Debra & Samuel Aaron: from FAA to OID

[Hilfskreuzer Möwe]

I don't think this one has been identified to date:

• Retired federal employees busted for $4 million ‘sovereign citizen’ tax fraud scheme: http://www.rawstory.com/rs/2014/07/30/r ... ud-scheme/

More OID scammers:

A married pair of former Federal Aviation Administration employees from Washington was sentenced this week for their role in a tax fraud scheme.

Debra and Samuel Aaron, of Whidbey Island, were convicted on charges of conspiracy to defraud the government and making false or fraudulent claims.

The couple promoted the 1099 OID tax fraud scheme often used by so-called sovereign citizens.

Debra Aaron claimed more than $14 million in tax refunds on behalf of 30 people and was paid $4 million before the IRS caught on.

The couple used a shell company to launder the money from their scheme and claimed some of the funds were used to help impoverished women in third-world countries.

In fact, federal authorities said, the couple used the money to remodel their home and take “lavish” vacations to Las Vegas; Sedona, Arizona; and the Caribbean.

The 60-year-old Debra Aaron, who retired as a management consultant for the FAA, was sentenced to five years in prison.

Her husband, 71-year-old Samuel Aaron, who served with distinction and retired after 25 years with the FAA, was sentenced to 30 months in prison.

Both were also sentenced to three years of supervised release and $723,275 in restitution.

Enjoy your retirement, folks!

SMS Möwe

[Dr. Caligari]

If they got $4 million out of the scheme, why only $723,000 in restitution? Was some of the money collected previously?

[wserra]

They blame Winston Shrout. From their sentencing memo:

Mr. and Mrs. Aaron discovered the 1099 OID scheme by attending seminars held by Winston Shrout, a national presence who holds seminars and conferences across the country decrying the paying of taxes and advocating schemes such as the 1099 OID scheme. They attended an “Advanced Seminar” with Winston Shrout, Seminars in Commerce in San Antonio Texas from February 15 to 17, 2008. Mr. Shrout, of course, charges people to attend his seminars.

At the conference in San Antonio, they learned about using the 1099 OID scheme to avoid taxes and get money back from the IRS. On March 10, 2008, impressed by what they ‘learned’ at the two day live seminar, they set up a conference call with Lisa Busser who represented Shrout at his business “Solutions in Commerce.” Busser and Shrout were so persuasive that Debra actually traveled to Hillsboro, Oregon on March 26, 2008, and met privately with Winston Shrout to learn more about the 1099 OID scheme. This meeting was facilitated by Morganne Rayne.

At some point, Shrout sold them a DVD that he distributed at his national seminars titled “1099 OID–and Its Place History” [sic]. (Scan of the DVD attached as Exhibit 7). Shrout and other 1099 OID professional speakers cite quasi legal formulations; tax code provisions; constitutional analysis and alleged historical bases of the IRS in support of their claims that using a 1099 OID scheme is both moral and legal.

In 2008 and 2009 the Aarons continued to attend conferences and seminars at which speakers propounded the use of the 1099 OID scheme and claimed it was not only legal but actually authorized by the IRS. At these conferences they were given additional hand-outs and other materials justifying the alleged legality of this scheme.
...
At the point in 2009 when the IRS first contacted the Aarons about their 2007 tax return, things could have been set right. Unfortunately, they were not. Continuing to believe in the legitimacy of what they had been taught at the seminars and in person by Winston Shrout and others, they continued to rely on Shrout and the other “experts” for advice in dealing with the IRS. Hence, the nonsensical “Accepted For Value” letters sent by Mr. Aaron to the IRS in 2009 in response to the IRS Notice for Tax Due. They were still drinking the Kool Aid at that point.

Why am I thinking about Judge Easterbrook? He may have written something particularly apropos of the Aarons.

[Jeffrey]

I'm surprised there isn't some type of investigation on Shrout at this point.

[notorial dissent]

I have to agree with Jeffrey here, I cannot believe that Shrout is still out walking around loose. He is one of the more malignant tax scam gurus around, and I would bet that the number of people's lives he has ruined is probably right at the top of the list. There should have been enforcemnt action against him years ago.

[Jeffrey]

He is one of the more malignant tax scam gurus around

And incredibly prolific as well. He's either invented or promoted every single big scam we've covered.

[Jeffrey]

serra, is there a link to the sentencing memo?

That is very juicy stuff.

[wserra]

Sure. I quoted the juiciest parts, though.

[JamesVincent]

Still want to see their arguments about how they aren't exercising a Federal privilege. Ought to be a hoot coming from someone who worked for the FAA.

[LPC]

At some point, Shrout sold them a DVD that he distributed at his national seminars titled “1099 OID–and Its Place History” [sic]. (Scan of the DVD attached as Exhibit 7). Shrout and other 1099 OID professional speakers cite quasi legal formulations; tax code provisions; constitutional analysis and alleged historical bases of the IRS in support of their claims that using a 1099 OID scheme is both moral and legal.

My recollection is that the "original issue discount" rules were first enacted as part of the Tax Reform Act of 1984, so there's only 30 years of "historical bases" to work from.

I suppose that there could have been some "constitutional analysis" of OID at some point, some where, because OID results in the taxation of imputed income without any transaction (other than the original issue of the security), but the rules were prospective only, and I've never heard of any constitutional challenges.

So I'm pretty sure that whatever was on that DVD was 100% nonsense.

[.]

My recollection is that the "original issue discount" rules were first enacted as part of the Tax Reform Act of 1984

Exactly right. The original, so to speak, OID securities were T-bills, which have been around forever. Nobody (IRS/fed gov) cared (from a revenue standpoint) about them because 100% of the interest was paid within a year of issue at maturity/redemption and reportable shortly thereafter.

Zero coupon bonds (10-30+ years) have been around since the '60s, but there were so few of them that they never got onto the radar until "STRIPS" proliferated in the early '80s when dealers bought Treasury bonds and split the principal and interest components into separate zero coupon products that had tax advantages. Thus, the changes in the '84 law.

How the devil any bozo who neither issues nor owns any zeroes (and probably doesn't even know what OID is) thinks that OID has anything to do with his return, much less can reduce his tax liability other than by making stuff up is a puzzlement.

What do these idiots use for a CUSIP on the fake 1099-OID form? 666666666?



I'd like to say nobody can possibly be this mind-numbingly stupid, but obviously I'd be wrong.

[Jeffrey]

So I'm pretty sure that whatever was on that DVD was 100% nonsense.

There are preview segments of the DVDs on his store website. "Constitutional analysis" based on what segments are free to watch are either bizarre rants on aliens, fabricated court room stories, anecdotes about how A4V works because it worked on his kids, and general citing century old court cases he "found on the internet" and explanations about how he "doesn't like case law" and bases what he does on "what's happening" and "looking around".

http://www.wssic.com/

Although his FAQ page contains this interesting disclaimer (emphasis mine):

Q. Where can I find information on the 1099 OID process?
A. The 1099 OID process is not one that Winston currently supports, advocates or lectures on. As such, we don’t have any products or information available involving that topic.

Which is basically bullshit because in several videos you can see him endorse the 1099 OID scam for example in this one at 9:35

https://www.youtube.com/watch?v=pE3gWL_ ... page#t=514

Now the earliest date for that video I can find is 2009 so it must have been a pre-2009 seminar which lines up exactly with the 2008 date given in the Sentencing Memo wserra graciously provided.

[grixit]

...anecdotes about how A4V works because it worked on his kids...

He defrauded the maternity department?

[.]

The 1099 OID process is not one that Winston currently supports, advocates or lectures on.

A wise move, considering that the "process" consists of fabricating withholding.

So, if you fabricate back-up withholding of 28% on OID imputed to you (even though you own no OID instrument) and expect to make any sense on the face of it at all, you have to report income from OID almost 4 times as large.

Which, being a large amount (these clowns apparently subscribe to the "go big or go home" theory of tax evasion,) is going to be taxable at about 40%. How does that work such that you get a refund?

Report 1 mill of fake OID income, tax 400K, fake withholding 280K. You owe 120K. That doesn't work. Perhaps they skip the mill or deduct a mill, the 1 mill being fake after all. That must be it. Refund 280K. Perfect!

Has anyone ever published one of their own ridiculous OID returns? I'd love to see one of these animals which apparently exist only in the wild.