Maine Fishing Families Against Power and Reach of Federal Government

FAMILY BUSINESS: CASE NUMBER THIRTEEN: MAINE LOBSTER FISHING FAMILIES

The Power And Reach Of the Federal Government

It was Friday morning, July 7th 1978, and a storm was coming to the coastal towns of eastern Maine. It was not an ordinary storm; it was the Government descending upon the several thousand fishing families in coastal Maine.

That morning in Chase’s Restaurant in Winter Harbor, the aroma of hot coffee, fresh bread baking and bacon on the grill found four fishermen having breakfast at 5:30 AM. Their routine was to sit at the counter where they often joked with Margaret, the waitress, attempting to see which fisherman could tease her the most – all in good fun. This morning was a bit different as the previous night’s phone calls up and down the coast of Maine were the main topic of discussion and there was no joking about it.

The Internal Revenue Service had quietly organized a task force in Washington, D.C. and sent four Internal Revenue Service agents on a special assignment to Maine arriving on July 5th. Their task was to capture the records of every lobster dealer (to whom the fishermen sold their lobsters to each day) and record every payment made to each individual fisherman. Later it was learned that all of these manual records (since no laptops were in use in 1978) would be compared to each fisherman’s 1977 income tax returns to see if income had been under reported. Everyone knew what the result would be.

Everyone knew and No One Cared until July 1978

Lobster fishing families were known to under report their income, perhaps thinking they were safe to do so because they were paid in cash and usually never deposited all the cash received. Most of that cash was used to pay family living expenses(supposedly no trail). It was a tradition passed down from one fishing family member to another over many generations. Everyone knew and no one cared until July 1978.

The information of what the IRS  agents were looking for quickly spread up and down the coast before the end of the week. The dealers were friends so they quickly revealed the type of questions they were being asked and records being looked by the IRS and the news frightened everyone involved.

Fishermen are independent people but they  protect each other when there is a threat. They never tell anyone exactly where they fish or what any day’s catch was. The dealers knew the catch information and they also knew if they ever revealed any individual fisherman’s actual catch they would soon be out of business. The lifestyle of the typical fisherman would generally include a modest but well furnished house with a new pickup in front and a new snowmobile and four wheeler in the garage. In a cove nearby they would have a fully outfitted lobster boat suitable for most any weather. The lifestyle and the tax return information did not match. Someone in Washington, D.C. wanted that to end.

In the next few weeks most fishing families  just sat back and waited uncomfortably, not knowing what to do. A few fishing families went to their accountants or lawyers and asked what action they should take. They received bad news. The lawyers told them that filing a fraudulent tax return was a criminal offense subject to fines and jail sentences. The news was even worse as the Federal District judges in Maine, especially Judge Edward Gignoux in southern Maine, was known to favor jail sentences for tax evaders.

There were only two choices available: (1.) File an amended tax return for 1977 before being contacted by the IRS, hoping the payment of the correct tax would suffice and that the IRS would not go through earlier years, all of which would be available as there is no statute of limitations for a fraudulently filed tax return. Some families filed amended Federal and Maine income tax returns and paid additional tax. As far as anyone knows they were never contacted by the task force; or, (2) Just wait. Most waited.

The task force spent the months of July and August in Maine going to every lobster dealer from Boothbay Harbor to Lubec. Several dealers under pressure from their clients tried to refuse access to their records. That did not last long as the IRS had all the leverage they needed to get the records.

As the calendar proceeded through September and October nothing happened and the fishermen started to relax. That all ended on November 1st when about one hundred fishing families received an invitation to an ‘Information Hearing Regarding Income Tax Returns” in Augusta, Maine on November 20th, three days before Thanksgiving. It is possible that the Government wanted the meeting to precede the normal Holiday time families gather together to get the greatest effect from what was to be explained. No one ever knew why only these specific families were selected as there were several thousand fishing families who used the same dealers whose records were examined.

It was not a pleasant meeting. Most of the families attended, some with their accountants or lawyers. They were told they would be sent a letter explaining how much in additional income taxes, interest and penalties they owed. The IRS spokesperson said they did not contemplate any criminal action for those who paid what they owed. They also said the letter would explain that each taxpayer would have the right to contest the findings themselves or through a qualified representative.

The letters arrived in mid-December. Some families paid immediately  as they were either too afraid to do otherwise or just knew they were caught and were happy not to be involved in a criminal matter. Others went to their accountants or attorneys.

It was not a Pleasant Meeting

Five families from Jonesport called Peter Feldman, an attorney in Ellsworth, who had been helping them form a cooperative for the marketing of their lobsters. He asked them to come to his office and bring the IRS letter, their 1977 income tax return, and all of the backup information used to prepare that return. They came to his office.  Some were sheepish and some were angry but all knew they were in trouble. Peter quickly learned from them exactly how the IRS got the information of sales of lobsters and why that information differed substantially from what was in their tax returns. He was not sure exactly what to do but knew that income taxation was not his area of expertise. He asked his new clients to give him a couple of days to go over the materials, stating that he intended to call a tax “guy” for help. He asked for a $2,000 retainer from each family and they all paid him that day in cash.

Peter called his law school classmate, David Reed, telling him the story and asking for his help.  David asked what the IRS letters said about the amount of time these taxpayers had to contest the amounts in the letters. The stated time was 30 days and five days had already expired. The letters were not in the form of the usual 30-day letter used by the IRS but could be worked with. David went to Ellsworth two days later and spent the day going over the information for each family. It seemed quite a coincidence that three of the families were named Beal and the other two were named Alley. In Downeast Maine those names were famous. The Jonesport Class D basketball team  was often comprised of Beals and Alleys and  over the years had dominated most of the other teams they faced. They were known for their tenacious defense and accurate shooting.

It was clear what the IRS had done as they attached copies of their manual worksheets computing the sales of lobster by each fisherman to their dealer. The calculated sales did not agree with the tax returns, in most cases by over $25,000. The IRS subtracted cash from the lobster sales used to buy bait or other supplies from the dealer in the weeks lobsters were sold, so that an accurate net sales figure was used. There was little David could do about the IRS calculation. He knew, however, that since all five families prepared their own tax returns that they probably missed some deductions they were entitled to. Each family was a little different and David met with each family individually to find information that might help. One item in common came out in conversation when David asked if the fishermen bought supplies from their dealer in the weeks when they did not fish. They all did, especially in the winter when they were mending traps. The IRS did not review those winter months  so missed these cash expenses. Three of the families had not thought to put these expenses into their tax returns. None of the families knew to deduct expenses for a home office which all were entitled to do. The rules in 1977 for a home office deduction were more favorable  then and all qualified. Some deducted expenses for their pickup truck used in the business but usually not as much as they could. All deducted the expenses associated with their boat so there was no opportunity there.

After many conversations and the gathering of information, David had reduced the amount owed by each family to about one half of the amount the IRS was demanding.

It took time to do all this so David filed a power of attorney form with the IRS for himself and Peter and also requested a 30-day extension which was granted.

David made an appointment for Monday, January 15th, to discuss these cases as provided for in the IRS letters to the clients. The hearing officer was located in the Government Center in Boston which was a little odd, but was not a problem for  David as he had attended a law school program in Boston and had been to the Government Center on tax matters before while working in the Boston office of KPMG. Most Maine based tax cases were conducted with the IRS in Maine, which is why this was odd.

David knew he would be able to help his clients based on the additional information he had obtained from them. He also thought he had a good chance to eliminate the 50% civil fraud penalties but he was still bothered by the whole matter. It just did not feel right that one class of citizen was being singled out in such a way when, as far as he knew, this procedure had never been used before in the United States. Yes, he knew the fishermen were not correct in this either but the result seemed very out of balance.

The Friday night before the scheduled meeting David could not sleep. He kept thinking about the cases and came up with an idea. Early the next morning, he went to his office and pulled the fishermen’s files out, looking at each file for the copy of the IRS’s lobster dealer’s records. His late night memory had been correct. Each of the records was listed by individual name using only the initial of the first name and the full last name. His clients were John N. Beal, John S. Beal Jr., James D. Beal, Robert N. Alley, and Robert N. Alley Jr. The two John Beals were not father and son but the two Robert Alleys were. David was excited. Unless the IRS task force members had prepared some other record showing the full names of the fishermen and tied that record to the sales work up, they might not have a case.

David quickly went to his office receptionist, (who always worked Saturdays during tax season) and got her copy of the Jonesport telephone directory as there was no public internet back then. When David looked at the alphabetic page for the Beals, he quickly counted 15 entries for ‘Beals’ with a first name starting with the letter ‘J’, including three who were Juniors. There were even more Alleys with a first name beginning with the letter ‘R’ ,with five who were Jrs.

David Reduced the Amount Owed by Each Family to About Half

“OK. this might be fun” he said to Peter on the way to Boston.  However, David had learned long before to never underestimate his competition and the IRS had very talented people. David pointed out to Peter that the IRS could always send agents back to the dealers to correct their error or worse, turn the case over to the IRS intelligence division for a criminal investigation.

The meeting with the hearing officer was subdued and formal. After introductions, the officer explained that he had reviewed the cases and did not see any chance for changes that would be in favor of the taxpayer. David was careful and first asked if the hearing officer had met with the members of the task force  and found out that he had not. David next asked if there were any other worksheets beyond what were sent to the taxpayers. The hearing officer said he did not think so, at least none that he had seen.

David said let us start with John N. Beal and asked the agent where the ‘adjusted sales’ figure of $230,300 came from. The officer pointed to the worksheet in his original file, which showed the exact amount of $230,300 under a column labeled “J. Beal.” David said “our clients name is John N. Beal as you can see on his tax return, how do you know “J. Beal’”on your worksheet is John N. Beal?”

Before the officer could answer, David took the Jonesport telephone book out of this briefcase and turned it so the officer could see the highlighted entries for 15 Beals with a first name starting with J. and the three who were Juniors. The officer just stared at the page. David turned the pages back to the Alleys and showed the similar information and asked the same question, “How do you know which Beal or Alley the worksheets refer to?” Peter commented that he knew that almost all male Beals and Alleys in Jonesport were fishermen.

The officer closed his file and excused himself. David and Peter were hopeful but not really sure what to expect. Later they guessed that the officer had called the task force leader in Washington.

When he came back he simply said, “Your clients are just lucky and this matter with respect to them is over.”

The clients were pleased when Peter called them, even when he cautioned them to keep this quiet and be more careful in filing their tax returns. They said “You and David will never have to pay for a lobster in Jonesport.”

David has not yet been to Jonesport.