Guilty Plea Entered in Sale of Phony Tax Shelters to Celebrities

In what a federal prosecutor termed “the largest amount of tax fraud that has ever been prosecuted,” a Washington businessman pleaded guilty Thursday to selling $445 million in phony tax deductions to more than 100 wealthy investors and show-business personalities, including Woody Allen, Dick Cavett and comedian Bill Murray.

Edward A. Markowitz, 35, faces 16 years of imprisonment and fines of $310,000. As part of a plea agreement, prosecutors said, he will turn over to the government his 2.5% ownership of the Washington Capitals, a National Hockey League team, worth as much as $250,000. Markowitz also agreed to assist with further government investigations of the fraud.

According to federal officials, the investors include author Erica Jong; actors Christopher Walken, Peter Boyle, Frank Langella and Tom Berenger; comedian Robert Klein; Broadway producer Alexander Cohen; New York lawyer Victor Kovner, and Allen’s manager, Jack Rollins, and his friend and collaborator, Marshall Brickman.

U.S. Attorney Rudolph W. Giuliani said at a news conference that there was no evidence that the investors knew that the tax shelters were illegal. They do not face criminal charges but will have to pay their unpaid taxes plus interest and penalties, he said.

Sold ‘Phony Deductions’

Giuliani said that, including interest and fines, the government stood to recover “a quarter of a billion in tax revenues.”

Of Markowitz, he said: “He was in the business of selling phony deductions. And he sold them at the multimillion-dollar level.”

Giuliani said the Markowitz case was larger than two other major tax-fraud schemes of recent years.

One, involving two companies called Sentinel Financial Instruments and Sentinel Government Securities, was a 1983 case that also featured prominent show-business figures among the affected investors, including actor Sidney Poitier and producers Norman Lear and Allen Carr. That scheme involved more than $130 million in phony deductions.

The other involved commodities trader Marc Rich--who, along with his partner, Pincus Green, and their two companies--was charged with evading taxes on more than $100 million. In settling that case, the government recovered more than $200 million in taxes, fines and interest.

Giuliani and Assistant U.S. Atty. Martin Auerbach, who handled the case, explained that Markowitz sold his wealthy clients participations in five partnerships that he created. The investors would then take tax deductions of from four to 10 times as much money as they actually invested.

Millions in Losses

The prosecutors said that Markowitz, who maintained offices in both Washington and New York, made it appear that the partnerships had sustained millions of dollars in losses on trading in government securities and precious metals futures contracts.

“In some cases these trades were rigged or prearranged to create a loss,” said Giuliani. “In other cases, they never occurred at all and phony documentation was created to make it appear as if there was a loss.”

Noting that tax shelters are not inherently illegal, Giuliani said that “there are ones that produce two-to-one, three-to-one, four-to-one write-offs--but when you have seven-, eight- and nine-to-one, there are some real questions.”

The fraudulent deductions were taken between 1979 and 1983.

The Justice Department and the Internal Revenue Service have been investigating the case for more than a year. The sealed indictment charging Markowitz with fraud was opened when he appeared in federal court Thursday morning.

He also was charged with evading his personal income taxes, paying only about $3,000 for 1981 by alleging that he had more than $1 million in phony losses.

Asked by U.S. District Judge Morris E. Lasker why he was pleading guilty to these “serious charges” that carry “large possible penalties,” Markowitz replied: “Because I am guilty.”

Markowitz, who drove a Rolls-Royce, owned several race horses and two Washington homes and maintained an apartment on New York’s swank Park Avenue, admitted that he conspired with lawyers, accountants and others to create and market the fraudulent tax claims.

Giuliani said that some of these lawyers and accountants, whom he called “active” participants, are under investigation and that “further criminal charges” are expected in the case.

Markowitz was released on his own recognizance and is scheduled to reappear for sentencing June 6.

Rollins, Woody Allen’s manager, said Thursday that he had no idea how much of his money had been invested with Markowitz because someone else often handles his investments. “I probably know much, much less than you do,” he told a reporter.

Rollins said that not only Allen but talk show host Cavett and comedian Klein were clients of his at the time the investments were made. They are no longer his clients.

Asked how he and many of his associates had become involved, he said they all used the same accounting firm, Bernstein & Freedman of New York. The firm dissolved after Albert Bernstein, one of its principals, died three years ago.

“I’m shocked for the people that were duped, me being among them, and for my clients,” Rollins said. “What is interesting is that the government is going to be plea bargaining (with Markowitz) while all the innocent people are going to be hit.”