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Cypen & Cypen
MARCH 1, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


The United States Court of Appeals for the Ninth Circuit was asked to determine whether -- and if so, under what circumstances -- a criminal defendant’s retirement benefits are available as a source of funds to compensate crime victims. Answering these questions requires reconciling two federal statutory schemes: one, the Mandatory Victims Restitution Act of 1996, governing payment of restitution to crime victims, and the other, the Employee Retirement Income Security Act of 1974, regulating private pension plans. Underlying each statute is a weighty policy determination. MVRA rests on the recognition that it is essential that the criminal justice system recognize the impact that crime has on the victim, and, to the extent possible, insure that the offender be held accountable to repay these costs. ERISA is meant to assure that retirement funds shall remain inviolate until retirement. Taking a close look at the statutory implementation of these two important policies, the appellate court concluded that criminal restitution orders can be enforced by garnishing the retirement funds, but with the funds only payable when the defendant has a current, unilateral right to receive payments under terms of the retirement plan. United States of America v. Novak, Case No. 04-55838 (U.S. 9th Cir., February 22, 2007).

2. RETIREMENT BOARD REJECTS PENSION INCREASE FOR FORMER LAWMAKERS: reports that the State Retirement Board unanimously rejected petitions by three former Massachusetts State Representatives who wanted their pensions increased to reflect the perquisites of office, including the value of state parking spaces on Beacon Hill, a $600 monthly stipend for expenses and costs for traveling to and from the State House. The former lawmakers were aiming to capitalize on a recent Supreme Judicial Court decision that allowed a former University of Massachusetts president to include his housing allowance in calculation of his retirement plan and boost his pension by $17,000. The State Treasurer, who serves as chairman of the retirement board, said that allowing the former legislators to include the perks in their pensions would spark a stampede by hundreds of other retired state employees seeking similar benefits. The representatives said they were both disappointed and angered by the board’s decision. Each is considering filing a lawsuit to fight to increase his pension. Talk about cohones.


From we learn that, despite shortfalls in other public pension plans in the state, the Illinois Municipal Retirement Fund has returned to fully funded status for the first time in six years. The fund, which represents 2,900 local units of government and 250,000 employees and retirees, reached 100.5% funding of its pension obligations as of December 31, 2006. Since then, the IMRF’s funding has risen to 103%, meaning the agency has $1.03 in assets for every $1.00 in liabilities. The IMRF was last above 100% in 2001, but a falling stock market took funding levels below 90% in 2002 and 2003. With $23 Billion in assets, the IMRF is the second-largest public pension fund in Illinois, trailing only the Illinois Teachers Retirement System, which has assets approaching $40 Billion. Last year, the IMRF enjoyed a return of 13.9% on its investment portfolio, roughly mirroring the market.


Shortly after we did a piece on major sports pension plans, including the National Basketball Association (see C&C Newsletter for February 15, 2007, Item 2), says that a small group of former NBA players will finally receive pensions. The former players who will be affected are those who spent three or four years in the NBA, or its predecessor, the BAA, prior to 1965. Previously, pre-1965 players had to have five years of service to qualify. The pre-1965 players will now receive $3,600 a month per year of service compared to the $2,400 per year of service they received under the previous pension program. The change is retroactive to July, 2005, meaning the 40 or so pre-1965 players with three or four years of service who were excluded from the old pension plan will soon be receiving lump sums equal to 20 months’ worth of pension checks. He shoots...he scores!


What can be accomplished through use of onsite visits to money managers? More than just part of due diligence, onsite visits can be useful as an educational experience. Here are some benefits:

  • Verification of Operations. Onsite, one can see the physical location and equipment, as well as the personnel involved in daily operations of the firm.
  • Verification of Actual Investment Process. Listen in on investment committee meetings first hand.
  • Verification of Operational Capabilities. Witness actual trading platforms and back office operations.
  • Meeting with Key Personnel. In addition to meeting with key personnel such as portfolio managers, compliance officers and management, one also has the ability to talk to people at the firm with whom there would not otherwise be contact, as they do not perform “road shows” of marketing professionals or portfolio managers.

We thank our client City of Gainesville Consolidated Police Officers’ and Firefighters’ Retirement Plan for developing these ideas.


We recently reported that former Maryland Pension Fund Manager Nathan Chapman was seeking a reduction in his sentence (see C&C Newsletter for December 14, 2006, Item 5). Now, as it turns out, Chapman’s trial judge should have stayed within Federal sentencing guidelines of five years and three months to six and a half years in prison, rather than doling out a seven and one half year prison sentence. Thus, the new sentence at the lowest end of the range results in a two year cut in jail time for Chapman.


The Internal Revenue Service has identified twelve of the most blatant scams affecting American taxpayers and warned people not to fall for schemes peddled by scamsters. IRS urges taxpayers to avoid the following common schemes:

  1. Telephone Excise Tax Refund Abuses. Early filing shows some individual taxpayers have requested large and apparently improper amounts for the special telephone tax refund. In some cases, taxpayers appear to be requesting a refund of the entire amount of their phone bills, rather than just the 3% tax on long distance and bundled service to which they are entitled.
  2. Abuse of Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift under-valued property to Roth Individual Retirement Arrangements. In one variation, promoter has the taxpayer move under-valued common stock into a Roth IRA, circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.
  3. Phishing. This technique is used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for loans in their names. These Internet-based criminals pose as representatives of a financial institution, or sometimes IRS itself, and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking website. The website then solicits a Social Security and credit card number. It is important to note that IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts.
  4. Disguised Corporate Ownership. Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising ownership of the business or financial activity. Once formed, these anonymous entities can be, and are being, used to facilitate underreporting of income, non-filing of tax returns, listed transactions, money laundering, financial crimes and possibly terrorist financing.
  5. Zero Wages. In this scam, which first appeared in the Dirty Dozen in 2006, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 showing zero or little income is submitted with a federal tax return. The taxpayer may include a statement rebutting wages and taxes reported by the payer to IRS. An explanation on Form 4852 may cite statutory language behind Internal Revenue Code sections 3401 and 3121 or may include some reference to the paying company refusing to issue a corrected form W-2 for fear of IRS retaliation.
  6. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote filing fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years.
  7. American Indian Employment Credit. Taxpayers submit returns and claims reducing taxable income by substantial amounts citing an American Indian employment or treaty credit. Although there is an Indian Employment Credit available for businesses that employ Native Americans or their spouses, there is no provision for its use by employees.
  8. Trust Misuse. For years unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits.
  9. Structured Entity Credits. Promoters of this newly-identified scheme are setting up partnerships to own and sell state conservation easement credits, federal rehabilitation credits and other credits. The purported credits are the only assets owned by the partnership and once the credits are fully used, an investor receives a K-1 indicating the initial investment is a total loss, which is then deducted on the investor’s individual tax return. Forming such an entity is not a viable business purpose. In other words, the investments are not valid and the losses are not deductible.
  10. Abuse of Charitable Organizations and Deductions. IRS continues to observe use of tax-exempt organizations improperly to shield income or assets from taxation. This can occur when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income. Contributions of non-cash assets continue to be an area of abuse, especially with regard to overvaluation of contributed property. In addition, IRS is noticing the return of private tuition payments being disguised as charitable contributions to religious organizations.
  11. Form 843 Tax Abatement. This scam rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by IRS through the Substitute for Return Program.
  12. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

IRS continues to watch scams that fall of the list. Five of last year’s Dirty Dozen scams (see C&C Newsletter for February 9, 2006, Item 8) rotated off of this year’s list. Absence of a particular scheme from the Dirty Dozen should not be taken as an indication that IRS is unaware of it or not taking steps to counter it. IR-2007-037 (February 20, 2007).


Speaking of telephone tax refunds (see the above item), millions of taxpayers may be missing out on legitimate telephone excise tax refunds because they did not make the one-time required request. About 30% of all taxpayers have not requested the telephone tax refund. The government stopped collecting the long-distance and excise tax last August, after several federal court decisions held the tax does not apply to long-distance service as it is billed today. Federal officials authorized a one-time refund of the federal excise tax collected on service billed during the previous 41 months, stretching form March 2003 through July 2006. The tax continues to apply to local-only phone service. For people requesting the telephone tax refund, it adds $30 to $60 or more onto a refund. For tips to help you figure the refund correctly and get it quickly, check out IR-2007-040 (February 23, 2007), which is available through


The Department of Labor’s Employee Benefits Security Administration enforces the Employee Retirement Income Security Act of 1974, which sets certain minimum standards for private sector pension plans. On the basis of the United States Government Accountability Office’s prior work, the Senate Committee on Health, Education, Labor and Pensions asked GAO to review EBSA’s enforcement program. Specifically, a new report addresses (1) the extent to which EBSA has improved its compliance activities since 2002; (2) how EBSA’s enforcement practices compare to those of other agencies; and (3) what obstacles, if any, affect ERISA enforcement. To do this task, GAO reviewed EBSA’s enforcement strategy and operations, and interviewed officials at EBSA, Internal Revenue Service and Securities and Exchange Commission, among others. Back in March 2002, GAO identified weaknesses in EBSA’s enforcement program, despite the agency’s actions to strengthen it. Since that time, EBSA has, among other things, promoted coordination among regional investigators and increased participation in its voluntary correction programs, as GAO recommended. EBSA has also recruited investigators with advanced skills in accounting, finance, banking and law who officials believe are necessary due to ERISA’s technicalities. Yet some weaknesses identified in 2002 remain. Specifically, EBSA still has not adequately assessed the nature and extent of ERISA noncompliance, even though it has taken steps to do so. Without these data, EBSA is not positioned to focus its resources on key areas of noncompliance or have adequate measurable performance goals to evaluate its impact on improving industry compliance. GAO also found that while some regional offices did routinely attempt to confer with their respective regional office of the SEC -- the agency that oversees many of the same pension service providers under securities laws -- for case leads or to consider trends of potential pension violations, others did not. Lastly EBSA’s overall attrition rates remain high, with many investigators leaving for employment outside the federal government, yet EBSA has taken limited steps to evaluate the effect such attrition has on its operations. GAO-07-22 (January 2007).


A significant amount of Generation X investors who do not put money into an individual retirement account would do so if they only had to make an initial investment choice and then forget about it, according to a survey reviewed by The survey of 500 people from ages 25 to 40 found that 44% of those who do not currently fund an IRA would be more likely to invest in one if there was a single investment choice. The same view was shared almost equally between current IRA investors and non-investors. Twenty percent of surveyed Gen-Xers do not know how an IRA works or even what it is, despite the fact that 40% of those who are saving for retirement have an IRA.


“Too many people think life is a spectator sport.” Katharine Hepburn

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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