Abusive Tax Scheme Halted in Nationwide Sweep

Washington DC - The Justice Department this week sued Nicholas P. Magalhaes, of Altamonte Springs, Florida, formerly of Smithtown, New York, to bar his alleged promotion of an abusive tax shelter for employers.

The government’s complaint, which was filed in the U.S. District Court for the Eastern District of New York, contends that Magalhaes and his businesses -- Asset Accumulation, Inc., Pinnacle Wealth Group, L.L.C., Strategic Ventures, Inc., and Pinnacle Wealth Concepts, Ltd. -- sell what they purport to be voluntary employees’ beneficiary association (VEBA) plans to employers. The suit alleges that Magalhaes falsely advises employers that his plans satisfy a tax-law provision that allows employers to make unlimited tax-deductible contributions to certain qualified welfare benefit plans.

The complaint alleges that Magalhaes falsely tells employers that the plans qualify as VEBAs or ten-or-more-employer welfare-benefit plans. If such plans meet certain statutory requirements, employers may deduct contributions they make to the plans to fund certain benefits for their employees. But the Justice Department complaint alleges that Magalhaes’s plans, rather than meeting the statutory requirements, are abusive tax shelters designed to enable employers to disguise as employee benefits substantial amounts of deferred compensation paid to select high-level employees. This allegedly enables the employers to improperly claim income-tax deductions for the compensation and the selected employees to improperly fail to report the compensation as taxable income.

According to the complaint, the IRS has identified more than 100 employers across the country that have participated in Magalhaes’s plans. The suit says the IRS estimates these schemes cost the Federal Treasury $ 6.7 million from 1996 through 2001.

“Law-abiding businesses deserve the assurance that their competitors are also reporting and paying their correct taxes,” said Eileen J. O’Connor, Assistant Attorney General for the Department of Justice’s Tax Division. “Stopping the promotion of abusive tax shelters and identifying and taking appropriate action against their participants are high priorities for the Tax Division.”

Today’s suit also seeks an order directing Magalhaes to give the Justice Department the names, mailing and e-mail addresses, and taxpayer identification and telephone numbers of all plan participants and persons who brokered or sold his plans.


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