U.S. Is Investigating $1-Billion Fraud in Gasoline, Diesel Taxes

The Justice Department on Wednesday disclosed a multi-agency investigation of a tax scheme costing the U.S. Treasury an estimated $1 billion annually in evaded federal excise taxes on gasoline and diesel fuel.

The probe so far has concentrated on wholesalers in New York, where annual tax losses are said to exceed $200 million, but cases are being developed across the country, including the Pacific coast, officials said.

Atty. Gen. Dick Thornburgh said such tax scams are “just as serious as a thousand convenience store stick-ups.” In announcing two federal grand jury indictments in Brooklyn, N.Y., of wholesalers charged with evading gas taxes, Thornburgh added: “Cheating the government out of its due revenue is the same as cheating the taxpayers who ultimately benefit from that revenue.

“This is money that could be going into mass transit and highway construction,” he said.

In the past, fuel excise tax prosecutions have been aimed primarily at organized crime and gasoline bootleggers. But the cases announced Wednesday involve otherwise legitimate gasoline distributors, the Justice Department said.

While the nationwide investigation is expected to uncover a wide range of schemes, those alleged by Wednesday’s indictments are thought to be “very typical,” said James Bruton, deputy assistant attorney general in the department’s tax division.

In one indictment, Getty Terminals Corp., a wholesale distributor of gasoline in the Northeast and Mid-Atlantic states, and three persons were charged with conspiring to defraud the United States and to evade federal excise tax.

Three counts of tax evasion involving approximately $1 million of federal excise taxes owed by Getty Terminals were also alleged. The company is a wholly owned subsidiary of Jericho, N.Y.-based Getty Petroleum Corp.

Getty Petroleum was formerly Power Test Corp. In 1985, Power Test adopted the Getty name after it bought most of the Northeastern gasoline stations of the former Getty Oil Co., which was acquired by Texaco Inc.

The individual defendants are William Rea, who managed Getty’s supply and trading department in the period covered by the indictment; John Quock, owner and president of two New York wholesale companies, Tun Yung Fuel Oil Corp. and Westwind Petroleum Inc., and John Pabone, owner and president of J & J Petroleum Inc. of Staten Island, N.Y.

The indictment accused the alleged conspirators of attempting to evade Getty Terminals’ federal gasoline excise taxes by falsifying sales invoices and corporate records to make it appear that Getty had sold gasoline to Tun Yung in a tax-free transaction. Actually, the gasoline was told to J & J, which, unlike Tun Yung, did not hold the necessary Internal Revenue Service form qualifying it for a tax-free transaction.

If convicted, Getty Terminals could be fined up to $2 million, while the three individuals would each face maximum imprisonment of 20 years and fines totaling $1 million.

The second indictment charged 1983-84 tax violations by Richard and Robert Kennon, brothers who owned and operated three gasoline companies in Westchester County, N.Y.

According to the indictment, the Kennons agreed with co-conspirators to purchase gasoline on which federal excise taxes had not been paid and caused it to be invoiced through a series of corporations set up for the purpose of evading excise tax payments.

The Kennons also were accused of creating fraudulent invoices representing that taxes had been paid on the gasoline and that the taxes were included in the price being charged.

If convicted, the Kennons face up to 14 years in prison and fines totaling $550,000.