The Internal Revenue Service and the Justice Department are investigating allegations of criminal tax fraud by the Zale Corp., the nation's largest jeweler, which may be liable for more than $100 million in back taxes and penalties, according to documents filed in U.S. District Court here.
The massive ongoing investigation surfaced in an attempt by the federal agencies to defend themselves against legal maneuvers they say could undermine both the investigation of Zale and other complex, long-range criminal tax investigations of major corporations.
Federal officials accuse Zale and its attorneys of using the Freedom of Information Act to tie up the investigation with requests for vast quantities of agency documents.
With more than 1,700 stores in 49 states and almost $905 million in sales annually, Zale is the leading retailer of jewelry in the United States, according to industry sources. The Dallas-based corporation also sells shoes, home furnishings, drugs and sporting goods through some of its 379 subsidiaries.
The investigation focuses on tax returns filed for fiscal 1970 to 1975, and involves allegations by the corporation's former treasurer of wrongdoing, including making false bookkeeping entries to evade corporate income taxes and making illegal political contributions.
Former treasurer Sol Shearn Rovinsky was fired by Zale in 1976 and charged by the company at the time with stealing $200,000 in corporate funds, according to news reports. Rovinsky was convicted in October 1977 of extorting funds from Zale, according to other news reports. $ according to an affidavit by an IRS attorney assigned to the investigation, the former treasurer admitted making false accounting entries and charged that corporate officials were aware of his actions.
The chairman and vice chairman of Zale, Ben A. Lipshy and Donald Zale, have been advised by the IRS that they are subjects of a criminal investigation, according to documents filed with the Securities and Exchange Commission by Zale.
The investigation apparently began in 1976, when Zale's corporate tax preparer approached the IRS and suggested that earlier tax returns might have been in error.
After the investigation began, attorneys from the law firm of former IRS commissioner Mortimer Caplin, who were representing Zale, began filing requests with the IRS for documents relating to the investigations. At one point those requests covered more than 500,000 pages of documents, the IRS noted. The scope of the request has since been reduced.
Responding to those requests, even when the response was to say no, consumed huge blocks of time and slowed the pace of the investigation, according to documents filed in court. The issue of how much the government must turn over to Zale is pending before U.S. District Court Judge Gerhard A. Gesell.
At one point IRS workers spent over 2,000 hours reviewing documents requested to determine what the IRS response should be. Because under law federal agencies may charge only for time spent locating the documents in question or copying them, the IRS could charge Zale only $80 for the effort.
In fact, the government alleged at one point, Zale's attorneys may have succeeded in wiping out nearly a third of the possible criminal case against Zale by delaying the investigation until the statue of limitations ran out on some alleged offenses.
"If this type of use of the Freedom of Information Act by large corporations that are the subject of inherently complex criminal tax investigations . . . is sanctioned . . . effective investigation and ultimate prosecution of large corporations involved in sophisticated and difficult to trace tax fraud violations will become extraordinarily difficult," government lawyers argued after a request for a detailed index of the documents in question.
Since 1975, when documents were made more easily available under the FOIA, the act has been increasingly used for purposes including "resisting assorted types of government enforcement proceedings," according to Robert Saloschin, director of the Justice Department's information, law and policy office.
Richard E. Timbie, an attorney for Zale, denied that the FOIA requests had been used to tie up the investigation. Because the IRS was unwilling to work out the requests for information informally (the FOIA requests took longer than they might have otherwise, he said.)
But he also noted that workers at the IRS are under legal obligation not to disclose certain types of taxpayer information and had to spend time in careful study of requested documents.
Zale Corp., which has included details of the IRS investigations and other investigations in its filings with the SEC, traces many of its legal problems to the allegations of the former treasurer.
Besides mentioning the IRS investigation, Zale noted in a report on fiscal 1979 that the company made payments to employes in other countries that "may have violated local law or facilitated such violations" in years before 1978.
Since then the corporation has revised its practices, the report said. The report also noted that Zale, in 1977, advised the U.S. Customs Service that it may have underpaid customs duties on some import transactions. s