Sixth Circuit Finds Millionaire Car Salesman Guilty of Tax Evasion

(Parker Tax Publishing July 2022)

The Sixth Circuit affirmed a district court and held that a millionaire car salesman who funneled away his customers' down payments and left them off his tax returns, in order to finance a multimillion-dollar mansion, was guilty of tax evasion. Additionally, the court also found that the taxpayer claimed expenses relating to his personal residences as business expenses. U.S. v. VanDemark, 2022 PTC 186 (6th Cir. 2022).

Background

Gregory VanDemark made a fortune selling cars. He built a mini-business empire in Amelia, Ohio. At the center of it all is the Used Car Supermarket (the Supermarket), a C corporation owned solely by VanDemark. VanDemark also owned three S corporations which supported the Supermarket. The Supermarket's clientele is by and large low-income and low-credit. Customers typically finance their cars by entering into lease-to-buy agreements. The process kicks off with a large down payment and approximately 90 percent of lease-to-buy contracts bought out their cars in the end.

Before 2013, everything was above board at the Supermarket on the tax front. The Supermarket's protocols ensured all the down payments remained within the IRS's view. To begin with, VanDemark kept a handwritten ledger at each of the two lots. Every time a customer made a down payment, his employees recorded it in one of these ledger books. They made sure to deposit every payment into the Supermarket's bank account as well. Afterward, employees entered the bank receipts into QuickBooks. And as a final step, VanDemark's tax preparer used the QuickBooks files to complete the necessary tax returns.

But in 2013, VanDemark began to short-circuit this process. He instructed an employee, Christopher McAfee, to start stashing the cash in a safe at the main office. In 2012, VanDemark deposited over $265,000 in cash into the account. But in 2013 and 2014, that number was much reduced to approximately $12,000 and $71,000, respectively. It turned out that VanDemark was using this cash to pay the mortgage on his multimillion-dollar mansion in Ohio. Because the stashed-away cash never reached the bank account, it never made it into VanDemark's QuickBooks files. And because VanDemark's tax preparer relied on those QuickBooks files, he failed to report the cash on VanDemark's tax returns.

VanDemark also overreported deductions on his personal returns. Aside from his Ohio mansion, VanDemark owned two other residences: a novelty house built in the shape of a paddleboat and an oceanfront property in Florida. VanDemark claimed construction, maintenance, and insurance expenses on these properties as business expenses for his S corporations. He pulled this off by telling the IRS that he was building the paddleboat house as a bed and breakfast, the Florida residence was his business headquarters, and his Ohio mansion was a rental property. As a result, VanDemark and the Supermarket paid no federal income tax in 2013 and 2014.

VanDemark's tax evasion activities caught up with him when a bank employee reported to her supervisor a conversation with VanDemark about the bank's $10,000 threshold for reporting cash deposits to the IRS. VanDemark began to make cash payments toward his mortgage several times a month, keeping each payment below $10,000. The information made its way to the IRS who sent an undercover agent posing as a businessman to meet with VanDemark. That agent expressed an interest in buying VanDemark's businesses and during their talks, VanDemark all but admitted to tax evasion by explaining that he stashed away 25 percent of his income. VanDemark also let slip that he shoved his personal expenses to the company so that he wouldn't "end up paying a bunch of dang taxes." The IRS executed search warrants and recovered the handwritten ledgers.

VanDemark was subsequently indicted on four counts of helping to prepare false individual and corporate tax returns in violation of Code Sec. 7206(2). He was also charged with structuring payments, in violation of 31 U.S.C. Sec. 5324(a)(3), and making false statements to federal agents in violation of 18 U.S.C. Sec. 1001. A district court jury found him guilty on all counts and he appealed to the Sixth Circuit.

Arguments on Appeal

Before the Sixth Circuit, VanDemark argued that the deposits he failed to include in income were not taxable income because, under Comm'r v. Indianapolis Power & Light Co., 493 U.S. 203 (1990), a deposit isn't taxable income unless the taxpayer has some guarantee that he will be allowed to keep the money. If a customer decides not to purchase the car at the lease's end, VanDemark contended, the customer can demand a refund of the down payment and, as a result, the Supermarket lacked the necessary "guarantee," and the down payments were never taxable as a threshold matter.

With respect to the guilty verdict for assisting in the preparation of a false personal return, VanDemark argued that because the IRS had no record of receiving VanDemark's 2013 personal return, VanDemark deserved to be acquitted of this charge. In making this argument, VanDemark cited a Ninth Circuit case, U.S. v. Dahlstrom, 713 F.2d 1423 (9th Cir. 1983) which held that "the filing of a return is in fact an element of a section 7206(2) violation."

Analysis

The Sixth Circuit rejected VanDemark's arguments and affirmed the guilty verdicts on all counts. With respect to VanDemark's argument about the deposits not being taxable income, the court found that this argument missed the mark for two reasons. First, according to testimony by long-time employee McAfee, the Supermarket issued virtually no refunds over a 30-year period. The court noted that the Supermarket found ways to keep these down payments at its discretion, the contract notwithstanding. And that meant, the court said, that the down payments were taxable upon receipt consistent with Indianapolis Power. Second, the court found that the Indianapolis Power discussion was a red herring because under VanDemark's own theory, the down payments were taxable once customers bought out their cars but, even when this happened, VanDemark failed to report the cash.

The court also found that, while it was true that the contracts required the Supermarket to refund a down payment if the customer returned the car at the end of the lease, that only happened if the excess mileage fee and the cost of damages to the car did not exceed the down payment amount. The court noted that these variables were couched in significant ambiguities which the Supermarket exploited to maintain control over the down payments.

With respect to VanDemark's reliance on the Ninth Circuit's decision in Dahlstrom, the Sixth Circuit noted that the decision was non-binding in the Sixth Circuit and, to the extent that it conditions liability on "filing" alone, it contradicts the statute's plain meaning. Code Sec. 7206(2), the court observed, imposes liability on "[a]ny person who . . . [w]illfully aids or assists in, or procures, counsels, or advises the preparation or presentation" of a fraudulent return. It's well-established, the court said, that every word is to be given effect in a statute, and interpretations that cause words to have no consequence are best avoided. The court found that it had to give non-redundant meanings to "preparation" and "presentation" because, in Code Sec. 7206(2), Congress chose to say, "preparation or presentation," and not "preparation and presentation." Thus, the court concluded, a taxpayer is guilty even if he helps prepare, without presenting, a fraudulent return.

For a discussion of the Indianapolis Power case and the taxation of deposits, see Parker Tax ¶71,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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