Date: 06-29-2016

Case Style: United States of America v. Morris E. Zuckerman

Case Number: 1:16-cr-00194-AT

Judge: Analisa Torres

Court: United States District Court for the Southern District of New York (New York County)

Plaintiff's Attorney: Stanley J. Okula and Edward Imperatore

Defendant's Attorney: Jim Bruton, David Zinn and David Horniak

Description: New York, NY - Manhattan Energy Investor Pleads Guilty To Tax Fraud Schemes Involving Evasion Of Over $45 Million Of Income And Other Taxes

Defendant Admits Hiding From the IRS the $130 Million Sale Of a Petroleum Products Company He Owned, Using H
is Attorneys To Provide False Information To IRS During Subsequent Audit, and Filing Dozens of False Tax Returns with IRS

Morris E. Zukcerman, a Manhattan businessman who owns companies involved in energy investments, pled guilty today to charges detailing ZUCKERMAN’s involvement in multi-year tax fraud schemes pursuant to which he evaded over $45 million in income taxes and other taxes. ZUCKERMAN entered his plea before U.S. District Judge Analisa Torres.

U.S. Attorney Preet Bharara said: “As his admissions today made clear, Morris Zuckerman took numerous pages from the tax evader’s playbook: he illegally evaded tens of millions of dollars of corporate income taxes from the $130 million sale of an oil company; he prepared personal tax returns for himself and family members that falsely claimed millions of dollars in deductions; he evaded employment taxes for household employees; and he schemed to defraud and obstruct the IRS auditors who were examining his false tax returns. After years of finding every way to avoid his tax obligations, Zuckerman has finally been forced to admit to his criminal tax evasion. I thank the New York Field Office of the Internal Revenue Service, Criminal Investigation Division, and the New York Office of the U.S. Postal Inspection Service for bringing Zuckerman’s breathtaking tax fraud schemes to a just conclusion.”

According to the Indictment, today’s plea proceedings in Manhattan federal court, and other court filings related to this matter:

ZUCKERMAN, the principal of M.E. Zuckerman & Co. (“MEZCO”), an investment firm located in Manhattan, schemed to evade taxes based on income received from the January 2008 sale of a petroleum products company (the “Oil Company”) he co-owned (through a MEZCO subsidiary) with a public company. ZUCKERMAN schemed to evade the reporting of the sale – which resulted in the receipt by the MEZCO subsidiary of $130 million in gross sales proceeds – by falsely telling his accountants in mid-2008 that he had transferred ownership of the MEZCO subsidiary to a family trust in early 2007. In support of the story he gave to the accountants, ZUCKERMAN created backdated documents such as promissory notes and a board resolution purporting to show the transfer of the subsidiary to his family trust in 2007. The false documents allowed ZUCKERMAN to remove the MEZCO subsidiary from the consolidated tax reporting being handled by the accountants for MEZCO and thereby evade the reporting to the IRS of the sale of the Oil Company, as well as the payment of over $35 million in corporate income taxes.

Following the sale of the Oil Company, ZUCKERMAN transferred the proceeds of the sale from the MEZCO subsidiary to his family trust and various corporations he controlled, including a company called Zuckerman Investments. Between 2008 and 2013, ZUCKERMAN directed that over $50 million of the funds transferred to Zuckerman Investments be used to purchase paintings by European artists from the 15th through the 19th centuries (the “Old Master paintings”), which ZUCKERMAN used to decorate his Upper East Side apartment and the apartments of two family members – Family Member-1 and Family Member-2.

ZUCKERMAN schemed to evade personal income taxes and to obstruct the IRS by (i) causing various tax return preparers to prepare U.S. Individual Income Tax Returns for ZUCKERMAN and his wife, and for Family Member-1, Family Member-2, and Family Member-3, that claimed, in the aggregate, millions of dollars of false and fraudulent deductions and expenses, such as phony charitable contributions and investment interest expenses; (ii) diverting, for personal use, corporate assets from MEZCO and other corporate entities ZUCKERMAN controlled by directing that hundreds of thousands of dollars of fees be paid between 2007 and 2013 to Family Member-1, Family Member-2, and Family Member-3, for which the family members performed little or no work; (iii) directing that corporate funds be used to pay compensation to, and health care insurance for, a household employee of ZUCKERMAN, whom ZUCKERMAN also caused to be falsely identified as a MEZCO employee to ZUCKERMAN’s corporate health care provider when, in truth and in fact, the household employee worked exclusively out of ZUCKERMAN’s homes in New York City and in Maine as a domestic employee; (iv) falsely under-reporting employment taxes through the payment of hundreds of thousands of dollars of cash and other wages to ZUCKERMAN’s domestic employees; and (v) providing false information to the IRS during audits in an attempt to fraudulently convince IRS auditors and other IRS employees that the fraudulent claims made on his previously filed tax returns were accurate when, in truth, they were not.

The False Charitable Contribution Deductions for the 2009 & 2011 Tax Years

ZUCKERMAN’s fraudulent charitable contribution deductions – totaling $1 million – arose out of a real estate transaction in 2009 and 2010, pursuant to which ZUCKERMAN purchased approximately 240 acres of property on Black Island, a small island located off the coast of Maine, close to ZUCKERMAN’s home on a nearby island. ZUCKERMAN was enlisted to purchase the Black Island property by a Maine-based land conservation entity named the Maine Coast Heritage Trust (“MCHT”), which was seeking to orchestrate the purchase for conservation purposes. After considering making a charitable contribution to the MCHT intended to be used to purchase the property, ZUCKERMAN decided instead to purchase the land as the outright owner for the benefit of himself and his family for $1 million through a newly formed limited liability company he solely owned. ZUCKERMAN, however, falsely told his tax return preparer that the $1 million he paid for the property should be declared on his personal income tax returns as a charitable contribution to the MCHT during the 2008 and 2010 tax years. ZUCKERMAN subsequently signed the false 2008 and 2010 tax returns and caused them to be filed with the IRS.

The False Investment Interest Expense Deductions Relating to the Corporate Loans

ZUCKERMAN orchestrated the creation of hundreds of thousands of dollars of fraudulent “investment interest expense” deductions on his own tax returns and those of three family members. ZUCKERMAN accomplished this by falsely telling his tax preparers that payments made from the personal bank accounts of ZUCKERMAN and his family members to a California bank were made to legitimately satisfy loan interest payments owed by one of his California companies. In fact, although the interest payments were initially made from the bank accounts of ZUCKERMAN and those of his family members (whose accounts ZUCKERMAN controlled), ZUCKERMAN secretly took funds from the bank account of the California corporation that owed the interest payments and reimbursed himself and his family members. In addition, because the corporation that owed the interest payments had claimed the interest indebtedness as an expense on its corporate tax returns, ZUCKERMAN’s claiming of the same expenses on his own tax returns and those of his family members constituted fraudulent double deductions.

The Audit Fraud

In seeking to obstruct and defraud the IRS during an audit of one of ZUCKERMAN’s companies, ZUCKERMAN used two attorneys from a law firm in Washington, D.C., to convey a false narrative to an IRS Appeals officer, who was undertaking a review of ZUCKERMAN’s challenge to an adverse determination made by an IRS auditor during the corporate audit. Pursuant to a “crime-fraud” ruling by the United States District Court for the Southern District of New York, and affirmed by the Second Circuit Court of Appeals, ZUCKERMAN’s companies were required to disclose to the grand jury all of the communications between ZUCKERMAN and the two attorneys that led to the submission to the IRS of the false factual narrative. ZUCKERMAN’s two attorneys were also required to provide grand jury testimony about the false information provided by Zuckerman, which had been provided to the IRS as part of ZuCkerman’s efforts to deceive the IRS.

* * *

ZUCKERMAN, 72, of New York, New York, pled guilty to one count of tax evasion, which carries a maximum sentence of five years in prison, and one count of obstructing the IRS, which carries a maximum sentence of three years in prison. Each of the charges also carries a maximum fine of $250,000, or twice the gross gain or loss from the offense.

As part of Zuckerman’s plea agreement with the Government, he agreed to pay a minimum of $37 million to the IRS as a result of his corporate and individual tax fraud activities. Zuckerman separately agreed to pay to New York State over $4.6 million based on a related tax fraud scheme he carried out, through his companies, that resulted in the evasion of New York State sales and use taxes owed in connection with Zuckerman’s purchase of dozens of 17th and 18th century ‘Old Master’ paintings, as well as jewelry.

Judge Torres set December 5, 2016, as the date for sentencing.

The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentences for the defendant will be determined by the judge.

Mr. Bharara praised the outstanding investigative work of the IRS and the U.S. Postal Inspection Service.

The prosecution of this case is being handled by the Office’s Complex Frauds and Cybercrime Unit.

Outcome: Guilty

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