U.S. Attorney, IRS Join Fleiss Investigation

The U.S. attorney’s office and the Internal Revenue Service have joined the investigation into the affairs of accused madam Heidi Fleiss and other alleged upscale prostitution rings in Los Angeles, federal sources said Friday.

The dimensions of the federal inquiry are unclear, but sources said Assistant U.S. Atty. Mark C. Holscher of the Los Angeles office is coordinating the investigation. Two federal officials said that among the areas investigators are interested in exploring are Fleiss’ income tax returns and the $1-million loan used to purchase her Beverly Hills home.

U.S. Atty. Terree A. Bowers declined comment, as did senior officials at the Criminal Investigation Division of the IRS.

But sources familiar with the investigation said the federal inquiry began at least several days ago. The IRS’ Criminal Investigation Division often enters criminal probes involving large sums of money. In many cases, the IRS investigates bank records, real estate and other transactions to determine if they were properly reported and whether taxes were paid.

“All sources of income are taxable,” one federal official said Friday. “That includes sources of income that are illegal.”

According to a copy of Fleiss’ 1992 federal income tax return that was made available to The Times, Fleiss declared an income of $33,000 last year. She listed her occupation as “counselor,” her employer as her father--Dr. Paul Fleiss--and her business address as the West Hollywood bungalow where she used to live.

Property records show that the bungalow is owned by Fleiss’ father, a Los Feliz pediatrician, as a rental property.

Dr. Fleiss has consistently refused to comment on the case pending against his daughter. Heidi Fleiss, who has pleaded not guilty to charges of running an upscale prostitution ring, declined comment Friday on any aspect of the criminal case.

Her lawyer, Anthony Brooklier, also declined comment.

The U.S. attorney’s office and the IRS are working with the Los Angeles Police Department and the California Department of Justice, sources said. The LAPD has played the lead role in investigating the alleged prostitution rings, but it does not have jurisdiction over tax issues.

If the loan used to finance Fleiss’ home becomes an issue, it could draw the interest of the FBI, which has jurisdiction over some banking matters. An FBI spokesman declined to comment about the case.

Rumors have circulated for months that money from motion picture studios may have made its way to prostitution operations, but sources refused to discuss whether that aspect of the probe has come under scrutiny by federal investigators. The FBI would be unlikely to investigate those allegations, but the agency could involve the IRS if money was not reported, either by alleged prostitutes or by movie studios.

Columbia Pictures, which has been linked to Fleiss through persistent rumors but no facts, declined comment Friday on the federal investigations. Privately, sources said that if Columbia is the focus of an investigation, the studio is unaware of it.

Columbia’s name surfaced publicly in connection with the scandal last week, when Executive Vice President Michael Nathanson denied speculation about possible ties to Fleiss.

But Nathanson has acknowledged that he is an acquaintance of Ivan Nagy, a former boyfriend of Fleiss who was arrested last week in a separate pandering case.

Daily Variety, the Hollywood trade paper, reported Friday that Nagy, a sometime director, had an office on the Columbia lot as recently as 10 months ago, based on an official phone directory.

At Columbia’s parent company, Sony Pictures Entertainment, a spokesman also declined comment on the latest Fleiss developments. Sources say Sony is combing spending reports and other records as part of an in-house investigation of any possible connections to Fleiss or Nagy. So far there is no evidence of wrongdoing, they said.

Times staff writer Alan Citron contributed to this article.