(212) 974-3435
Defendant Schemed To Hide From the IRS The $130 Million Sale Of a Petroleum Products Company He Owned, And Used His Attorneys To Provide False Information To IRS During Subsequent Audit
Preet Bharara,
the United States Attorney for the Southern District of New York, Shantelle P.
Kitchen, Special Agent in Charge of the New York Field Office of the Internal
Revenue Service, Criminal Investigation Division (“IRS-CI”), and Philip R.
Bartlett, Inspector-in-Charge of the New York Office of the U.S. Postal
Inspection Service (“USPIS”), announced that MORRIS E. ZUKERMAN, a Manhattan
businessman who owns companies involved in energy investments, was charged
today in a three-count Indictment with engaging in multi-year tax fraud schemes
pursuant to which he evaded over $45 million in income and other taxes.
ZUKERMAN was presented earlier today in Manhattan federal court before U.S.
Magistrate Judge Gabriel W. Gorenstein.
U.S. Attorney
Preet Bharara said: “As alleged in the indictment, Morris Zukerman cheated on
virtually all of his various tax obligations: he evaded tens of millions of
dollars of corporate income taxes arising out of $130 million sale of an oil
company; he prepared personal tax returns for himself and family members that
claimed millions of false deductions; he evaded employment taxes based on
personal employees; and he evaded New York sales and use taxes. To top it
off, when the IRS auditors examined his returns, Zukerman allegedly schemed to
defraud and obstruct the IRS auditors who were examining his false tax
returns.”
IRS-CI Special
Agent in Charge Shantelle P. Kitchen said: “There is simply no excuse for a
financially successful individual, clearly with the resources to meet his tax
obligations, to defraud the tax system and ultimately cheat hard working, law
abiding taxpayers who strive to do what is right. As protectors of our
nation’s tax system, IRS Criminal Investigation is committed to ensuring that
everyone pays their fair share. We will use our financial investigative
expertise to dissect and unravel complex tax fraud schemes, especially those
specifically designed to obstruct the Internal Revenue Service from carrying out
its mission to serve American taxpayers.”
USPIS
Inspector-in-Charge Philip R. Bartlett said: “Honest taxpayers should be
offended by the actions of Mr. Zukerman who devised a scheme to avoid paying
his fair share of taxes. As citizens we have a legal obligation to pay
taxes and when this doesn’t happen, law enforcement will be there to ensure
these scofflaws are brought to justice.”
According to
the Indictment unsealed today in Manhattan federal court and other court
filings related to this matter:
ZUKERMAN, the
principal of M.E. Zukerman & Co. (“MEZCO”), an investment firm located in
Manhattan, schemed to evade taxes based on income received from the January
2008 sale of a petroleum products company (the “Oil Company”) he co-owned
(through a MEZCO subsidiary) with a public company. ZUKERMAN schemed to
evade the reporting of the sale – which resulted in the receipt by the MEZCO
subsidiary of $130 million in gross sales proceeds – by falsely telling his
accountants in mid-2008 that he had transferred ownership of the MEZCO
subsidiary to a family trust in early 2007. In support of the story he
gave to the accountants, ZUKERMAN created backdated documents such as
promissory notes and a board resolution purporting to show the transfer of the
subsidiary to his family trust in 2007. The false documents allowed
ZUKERMAN to remove the MEZCO subsidiary from the consolidated tax reporting
being handled by the accountants for MEZCO and thereby evade the reporting to
the IRS of the sale of the Oil Company, as well as the payment of over $35
million in corporate income taxes.
Following the
sale of the Oil Company, ZUKERMAN transferred the proceeds of the sale from the
MEZCO subsidiary to his family trust and various corporations he controlled,
including a company called Zukerman Investments. Between 2008 and 2013,
ZUKERMAN directed that over $50 million of the funds transferred to Zukerman
Investments be used to purchase paintings by European artists from the 15th
through the 19th centuries (the “Old Master paintings”), which ZUKERMAN used to
decorate his Upper East Side apartment and the apartments of two family members
– Family Member-1 and Family Member-2.
In connection
with the purchase of the Old Master paintings, ZUKERMAN schemed to defraud New
York State of over $4.5 million of sales and use taxes by directing that the
paintings, which were frequently purchased from galleries located blocks from
ZUKERMAN’s Manhattan residence, be shipped by the galleries to ZUKERMAN’s
corporate addresses located in Delaware and New Jersey, and transported
immediately thereafter (sometimes within minutes), by ZUKERMAN and others, back
to ZUKERMAN’s residence in New York – all without the payment to New York State
of sales or use taxes. ZUKERMAN further schemed to defraud New York State
of sales and use taxes by using his corporate address in New Jersey to be
falsely listed on a sales invoice for a $645,000 pair of diamond earrings he
purchased in Europe from a jeweler who turned over possession of the earrings
to a member of ZUKERMAN’s family in Manhattan but charged no sales tax, based
on the out-of-state address provided by
ZUKERMAN.
ZUKERMAN also
schemed to evade personal income taxes and to obstruct the IRS by (i) causing
various tax return preparers to prepare U.S. Individual Income Tax Returns,
Forms 1040, for ZUKERMAN and his wife, and for Family Member-1, Family
Member-2, and Family Member-3, that claimed, in the aggregate, millions of
dollars of false and fraudulent deductions and expenses, such as phony
charitable contributions and investment interest expenses; (ii) diverting, for
personal use, corporate assets from MEZCO and other corporate entities ZUKERMAN
controlled by directing that hundreds of thousands of dollars of fees be paid
between 2007 and 2013 to Family Member-1, Family Member-2, and Family Member-3,
for which the family members performed little or no work; (iii) directing that
corporate funds be used to pay compensation to, and health care insurance for,
a household employee of ZUKERMAN, whom ZUKERMAN also caused to be falsely
identified as a MEZCO employee to ZUKERMAN’s corporate health care provider
when, in truth and fact, the household employee worked exclusively out of
ZUKERMAN’s homes in New York City and in Maine as a domestic employee; (iv)
falsely under-reporting employment taxes through the payment of hundreds of
thousands of dollars of cash and other wages to ZUKERMAN’s domestic employees;
and (v) providing false information to the IRS during audits in an attempt to
fraudulently convince IRS auditors and other IRS employees that the fraudulent
claims made on his previously filed tax returns were accurate when, in truth,
they were not.
The False Charitable Contribution Deductions for the 2009 &
2011 Tax Years
ZUKERMAN’s
fraudulent charitable contribution deductions – totaling $1 million – arose out
of a real estate transaction in 2009 and 2010, pursuant to which ZUKERMAN
purchased approximately 240 acres of property on Black Island, a small island
located off the coast of Maine, close to ZUKERMAN’s home on a nearby
island. ZUKERMAN was enlisted to purchase the Black Island property by a
Maine-based land conservation entity (“the Conservation Entity”) that was
seeking to orchestrate the purchase, for conservation purposes. After
considering making a charitable contribution to the Conservation Entity
intended to be used to purchase the property, ZUKERMAN decided instead to
purchase the land as the outright owner for the benefit of himself and his
family for $1 million through a newly formed limited liability company he
solely owned. ZUKERMAN, however, falsely told his tax return preparer
that the $1 million he paid for the property should be declared on his personal
income tax returns as a charitable contribution to the Conservation Entity
during the 2008 and 2010 tax years. ZUKERMAN subsequently signed the
false 2008 and 2010 tax returns and caused them to be filed with the IRS.
The False Investment Interest Expense Deductions Relating to the
Corporate Loans
ZUKERMAN
orchestrated the creation of hundreds of thousands of dollars of fraudulent
“investment interest expense” deductions on his own tax returns and those of
three family members. ZUKERMAN accomplished this by falsely telling his
tax preparers that payments made from the personal bank accounts of ZUKERMAN
and his family members to a California bank were made to legitimately satisfy
loan interest payments owed by one of his California companies. In fact,
although the interest payments were initially made from the bank accounts of
ZUKERMAN and those of his family members (whose accounts ZUKERMAN controlled),
ZUKERMAN secretly took funds from the bank account of the California
corporation that owed the interest payments and reimbursed himself and his
family members. In addition, because the corporation that owed the
interest payments had claimed the interest indebtedness as an expense on its
corporate tax returns, ZUKERMAN’s claiming of the same expenses on his own tax
returns and those of his family members constituted fraudulent double
deductions.
The Audit Fraud
In seeking to
obstruct and defraud the IRS during an audit of one of ZUKERMAN’s companies,
ZUKERMAN utilized two attorneys from a law firm in Washington, D.C., to convey
a false factual narrative to an IRS Appeals officer, who was undertaking a
review of ZUKERMAN’s challenge to an adverse determination made by an IRS
auditor during the corporate audit. Pursuant to a “crime-fraud” ruling by
the United States District Court for the Southern District of New York, and
affirmed by the Second Circuit Court of Appeals, ZUKERMAN’s companies were
required to disclose to the grand jury all of the communications between
ZUKERMAN and the two attorneys that led to the submission to the IRS of the
false factual narrative.
ZUKERMAN, 71,
of New York, New York, is charged with: one count of tax evasion, which carries
a maximum sentence of five years in prison; one count of wire fraud, which
carries a maximum sentence of 20 years in prison; and one count of obstructing
the IRS, which carries a maximum sentence of three years in prison. The
three charges each also carry a maximum fine of $250,000, or twice the gross
gain or loss from the offense.
The maximum potential
sentences in this case are prescribed by Congress and are provided here for
informational purposes only, as any sentences for the defendant will be
determined by the judge.
ZUCKERMAN was
released on a $2,500,000 secured bond. The case was assigned to United
States District Judge Analisa Torres, and a conference is set for June 8, 2016,
before Judge Torres.
Mr. Bharara
praised the outstanding investigative work of the IRS and the U.S. Postal
Inspection Service.
The prosecution
of this case is being handled by the Office’s Complex Frauds and Cybercrime
Unit. Assistant United States Attorneys Stanley J. Okula and Edward
Imperatore are in charge of the prosecution.
Publication provided by:
Department of Justice
U.S. Attorney’s Office
Southern District of New York
23 May 2016
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