The Internal Revenue Service has charged that W. Dale Hess, convicted along with suspended Maryland Gov. Marvin Mandel in Mandel's 1977 political corruption trial, owes the government more than $474,000 in back taxes and penalties, Hess's lawyers said yesterday.
The allegations of fraud cover the years 1972 through 1975, Hess attorneys William G. Hundley and Gerald H. Sherman said yesterday. Particularly at issue, Sherman added, are transactions made between Mandel and Hess in 1972 and 1973 -- years in which Hess paid no federal income taxes.
It was during that time, according to testimony in the Mandel trial in 1977, that Hess gave the governor a four-ninths interest in Hess's $250,000 share of Security Investment Co., a firm that leased office space to the Social Security Administration.
Prosecutors in the Mandel political corruption trial charged that the gift of an interest in Security Investments was part of $350,000 worth of gifts and favors that Hess and four codefendants gave the governor.
In return, the prosecutors contended, Mandel aides helped ensure passage of legislation that financially benefitted a racetrack secretly owned by Hess and codefendants Harry W. Rodgers Ill, William A. Rodgers, Ernest N. Cory and Irvin Kovens.
Hess contended that he had transfrred the Security Investments intelest to Mandel as a form of paying the governor $15,000 in legal fees that he said he owed Mandel for legal work performed between 1961 and 1967.
Last June, IRS District Director Gerald G. Portnoy wrote Hess informing him that the IRS believed he had fraudulently underreported his taxable income in 1972 and 1973. Other errors were made in tax returns through, the IRS charged.
Hess, a former state legislator who roomed with Mandel in Annapolis during the 1950s and 1960s, was by the early 1970s a millionaire with large interests in a variety of real estate ventures.
On his 1972 tax return -- in which the Harford County native listed his occupations as "executive, farmer" -- Hess claimed a $30,000 loss from his investment in Marlboro racetrack, the track that benefitted from Mandel's legislative manipulations.
On the same return, Hess reported that he lost $31,635 on his investment in Security Investment Co.
The Washington Star reported yesterday that the IRS specifically objected to the business losses Hess claimed on his interest in Security Investments. In addition, the IRS charged Hess with undervaluing his share of the proceeds from the sale of Marlboro racetrack, The Star said.
In all, according to Hess' tax attorney, Sherman, the IRS made between 20 and 25 allegations of underpayments, "many of them minor."
Portnoy's charge involves civil, not criminal tax fraud, attorneys Hundley and Sherman said yesterday. Hundley added that he was surprised by the charges because U.S. prosecutors had attempted to have Hess and Mandel indicted in 1975 on criminal income charges and failed.
"The IRS investigators had recommended that they try for a criminal tax indictment," Hundley said. "But when Weiner (Mandel's lawyer Arnold M. Weiner) and I went to the regional counsel in Philadelphia, he agreed with us that there was not enough evidence for a criminal indictment."
Sources familiar with tax investigations indicated, however, that the new charges are not surprising since IRS investigators frequently audit returns of defendants convicted in cases involving large amounts of money being used illegally.
Hundley and Sherman both flatly denied yesterday the IRS charges with Hundley labellinng them outrageous.
Tax attorney Sherman said yesterday, "We intend to fight (the IRS) both on the charges of underreporting and fraud." Hundley added that the federal government "won't get peanuts' out of this prosecution.
Although the specifics of the IRS allegations could not be determined yesterday, the attorneys agreed that a major portion of the $474,000 represents penalties the IRS is levying against Hess for allegedly underreporting his income during the years involved.
Civil fraud laws require that a 50 percent penalty be levied on the entire tax owed in a tax year if the taxpayer fraudulently misrepresents any item of income on that year's return.
Hundley said he believed the charges came as a result of Hess's refusal to grant the IRS an extension on an audit of him it was doing last June. He said the charges were made shortly after Hess refused the extension.
No hearing date has been set in U.S. tax court for the case but Sherman indicated he expected that a settlement conference between himself and IRS officials probably would be held before any hearing took place.
Mandel was suspended from the governorship Oct. 7, 1977, when both he and Hess were sentenced to four years in prison and fined $40,000 by U.S. District Court Judge Robert L. Taylor Hess, Mandel and the other four defendants currently are appealing their convictions.
There is no indication that the IRS is investigating any of the other principal defendants in the Mandel trial.
Hess could not be reached yesterday for comment on the IRS allegations.