisting in the preparation of a false tax return against five of the individual officers. Specifically, for certain employees, the scheme is alleged to have operated as follows. The six officers allegedly calculated monetary bonuses for certain employees. They then advised the employees that the company would pay for personal goods or services as an additional bonus (instead of a larger monetary bonus). The officers then allegedly instructed the employees to charge the company for payment of invoices and credit card charges for personal goods and services. Those invoices and credit card statements were then paid from a company non-payroll account.
According to the superseding indictment, the officers allegedly altered the invoices that the employees submitted to hide the fact that they were for personal goods and services. Among the goods and services the company allegedly paid for but did not report were light posts for an employee’s home, personal travel expenses, landscaping work for a personal residence and construction on an employee’s personal residence. One of the six officers allegedly told an employee that the company would pay for these expenses and the expenses would then be deducted from the employee’s bonus. Further, the officers allegedly told employees that the company would pay for the employees’ personal travel expenses. They also allegedly falsified documents, such as letters, purporting to show that the employees’ personal travel expenses were company travel expenses. The company did not report the travel expenses to the IRS as an employee bonus.
The superseding indictment further charges that, in addition to failing to report the value of the goods and services as bonuses, the six officers also failed to pay FICA taxes on the unreported bonus compensation. As a result, the employees received false W-2 forms that did not include the correct amount of compensation received and FICA tax withholding, which in turn led the affected employees to file a false tax return.
The six officers were among the employees to whom the unreported bonuses were issued. All six officers pleaded not guilty to the charges. A trial date has not yet been set. The White Collar Watch will continue to monitor this case as it develops.