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THE SAGA OF 'STOPGAP INVESTMENTS'

February 01, 2006

Tax Court Judge Thornton is nicer than I am.

John Maher was an IRS valuation specialist with a gambling problem. Judge Thornton explains:

Petitioner has been described as a compulsive gambler. On one of his periodic gambling trips to Las Vegas, Nevada, petitioner falsely represented to a longtime friend, Roy Kieffer, and various Kieffer family members (collectively, the Kieffers) that he could invest money for them in a Federal employee investment program, called "Stopgap Investments", with a guaranteed 30-percent annual return. In reality, there was no such investment program.

The issue before the Tax Court was whether Mr. Maher had committed civil tax fraud when he failed to report the Kieffers' "investments" as income. If it was fraud, the 75% fraud penalty would apply; also, one additional year would be open to tax assessment, as there is no statute of limitation for tax assessment when tax fraud is involved.

The Tax Court ruled that the behavior didn't quite rise to the level of tax fraud:

Petitioner's scheme to defraud the Kieffers was reprehensible, but respondent has not convinced us that petitioner had any specific intent to evade taxes. In this proceeding, petitioner has never denied that he fraudulently misappropriated money from the Kieffers and that it was wrong to do so, although he alleges that these misdeeds were an isolated aberration in his conduct. Petitioner maintains that he always intended to repay the Kieffers with interest for their "investments", and that he eventually did so, with liquidated damages, albeit pursuant to a consent judgment

Beh. The guy worked for the IRS, he stole his friends money, gambled it away, and didn't report it. Yeah, he was forced to pay it back, but Mr. Maher's behavior falls below the level we should expect of grown-ups. But maybe that's the reason I'm not a Tax Court judge. OK, maybe one of many, many very good reasons.

Cite: John V. Maher, T.C. Memo. 2006-14

The Skywalk office of "Stopgap Investments."

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