UNITED STATES OF AMERICA v. DANIEL D. WEDDINGTON; JAMES R. EARL; MID-CON PETROLEUM INC., AURORA CAPITAL GROUP, INC, JEFFREY GAUMER
The tax law suit against the defendants; Daniel D. Weddington, James R. Earl, Mid-con Petroleum Inc., Jeffrey L. Gaumer and Aurora Capital Group, Inc., was filed by the government of United States representatives in April 2008. The case was heard in Ohio Southern court and was presided over by Judge James L. Graham. The jurisdiction was deemed appropriate because the defendants resided in Ohio. As well, most of the crimes that had been allegedly perpetrated by the defendants had taken place in this particular judicial district (Anonymous, 2008). The civil action was pursued following a request by the chief counsel of the IRS and a delegate of the US treasury. Directions for commencement of the same were issued by a delegate of the US Attorney General.
The defendants, through the Intangible Drilling Cost (IDC) scheme, defrauded the IRS resulting in unfair gains at the expense of unsuspecting investors and massive losses to US government (Anonymous, 2008). Daniel Weddington and James Earl owned 50% stake each in Mid-con whose core business activity was drilling oil and gas wells (Anonymous, 2008). Mid-con aggressively promoted an investment opportunity where customers would enter into joint venture agreements with the company to supposedly acquire a working interest in drilling of new oil and gas wells. The company advised the participants that this kind of engagement entitled them to 100% tax deduction on the investment made in a particular year. Jeffrey Gaumer facilitated the recruitment of investors into the IDC scheme as evidenced by the 'finder's fee' paid out to him by Mid-Con (Anonymous, 2008).
Mid-con Petroleum Inc., through its agents Weddington and Earl, intentionally issued falsifying statements to its investors purporting that the investment made were attributable to the intangible cost of drilling new wells (Anonymous, 2008). Consequently, such investments were 100 percent deductible under the IRC. However, the participants were not legally eligible for the tax deduction since such eligibility only exists in transactions of significant economic substance. Mid-con IDC scheme on the other hand lacked economic substance since the participants would only benefit in income tax savings, which in fact resulted in income tax losses for the US government. Indeed, the government maintained that the ventures acted as 'unlawful tax shelters' (Anonymous, 2008) .The IRC provides that deductions are made for actual IDC in the same year that they are paid out by the participants. However, Mid-Con agents overstated the actual IDC for various ventures and in some instances sold duplicative interests over same wells (Anonymous, 2008). As a result, the deductions claims presented to the IRS were inflated and did not adhere to the IRS required timeframe.
The IRS estimated revenue losses of up to $6.9M between 2001 and 2004 assuming that the entire scheme was a fraud (Anonymous, 2008). Evidently, the IRS lost a substantial amount of taxpayer's money by paying out tax deductions claims to individuals who were not entitled to such claims. In addition the US government lost revenue in terms administrative costs associated with detecting and correcting inaccurate tax returns. This meant that the IRS would incur further costs in resolving the matter. The public's confidence in IRS as an institution expected to ensure fairness in tax compliance issues was also shaken.
The defendants clearly violated multiple tax practice standards. Firstly, by organizing and marketing the Mid-Con IDC scheme, the defendants knowingly promoted a tax shelter that assisted participants to evade income tax payments. Secondly, the defendants made false statement regarding eligibility for tax deductions over the investments made by participants thereby misleading them into filing illegal claims and consequently understating their federal income liabilities (Anonymous, 2008). Additionally, the defendants interfered with IRS investigations by altering information and withholding critical documents required in the investigation. This conduct significantly interfered with administration as well as enforcement of the internal revenue law. Mid-Con, through weddington and Earl overstated the value of the IDC to the participants thereby inflating the value of claimed deductions (Anonymous, 2008). In fact, a number of the IDC were proven to be nonexistent and had therefore yielded fictitious deductions. The defendants knowingly made these gross valuation overstatements in order to understate the participants' liability for tax. Further, the defendants knowingly advised and assisted the IDC scheme participants with information that resulted in understatement of personal tax liability.
In their defense, the defendants maintained that the IDC scheme was legitimate and continued its promotion during the investigation period. In fact, the defendants modified various items in the scheme in attempts to legitimize and appear compliant with the Internal Revenue Code. For instance, Mid-con started filing partnership federal income for the joint ventures after IRS raised questions and changed the wordings in demand notes to appear in compliance with IRS regulations (Anonymous, 2008). The court moved to issue permanent injunction to the defendants to bar them as well as any party acting on their behalf from engaging in such conduct in future. Since the defendants were found to have engaged in conducts that interfered with enforcement of internal revenue laws, the court moved to issue an injunctive relief against them as well as their agents in order to prevent the recurrence of similar incidences in future. The civil penalties were issued since the court pursued civil proceeding in the matter. Criminal proceedings are normally pursued in cases where the defendant has committed a crime directly to an individual thereby causing harm to the entire state (Edwards & Edwards, 2008). However, in the subject case, the defendants committed crime against specific entities which necessitated a civil proceeding and subsequent civil penalties.
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