We don’t often write about criminal tax cases here on this site, but the case of United States v. VanDemark[1] discusses a taxpayer who, per the beginning of the Sixth Circuit opinion “tried to hoodwink the IRS.”[2]  Of interest outside the criminal tax controversy context, he attempted to argue in his defense that he did not have to report cash deposits he received as income due to lack of “some guarantee” the business would keep the funds, an argument the appellate panel did not find persuasive given the facts of his case.

The opinion continues with the following broad summary:

Gregory VanDemark owns the Used Car Supermarket, which sells cars from two lots in Amelia, Ohio. In 2013 and 2014, VanDemark funneled away his customers’ down payments and left them off his tax returns. He used this stashed-away cash to finance the mortgage on his mansion. The IRS caught wind soon enough. The government charged VanDemark with crimes related to his scheme, and a jury convicted him of six counts. VanDemark moved for an acquittal on three of these counts and a new trial on all six. The district court denied both motions.[3]

The opinion has more details on the structure of Mr. VanDemark’s businesses:

Gregory VanDemark made his fortune selling cars. He’s built something of a mini-business empire in Amelia, Ohio. At the center of it all is the Used Car Supermarket, a C-corporation owned solely by VanDemark. Flanking the Supermarket are VanDemark’s three S-corporations: the VanDemark Group, the VanDemark Corporation, and Gregory Properties. Each supports the Supermarket in its own way.1 And because these are S-corporations, VanDemark must report flow-through income and deductions on his personal returns.

The Supermarket’s clientele is by and large low-income and low-credit. Customers typically finance their cars by entering into lease-to-buy agreements. The process kicks off with a large down payment. These down payments, and VanDemark’s efforts to hide them, are at the heart of this appeal.[4]

The Court than outlines the actions that eventually led to the taxpayer’s issues with the IRS:

Before 2013, everything was above board at the Supermarket on the tax front. The Supermarket’s protocols ensured all the down payments remained within the IRS’s view. To begin with, VanDemark kept a handwritten ledger at each of the two lots. Every time a customer made a down payment, his employees recorded it in one of these ledger books. They made sure to deposit every payment into the Supermarket’s bank account as well. Afterward, employees entered the bank receipts into an accounting software called QuickBooks. And as a final step, VanDemark’s tax preparer used the QuickBooks files to complete the necessary tax returns.

But in 2013, VanDemark began to short-circuit this process. He instructed an employee named Christopher McAfee to start stashing this cash in a safe at the main office. McAfee did as he was told. And, not surprisingly, the amount of cash deposited into the Supermarket’s bank account plunged in 2013 and 2014. In 2012, VanDemark deposited $265,499.25 in cash into the account. But in 2013 and 2014, that number was much reduced to $12,194.63 and $71,150.86, respectively. Because the stashed-away cash never reached the bank account, it never made it into VanDemark’s QuickBooks files. And because VanDemark’s tax preparer relied on those QuickBooks files, he failed to report the cash on VanDemark’s tax returns.[5]

Not surprisingly, Mr. VanDemark had a use in mind for this cash. The opinion notes that “VanDemark used most of this cash to pay the mortgage on his multimillion-dollar mansion.”[6]

However, he was aware that the bank that held the mortgage faced requirements to report certain cash transactions, but he was unsure of the details.  So, he decided to ask a bank employee about the issue:

Wary of attracting the IRS’s attention, VanDemark asked an employee at his bank to confirm the IRS reporting threshold. She told VanDemark that the bank had to report “[a]nything over 10,000 in cash” to the IRS. (R. 73, Trial Tr. (Luck), PageID 1086-87.) So with this information in hand, VanDemark began to make cash payments toward his mortgage several times a month, keeping each payment below $10,000.[7]

But his attempts to reduce his taxes did not stop with the cash from deposits being diverted to pay the mortgage.  The opinion notes:

But VanDemark’s tax evasion didn’t stop there. He overreported deductions on his personal returns as well. Aside from his Ohio mansion, VanDemark owned two other residences: a novelty house built in the shape of a paddleboat and an oceanfront property in Florida. VanDemark claimed construction, maintenance, and insurance expenses on these properties as business expenses for his S-corporations. He pulled this off by telling the IRS that he was building the paddleboat house as a bed and breakfast, the Florida residence was his business headquarters, and his Ohio mansion was a rental property. Thanks to these efforts, VanDemark and the Supermarket paid no federal income tax in 2013 and 2014.[8]

However, it turned out that inquiring of the bank employee about how much he could pay in cash before the bank had to notify the IRS was going to lead to the exact type of IRS attention he appeared to be attempting to avoid.  Apparently, he didn’t realize that the employee might consider the very act of asking such a question and then making cash payments just below those levels would look suspicious to the bank employee:

His enquiries at the bank had raised some eyebrows. The bank employee reported her conversation with VanDemark to her Bank Secrecy Act officer. This information made its way to the IRS, which deployed a special agent to investigate.[9]

An IRS special agent approached Mr. VanDemark posing as a businessman interested in buying his business. Not surprisingly, Mr. VanDemark felt he needed to tell the potential buyer that there was a bit of “off book” activity and this business was truly more profitable than it would appear from the tax returns and his Quickbooks ledger:

In December 2014, an IRS special agent contacted VanDemark. Posing undercover as a businessman, he expressed an interest in buying VanDemark’s businesses. The pair spoke over the phone several times. In one of these calls, VanDemark spilled the beans. He boasted that he had about “$16 million in assets” and his businesses “net over $1 million a year.” (R. 90, Gov’t Ex. 2, PageID 1524-25, 1546.) VanDemark all but admitted to tax evasion by explaining that he “pulled out . . . 25% of that big figure” “in the last couple of years [2013 and 2014].” (Id. at PageID 1549-50.) What’s more, he kept track of the stashed-away 25% “just in case.” (Id. at PageID 1551.) VanDemark let slip about his deductions as well. He admitted that he “shoved all expenses on the company” so that he wouldn’t “end up paying a bunch of dang taxes.” (Id. at PageID 1527.) And to top it all off, VanDemark confessed he was “kind of . . . giving [the agent] information [he] shouldn’t even be talking about.” (Id. at PageID 1550.)[10]

At this point, the IRS decided now was the time to obtain search warrants, seize records and begin questioning Mr. VanDemark. Apparently not realizing that his “buyer” was using his conversations to obtain incriminating information that the IRS agents now questioning him were aware of, Mr. VanDemark was, shall we say, not entirely truthful with the agents per the Court’s description of the events.

The IRS had heard enough. In July 2016, it executed search warrants at VanDemark’s three residential properties and the two Supermarket lots. Agents recovered the handwritten ledgers from the two lots. They found VanDemark at his paddleboat-shaped house and interviewed him for over three hours. He told the agents that his QuickBooks files contained all of his business records. At no point did he mention the ledger books. Asked whether he had skimmed cash from his dealership, VanDemark claimed that his employees deposited everything into the Supermarket’s bank account.[11]

As you have probably surmised, the IRS now had enough material to obtain an indictment against Mr. VanDemark:

Fast forward a year and a half, and a grand jury indicted VanDemark on six counts. The first four charged VanDemark with helping prepare false tax returns, in violation of 26 U.S.C. § 7206(2). Counts One and Two dealt with the Supermarket's 2013 and 2014 corporate returns. Counts Three and Four concerned VanDemark's 2013 and 2014 personal returns. Count Five charged VanDemark with structuring payments, in violation of 31 U.S.C. § 5324(a)(3). And Count Six charged VanDemark with making false statements to federal agents, in violation of 18 U.S.C. § 1001.[12]

At his trial things did not go well for Mr. VanDemark:

The trial began in March 2020. After the government rested, VanDemark made a Rule 29(a) motion for acquittal on Counts One, Two, and Three. The district court denied the motion. But VanDemark renewed it twice before the jury reached its verdict: once at the end of his case and again after the district court instructed the jury. The district court denied the motion twice more.

The trial lasted six days. In the end, the jury found VanDemark guilty on all counts. VanDemark renewed his motion for acquittal under Rule 29(c). He also moved for a new trial on all six of his counts under Rule 33. In a 17-page written order, the district court denied both motions. In May 2021, the district court entered judgment. And now, VanDemark appeals.[13]

Mr. VanDemark appealed this result, arguing that the trial court improperly denied his motion to acquit.  Key to this is his argument that, in fact, those deposits were properly not reported as income.  As the opinion describes his argument:

The first two counts charged VanDemark with assisting in the preparation of false corporate returns for 2013 and 2014. VanDemark’s argument begins and ends with Commissioner v. Indianapolis Power & Light Co., which says that a deposit isn’t taxable income unless “the taxpayer has some guarantee that he will be allowed to keep the money.”3 493 U.S. 203, 210 (1990) (emphasis added). VanDemark claims that the lease agreements tied the Supermarket’s hands. If a customer decides not to purchase the car at the lease’s end, says VanDemark, the customer can demand a refund of the down payment under the contract. And so, the argument goes, the Supermarket lacked the necessary “guarantee,” and the down payments were never taxable as a threshold matter.[14]

This issue is more in line with what we usually discuss in these articles. So, did the appeals court agree with Mr. VanDemark’s argument that the deposits were not taxable and therefore he could not have been guilty of assisting in the preparation of false income tax returns?

Well, not quite.  First, the panel did not agree Mr. VanDemark did not have some guarantee he would be allowed to keep the money:

…[T]he Supermarket issued virtually no refunds across decades. The Supermarket found ways to keep these down payments at its discretion, the contract notwithstanding. And that means the down payments were taxable upon receipt consistent with Indianapolis Power.[15]

The panel noted a number of reasons why the corporation was virtually assured that it would keep the deposits it received:

We begin with the Supermarket’s track record on refunds. Christopher McAfee worked at the Supermarket for no fewer than 30 years. And he testified that, in those 30 years, he saw the down payment refunded “maybe, one, two, three” times total. (R. 72, Trial Tr. (McAfee), PageID 1470.) The record contains additional corroboration as well. A special agent reviewed VanDemark’s ledger books from 2012 to 2014 and found only one refund. What’s more, that single refund wasn’t even issued at the end of the lease under the contract. Instead, VanDemark refunded the deposit the same day the customer paid it. Perhaps the customer changed his or her mind before finalizing the lease, and the Supermarket issued a refund at its discretion. In any event, that single refund had nothing to do with the contract. This means that the contract terms forced VanDemark’s hand a grand total of zero times from 2012 to 2014 (and maybe “one, two, three” times in 30 years).

Simply put, these numbers belie VanDemark’s Indianapolis Power argument. One way or another, the Supermarket engineered for itself “some guarantee” of keeping the down payments — that much is clear enough. Certainly, this conclusion is within a rational jury’s reach. VanDemark’s control is shown in the contract itself and in how VanDemark applied that language. True, the contract requires the Supermarket to refund the down payment if the customer returns the car at the end of the lease. But that’s only if the excess mileage fee and the cost of damages to the car do not exceed the down payment amount.

And as the district court emphasized, these variables are couched in significant ambiguities. The Supermarket exploited them to maintain control over the down payments. On excessive mileage, the contract imposes a fee “equal to $.50 per mile for miles to be computed at the end of the lease and balance due.” (R. 59, July, 17, 2020 Op. & Order, PageID 247.) But importantly, the contract fails to specify a base mileage. As a practical matter, this allows VanDemark to define the number of excess miles after the lease ends. This theme continues with the second variable. The contract says that damages beyond “ordinary wear and tear” come out of the deposit. (Id.) As for calculating those costs, however, the contract places everything in VanDemark’s hands. It specifies that “a representative from VANDEMARK . . . shall be the sole judge and arbiter as to whether or not any disputed damage is due to ordinary wear and tear or due to some other cause.” (Id. at PageID 247 (emphasis added).) These ambiguities enable the Supermarket to jack up both variables on the back end to prevent a refund if it wishes.[16]

But the panel notes that even if Mr. VanDemark was correct in his view under these facts that the deposits were not immediately taxable upon receipt, Mr. VanDemark failed to treat them as taxable once any potential risk of having to return the deposits went away:

The plot thickens even more from here, and not in VanDemark’s favor. VanDemark argues that everything rises and falls with the contract’s refund language. He doesn’t dispute that once a customer converts the lease into a purchase, the refund provision no longer applies. In other words, the down payment is taxable by that point. If only the refund language didn’t tie his hands, no doubt VanDemark would have reported everything — that’s the implication of his Indianapolis Power argument, anyway. This begs the question: When those 2013 and 2014 leases were eventually bought out — whether in 2013, 2014, or later — did VanDemark report the down payments?

Not quite. It turns out that at least seven customers (1) began their leases in 2013 or 2014 and (2) bought out their cars within that same window. One of these leases ended in 2013, and the remaining six in 2014. And under VanDemark’s own theory, the down payments for these leases should have appeared on the Supermarket’s 2013 and 2014 returns. But they did not, which means that VanDemark fails his own test. And VanDemark says nothing about the 2013 and 2014 leases that were bought out after 2014. He could have pointed the IRS to those tax returns where he eventually reported the down payments for these leases. That way, his failure to report those payments in 2013 and 2014 becomes a timing issue that falls short of a criminal prosecution. But VanDemark did no such thing. All of this shows that he never intended to report any of the down payments, with or without Indianapolis Power. The district court properly denied VanDemark’s acquittal motion as to Counts One and Two.[17]

The failure to ever include such deposits as income could reasonably be interpreted as evidence he acted to avoid paying tax on these funds.

[1] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/car-salesman%e2%80%99s-tax-fraud-conviction-upheld/7dm34 (retrieved July 1, 2022)

[2] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[3] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[4] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[5] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[6] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[7] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[8] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[9] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[10] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[11] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[12] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[13] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[14] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[15] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[16] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022

[17] United States v. VanDemark, CA6, Docket No. 21-3470, June 30, 2022