Lawyer Charged with Tax Evasion for Paying Personal Expenses from Firm

Posted on: July 28, 2011 | By: dunn_access | Criminal Tax Prosecutions

By Stephen J. Dunn

Own a small business?  Do you run personal expenses through the business?   A recent Tennessee case shows where this practice can lead.

A Federal grand jury in Knoxville, Tennessee has indicted lawyer John Threadgill for tax evasion.  The indictment alleges that from 1986 to 2004, Threadgill evaded $1.4 million in Federal income tax by conduct which included paying from his law firm $245,000 for family educational expenses, $213,000 in personal real estate purchases, $69,000 for his daughter’s wedding, and $52,000 for personal travel.  The unstated premise is that Threadgill deducted the personal expenses, disguised as legitimate deductions, on his law firm income tax returns.

Payment of a small business owner’s personal expenses from the business is common.  Upon discovering it, the IRS usually responds by imposing civil penalties in addition to tax on the disallowed expenses. Interest accrues on an assessment of tax and penalties.

Threadgill’s case is so serious and blatant the IRS proceeded against him criminally.  In criminal cases the IRS prefers charging 26 USC § 7206(1)–filing a false tax return.  § 7206(1) requires the IRS to prove beyond a reasonable doubt that (1) the defendant filed a false tax return, and (2) that he did so willfully.   It is a felony.  Conviction is punishable by fine of up to $100,000 and imprisonment of up to three years.

The IRS asked the grand jury to indict Threadgill, and the grand jury did indict him, for the more serious offense of 26 USC § 7201—tax evasion.  § 7201 requires proof of the same two elements for  26 USC § 7206(1), plus a third element—an affirmative act of evasion.  Conviction of this felony is punishable by fine of up to $100,000 and imprisonment of up to five years.

The indictment charges Threadgill with the following affirmative acts of evasion:

a.         Using his law firm bank account and payroll account to issue checks to third parties for personal expenditures, thus disguising the existence and source of funds available to pay his assessed personal income taxes and thwarting attempts to collect such taxes;

b.         Creating and maintaining ledgers that concealed the true nature of personal expenditures from his law firm account;

c.         Establishing bank accounts in the names of nominee trusts and using  such accounts to disguise the existence of assets, thus thwarting attempts to collect his personal income taxes; and

d.         Titling his personal residences in the names of nominee trusts in an attempt to disguise the ownership of such residences and place them beyond the reach of creditors, including the Internal Revenue Service.

Willfulness—that Threadgill knew his tax returns claimed deductions for nondeductible items—will be the toughest element for the government to prove in its criminal case against him.  Willfulness usually is proved circumstantially.  That Threadgill is a lawyer presumed to know the law does not help him on willfulness.

If  Threadgill is convicted, a prison term is likely.  The ensuing civil entanglements—IRS efforts to make civil assessments against him and seize his assets—can go on for years.

In November, 2009, the Tennessee Supreme Court upheld a one-year suspension of Threadgill from the practice of law for having misappropriated client funds.