Sloppy Tax Planning

The sentencing memorandum submitted by the prosecution in the Randy "Duke" Cunningham matter describes a rather bizarre attempt by Cunningham to "comply" with the tax laws.

First, he sold his residence to a "briber" for $1.5 million. After he discovered that he would not have sufficient cash to purchase a "monster" mansion that he wanted, he re-papered the sale of the home to reflect a sale price of $1.675 million. The home was only worth $975,000.

Subsequently, after he was informed by his accountant that the profit on the sale, because it was in excess of $500,000, would generate tax at capital gains rates, he hit up the "briber" for another $115,100 to pay the tax. This payment was disguised as a "public relations and communications expense" and was payable to Cunningham's military memorabilia business.

Of course, Cunningham got the tax results all wrong.

The spread between $975,000 and $1.675 million was a bribe, as was the payment of the $115,100. Thus, Cunningham had ordinary income, subject to SECA, of $815,500. He had capital gain on the sale of the home on the difference between his basis and $975,000, although he would only have to recognize the gain to the extent that it exceeded $500,000.

Of course, there were numerous additional bribes both related to these real estate transactions and many others, all of the proceeds of which are taxable at ordinary gains rates and subject to SECA.