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July 7, 2004.

U.S., Defendant.

The opinion of the court was delivered by: AMY J. ST. EVE, District Judge


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 years.

  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 this case."

  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 Wellek

  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 ...

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