The Internal Revenue Service and the Justice Department earlier this year used an undercover business front to conduct a criminal investigation of a Georgetown accountant who sells artwork to wealthy clients in need of year-end tax shelters.
The undercover investigation by the IRS is part of what officials described as a new national effort to crack down on "abusive" tax avoidance by the rich. This is the first time the IRS has used a business front in the mid-Atlantic region as an investigative method.
Early this year, two undercover IRS agents approached Georgetown investment counselor Charles J. Walsh and told him they were seeking to invest in a tax shelter that would shield the previous year's income of a janitorial service in suburban Maryland.
According to an IRS affidavit and transcripts of secret tape recordings attached to a search warrant, the IRS had probable cause to believe Walsh and two associates were "involved in the promotion and sale of fraudulent and abusive tax shelters . . . which lack any economic purpose other than the generation of false . . . tax benefits . . . that greatly exceed the taxpayer's actual cash investment."
No charges have been filed in the case, which is before a federal grand jury.
In a sale of four lithographic plates to two undercover agents, Walsh allegedly backdated the sale documents, including a $184,000 promissory note that the agents allegedly were advised to destroy, according to the affidavit.
By doing so, Walsh arranged for the undercover men to eliminate totally their 1981 tax liability and a large portion of their 1982 and 1983 tax liabilities by investing only $16,000 in cash, the affidavit said.
According to the IRS affidavit, Walsh and an associate, George Michael Whitfield, have sold lithographic plates made by a Spanish-based artist, Frank R. Carmelitano, to 15 to 20 Washington-area doctors, dentists and lawyers.
Among the prominent investors who put up a minimum cash investment of $3,000 was Peter F. Krogh, dean of the Georgetown University School of Foreign Service. There was no allegation that investors, including Krogh, acted improperly. Krogh was expected to be questioned in the case, officials said.
"I bought a couple of tax shelter investments from him Walsh ," Krogh said yesterday, adding that he thought his total cash outlay for Walsh's lithographic plates was about $11,000 over two years. "I'm a private citizen who makes investments and files his taxes."
Agents seized business records at Walsh's 3062 M St. NW offices in late July.
Plato Cacheris, an attorney for Walsh, said yesterday that Walsh has not been charged in the investigation, and denies that he was involved in any fraudulent activity. Cacheris also said that if charges are filed he intends to challenge the investigative methods used by IRS agents as "an overextension of Abscam."
"They are now going into the offices of businessmen," Cacheris said. "Instead of sending in Arab sheiks to inveigle congressmen, they are now sending in IRS agents posing as janitors to buy tax shelters."
Warren L. Miller, Whitfield's attorney, said yesterday that he found the IRS investigative methods "repugnant to any concept of fair play," and added that despite his "abhorrence" for the IRS conduct, my client still denies being involved in any conspiracy to defraud the IRS."
In several instances, according to the transcripts, Walsh said he backdated the sale of artwork into the previous tax years. He also explained to the agents how he could use phony promissory notes to inflate the value of their investment, thus supporting greater investment credits and depreciation deductions claimed on their tax returns.
In a transcript of a conversation recorded on March 5, Walsh explained that the $184,000 promissory note signed by IRS agents to accompany their $16,000 cash investment was what the affidavit described as a sham piece of paper useful in proving to the IRS in any future audit the value of the lithographic plates.
"When you sign it the promissory note , fold it up and put it in your pocket. Nobody's going to make a copy of it. So, you're holding it for safekeeping, if you understand what I mean," Walsh was recorded as saying.
When the undercover men pressed Walsh to determine what he was really trying to tell them, Walsh said, more explicitly, "You know what I would do with the thing?"
"What?" asked IRS agent Jules R. Dorner.
"Throw it off the Bay Bridge on your way home."
Walsh, who described himself in one newspaper profile as a man who owns "a house in Georgetown, a Bentley and an office with a fireplace," would not comment when reached yesterday.
The transcripts of his conversations with the IRS agents provide a glimpse into some of Walsh's views of the tax agency.
Said Walsh in one recorded conversation: "We'll deal with the IRS. F--- the IRS . . . . The guys are not boogie men. They're, ah, most of the guys went to two years of ah, two years of junior college and couldn't pass the exams to go ahead, so they go over to the Internal Revenue and get a job . . . . Whenever somebody's audited we always have them referred to a field office where they have a bunch of racial expletive trainees generally."
For every dollar of their investment, according to the affidavit, Walsh told the agents they could claim $4 in tax deductions, at least twice the amount currently allowed by IRS rules. In one illustration from a brochure distributed to Walsh's clients, an investor in the 50 percent tax bracket who put up $16,000 in cash could reap an immediate first year tax savings of $36,000, and decreasing amounts in subsequent years. The total tax savings, minus investment and Walsh's $2,000 fee, was projected at $60,000.
The investigation of Walsh was approved by senior officials of the tax division of the Justice Department. Officials familiar with the investigation said that the case represents a newly focused effort by the department to discourage what is described as the growing abuse by wealthy investors of tax code provisions that create large deductions out of minimal cash investments.
Some of these investments in artwork, oil and gas well drilling and some real estate ventures are designed never to pay off and, therefore, are created not for their potential economic value in the future but for short-term tax writeoffs, officials said.
In an unrelated matter this year that involved no allegations of fraud, The Washington Post reported that Attorney General William French Smith stood to receive $175,000 in tax deductions over three years from $66,000 in investments in gas-well drilling ventures. Two weeks after the public disclosure of Smith's tax shelter he said he would limit his tax savings to the actual amount he invested in the drilling ventures.
The IRS affidavit explained that in the Walsh case the artist "would produce lithographic plates for sale to investors in the United States at $40,000 per plate; then Carmelitano will lease back the plate for five years with unlimited use to produce prints for sale.
"He the artist agrees to pay the investor . . . minimum rental payments of $1,000 per year or 60 percent of the proceeds from his sale of the prints."
According to Walsh's brochure, the investor puts up $3,000 in cash for each plate and signs a promissory note for the remaining $37,000. "For his part, the investor enjoys an accelerated depreciation deduction upon purchase of the plate, plus an investment tax credit," according to the affidavit.
Walsh, however, allowed the agents to keep the lithographic plates, thus eliminating any possibility that their investment would generate income through the artist, according to the affidavit.