Originally Published on forbes.com on December 3rd, 2011
What would you do if you found $1,000,000 of cash in your deceased mother’s house ? One very bad idea would be to use the money to buy hair products that you sell at cost, while depositing the receipts. Linda Abramson-Schmeiler adopted that as part of her business plan. Over a three year period she reported over $6,000,000 in gross receipts from sales of hair care products. Analysis of her bank records by IRS CID indicated that she had understated gross receipts by 1.4 million. She did not understand why she needed to report those sales. They had been at break-even. She is right there in a sense. If you sell items at cost and omit both the sales and the costs of sales, you will not overstate your taxable income. No harm, no foul. Or as Ms. Abramson put it, perhaps because she was dealing with shampoo, it was a “wash”. Agent Jonathan Lynch, a CPA, who probably thinks in double entry, pointed out that the 1.4 million in costs had to be funded somehow. The explanation was all the loose cash that Ms. Abramson had found in her mother’s house. The problem with the plan, besides not making much business sense, is that a jury might not believe it. Ms. Abramson believed that the jury did not get it right because the judge did not let them hear all the evidence, which is why her conviction was being appealed to the Tenth Circuit.
Coverage of the conviction
Her conviction and three year sentence in March garnered a bit of coverage in Colorado no doubt due to this press release from the US Attorney’s office for the District of Colorado. The release appears to have been timed to have a salutary effect on compliance:
In the course of pronouncing sentence on March 17, Judge Blackburn condemned this defense as feckless and stated that he believed that Abramson-Schmeiler had perjured herself in her testimony and had suborned perjury from others in her immediate family.
“As tax season approaches, this case demonstrates that fraudulently attempting to evade taxes results not only in severe financial consequences, but can also result in going to federal prison,” said U.S. Attorney John Walsh.
“This sentence should send a clear message; hiding income from the IRS is a crime and the consequences of such acts can and will result in jail time”, said Sean Sowards, Special Agent in Charge, IRS Criminal Investigation,Denver Field Office.
“This sentence should send a clear message; hiding income from the IRS is a crime and the consequences of such acts can and will result in jail time”, said Sean Sowards, Special Agent in Charge, IRS Criminal Investigation,Denver Field Office.
Ms. Abramson has set up a website to tell the true story and help others who might be subject to IRS persecution. Here is an invitation:
I have to say the advice and tips section of the website is a little disappointing. Part of her defense was that the tax laws are so complicated that lots of people make honest mistakes and she includes this clip of Tim Geithner:
Ever since that problem, I’ve felt bad for Mr. Geithner, because I was able to figure out how easy a mistake it was to make. Having to pay self-employment taxes on wages from international organizations is on the obscure side. I even had this horrifying sense that I had made the same mistake on a return, but it turned out the agency that fellow had worked for only sounded like it was international. Not reporting all the sales proceeds that you have deposited in the bank is a much more straightforward “mistake”.
The Business
Ms. Abramson was a hair stylist. Like many stylists she picked up a littlee xtra income by selling hair care products to her customers. The distribution system of the products is based on the theory that you need professional guidance in the selection of your shampoo or whatever. So the products are only distributed through stylists. One day in 2000, somebody came into her salon and offered to buy everything she had on the shelves. This was her introduction to the “gray market“. Hair care products that are meant to be only sold by hair professionals are diverted and end up in other retail outlets. The practice is not strictly illegal, but it does raise ethical issues.
Ms. Abramson went into the gray market in a big way. As noted her reported sales were over 6 million in the course of three years. IRS CID managed to prove that those receipts were understated by 1.4 million.
Ms. Abramson went into the gray market in a big way. As noted her reported sales were over 6 million in the course of three years. IRS CID managed to prove that those receipts were understated by 1.4 million.
The Appeal
Criminal appeals cases are not of that much interest to me, professionaly. They are usually about rules of evidence.
The jury was not allowed to hear her tax preparer Robert Powell express his opinion that if she underreported income it was not on purpose. The Tenth Circuit ruled that the trial court had erred in thus ruling, because Mr. Powell was not testifying as an expert. Ms. Abramson is not getting a new trial though :
Although the government does not concede that the district court erred, it argues that any error by the district court was harmless. We agree.
Defendant provided ample testimony in support of her good faith defense. Defense counsel elicited testimony on cross-examination that Mr. Powell never explained to defendant how the IRS calculates cost of goods sold; never explicitly told her to “make sure that you include in your sales and in your cost of goods sold all transactions where you didn’t make a profit,” ; and he did not think there was anything suspicious about the gross receipts and cost-of-goods-sold numbers she provided to him. Mr. Powell also agreed with the statement that “someone who is uneducated in tax law and how tax return is done might say the transactions I don’t make a profit on I don’t need to report them because it doesn’t affect my ultimate tax ….”. He further testified that he kept preparing defendant’s taxes—even after learning of the criminal investigation—explaining, “from my end I had nothing there to say anything was going wrong.” And even after speaking with the IRS criminal investigators three times and giving testimony to the grand jury, he continued to do her taxes because he “still didn’t think she was doing anything wrong.”
I have to say that I have a certain admiration for Mr. Powell. I think that to do the job right, there is a sense in which you have to love your clients. When it comes to loving wisely, though, Mr. Powell comes up short. When IRS CID,(those are the ones who carrry guns and have arrest powers) is interested in your client you are not doing your client a favor by continuing like everything is normal. A tax preparer or accountant needs to tell his client to get a lawyer. If there is more accounting to be done the lawyer will do the hiring so that there is privelege.
Does Linda Abramson belong in prison ?
You can check out the website and make your own judgment. Frankly, I have trouble wrapping my head around the idea of a stylist making millions of dollars by flipping hair care products from one distributor to another. Given the way her case played out, she is certainly not a criminal mastermind
Note
Jack Townsend who has a great blog on Federal tax crimes wrote a piece on the evidentiary issues in this case.