That’s Judge Wherry’s unwhimsical advice to David L. Carreon, et al. (the et als being David’s several alter ego corporations), in 2014 T. C. Memo. 6, filed 1/9/14. IRS wanted to nail Dave with the 75% fraud hit, but although Dave’s story’s rather dicey, IRS can’t muster clear and convincing proof.

It’s all about Dave’s QuickBooks accounts. Dave kept records of all his diversionary tactics, and only hid a little bit of his unreported income with purported charities, fetchingly named “Helping Hand, Jubilee, and Brother’s Keeper”, 2013 T. C. Memo. 6, at p. 13; Dave, of course, had signatory power over the account wherein such checks were deposited.

Dave blames the promoter of this swindle for his predicament. While that doesn’t cut it for negligence or substantial underreporting, it does help for fraud, provided one is as unsophisticated as Dave. Although Dave runs a credit-card processing outfit, he claims innocence as to tax, and Judge Wherry is buying it.

Background: “In 1999 Mr. Carreon and Ms. Portugal [Mrs. Dave] were introduced by a mutual friend to Clementine Estrada. Ms. Estrada provided advice to Mr. Carreon and Ms. Portugal on how to set up entities for their business. Ms. Estrada also gave them advice about asset management protection and a financial strategy referred to as the ‘agent-principal’ relationship. Mr. Carreon understood that the concept was set up to operate by taking the net gross receipts from their credit card processing business…after business expenses including their salaries and put those funds into other entities such as a trust. These other entities were to be designated as a business trust, a charitable trust, and a management trust. There was also to be a ‘living trust’ to hold and protect their property, such as their home, personal property, etc.

“Additionally, Ms. Estrada explained that the management trust would be managed by a company called Builders, which would charge a fee for services of 11% of the first $70,000 of credit card processing receipts and 6% for any excess money managed beyond $70,000. Ms. Estrada also referred Mr. Carreon and Ms. Portugal to Robert Holcomb in order to hear more about the ‘agent-principal’ relationship, since they were equal owner members of the business and Ms. Portugal was the managing member.” 2013 T. C. Memo. 6, at pp. 5-6.

Holcomb turns Dave and Ms. Portugal onto a CPA, who is ex-IRS but who knows about agent-principal from the travel agencies, where the move is legitimate.

There, the travel agent gets the money from the voyager, takes it in as gross receipts, but then pays most of it over to the hotel, airline, cruise ship operator, etc., for the benefit of the voyager. The payover then comes off the agent’s taxable income. For an analogous case, see my blogpost “Stamp Out Smoking”, 11/19/13.

But in Dave’s case, he was paying over the ostensible principal’s payover for himself, and that’s a no-no.

In short, an unprincipled principal.

Lucky for him, Dave kept good records, didn’t deal in cash, didn’t give far-fetched excuses, cooperated (mostly) with IRS when they blew the doors off his little fiddle, and said he relied on Holcomb and the CPA.

So Dave dodges the 75% fraud bullet.

As for Holcomb, Estrada and the CPA, Judge Wherry has nothing to say. But I would quote Abraham Lincoln anent all these wiseguys who arrange tax fraud for a piece of the action: “Must I shoot a simple-minded soldier boy who deserts, and not touch a hair of the wily agitator who induces him to desert? I think that in such a case, to silence the agitator and save the boy, is not only constitutional, but withal a great mercy.”

IRS please copy.