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Wednesday, October 22, 2008
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Northern California Man Barred from Promoting Alleged Stock-loan Tax-fraud Scheme

Government Lawsuit Says Promoters Disguised Stock Sales as Purported Loans

WASHINGTON – A San Francisco federal judge has issued a permanent injunction barring a Northern California man from promoting what a government lawsuit describes as a tax fraud scheme, the Justice Department announced today. U.S. District Judge Phyllis J. Hamilton signed the injunction order against Scott Cathcart of Ross, Calif. Cathcart agreed to the injunction without admitting the government allegations against him.

The government complaint filed in the case a year ago alleged that Cathcart and other defendants promoted a so-called "90 Percent Stock Loan" program that falsely purported to enable customers to contribute appreciated stocks or other securities in exchange for payments equal to 90 percent of the value of those stocks or securities without paying income tax on any capital gains.

According to the complaint, the defendants told customers they could avoid income tax on their gains because the transaction was a "loan" rather than a "sale." But in fact, the government alleged, customers’ stock was actually sold to raise the funds to pay the customers.

The suit alleges one customer, an engineer from Hermosa Beach, Calif., used the defendants’ scheme to dispose of more than $700,000 worth of appreciated stock and failed to report $677,777 of gain. The complaint alleges that the defendants’ scheme is estimated to have cost the U.S. Treasury more than $230 million.

According to the complaint, the defendants marketed the scheme to approximately 1,700 customers nationwide in transactions totaling more than $1 billion. The government’s request for injunctions against the other defendants remains pending.

"The public should beware of promoters who promise miraculous tax benefits," said Nathan J. Hochman, Assistant Attorney General for the Justice Department’s Tax Division. "If it sounds too good to be true, it most likely is."

Hochman thanked Justice Department trial attorneys Allyson Baker and Nathan Clukey, Internal Revenue Service Chief Counsel attorney Huong T. Bailie, and revenue agents Marie Allen and Judy Steiner of the IRS’s Small Business/Self-Employed Division, who conducted the investigation that led to the injunction.

The Justice Department has obtained injunctions against more than 355 tax-scheme promoters and tax preparers since 2001. Information about those cases is available on the Justice Department Web site.