Tax Evasion—Convictions

The US DOJ has announced that two individuals have been convicted of tax crimes connected to the “promotion of a tax evasion scheme using ‘pure equity trust’ organizations.”^[1] David Carroll Stephenson was convicted of conspiracy and willful failure to file income tax returns for 1998 through 2000, while his co-defendant, Michael Joseph Shanahan, pleaded guilty to conspiracy and to failing to file an income tax return for 1999.^[2]

According the indictment and trial evidence, Mssrs. Stephenson and Shanahan “marketed trust packages through a Tacoma-based organization they called American Business Estate and Tax Planning (ABETP).”^[3] Customers were told that income taxes could be avoided if income and assets were placed in “pure equity trusts,” and that control could be retained over the use of the income and assets.^[4] After the sale of more than 400 trusts, more than $2 million in revenue went the defendants’ way.^[5]

Though neither defendant was a lawyer, according to the indictment, they presented themselves in terms that suggested that they had legal experience, and they then advised their clients to not file federal income tax returns, and to not worry about the trusts’ income because they “were ‘foreign’ to the United States in that they were created outside the boundaries of the District of Columbia.”^[6] They also advised their clients to do things such as transfer title of all real estate and vehicles owned free and clear to the names of trusts, and then lease the property to themselves.^[7]

In addition to being charged with conspiracy and failure to file a tax return, Mr. Stephenson was also accused of criminal contempt. On July 30, 2004, the US District Court for the Western District of Washington issued a permanent injunction against Mr. Stephenson, in which the Court ordered Mr. Stephenson to file, within 10 days, “a complete list of customers … who had purchased any trust or other type of entity” from Mr. Stephenson; it was alleged that Mr. Stephenson did not do so.^[8] However, in a superseding indictment, it was alleged that Mr. Stephenson committed contempt by “disobeying and resisting a lawful order, decree, and command” which enjoined Mr. Stephenson from “Organizing, promoting, marketing, or selling any abusive tax shelter, plan or arrangement that incites taxpayers to attempt to violate the internal revenue laws or unlawfully evade the assessment of their federal tax liabilities; and … Further engaging in any conduct that interferes with the administration and enforcement of the internal revenue laws.”^[9]

While injunctions are equitable in nature, criminal contempt is covered by 18 U.S.C. § 401, which states that a “court of the United States shall have the power to punish by fine or imprisonment, or both, at its discretion, such contempt of its authority, and none other, as … (3) Disobedience or resistance to its lawful writ, process, order, rule, decree, or command.” As of February 16, the contempt issue was still being dealt with.

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[1] US DOJ, Two Trust Promoters Convicted of Tax Crimes, Feb. 21, 2006.
[2] Id.
[3] Id.
[4] Id.
[5] Id.
[6] Indictment, United States v. Stephenson, No. 3:05-cr-05158, at 6 (W.D. Wa. 2006) (available through ECF).
[7] Id.
[8] Id. at 14.
[9] Superseding Indictment, Stephenson, supra note 6.