Detective or Accountant?: The Wizard Busts a Coin-Op Fraudster

                                 CASE NUMBER 18—A SAD FAMILY BUSINESS SITUATION

Family businesses are not always successful. They are not always passed down to the next generation. In fact the statistics are close to the failure rate of marriages. The matching is surprising.

About 50% of first marriages fail and about 50% of family businesses never get to the second generation. About 75% of second marriages fail and about 75% or family businesses never make it to the third generation.

The failure rate of third marriages is even higher as are the family businesses, which never make it to a fourth generation. We all envy the successes of families in business but know that family business failures can touch our lives or those of our friends.

This story is a about a double failure –both the marriage and the business.

David Reed starting working as a forensic accountant and expert witness for Sarah Goldsmith early in his career. Mrs. Goldsmith had been one of his first year law school professors having replaced another professor who had to miss part of the school year due to illness.

In David’s third year Mrs. Goldsmith came back to teach again, as the professor who had been ill 2 years before died. She taught an Evidence course and a Family Law course. She was very demanding and very good. She was the only woman on the faculty which somewhat matched the fact that in David’s class there was only one woman. It was, after all, 1969.

Mrs. Goldsmith started a private, solo practice 1n 1970 specializing in family law. Her clients were mostly women. She would call in David when she had a client with a complicated tax or financial situation or had a spouse who owned and managed a business. In the first few cases David attended a meeting or two with each client so he would have background information first hand.

Those meetings made David nervous as he listened to the advice Mrs. Goldsmith would give her client. She would say: “This is a war. You need to have the endurance to withstand a long difficult process. I want you to enter an exercise program; have your hair and nails done every week; and spend more money on yourself than you have done before. It is not a time to scrimp. We need to build a record.”

This may seem like logical advice but the more David heard the more he hoped his friends or clients’ wives would never retain Mrs. Goldsmith. There is no winning in a divorce case and many divorcing parties are not happy with their representation.

Mrs. Goldsmith always got paid up front and billed regularly during the process. She was as good in the courtroom as she was in designing the strategy for the whole process. Her reputation resulted in most of her cases being settled with very favorable results for her clients.

Each case had its own idiosyncrasies but one stood out in David’s mind. The divorcing couple lived in Waterville, Maine where the husband owned and operated a dry cleaning and coin operated laundry business. Mrs. Goldsmith’s client, Rose Fournier, told her that her husband’s tax returns did not include the coins he collected from the laundry machines each week. His habit was to empty the machines in his four locations several evenings a week; hide the coins in their basement; and, once every couple of months drive to Boston to cash in the coins using several banks which had coin machines for that purpose. Banks then did not keep a record of these mechanical transactions, but Jacques Fournier was very careful to vary his routine, even going to Manchester, New Hampshire a few times for the same purpose.

Mrs. Goldsmith told all this to David in their first meeting about her client. David had experience with skimming cases and similar forms of underreporting income. He was quick to tell Mrs. Goldsmith that since her client knew all about this she was hardly “an innocent spouse” for tax purposes. Mrs. Goldsmith said she just wanted enough evidence of the tax cheating to have an edge in negotiating the overall financial settlement.

David was given the couple’s last three years of personal and corporate tax returns but knew he may not be seeing the whole story of the business income reported. The husband’s S Corporation that owned and operated the dry cleaning and laundry business showed less than $20,000 of net income and only a $35,000 salary being paid to Jacques in each of the three years.

It was quite a modest economic picture compared to the family’s style of life. They not only had a nice home near Colby College, but also had a cottage on Moosehead Lake overlooking Mt. Kineo. Two new cars, two boats, two snowmobiles and two ATV’s were listed as personal property on a form Rose completed for Mrs. Goldsmith. Rose said that Jacques paid cash for most of these items.

David asked Mrs. Goldsmith to arrange for him to visit the business office in Waterville that was in the building where the dry cleaning business was located. He prepared a partial list of information he wanted to review when he was there and said he expected the company bookkeeper to be available.

He was careful not to ask for several items he really wanted to see, the bank deposit slips for all the business bank accounts and the credit card transaction files. He knew that asking for them might make them disappear. He was confident that the any good bookkeeper would keep the deposit slips and credit card transaction files and would give him access to them when he was there.

He scheduled his appointment for 11:00 AM on a Friday to allow time earlier that morning to visit each location other than where the office was. He wanted to see if each laundry had all coin-operated machines and if they also had change machines.

They all did and there were no washing machines or dryers that accepted credit cards. These models also did not tabulate the total amount of coins entering the machines nor did the change machine. He did not have to pretend to be a customer as no one was in any of these three locations to manage the location.

He found out later that an employee came to each location every morning to open up; clean up; and, do any needed maintenance or schedule it to be done. That same individual returned three days a week to lock up and Jacques came in the other 3 evenings.

David knew he might have to prepare an analysis of the un-deposited coins so he counted the number of machines in each location, the amount needed for a normal wash and what the fee was to use a dryer. His plan was then get industry information on what an average location would do for business with the same amount of equipment.

The bookkeeper was at the office when he arrived. She was nervous but that is almost always the case when an accountant shows up to look at the books and even more so in a situation like this. Jacques was not there and neither was his attorney or outside accountant. That was good for David.

It did not take him long to get to the bank statements and then to the deposit slips. He reviewed every deposit slip for the three years. Not one of the deposit slips had an entry for coins being deposited. The total of the checks and bills deposited plus the credit card receipts agreed to the total receipts shown in the tax returns.

All monies were deposited in the same small bank in Waterville, a bank that David’s firm audited. He knew he would be able to find out if the branch used had a coin machine, as Jacques could claim that he used a coin machine to convert the coins to bills before making a deposit.

David also knew it would be good to see if any bank in Waterville had a coin machine. David had learned that his job was not only to build a factual case for Mrs. Goldsmith but also help to eliminate possible defenses.

David called Mrs. Goldsmith with his findings and asked if she wanted him to prepare an analysis of what the likely amount of unreported income was for the three years. She said to wait, as she would first see if she could use the information gained so far to negotiate a reasonable settlement for her client. She expected she would not have to remind opposing counsel more than once that a conviction for criminal tax fraud in Maine would almost certainly result in jail time.

David never learned exactly how the conversation between the lawyers went, but several days later he received a call from Mrs. Goldsmith, who just said “It is over so send me your bill.”

Of course, she thanked him.

About a year later David was in Waterville and drove by the dry cleaning business.

It was closed and the space was for lease.

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David Hawkes (aka David Reed) is a tax, financial planning, family & small business consulting expert. He has worked with thousands of clients and saved them millions of dollars in taxes over the course of his career. David is also a former minority shareholder of the Boston Red Sox.