C ELEBRIMBOR Y LOS ANILLOS DE PODER

For some reason, physicians have been known to engage in the act of corporate skimming involving their medical practices.

Dale Grunewald is a Iowa physician who practiced medicine in the Medical Services Partnership from 1975 through 1987. He was in charge of maintaining the partnership books and records, and was solely responsible for calculating and paying the partners their respective partnership draws. In 1983, he was appointed medical director of a medical clinic, and payments for his services in this position were deposited into the partnership account. Beginning in January 1985, these payments and all 1099 forms were sent directly to Grunewald's home and not deposited into the partnership account, and he did not enter the payments in the partnership books and records. Instead, Grunewalk endorsed each of the checks and deposited them into his personal bank account.

Midway through 1985, Grunewald's partners noticed that their income had decreased, and they confronted him. Grunewald convinced them that the salary he received from the medical clinic was not partnership income. The accountant who prepared the tax returns for the partnership and for each of the individual partners relied solely upon information provided to him by Grunewald, and Grunewald did not inform him that he had received any income from Mercy, nor did he inform the accountant that there was $63,000 in income each year that was not reflected in the partnership books and records.

In May 1987, one of Grunewald's partners approached a patient who was an IRS agent, and told him that Grunewald was not depositing money received from the medical clinic in the partnership account and was not reporting this income on his personal tax returns. Throughout the IRS investigation, Grunewald assured agents that his salary from the clinic had been

deposited into the partnership account, and had been reported to the IRS by the partnership. He eventually acknowledged the truth and was indicted and ultimately convicted. On appeal, he unsuccessfully argued that his statements to the IRS should have been suppressed since they were obtained in a criminal investigation under the guise of a civil audit. (This argument is a recurring issue in criminal tax jurisprudence, and is discussed in Chapter 9.) United States v.

The tax fraud scheme crafted by doctors Frank Kresock and Rosemary DePaoli of Scranton, Pennsylvania was slightly different. A married couple, Kresock was a cardiologist while DePaoli was a dermatologist. In 1988, they formed a medical corporation known as Columbia Medical Group, Inc., with each owning one-half of the shares and both acted as the corporation's employees, lessors and creditors.

In 1995, a routine IRS audit of the medical practice’s 1993 corporate tax return led to a criminal investigation. Kresock and DePaoli used corporate funds to purchase thousands of dollars worth of guns and jewelry, misrepresenting these purchases to the accounts as "office supplies." With corporate funds, they purchased several vehicles, including a Ferrari Testarossa and Harley Davidson motorcycles, and dipped into the practice to renovate their vacation home, purchase jewelry, gold coins and many other personal items and services, including child care, home furnishings, groceries, diapers, children's toys, tampons and mustache wax. Many of Kresock's receipts were altered. They did not declare the personal expenses they paid for with the practice’s funds as income on their personal tax returns. Instead the expenses frequently were treated as business-related items on the corporate returns.

The scheme was a classic corporate skim, similar to Scenario 8. The doctors took steps to conceal the personal nature of the corporation's expenditures by falsely coding the check stubs to make the expenses appear businessirelated. The purchase of a Harley Davidson motorcycle, for example, was coded as "equipment rental" for a cardiac echo machine. They also omitted income on their personal tax returns from other sources, including fees from speaking

engagements and for work performed at Bloomsburg Hospital. A jury convicted them of tax fraud. Kresock received a 20-month prison sentence, while DePaoli received 16-months. United

States v. DePaoli (unpublished) , 41 Fed.Appx. 543 (3rd _{Cir. 2002)}

Mahendra K. Tandon ran the Saint Clair Industrial Medical Center in Cleveland, Ohio during the 1980s. In April 1985, Tandon had purchased the property where his medical practice was located, but soon began taking steps to conceal his ownership of it, despite continuing to payt he mortgage on the property and also depreciated it on his 1986 and 1987 income tax returns and receiving the rental money generated by apartments and a garage located on the property. His personal income tax returns understated the income received from his medical practice. In addition, Superior Medical's corporate return for 1988 failed to report tens of thousands of dollars in medical income and Tandon's personal income tax return for 1988 failed to report the income omitted from the corporate return, which Tandon was directly involved in preparing.

In what turned out to be a very bad move, Tandon depreciated a Rolls-Royce he had leased at the end of 1986 on his 1986 and 1987 returns, and Superior Medical depreciated the vehicle on its 1988 corporate return, even though this could not be done under the tax code because neither Tandon nor Superior Medical owned the car. Tandon also reported the depreciation of the vehicle so that the IRS had no way of knowing that it was a car that was being depreciated; nowhere on any of the returns was the car described or identified and it was

depreciated in a section of the returns that specifically stated, "Do not use this part for automobiles."

Tandon also funneled money from his medical practice into several different accounts. The receipts from Superior Medical were deposited into various accounts to which Tandon had access, although his name did not appear on all of them.

Following a civil audit that prompted Tandon to file amended tax returns, the case was referred for criminal investigation. Tandon then tried to stall the investigation and gave a series of misleading statements. After indictment and a jury trial, Tandon was convicted on three counts of willfully filing false personal income tax returns for the years 1986, 1987, and 1988, in violation of § 7206(1), and one count of willfully aiding and assisting in the filing of a false corporate return for the year 1988, in violation of § 7206(2). The district court sentenced him to 18 months in prison. The conviction was upheld on appeal, which focused on Tandon’s claim that the depreciation of the Rolls Royce was the result of professional advice he had received.

United States v. Tandon, 111 F.3d 482 (6th _{Cir. 1997).}

4.7 Conclusion

In addition to being taxable, embezzlement schemes frequently involve the fabrication of records that necessarily result in false returns being filed by other entities or people, raising the specter of a double tax fraud. It is no surprise, given the well-established principle that embezzlement proceeds are income, that embezzlers often find themselves charged with tax fraud in addition to theft. Is that necessarily automatic? The next chapter discusses this issue.