U.S. Tax Court Rules Silent Illinois Politician Committed Tax Fraud; Statute of Limitations does not Bar Assessment of Old Deficiency

Aug 13, 2012   

On July 30, 2012, the U.S. Tax Court concluded that Betty Loren-Maltese, a locally well-known Illinois politician, fraudulently underreported income on her 1994 income tax return by omitting two substantial conversions of campaign funds to personal use.  Betty Loren-Maltese v. Commissioner, T.C. Memo 2012-214, is available here.

Ms. Loren-Maltese was the President of Cicero and the Republican Committeeman of Cicero Township, Illinois in 1994.  (Some readers may recognize Cicero as a town known for the headquarters of Chicago mobster Al Capone.  Certainly, Ms. Loren-Malteses actions did not help Ciceros colorful reputation.  She is the widow of another well-known local politician, Frank Maltese, who was sentenced to prison for being a mob bookmaker and pleading guilty to a federal gambling charge.) In 2002, Ms. Loren-Maltese was sentenced to serve eight years prison for conspiracy to defraud the town through a pattern of racketeering via multiple acts of bribery, money laundering, mail and wire fraud, official misconduct and interstate transportation of stolen property. See her criminal conviction in U.S. v. Spano, 421 F.3d 599 (7th Cir. 2005) here.

In addition to her criminal conviction, the Commissioner issued a notice of deficiency alleging civil tax-fraud for tax year 1994.  The Commissioner contended that Ms. Loren-Maltese withdrew more than $350,000 from the Committeeman Fund to finance her purchase of a classic black 1993 Cadillac Allante convertible and to invest in a luxury golf course.  The Commissioner also contended that the car and investment created taxable income in which she fraudulently tried to evade the tax due on the income.

Thus, there were three issues of law in the case related to the car purchase and golf course investment: (1) the general rules of tax fraud; (2) the proper treatment of money taken by a politician from her campaign fund for personal use; and (3) the effect of taking the Fifth Amendment in civil tax litigation, right against self-incrimination. Below, we explore how the Tax Court addressed these issues.

(As a threshold matter, it is important to take notice that the Commissioner was required to establish the underpayment from the personal use of campaign funds was fraudulent because fraud stops the clock on the statute of limitations under Sections 6501(a) and (c) available here.  Because so much time had passed since Ms. Loren-Maltese filed her 1994 tax returns, proving fraud was the only way the Commissioner could prevail.)

The Car

In 1994, Ms. Loren-Maltese purchased a classic black limited edition 1993 Cadillac Allante convertible with a check that was drawn on the Committeeman Fund.  The documents, prepared by the dealer and reviewed by Ms. Loren-Maltese, indicated that she was the owner and not in a capacity for the Town of Cicero or the Republican Party.  Using the Committeeman Fund to purchase the car for personal use is critical because Ciceros town attorney informed Ms. Loren-Maltese that she did not have to disclose contributions or expenditures for the Committeeman Fund, but did have to file publicly disclosed financial reports that gave detailed lists of contributions and expenditures for the Organization Fund.  The attorney also informed her that if she took money from the funds, she would have to pay tax on it and consider it personal income.  Nonetheless, she purchased an individual auto-insurance policy, indicated the use was for pleasure, and gave the dealership her personal information such as her address and drivers license number.  Under Illinois law, the name of the title creates a prima facie presumption that she is the owner of the car.

The court explained that paper formalities were not enough to prove an underpayment existed from the failure to include the personal use of the Committeeman Fund as personal income.  In response, the Commissioner pointed to her silence at trial.  She invoked the Fifth Amendment on virtually every question about the car, including its purchase, use, reporting, and her use of Committeeman Funds to buy it.  This silence severely injured her case because it allowed the court to draw a negative inference against her and because the Commissioner had voluminous evidence against her, such as her use of personal funds for insurance payments and maintenance for the car.  Human nature also allowed the court to draw inferences from her silence if, under the circumstances, it wouldve been natural for her to object.  See U.S. v. Hale, 422 U.S. 171 (1975).  Furthermore, the car was garaged at her summer home in Indiana.  Thus, the court determined car was purchased for personal use with money she personally converted from the Committeeman Fund and failed to include that income on her tax return, which created an underpayment.

However, to prove fraud, the Commissioner was required to provide some evidence that she understood that she used campaign funds for personal use and willfully did so with the intent to evade taxes she knew would have been due.  The Commissioner already established that an underpayment existed, and subsequently, the Commissioner needed to establish some portion of that underpayment was due to fraud.  Furthermore, fraud requires a state of mind, which is commonly defined as an intentional wrongdoing on part of the taxpayer with the specific purpose to evade a tax believed to be owing.  See McGee v. Commissioner, 61 T.C. 249 (1973).  It is rare to have direct proof of someones state of mind, so the court typically relies on circumstantial evidence.  In this case, the court looked for “badges of fraud,” which were inadequate records, implausible or inconsistent explanations of behavior, concealing assets, engaging in illegal activities, and attempting to conceal activities.

The court explained that she was well-advised by the town attorney on the details of titling and tracing funds but used this knowledge to hide her use of campaign funds.  She also asked to garage the car at someone elses home after learning she was the subject of a federal investigation.  Therefore, the court found that the Commissioner had shown by clear and convincing evidence that Ms. Loren-Malteses understatement of income was due to fraud.

The Golf Course

The other item of the asserted underpayment of taxes came from Ms. Loren-Malteses investment in the Four Seasons resort and golf course in Miscauno Island, Wisconsin.  The resort was in desperate need of renovation, and the money for the work came from loans by Ms. Loren-Maltese and other investors.  Between July and September of 1994, Ms. Loren-Maltese gave and personally signed three checks totaling $350,000, also drawn from the Committeeman Funds account, to investors for the Four Seasons.

Despite her use of the Committeeman Funds account, all documents relating to the loan and promissory notes identified Ms. Loren-Maltese in her personal capacity only.  The purchase in her personal capacity only is further evidenced through the investment group commissioning research into the complicated Wisconsin laws.  The lawyer who conducted the research carefully noted the names of the parties involved, the amount of investments, and their legal capacities.  There was no mention of Ms. Loren-Maltese in any representative capacity while other investors were indentified as holding interests as partnerships.  As a result, the court determined that Ms. Loren-Maltese did not include in her personal income the money taken from the Committeeman Fund, which resulted in an underpayment of taxes. 

Once the court determined she used the Committeeman Fund for personal use, the court then determined that Ms. Loren-Maltese failed to carry her burden to establish that the understatement of income arising from the Four Seasons investment wasnt done with fraudulent intent.  She tried to argue the investment was done on behalf of the Committeeman Fund as the loan repayments were signed over to the Fund.  However, the checks were only signed over after a grand jury subpoena for information and the documents relating to investments made in the Four Seasons were served.

Additionally, her argument that the investment was done on behalf of the Committeeman Fund is inconsistent with her Form D-2s, Report of Campaign Contributions and Expenditures.  The forms indicated great discrepancies between the reported assets and the actual account balances of the Committeeman Fund and the differences do not coincide with the Four Seasons investment. Once again, her argument also failed due to her negative inference from taking her Fifth Amendment when asked at trial about whether she knowingly falsified the Form D-2s to disguise her investment in the Four Seasons.  The omissions and inconsistencies in the forms, along with her less-than-credible argument, flash another badge of fraud, which is that of implausible explanations.

Ms. Loren-Maltese also argued that she complied with state reporting requirements and treated the promissory note as an investment.  Nevertheless, there were exceptionally suspicious imprecision from the loan and repayments on note.  Other expenditures and receipts on the D-2 include exact values of modest expenses like keychains and fast-food meals.  Consequently, the court concluded that the her attempts to recharacterize the investment as an investment on behalf of the Fund, rather than a conversion of the Funds assets to her personal use failed to refute the Commissioners argument that any understatement from her failure to include the amount of her investment in the Four Seasons as income on her 1994 was due to fraud.

The court also took note of Ms. Loren-Malteses level of education and business experience as a factor in determining fraudulent intent.  She was a capable politician who managed the business affairs of the Town, understood contracts and the importance of title, understood what a nominee was, and hired attorneys to help her with the Four Seasons investment.  She also used her knowledge as an experience politician to conceal her activities.

In conclusion, the court found that both the car and golf course should have been included in her income.  Her failure to do so was due to fraud.  Thus, the statute of limitations was not barred for assessing her 1994 deficiency.

The attorneys at Fuerst Ittleman, PL have extensive civil and criminal tax litigation experience before the U.S. District Courts, the U.S. Tax Court, and the U.S. Circuit Courts of Appeal.  You can contact us by calling 305.350.5690, or by emailing us at contact@fidjlaw.com.