Big names and big money are caught up in tax-fraud charges
It was one of those all too tempting tax dodges. Invest $30,000 in Wyoming coal fields, the pitch went, and use a loophole in the law to take a legitimate $150,000 deduction on Form 1040. Like many tax-shelter schemes, the offer attracted big names with big money: Basketball Stars Spencer Haywood and Earl (“the Pearl”) Monroe, Candid Camera Host Allen Funt, Rock Singer Alice Cooper and Model Margaux Hemingway. The late Elvis Presley was the biggest customer of all: he sank $500,000 into the enterprise.
That was four years ago, and those Wyoming “coal fields” are still virgin grassland. Last week eleven of the 13 men involved in promoting the deal appeared in U.S. District Court in Boston for arraignment on charges that they fraudulently induced investors to take the write-offs. The Government also charges that the deductions were in fact illegal.
The alleged leaders of the group are George Osserman and Paul Garfinkle, a pair of freewheeling tax attorneys, along with Irwin Meyer and Stephen Friedman, two producers of the hit Broadway musical Annie. According to federal investigators, the four built a tax-shelter empire selling interests not only in American coal but also in distribution rights to European films and a Namibian diamond mine. They funneled investment money through a string of paper corporations with headquarters in the U.S., and such offshore havens as the Cayman Islands and Curaçao. Although the current charges concern only the coal caper, which involved write-offs totaling $150 million, sources close to the case estimate that when all the allegedly bogus tax deductions peddled by the defendants are uncovered and toted up, the U.S. may be short between $500 million and $1 billion. That would make their swindles even bigger than the notorious Home-Stake oil-drilling fraud of 1974, which took in a host of celebrities from Bob Dylan to Jack Benny.
Over the years, Congress has fiddled with the tax code to allow deductions for investments in ventures considered worthwhile but risky, like coal mining, oil drilling and public housing construction. The shelters encouraged the wealthy to invest chunks of income that would otherwise have been heavily taxed. The problem was that in some cases lawyers and accountants found clever ways to make such investments appear much larger on paper than they actually were. In 1976 a major revision of the tax code eliminated some of the most abused shelter provisions.
Operating out of a small, unpretentious office in Newton, Mass., during the early ’70s, Osserman and Garfinkle became titans in the tax-shelter business. Osserman, described by associates as the “brains” of the operation, was known to promise new clients that they would never have to pay another dime in taxes. In 1975 the two lawyers joined forces with Producers Meyer and Friedman, whose show-biz connections helped catch the stars as investors. A year later, the group leased 22,000 acres in Wyoming, ostensibly to develop coal deposits. The investors signed notes specifying that for every dollar they put up in cash, four additional dollars would be taken out of their anticipated coal-mining profits. That was the gimmick that gave the investors a five-for-one write-off. Those profits never materialized. One excellent reason: though Osserman and his colleagues held surface rights, the coal underneath all but 400 acres happened to belong to the U.S. Government.
Federal investigators are still trying to determine how much was raised by other Osserman ventures, like the diamond mine in Namibia. A geologist sent to Africa by the IRS learned that in two years of operation the mine had produced five diamonds the size of pinheads. Total market value: less than $75.
Another questionable aspect of the coal deal, according to the Government lawyers, was its timing. The IRS sharply curtailed this particular kind of tax shelter as of Oct. 28, 1976.
Federal prosecutors charge that the mine shares were sold after that deadline, and that Osserman and others backdated all the documents so the tax deductions would appear to be valid.
All told, the Osserman group raked in $20 million in coal investments, only $300,000 of which went to pay for leasing the lands. The rest was dissipated through a network of corporations; part went for commissions to tax-shelter salesmen and payoffs to business associates, part into other deals, and part was used to purchase such assets as a business jet, a Ferrari and several Rolls-Royces. Investigators believe that a sizable chunk of the money may remain salted away in Swiss bank accounts. Further indictments might be handed down against some investors, who knew that the transactions were a sham.
So far, no celebrities have been charged, though they could be facing stiff bills for back taxes.
Whatever the outcome of its case, the Justice Department clearly intends these indictments to serve notice that it is cracking down on tax-shelter abuses. But the process is bound to be slow. The Government spent three years gathering evidence on the coal-mining case, which is scheduled to go to trial at the end of March.
One of the accused has already vanished. Conspicuously absent from last week’s arraignment was George Osserman.
He is considered a fugitive, and a warrant has been issued for his arrest. Federal investigators believe he is now in Africa.
— By Charles Alexander. Reported by Hays Corey /Boston and Gary Lee/Washington
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