LAWFUEL – The US Legal Newswire – MICHAEL J. GARCIA, the United States Attorney for the Southern District of New York, announced that HARRY WILLNER, a former Internal Revenue Service (“IRS”) Revenue Agent, pleaded
guilty today in Manhattan federal court to carrying out a scheme
to obstruct the IRS by fraudulently attempting to sell to other
taxpayers, and fraudulently using on his own personal income tax
returns, tax losses belonging to a separate company he
controlled.
According to the Indictment returned by the grand jury
in March and statements made during today’s guilty plea
proceeding before United States District Judge GERARD E. LYNCH:
WILLNER was employed by the IRS as a Revenue Agent
assigned to the Large and Mid-Size Business (“LMSB”) Unit of the
IRS in the Southern District of New York. As an LMSB Revenue
Agent, WILLNER was responsible for audits of large financial
institutions and served as a Team Coordinator of other Revenue
Agents. WILLNER was employed by the IRS as a Revenue Agent or
Appeals Officer since 1974.
At various times, WILLNER was also an officer of a
corporation known as NIA Advertising, Inc. (“NIA”), which was
purportedly in the advertising business. According to certain
NIA records, NIA’s address was the same as WILLNER’s home address
in New Jersey. WILLNER did not request approval from the IRS to
serve as an officer of NIA, as was required by IRS regulations.
WILLNER did, however, request approval for outside, part-time
employment as an instructor with schools located in Manhattan and
to hold an unspecified position with a company known as Royal
Magazine, Inc. (“Royal”).
According to NIA’s books and records, from 1998 through
2001, NIA purportedly loaned Royal approximately $849,000, a
“loan” which was not evidenced by any written contracts or
agreements. Beginning in 2002, WILLNER reported a “bad debt”
deduction on NIA’s corporate tax return, associated with the
purported loan to Royal, which resulted in a “net operating
loss,” or “NOL,” for NIA’s 2002 return of more than $758,000.
The Internal Revenue Code and associated regulations generally
define an NOL as an amount by which allowable deductions and
exclusions for the year in question exceed gross income for that
same tax year. The Code and Regulations also provide that NOLs
can be carried back or forward to offset net income in other tax
years.
From January 2002 through March 2006, WILLNER
endeavored in two principal ways to make fraudulent use of the
NOLs purportedly generated by NIA in 2002. First, between 2003
and 2004, WILLNER attempted to, in effect, sell NIA’s NOLs to
other taxpayers, which would enable those other taxpayers to use
the NOLs to offset the income on their own tax returns and
thereby to fraudulently reduce their tax liabilities. WILLNER
proposed to accomplish this fraud by having other taxpayers, who
were owed income, direct the fee payment to NIA, which would
report it as income. NIA would not pay tax on the payment
because the income would be offset by the NOL. WILLNER would
then remit the money, less a fee for himself, to the other
taxpayer disguised as a loan repayment.
WILLNER explained the fraudulent steps attendant to the
sale of the NOLs in a tape-recorded conversation
made by the IRS during its investigation.
During the conversation, between
WILLNER and an accountant from whom WILLNER was attempting to
recruit participants in the scheme, WILLNER stated that he had
“about $700,000 dollars’ worth of losses” in NIA and explained
that the accountant’s clients could use the NOL if they diverted
their income from their own tax returns to WILLNER at NIA.
WILLNER further explained the scheme as follows:
NIA Advertising would report the income. So
there wouldn’t be a question of it not being
reported . . . . I would take the money net
of my fee and remit it back to the client . .
. . So let’s assume that there’s a twenty
percent fee. So the person sends a hundred
thousand to NIA. NIA reports the hundred
thousand and then I write a check for eighty
thousand back to, let’s say, your client.
Your client gets it free, because we could
say that it’s a loan, or repayment of a loan
from, from him to me, so he doesn’t have to
pay the income tax, he just pays the fee.
WILLNER also stated to the accountant that he had engaged in the
scheme “[o]nce before” with “somebody with forty thousand.”
WILLNER further explained the financial benefits that would be
enjoyed by himself and the people who agreed to participate in
the fraud: “So, I mean, in this case everybody is gonna make out.
Certainly, your … client’ll make out ‘cause he’ll be saving,
and NIA makes out because …. they don’t have to, well, they’re
reporting the income but there’s no tax, federal state or local
tax ‘cause of the big NOL and … I get a little fee for it.”
The second aspect of the scheme occurred between March
2002 and March 2006, when WILLNER used NIA’s NOLs to offset his
own individual income tax liability by having fee income, earned
by WILLNER in his individual capacity as an instructor at two
Manhattan-based schools, paid or assigned to NIA. WILLNER
directed the two schools at which he earned off-duty teaching
income to issue Form 1099s to NIA. WILLNER thereafter
fraudulently reported the fee income on NIA’s corporate income
tax returns as receipts of NIA. Because NIA carried the sizeable
NOL deduction from 2002 through 2005, the taxability of the
teaching income was offset. As a consequence of this latter
scheme, WILLNER evaded a total of approximately $20,957 in United
States income taxes.
WILLNER, 59, a resident of Fair Lawn, New Jersey, faces
three years in prison and a fine of $250,000 as a result of his
guilty plea to corrupt interference with the administration of
the tax laws. Judge LYNCH set a date for WILLNER’s sentencing on
March 14, 2008.
Mr. GARCIA praised the investigative efforts of the
Internal Revenue Service, Criminal Investigation Division, and
the United States Department of the Treasury, Treasury Inspector
General for Tax Administration.
Assistant United States Attorneys PABLO QUINONES and
STANLEY J. OKULA, JR., are in charge of the prosecution.
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