It’s Not a Fringe Benefits Case

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].

Where’s the Justice?

It’s better to be frustrated and impatient than angry and horrified, so getting a new president and administration that isn’t made up of idiots, creeps and criminals is a blessing.

Nevertheless, I never expected to be thinking so much about a few Democratic senators, especially that two-headed, pro-filibuster creature we might as well call “Manchinema”. There is so much that could be accomplished with Joe Biden as president, a small majority in the House and 50 votes in the Senate.

Unfortunately, another source of frustration and impatience at the moment is Attorney General Merrick Garland and the talented lawyers who work for him.

As Jennifer Rubin of The Washington Post points out:

[Garland] has . . .  never indicated as to whether, now that former president X is out of office, the department would follow up on alleged illegal conduct examined by special counsel Robert S. Mueller III (e.g., obstruction of justice, perjury, witness tampering). 

Here’s more on that story from Washington Monthly’s Jennifer Taub:

Special Counsel Robert Mueller’s Report on Russian Interference in the 2016 Election was released to the public on April 18, 2019 (in redacted form). Volume II provided a clear, detailed roadmap for a post-term prosecution of X for a variety of obstruction-of-justice offenses. The Report noted that while the Justice Department policy forbids prosecuting a president while in office, “Recognizing an immunity from prosecution for a sitting President would not preclude such prosecution once the President’s term is over or he is otherwise removed from office by resignation or impeachment.”

This should have been a bombshell. But, thanks to [former Attorney General] Barr’s words and actions almost a month earlier, selling the report as an exoneration of X, [it] fizzled. (In a particularly egregious headline, the New York Times said that Mueller exonerated X, not even attributing it to Barr.) By the time we got to read the report, Barr’s characterizations had been disproved, but by then the press and public yawned.

Let’s recall what Barr did. On March 22, 2019, the Justice Department received a confidential copy of the 448-page Mueller Report. A former AG and political player for decades, Barr surely saw how damaging it was, so he did not share it. Instead, two days later, on March 24, Barr delivered a four-page letter to Congressional leaders (which was then released to the public). The letter purported to “summarize” the Mueller Report’s “principal conclusions.” But Barr did not provide a truthful summary; he concocted a cynical spin.

Regarding obstruction of justice, Barr said Mueller had concluded that “while this report does not conclude that the president committed a crime, it also does not exonerate him.”

This was a shocking revelation. . . .  In a Politico roundup published that day, I contended that “Barr’s conclusions are not credible.”  It took reading between the lines to appreciate his hustle. But, instead of respecting Mueller’s refusal to clear X, Barr told Congress that this meant it was now his job to come to a legal conclusion. But, it was not. Doing so undermined the entire purpose of the Special Counsel statute, which was NOT to leave such a decision in the Attorney General’s hands. Barr claimed that “the evidence developed during the Special Counsel’s investigation is not sufficient to establish that the President committed an obstruction-of-justice offense.”

Thanks to Barr, many wrongly believe Mueller exonerated X. Around 60 percent of Americans either thought the president had been cleared or were unsure. Only 40 percent correctly understood that Mueller did not exonerate X.

Disappointingly, Merrick Garland’s Justice Department [has chosen] to continue the cover-up. Here’s a little background to explain how this happened and the alternative path Garland could have taken.

Back in April of 2019, Barr said that he relied on advice from the Justice Department’s Office of Legal Counsel before drafting his March 24 communication to Congress about the Mueller Report. In response, the non-partisan, public interest organization Citizens for Responsibility and Ethics in Washington (CREW) sued the Department under the Freedom of Information Act (FOIA), requesting all related documents.

[The Justice Department] told the judge that one of the documents that CREW wanted was protected from public disclosure under the FOIA law under the “deliberative process privilege.” They argued this particular March 24, 2019 memo from the Office of Legal Counsel to Barr was “pre-decisional” as they claimed it was given to Barr before he made his final decision on whether Trump obstructed justice. And they claimed that it was “deliberative” because it was provided to aid him in his decision-making process.”

On May 4 of this year, Judge Amy Berman Jackson called bullshit on those claims, to put it mildly. In a stinging opinion, she ruled in favor of CREW and ordered Garland’s Justice Department to hand over the memo. . . . Berman Jackson wrote that “there was no decision actually being made as to whether the then-President should be prosecuted.” She saw the DOJ as “girding for a preemptive strike on the Mueller report.” The memo was not shielded as pre-decisional legal advice.

As I wrote in the Washington Monthly at the time, this was Garland’s inflection point. It would have been so very easy to decide not to appeal and to allow the memo to be released. Instead, Garland’s DOJ lawyers doubled down on the deception. On May 25, Garland had his team ask Judge Jackson to stay her order (put it on hold) so they could keep the memo hidden while they appealed her decision. . . . 

Garland’s decision shocked and disappointed many experts. Former Solicitor General Neal Katyal penned an opinion piece arguing that “the American people have a right to see the memo. Then they can decide whether Mr. Barr used his power as the nation’s chief law enforcement officer as a shield to protect the president” . . . 

Garland, who served on the D.C. Circuit Court of Appeals from 1997 to 2021, might have additionally justified releasing the memo to the public on principle. Anyone with eyes could see that both Barr and Justice Department lawyers (still employed by Garland) misled a federal judge. A strong manager would make it clear that dishonesty would no longer be tolerated under his leadership. As a former DOJ prosecutor—after the Oklahoma City bombing Garland left private practice to prosecute domestic terrorism—Garland should have been incensed. As Bob Dole used to say, “Where’s the outrage?” . . . 

Unquote.

Whether that memo is ever made public is much less important than whether our former president (aka the unindicted co-conspirator) is ever prosecuted. Now that he’s no longer shielded by the presidency, he needs to face the music for his obstruction of justice, perjury and witness tampering. Prosecuting him would outrage his crazy supporters. That’s too damn bad. Attorney General Garland needs to demonstrate that powerful people, even presidents, can’t trample on the law and avoid the consequences.

Garry Kasparov and Alexandra Petri on What Should Come Next

Garry Kasparov, former world chess champion, left Russia in 2013, fearing persecution for his political views. He became a citizen of Croatia and now lives in New York City. He has some thoughts post-January 6th:

As terrible as the events of Jan. 6 were — and I’m on the record warning of “the unimaginable” — I’m going to repeat what I said after Election Day: It’s not over.

There will be more violence, especially if the Capitol perpetrators and those who incited them — starting with the President — are not held accountable.

The correct response is the dispassionate application of the law. Not political persecution, but not politically motivated leniency, either. We don’t have to choose between unity and justice. Avoiding doing the right thing will only prolong the crisis and give aid and comfort to enemies of the state and of the peace.

[The] Founding Fathers failed to resolve the historical challenge of slavery, passing a bloody Civil War on to future generations. Despite Abraham Lincoln’s assassination, Reconstruction allowed the South a “defeat with honor,” decades of Jim Crow, and the pernicious Lost Cause mythology that persists today.

. . . No new mythology should be allowed to sprout from this vile transgression. The worst result would be letting the mutineers off the hook — and this includes the elected officials who encouraged them, . . . especially President Txxxx. That they, and scores of other Republicans, continue to attack the integrity of the election even now is beyond the pale. . . .

History teaches us the cost of well-meaning but shortsighted attempts to sacrifice justice for unity. Russians learned this in the hardest possible way after the fall of the Soviet Union. . . . They declined to root out the KGB security state in the interest of national harmony. It would be too traumatic, our leaders said, to expose the countless atrocities the Soviet security forces committed and to punish their authors.

A feeble truth commission was quickly abandoned by President Boris Yeltsin, and soon even the Soviet archives were closed, although not before researchers . . . revealed some of the KGB’s atrocities. The KGB’s name was changed to the FSB and its members quietly stayed in touch and intact. The result? A mere nine years after the Soviet Union collapsed in 1991, Russia elected a former KGB lieutenant colonel, Vladimir Putin, to the presidency. It was the last meaningful election we ever had. We chose unity and we got dictatorship.

America should not make a similar mistake. The truth may hurt, but lies will do far greater damage in the end. Americans should be prepared for a long fight against these anti-democratic forces. The attack on the Capitol has opened every eye; there can be no more feigned ignorance of the crisis.

Many Americans were shocked by how many of their compatriots, including nearly all GOP officials, have been willing to go along with Txxxx’s open assault on the pillars of their open society, from the free press to fair elections. . . . Demagogues don’t find radicals to lead, they steadily radicalize their followers one outrage at a time. The culmination, so far, was January 6.

Hemingway wrote in “For Whom the Bell Tolls”: “There are many who do not know they are fascists but will find it out when the time comes.” The time has come, and we are finding them out. . . .

Unquote.

Alexandra Petri writes a humor column for The Washington Post. One of her columns last week was called “I See No Choice But to Resign from this Death Star as It Begins to Explode”. Today she has “Now Is Not the Time to Point Fingers, Julius Caesar. Now Is the Time for Healing”. She’s very good at her job:

Now is not the time to cast blame and call out names. Now is the time for healing. Please stop bleeding on my toga; that is a sad reminder of a hurtful time I hope we can put behind us. The last thing we need is to be thinking about the past, when I have already dropped my dagger, forgotten every threatening or negative thing I ever said, and am, frankly, ready to move on. Now is the time to come together, for the good of Rome.

You’ve Been Robbed

From Paul Waldman of The Washington Post on Twitter:

Even if you’re lucky enough not to have lost anyone or gotten sick in the pandemic, you are the victim of a robbery.

Because of Txxxx’s malignant incompetence and the stupidity of his followers, we’ve all been robbed of time we can’t get back – maybe a year or more.

We’ve been robbed of time with loved ones, education for our kids, contact with others, at least a little freedom from this constant anxiety, just the mundane but precious parts of normal life. It is a theft, and it didn’t have to happen this way.

In many countries with competent leadership and a sane populace, the pandemic is under control. Here are new cases yesterday:

Spain: 389
Germany: 361
Canada: 306
Japan: 227
Italy: 191
Netherlands: 64
S. Korea: 53

USA: 50,934

Robbery victims often speak of a sense of violation, one that turns into rage that has nowhere to go. You may be feeling that now. And you should. We all should. We’ve been robbed of so much, even if we’ve escaped the worst.

Maybe you’re not an immigrant or a racial minority or a trans person or someone else Txxxx has attacked directly. Maybe you still have your job and haven’t lost a loved one or gotten sick. But we are all his victims now.

And he should never be forgiven.

[Neither should his accomplices, especially the politicians.

You can use the Search Directory at ActBlue to find Democrats to support.]

Going All In

Tom Sullivan of Hullabaloo shares a theory:

Not even overwhelming public outcry is likely to move Senate Republicans to waver in support of their Leader, nor from helping cover up his crimes. Last night in a Facebook post, historian Rick Perlstein … offered a theory for why:

Germans who left behind evidence during World War II that they knew … committing war crimes was wrong … were more likely to … commit war crimes. This was because (1) they had passed a point of no return, and (2) the motivation became even more frenzied devotion to “winning” as the state defined it, because they realized that if Germany lost, they would be punished–because, again, they knew they were breaking the law.

…. now that all these Republican “moderates” are on the record advancing what Jerold Nadler correctly call a coverup with their votes again evidence and witnesses, it becomes all the more important for T—-ism to prevail so they never have to face the music for their sins–and they may work with ever greater frenzy to make sure T—-ism never loses. To liberals who think to themselves, “The House managers’ presentation is so airtight and inarguable, surely one of these Republicans will break”: well, the very air-tightness might have the opposite effect. They may commit themselves ever more strongly to the ratchet toward dictatorship. Because if T—- loses, they can now imagine themselves in the figurative dock.

A key difference between Perlstein’s example and ours is Germans had seen punishment after World War I, that is, in recent collective memory. They had reason to fear accountability as a real prospect. Republicans over the last half century, on the other hand, saw Gerald Ford pardon Nixon, Reagan dodge impeachment, and George H.W. Bush pardon six of Reagan’s Iran-Contra co-conspirators.

They saw the administration of George W. Bush lie the country into war and commit war crimes with impunity courtesy, in part, of Barack Obama’s wanting to “look forward,” not back. They witnessed the financial industry bring the world economy to its knees and go unchastened, only to get richer and more powerful courtesy, again, of Barack Obama’s wanting to “look forward,” not back.

Yet, even if they fear no punishment, Republicans may have reached their own “point of no return.”

Meanwhile, … the rich just get richer, nonwhite people get more numerous, and T—-’s base gets more anxious [that] its accustomed social and political dominance will be lost to the multicultural ….

Meanwhile, Sen. Elizabeth Warren has pledged if elected to “investigate corruption during the T—- administration and to hold government officials accountable for illegal activity.” That ought to have at least sent shivers up some spines. Because Warren appears to mean it. First she has to get to the White House.

In justifying his Iran-Contra pardons, Bush argued that the prosecutions amounted to “the criminalization of policy differences.” Expect to hear that phrase again soon. William Barr sits atop Trump’s Department of Justice just as he did under Bush 41. As things sit now, Republicans and the donor class have little reason to fear punishment.

The rest of us had best get busy giving them reason to.

Unquote.