Tax Court in Brief | Podlucky v. Commissioner | $34M Jewelry in a Secret Room, Constructive Receipt, Innocent Spouse, and Putative Monks

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The Tax Court in Brief – May 2nd – May 6th, 2022

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Tax Litigation:  The Week of May 2nd, 2022, through May 6th, 2022

Podlucky v. Commissioner, TC Memo. 2022-45| May 5, 2022 | Lauber, J. | Dkt. No. 453-17

Opinion

Summary: Greg Podlucky (Podlucky), a CPA, started a tea bottling business, Le-Nature’s, Inc. (LNI). Podlucky served as CEO, majority shareholder, and chair of the board. In its early years, LNI was successful, and eventually various private equity investors invested millions into LNI. In return, those firms were allowed seats on the LNI board. When it came time for those investors to consider liquidating their interest (or selling LNI altogether), Podlucky refused to allow access to books and records. So, the investors sued LNI, alleging that Podlucky intentionally obstructed their attempts to sell their stock by blocking access to books and records. They discovered that Podlucky was maintaining two sets of books: one set reported actual sales and profits, and another that reported fictitious sales and profits. The gap was in the hundreds of millions of dollars.

This prompted an involuntary bankruptcy and, eventually, LNI could not be salvaged—the minority shareholders lost their investments, and LNI’s lenders lost more than $600 million. A criminal investigation ensued. Through that, a “secret room” was discovered at LNI’s headquarters that contained $34million in jewelry. Ultimately, Podlucky was indicted on counts of mail fraud, conspiracy to commit money laundering, and attempting to evade or defeat tax in violation of section 7201. The tax charges were based on Podlucky’s failure to report near $35million of income, in the form of constructive distributions from LNI. Podlucky plead guilty and was sentenced to 20 years’ imprisonment. Karla was likewise found guilty of money laundering and sentenced to 51 months’ imprisonment.

Following the criminal proceedings, the IRS initiated a civil examination of the Podluckys’ 2003-2006 joint income tax returns in which the Podluckys reported between $350,000 and $600,000 of income. Relying on prosecutorial reports from the criminal tax evasion charges, the Revenue Agent determined that the Podluckys received near $35million in unreported income, in the form of constructive distributions from LNI. In all, the tax deficiencies totaled about $5million and fraud-related penalties of about $4million were assessed against Podlucky. The Podluckys timely petitioned and disputed the liability. They refused to cooperate and advanced frivolous arguments in the proceeding. Days before trial, the Podluckys announced they filed amended returns “to include all the audit adjustments as determined by [the IRS]” and that they were rescinding their petitions. The Podluckys asserted that no trial should thus be held. The case proceeded to trial. Podlucky testified, in part, that he purchased the luxury jewelry because LNI was “diversifying [its] product lines” and “dealing with Tibetan monks in Asia” who “want[ed] hard assets” rather than cash for purchase of valuable species of tea. The issues, findings, and key points of law from that proceeding are summarized below.

Key Issue:

Primary Holdings:

Key Points of Law:

Insights: This Podlucky opinion illustrates the confluence of criminal and civil tax proceedings and how the former can influence outcomes in the latter. Podlucky defrauded investors and the United States Department of the Treasury; hundreds of millions were squandered. Perhaps the minority shareholders should be congratulated for pursuing their rights to access LNI’s books and records, rather than simply acquiesce to Podlucky’s actions contrary to the shareholders’ rights; otherwise, Podlucky’s fraud and tax evasion may have continued without legal or tax accountability. The opinion is also a reminder of the uphill burden of those claiming innocent spouse relief when that spouse is a primary beneficiary of the financial gains and luxurious lifestyle secured by the underreporting of the joint-filers’ income.