It’s blatant fraud and tax evasion. Daniel Shaviro, a professor of taxation at New York University’s School of Law, explains why the case against the former president’s company and its Chief Financial Officer is extremely serious:
In the days before the July 1, 2021 issuance of the Manhattan District Attorney’s Weisselberg-X Organization indictment, public anticipation was positively underwhelming. It would just be a fringe benefits case, we were told – meaning, a dispute, of a picayune sort that almost never yields criminal charges, regarding whether or not an employee’s use of, say, a company car or apartment yielded taxable income . . . . Everyone does it, we heard, and it shouldn’t be the basis for a criminal fraud charge. What’s more, this ostensibly would just be a New York State or City income tax issue, not federal, thus limiting the scale and monetary significance of the claimed wrongdoing.
Then the indictment dropped, and it turns out that public expectations could scarcely have fallen further short than they were of the magnitude of what was actually being charged. Let me spell out the particulars under several headings:
1. This is no mere fringe benefits case. It is a straight-out fraud case, claiming that the defendants kept double books: phony ones to show the tax authorities, and accurate ones to be hidden from view. The question of whether a given company apartment or car might in theory (with appropriate supporting facts) have been an excludable fringe benefit turns out to be almost completely irrelevant. A better analogy to what is being charged here is the following:
Suppose that your employer pays you monthly, through automatically deposited paychecks that end up being included on your annual W-2. But suppose that each month you could stop by the front office, request an envelope full of cash in unmarked bills, and have your W-2 reduced accordingly. So your true income would be the same as if you hadn’t stopped by, but you’d be reporting less salary. If your employer kept careful records of all the cash it gave you, and also still deducted it all, we would basically have this case. That is far different from simple failure to pay taxes on fringe benefits, which is how the indictment has been widely misunderstood, thanks in part to X’s defense lawyers’ laying the groundwork before the charges were made public on Thursday.
2. It is not just a state and local income tax fraud case. It is also – via New York State fraud, conspiracy, and grand larceny statutes – a federal income tax fraud case. The indictment’s first three and longest counts detail a “scheme to defraud” the federal Internal Revenue Service, including through a “conspiracy” with multiple “overt acts,” and the commission of “grand larceny.” In other words, just as the Manhattan DA could indict someone for committing such crimes (within its jurisdiction) against the likes of you or me, so here it has identified the IRS as the main victim of the defendants’ actions. Indeed, the word “federal” appears thirty times in the Manhattan DA’s 24-page charging document.
Given the facts alleged, it is hard to fathom that the IRS – if it agrees that those facts are true – would not promptly indict the defendants for federal income tax fraud. Failing to bring charges would amount to saying that overt and deliberate tax cheating of the most brazen kind need not be addressed criminally. If a private individual, rather than the Manhattan DA had somehow gathered all of this information and reported it to the IRS, he or she would be in a great position to claim a whistleblower award. And while federal authorities often refrain from piling on, by bringing their own charges when state authorities are already prosecuting a case; the indictment here makes explicit that the fraud was, in the main, directed against the federal government itself.
3. If the Manhattan DA can prove the facts asserted, this is not a trivial case, or one that ordinarily would not be brought, or one that bespeaks political bias, or is just about pressuring a witness whom the DA wants to “turn.” It is unimaginable to me that any prosecutor would not bring these or similar charges under the asserted facts. If the case is proven, the DA will not have been criminalizing political disagreement, as critics complain. Rather, it will have been criminalizing crime – and not a moment too soon from a broader enforcement standpoint, given widespread concerns about plunging enforcement, not just against income tax fraud, but against white-collar crime more generally.
That’s the general overview. However, delving into the details can help to show why all this is so. A clear understanding is best conveyed by turning the indictment’s formal presentation of the charges into more of a straightforward narrative. The rest of this commentary presents the main elements of the story that the indictment tells.
One should keep in mind, of course, that all this is just the Manhattan DA’s case. . . . For convenience, I will set forth the prosecutorial version of what happened without repeating (more than sporadically) that it all still needs to be proven.
4. The true economic deal alleged by the indictment – Weisselberg had a fixed economic deal with the X Corporation. He was to be paid a fixed amount – which, for the years 2011 through 2018, equaled $940,000 annually, comprised of $540,000 denominated as base salary and $400,000 denominated as an end-of-year bonus. Nothing else in the employment agreement and arrangements between the parties that the indictment discusses would change this fixed bottom line. Any supposed “fringe benefit” – and, as we will see, the term really does not fit well here – that the X Organization (through any of its entities) furnished to Weisselberg would be treated as compensation in the company’s internal records, and charged against his $940,000 receipt. Thus, for example, suppose the Organization paid him $50,000 in cash, either directly or through a payment to a third party supplier (including other X entities) of consumer benefits to him. In that case, all else equal, Weisselberg would get $890,000, rather than $940,000, with that lower amount being treated as compensation in issued W-2s and1099s, and by him on his own tax returns. But the Organization’s internal records would still show that he had received $940,000 of compensation, including this $50,000.
5. Fraudulent double bookkeeping – Implementing this scheme required having two inconsistent sets of records: (a) the fake ones for tax reporting that excluded a part of his compensation (under the parties’ financial deal and the company’s secret bookkeeping), and (b) the true accounting records that the company maintained privately. Experts on tax enforcement agree that keeping two sets of books, in this fashion, is “a red flag” and “a classic indication of an overt act of evasion,” often causing the government to have a “slam-dunk case.”
6. Additional overt acts to conceal the fraud – Even in the company’s own ledgers, as distinct from those that were disclosed to relevant tax authorities, Weisselberg took steps to conceal his receipt of benefits. . . .
7. A large number of the items that the company funded (and then subtracted from Weisselberg’s reported compensation) had no relationship whatsoever to the sort of items that, under appropriate circumstances, might potentially constitute tax-free employee fringe benefits. . . . The following items that the company paid for, on Weisselberg’s behalf, most emphatically do not fit the profile of potentially excludable fringe benefits:
• private school tuition expenses for Weisselberg’s family members
• a Mercedes Benz automobile that was the personal car of Weisselberg’s wife
• unreported cash that Weisselberg could use to pay personal holiday gratuities
(To treat cash as a “fringe benefit” would imply that the term covers all employee compensation. Does this mean that, whenever one is paid with cash off the books and does not report it, the IRS is merely quibbling over fringe benefits? Of course not.)
• personal expenses for Weisselberg’s other homes and an apartment maintained by one of his children; these included such items as new beds, flat-screen televisions, the installation of carpeting, and furniture for his home in Florida
• rent-free lodging and other benefits to a family member of Weisselberg .
In the light of such items, along with the secret double bookkeeping and internal company treatment of all these items as compensation, there are only three possible explanations for calling this a “fringe benefits” case. The first is that one has not read the indictment or otherwise acquainted oneself with the pertinent facts. The second is one that is ignorant, not just of extremely basic aspects of federal and state income tax law, but also of common English language usage. Calling bundles of cash and the provision of flat screen televisions in employees’ vacation homes “fringe benefits” – especially when they are not extra pay, but replace ordinary paycheck salary, dollar for dollar – would appear to leave no employee compensation outside the term’s potential scope. The third is that one has decided to misinform one’s audience.
8. Fraudulent mischaracterization of employee compensation, supported by deceptive bookkeeping – The company also reported Weisselberg’s annual end-year payments ($400,000 for the years 2011-2018) as non-employee compensation, using Form 1099 rather than the W-2 that is used for salary. He relied on this mischaracterization to make deductible annual contributions out of these amounts to a Keogh plan, which is a tax-deferred pension plan that one can deductibly fund by using self-employment income, but not employee wages. To help support this characterization (which the indictment asserts Weisselberg knew was false), end-year payments would be made by X Organization entities of which he was not an employee, such as the Mar-a-Lago Club and Wollman Rink Operations LLC. This creation of a false paper trail – since he had not directly performed services for these entities supporting the receipt of such payments from them, even as an independent contractor – fits the alleged pattern of not merely taking incorrect tax positions, but engaging in intentionally misleading overt acts in support of a conspiracy to defraud. It also arguably shows consciousness of guilt.
9. Evasion of New York City income tax by falsely denying local residence status – The indictment states that, from 2005 through 2013, Weisselberg and the other corporate defendants acted to “conceal his status as a New York City resident” and thus “enable[d him] to avoid the payment of New York City income taxes”. It further adds that he “spent most of his days each year in New York City, working in the X Organization offices at X Tower. He was a New York City resident, and knew that he was a New York City resident, but falsely claimed to his tax preparer and to the tax authorities that he was not a New York City resident” . . .
It is a widely-known fact among New York-area taxpayers – and not just those with specific tax and accounting knowledge, like Weisselberg himself – that, if one has an apartment in New York City (as he did) and is in the City for at least a part of more than 183 days in a given year, then one counts for that year as a City resident. This is not an issue that turns on any broader (or other) facts and circumstances. Under the indictment’s stated facts, therefore, Weisselberg unambiguously was a New York City resident for all of the years from 2005 through 2013, based on an objective black-letter rule that is hardly arcane or obscure.
10. What was X’s role in all this? . . . There is little direct discussion of what X himself did or knew personally in relation to the facts asserted in the indictment. If X is subsequently indicted by the DA in connection with the crimes alleged here or anything else, his conviction would require proof in court, beyond a reasonable doubt, of his requisite criminal actions and intent. In the courtroom of public discussion and debate, however, any claim that the crimes asserted in the indictment could have occurred without his participation and knowledge may be viewed by many as begging credulity [i.e. he’s as guilty as hell].