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FERTILE FIELDS OF TAX FALSEHOOD

January 31, 2008

A co-owner of an injection molding company in Fertile, Iowa, pleaded guilty Tuesday to federal tax charges. The charges against Thomas Dillavou of Lake Mills arose from a scheme to divert money from the corporation for offshore investments and to pay personal expenses. Mr. Dillavou admitted diverting $598,000 in corporate funds.

It appears that he first got the attention of the IRS by getting behind on employment taxes. From a U.S. Attorney document in the case:

Plastic Injection Molders, Inc (PIM) is a plastic molding company owned 50% each by Thomas Dillavou and Gregory Knopf. PJM has been in operation since 1986. In 1993, the defendent entered into an Offer in Compromise agreement with the Internal Revenue Service ("IRS"), on behalf of PIM, pursuant to which PIM agreed to pay delinquent employment taxes over a five year period. During the years 1997 through 2000, the defendant diverted approximately $598,172 of corporate profits from PIM and spent the money in a variety of ways, including: a personal investment scheme overseas; paying for repairs and remodeling for his personal residence; making payments for personal loans and paying for vaction expenses, among other things.

Mr. Dillavou pleaded guilty to two counts of a five count indictment. Three other counts, including one for defrauding a bank, were dropped. Based on the agreed tax loss of $153,488, an agreed 2-step enhancement for use of "sophisticated means" in the fraud, and an agreed 2-step reduction for "acceptance of responsibility," the federal sentencing guidelines indicate a prison term of 21-27 months.

Diverting corporate funds to personal use and "borrowing" withheld payroll taxes from the IRS are universal temptations for business owners -- but they are universally unwise, as Mr. Dillavou is learning the hard way. If I were his business partner, I would have other reasons to be upset at the diversion of so much money from the company.

In addition to the prison time, expect the IRS to insist on collecting the back taxes, and probably additional civil penalties. Iowa tax authorities might also get involved. Sentencing is scheduled for April 23.