The opinion of the court was delivered by: AMY J. ST. EVE, District Judge
MEMORANDUM OPINION AND ORDER
In April 2004, the Internal Revenue Service ("IRS") issued a
jeopardy assessment and jeopardy levy upon approximately
$12,000,000 of Plaintiff's seized cash to satisfy past due tax
obligations totaling $11,537,250.16. Plaintiff filed a complaint
pursuant to 26 U.S.C. § 7429(b) seeking a judicial determination
of the reasonableness of the jeopardy assessment, jeopardy levy,
and the amount assessed.
Mr. Wellek operates three exotic dancing establishments in
Illinois Heavenly Bodies, The Skybox and Cowboys. These
establishments generate primarily cash income. Mr. Wellek failed
to file any personal or corporate income tax returns for the tax
years 1989 through 1999. As a result, the IRS conducted an
examination to determine Mr. Wellek's tax liability for those
I. IRS Investigation of Michael Wellek
Initially, Mr. Wellek did not cooperate with the IRS. When Mr.
Wellek eventually began cooperating with the IRS, he informed the
revenue agents that he was accruing funds to prepare for a potential liability to the Department of Labor ("DOL").
Wellek said that he had deducted this potential DOL liability
from his income. Although the deduction was not allowable under
tax law, Mr. Wellek claimed that the amounts he had accrued
offset any income he had earned between 1989 and 1999. Despite
Mr. Wellek's misunderstanding of the tax law and of his
obligation to file annual tax returns, the IRS continued working
with him in order to determine his past revenues and tax
liabilities. During this process, Mr. Wellek prepared
spreadsheets for the revenue agents. He represented to the agents
that these spreadsheets reflected all of his deposits into his
bank account. Wellek further represented that these deposits
accurately reflected his total income for the tax years in
question. Revenue Agent Gibbons informed Mr. Wellek that they
could utilize this "bank deposit method" of calculating his gross
income for purposes of the audit, but he never informed Mr.
Wellek that he only needed to report as income those amounts that
he deposited during a tax year period.
In an effort to reconcile eleven years worth of unpaid tax
liabilities, the IRS agreed to Mr. Wellek's suggestion to roll
his tax liabilities for the tax years 1989 through 1999 into a
single year. Mr. Wellek would then pay the cumulative taxes owed
as if they were due for the year 1999. Based on the records
provided by Mr. Wellek, the IRS determined that Mr. Wellek owed
$3,282,188.58 for the eleven-year span during which he paid no
taxes. The IRS also agreed to waive any penalties in making the
assessment for the 1989 through 1999 tax liabilities. As IRS
Revenue Agent Gibbons testified, the IRS was "very generous in
Mr. Wellek made an initial $100,000 payment towards his
liability in October of 2000. Under the agreement, Mr. Wellek was
obligated to make monthly $100,000 payments toward his
$3,282,188.58 liability until he paid it off. He also had to file
his income tax returns on time. After his initial payment,
however, Mr. Wellek failed to make any additional payments until August 2002 after IRS Revenue Officer Perlman contacted him.
Additionally, Mr. Wellek failed to timely file his tax returns
for the tax years 2000 and 2001.
When Revenue Officer Perlman contacted Mr. Wellek in August
2002 to collect the remaining 1999 tax liability (representing
taxes due for 1989-1999), Mr. Wellek informed him that he had not
made any subsequent $100,000 payments pursuant to the agreement
because he "couldn't afford to make any more." Mr. Wellek also
told Revenue Officer Perlman "that he had structured his entire
life and business arrangements so that if he were ever on the
stand and had to answer the question, `Do you own something?'
under oath, he could say `No' and not be lying." Revenue Officer
Perlman subsequently investigated Mr. Wellek and found that Mr.
Wellek owned virtually no assets in his name. Mr. Wellek's wife,
however, owned substantial assets. A Choicepoint report for Mr.
Wellek revealed that he had used "Michael Weller" and "Michael
Stauter"*fn1 as aliases.
Mr. Wellek told Revenue Officer Perlman that he was unable to
pay his entire tax bill at once. He said that he "didn't have the
money, [and] that he couldn't come up with the money" to pay his
outstanding liability. Revenue Officer Perlman reached an
agreement with Mr. Wellek whereby Mr. Wellek would pay $20,000
per month on the outstanding liability. If Mr. Wellek complied
with the payment schedule, the IRS agreed to abate $750,000 in
penalties. Revenue Officer Perlman also requested that Mr. Wellek
file his 2000 tax returns. Mr. Wellek failed to meet both the
filing and the payment deadlines.
On April 18, 2003 more than two years after it was due Mr.
Wellek finally filed his tax return for the tax year 2000. On
Schedule C, Mr. Wellek reported gross income from his business of $5,069,156 and claimed adjusted gross income of only
$114,613. Mr. Wellek attached a "Disclosure Statement"
representing that "gross receipts were based on the bank deposit
method." Mr. Wellek did not disclose that he was not reporting
all of his gross income as required by law.
II. The IRS-CID Seizes Approximately $12,000,000 in Cash from
On or about May 5, 2003, the IRS Criminal Investigation
Division ("IRS-CID"), pursuant to a search warrant authorized by
the United States District Court for the Northern District of
Illinois, executed the search warrant at a warehouse were Mr.
Wellek conducted business. During the search, the IRS-CID seized
approximately $12,000,000 in cash. The cash was stored in bags
marked with a date and location indicating from which exotic
dancing club the cash was earned. The IRS-CID also seized
business records, including records revealing that Mr. Wellek had
received some of the seized cash in 1999 and 2000.
A subsequent analysis of the seized cash and business records
revealed that $2,696,476.05 was attributable to Mr. Wellek's 2000
tax year. A further analysis demonstrated that $871,193.20 of the
cash receipts attributable to Mr. Wellek's 2000 tax year were
deposited in years subsequent to 2000. The IRS treated ...