CLEVELAND - A federal jury returned guilty verdicts today against Joseph H. Smith, the former Treasurer, Chief Financial Officer and Legal Secretary for the Catholic Diocese of Cleveland, the Justice Department announced. Smith, an attorney and certified public accountant, was convicted on six tax charges after a six-week trial in a Cleveland federal court. The jury acquitted Smith of mail fraud and conspiracy to commit mail fraud.
Smith’s co-defendant, Anton Zgoznik, was convicted in October 2007 of similar charges. Zgoznik is a former Diocese employee who owned and operated several corporations that provided accounting, tax, financial and computer technology services for the Diocese.
According to the indictment and evidence established during trial, Smith and Zgoznik entered into an elaborate scheme to defraud the Diocese and related organizations and to defraud the IRS. Between 1997 and 2003, Zgoznik paid more than $784,000 in kickbacks to Smith in exchange for Smith’s efforts to steer work to the entities that Zgoznik controlled. As a result, the Diocese paid the entities controlled by Zgoznik more than $17.5 million between 1997 and 2003. Some of the bills to the Diocese were inflated or were for services that were not needed.
Evidence also showed that Smith and Zgoznik defrauded the IRS by disguising the kickback payments as compensation for "consulting" and "legal" services that Smith purportedly provided for the Zgoznik entities. The two defendants disguised the kickbacks in part by having Zgoznik’s companies pay the kickbacks by checks payable to a golf paraphernalia business (Tee Sports Inc.) operated by Smith and to another business name used by Smith (JHS Enterprises), as purported payments for legal, consulting and other services not actually rendered by Smith. As a result of this scheme, Smith and Zgoznik were able to deceive the IRS during an audit of Smith’s 1999 tax return and three years of returns for the Zgoznik entities. Smith also failed to report some of the kickbacks on his tax returns and misreported other kickbacks as "business income" on his Schedule C.
John A. Marrella, Deputy Assistant Attorney General for the Justice Department’s Tax Division, stated: "This conviction serves as yet another reminder that individuals who break our nation’s tax laws face serious consequences. Citizens who comply with our tax laws can be assured that the United States vigorously prosecutes those who choose to violate the tax laws."
"All income is taxable, even income that is stolen from others or disguised as legitimate income," said Eileen Mayer, IRS Criminal Investigation (IRS-CI) Chief. "Today’s conviction proves that there is no way to hide illegal deeds from the government."
The court dismissed eight money laundering charges against Smith. Smith faces a maximum sentence of 20 years in prison. Sentencing before U.S. District Judge Ann Aldrich is set for Oct. 3, 2008.
Deputy Assistant Attorney General Marrella thanked IRS-CI, U.S. Postal Inspection Service and the FBI who investigated this case, as well as Tax Division trial attorney Jerrod Patterson and Assistant U.S. Attorney John M. Siegel who prosecuted this case.