BROOKSVILLE — Brooksville lawyer Tom Hogan Jr. and a longtime business partner, R. Victor Taglia, are fighting off claims that they owe a total of about $20 million in taxes on more than $50 million dollars the Internal Revenue Service says was funneled through a "tax avoidance scheme" in the U.S. Virgin Islands more than a decade ago.
The cases, filed in little-known U.S. Tax Court earlier this year, hinge on whether the two men were "bona fide" residents of the Virgin Islands in 2002, 2003 and 2004. Residency would have qualified them for a 90 percent reduction their income tax rate.
Also at issue is whether the Virgin Islands company that Hogan and Taglia helped form in 2001, Madison Associates LLC, offered a legitimate business service or merely "a prepackaged tax-avoidance strategy," as the IRS stated in a related case.
Hogan referred questions from the Tampa Bay Times to his Dallas-based lawyer, Joseph M. Erwin. Erwin declined to comment, but in court documents wrote that Hogan and Taglia were "physically present in the U.S. Virgin Islands consistent with (their) employment" and maintained "the requisite social, family and professional relationships" in the territory.
The documents in Tax Court, which allows taxpayers to challenge IRS tax bills, also say that if the two did fail to pay taxes, it was due to "reasonable cause" not "willful negligence" — a finding that could add steep penalties to their tax bills.
If the judge rules that the two men were not residents of the Virgin Islands, Hogan, a high-profile Hernando County lawyer whose firm represents the city of Brooksville, will owe as much as $10 million in unpaid federal taxes for the three years, and Taglia, a Palm Harbor accountant, will be on the hook for up to $10.9 million.
By far the biggest tax bills stem from 2004, when Taglia and Hogan both declared incomes of about $26 million from sources in the Virgin Islands, according to court files.
A possible source of the money was revealed in a since-resolved Tax Court case involving John G. "Gary" Grubbs.
Nevada-based Grubbs Emergency Services LLC transferred $42.8 million to Madison in 2004 and 2005, the IRS said in that case, adding that this was part of a series of transactions designed to hide assets from the 2003 bankruptcy of Grubbs' Brooksville-based construction company and "strip … profits from (Emergency Services) to reduce taxable income."
Companies owned by Hogan and Taglia eventually routed some of the money back to Grubbs, the IRS said, including by spending $23.5 million to help Sun West Acquisition Corp. secure the rights for the property near Aripeka that is now the site of the proposed SunWest Harbourtowne development.
The three men have been partners in several businesses, including Sun West, though Taglia wrote in an email to the Times last week that he had resigned as an officer and director of the company. He offered no further comment.
Grubbs' case with the IRS was settled in December, when an IRS lawyer agreed that he owed no taxes from the 2004 and 2005 transfers; the IRS could not prove he controlled Emergency Services, Grubbs said last week, because he did not.
"Two people control that company — Tom and Vic," said Grubbs, though since 2013 he has been listed as a company officer in state records.
The clearest picture of how the IRS believes Madison avoided U.S. taxes can be found in a 2015 case against another longtime Hogan associate, now-deceased Destin businessman Travis Sanders.
After Sanders successfully challenged his tax bills from the early 2000s in Tax Court, the IRS appealed in the 11th Circuit U.S. Court of Appeals in Atlanta — partly in hopes of setting a precedent that could impact the claims against Hogan and Taglia.
"There are over 100 cases pending before the Tax Court and the IRS that concern the same issue raised by this appeal," states an IRS brief filed in the case.
Under a long-standing agreement between the United States and the Virgin Islands, territory residents pay taxes to the Islands rather than to the United States.
It was a popular tax shelter during the early 2000s, when the territorial government used low taxes to lure investors without "necessarily keeping track of whether they were residents or were not," said Patricia Brown, a former U.S. Treasury Department lawyer who is now a professor of tax law at the University of Miami.
Madison, whose clients included prominent Tampa developers, was one of several companies formed to capitalize on those deductions before residency rules were tightened by the American Job Creation Act of 2004, the IRS brief says. The changes included a requirement that anyone filing tax returns in the Virgin Islands must maintain residency throughout the tax year, not just before the end of it. Madison "ceased operations" the next year, the IRS brief said.
Hogan recruited Sanders — a business associate close enough that Hogan serves as the representative of Sanders' estate — as a partner in Madison in 2002, the brief said.
That year, Sanders funneled the $1.2 million profit his Florida-based surge-suppression companies earned through Madison, according to the IRS brief. After Madison took its cut, Sanders was paid more than $1 million in salary as a Madison employee, allowing him to file a Virgin Islands tax return.
A three-year statute of limitations that would have long ago expired on his tax debt does not apply, the IRS brief argues, because Sanders was never a "bona fide" resident of the Islands.
Though Sanders' lawyers presented evidence of Virgin Islands residency, including access to a Madison-owned condominium, a checking account registered to a Virgin Islands address, and his marriage and purchase of a car on the Islands, the IRS said credit card receipts show he spent only eight days there in 2002.
Furthermore, Madison offered no services to Sanders' businesses, and Sanders performed no duties for Madison, instead repeatedly representing himself as the full-time manager of his businesses in Destin, the brief said.
"To say that Sanders 'worked' for Madison is to elevate form over substance and to turn a blind eye to the realities of the situation," the IRS brief said.
Hogan's petition in Tax Court says Madison was vetted and approved by the Virgin Islands' Economic Development Program. Hogan actively worked for the company and "held himself out to others as a resident of the U.S. Virgin Islands by paying taxes and observing the other economic burdens, civic obligations, and legal formalities of residency," his petition says.
But in 2003 and 2004, he was also highly visible in Hernando County, running one of the county's biggest law firms and helping form the since-failed Cortez Community Bank, which touted itself as local alternative to large financial institutions.
In January 2004, the county approved a homestead exemption for the home east of Brooksville owned by a trust in Hogan's name and by his wife, Deborah. Securing the exemption required the owner to sign a sworn statement affirming, "I am a permanent resident of the state of Florida."
According to his law firm's website, Hogan served on the 5th Judicial Circuit's Judicial Nominating Committee from 2002 to 2006, a position that requires residency in the circuit.
And in the early 2000s, Hogan was one of three well-connected Brooksville business partners who developed an industrial park near Interstate 75 with the help of a $750,000 grant intended to provide jobs for low-income workers.
Under pressure to find tenants for the vacant park in 2004, he recruited Sanders, whom the county soon rejected because of his criminal record, including a 1989 no-contest plea on a child pornography charge that stemmed from filming himself having sex with a 14-year-old girl.
In a 2004 interview with the Times, Hogan defended Sanders, talking about their positive business and personal connections, including joint ownership of a boat in the Virgin Islands.
Unfortunately, he told the Times, he didn't get to use it as much as he would like.
Staff writer C.T. Bowen contributed to this report. Contact Dan DeWitt at [email protected]; follow @ddewitttimes.