In January 2003, federal prosecutors say, auto dealer Jamie Auffenberg told an undercover Internal Revenue Service agent that when Auffenberg went to the U.S. Virgin Islands, he made a point of recruiting people to share meals or go fishing.
Auffenberg sought these contacts, the government suggests, to support false claims that he was a legal resident of the Virgin Islands and managed his Illinois dealerships from there. A fraudulent lease of a condominium on the island of St. Croix furthered the scheme, prosecutors argue.
The honesty of claims by Auffenberg and others about where they lived and did business is at the heart of a case of tax fraud that prosecutors allege amounted to more than $76 million from 1999 to 2002.
A 78-page federal indictment details the reported conversation between Auffenberg and the IRS agent. The indictment charges Auffenberg with taking part in an elaborate conspiracy to cheat the United States and Virgin Islands out of taxes.
Auffenberg, 57, is scheduled to go on trial Jan. 12, with co-defendants in St. Croix. His dealership group operates 11 new-vehicle franchises in OFallon and Belleville, Ill., east of St. Louis.
Late last month, Auffenberg told Automotive News he is eager to clear his name. He said he feels he is close to getting this thing behind me but declined further comment.
Earlier, an attorney for Auffenberg said his client had followed the advice of tax professionals and had committed no crime.
Auffenberg was chairman of the American International Automobile Dealers Association in 2002 and has continued to serve on the associations board of directors. The federal charges are not related to his roles at AIADA.
The association said Auffenberg submitted his resignation late last year, and it was accepted.
According to records in the case, Ford Motor Co. got a court order to protect confidential business information in some of the documents the government subpoenaed.
In March 2007, Auffenberg and other defendants were charged in an Illinois federal court. The government says Auffenberg was one of more than 60 wealthy mainland United States taxpayers who took advantage of a tax scheme created and run by Kapok Inc. and its management subsidiary.
The government says Kapok was a sham. The indictment alleges that participants diverted U.S. income to the Virgin Islands by claiming they had business operations there. They then collected Virgin Islands economic development tax credits for management fees paid to Kapok, according to the indictment.
This awkward fiction was created for the purpose of evading United States taxes, the indictment says.
High conviction rate
The government has not explained why Auffenberg is the only wealthy participant who has been charged. The indictment alleges he cycled about $11 million through Kapok in 2001 alone.
Other defendants include the alleged architects of the scheme, identified in the indictment as physician Peter Fagan and certified public accountant James Ferguson. Both are licensed in Texas.
Joe Kristan, a partner at the accounting firm Roth & Co. in Des Moines, Iowa, has studied and written extensively about tax shelters. He told Automotive News he isnt fully informed about the evidence in the Auffenberg case. But he said the governments conviction rate is pretty high in similar cases that allege payment of phony management fees to offshore companies to evade U.S. taxes.
One uncertainty in Auffenbergs case is the effect of holding the trial in the Virgin Islands. Kristan said a jury there might be more sympathetic than one in the United States because the islands have promoted themselves as a legal tax haven, and Kapok had business operations there.
While Auffenberg was chairman of AIADA, the group ousted longtime President Walter Huizenga. After selecting Marianne McInerney as Huizengas successor, AIADA went through a period of turmoil. McInerney left the association in 2006.