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November 13, 2004
Settlement reached in Kapok suit
By JIM McBRIDE
jim.mcbride@amarillo.com
Amarillo Globe-News
Amarillo plaintiffs and a Virgin Islands-based firm reached an out-of-court settlement this week in a federal racketeering lawsuit filed by investors who claimed they were victims of a fraudulent offshore tax-shelter scheme.
In the wake of the Amarillo suit, the U.S. Treasury Department and the Internal Revenue Service warned potential investors in June to avoid questionable Virgin Islands tax shelters.
The suit was filed earlier this year by MDS Holdings LLC, Michael D. Smith, ACF Management and Alvin Fults against Kapok Management, Peter C. Fagaon, James Ferguson CPA, Jonathana David Jackson CPA and the Horne CPA group.
Kapok has been the subject of a federal grand jury investigation in the U.S. Virgin Islands, and one Kapok associate has pleaded guilty to criminal charges of attempting to evade U.S. tax laws.
Parties in the case have not filed settlement documents, but advised the U.S. District Court in Amarillo that the case was settled after a mediation conference Wednesday.
Details of the proposed settlement were unavailable Friday and the agreement is expected to be confidential.
The Globe-News was unable to reach attorneys for the plaintiffs or defendants Friday for comment.
According the suit:
Ferguson, a CPA who had an Amarillo office in the same building as Fults and Smith, told the men they could cut their taxes using Kapok's tax strategy. The tax shelter's premise was to take advantage of Virgin Islands tax laws, which provided a 90-percent tax break in some cases.
In February 2002, Smith and Fults entered into investment agreement with Kapok. Each paid $10,000 to Kapok as an invesment fee, and each paid $40,000 in consulting fees to Horne CPA group.
Acting on advice from Ferguson, Fagan and Jackson, Smith and Fults established Virgin Islands residency, bought a condo there and set up an office. On May 20, 2003, IRS agents executed various search warrants at Kapok. IRS agents later told Smith and Fults the Kapok tax strategy was illegal and said they would go to prison if they filed tax returns based on the strategy.
Kapok and the other defendants filed court documents denying claims in the Amarillo suit.
In a nationwide alert issued in June, the Treasury Department urged potential investors to avoid some Virgin Islands tax shelters.
Promoters of the schemes told investors they could establish Virgin Islands residency by spending less than a year in the Virgin Islands and cut their U.S. income tax liability, according to the alert. The alert said taxpayers who knowingly use such shelters could be guilty of evading U.S. tax laws.
Posted by afinta at November 13, 2004 12:08 PM
