Gambler And Accountant 'Rented' Losing Ticket Stubs To Fake Gambling Losses, Justice Announces.

A New Hampshire gambler, Phillip W. Cappella, and his tax preparer pleaded guilty to conspiracy to defraud the IRS by presenting at an audit losing lottery tickets they had rented from someone else, according to a Justice Department release.

A state lottery jackpot winner, Cappella tried to "wipe out" his 1989 $135,716 portion of the jackpot by renting a "collection of losing lottery tickets for a fee of $500." Tax preparer Henry Daneault of Lowell, Mass., filled the bed of his truck with boxes of losing tickets and organized them in his office to present for the IRS audit.

====== FULL TEXT ======

MEGABUCKS WINNER AND TAX RETURN PREPARER PLEAD GUILTY IN TAX

[1] Boston . . . A past winner of the State Lottery Megabucks and his tax preparer pleaded guilty today in federal court to conspiring to reduce the taxes on the winnings by faking offsetting gambling losses, and "renting" old, used lottery tickets to bolster their claim.

[2] After the hearing, U.S. Attorney Donald K. Stern said, "No one enjoys paying taxes, but all of us have to pay our fair share. When a few set out to cheat on their taxes, everyone else pays for it."

[3] U.S. Attorney Donald K. Stern, Assistant Attorney General of the Tax Division Loretta C. Argrett, and Chief of the Criminal Investigation Division of the IRS Frederick Aufiero, announced that HENRY A. DANEAULT, age 47, of 25 Bradstreet Avenue, Lowell, Massachusetts, and PHILLIP W. CAPPELLA, age 34, of 1 Birch Lane, Pelham, New Hampshire, pleaded guilty to an indictment which charges them with conspiracy to defraud the IRS. DENEAULT also pleaded guilty to aiding and assisting in the preparation of a false Federal income tax return.

[4] U.S. District Judge George A. O'Toole set sentencing for June 11, 1996. DANEAULT faces up to 8 years in prison and a fine of $500,000. CAPPELLA faces up to 5 years in prison and a fine of $250,000. In addition to the criminal penalties, each faces substantial civil income tax liabilities, interest, and penalties.

[5] At the plea hearing, Special Assistant U.S. Attorney John M. Hodgens, Jr. told the COurt that if CAPPELLA and his accountant, DANEAULT, proceeded to trial, the Government would have proved that they agreed to evade the defeat the Federal income tax on CAPPELLA's Megabucks winnings by concocting false, offsetting, gambling loss deductions, and then, when Cappella's return came under audit, they presented the IRS with what purported to be CAPPELLA's losing lottery tickets. In fact, the lottery tickets had been "rented" for the sole purpose of deceiving the IRS during the audit.

[6] The evidence would have shown that HENRY A. DANEAULT operated and solely owned a tax preparation, bookkeeping, and accounting firm known as Daneault Associates, Inc., which was located at 1745 Middlesex Street, Lowell, Massachusetts. He was an Enrolled Agent, which enabled him to practice before the Internal Revenue Service and represent taxpayers during audits and appeals. DANEAULT held himself out as a former Internal Revenue Service, Revenue Officer, in the Lawrence, Massachusetts field office.

[7] At trial, the government would have proved that on or about October 16, 1985, CAPPELLA was one of eight winners of a $21,000,000 Massachusetts State Lottery jackpot known as "Megabucks." CAPPELLA's share of the jackpot was approximately $2,700,000, which was to be paid out over twenty years in annual installments of approximately $135,000, before federal and state income taxes.

[8] In March, 1990, DANEAULT prepared a U.S. Individual Income Tax Return (Form 1040) for the year 1989 on behalf of CAPPELLA and his spouse. On line #22 of the return, CAPPELLA reported as income "gambling winnings" in the amount of $135,716. On line #25 of the return, at Schedule A -- Itemized Deductions, CAPPELLA falsely and fraudulently claimed a "gambling losses" deduction of $65,000. In this way, CAPPELLA virtually "wiped out" his tax liability on the gambling winnings.

[9] The evidence showed that in January, 1991, the IRS selected CAPPELLA's 1989 return for an audit. DANEAULT represented CAPPELLA during the IRS audit.

[10] In May, 1991, just before a scheduled meeting with the IRS auditor, DANEAULT caused a telephone call to be placed to William Jenner, of Worcester, Massachusetts. Jenner agreed to rent to DANEAULT Jenner's collection of losing instant lottery tickets in exchange for a fee of $500.

[11] On or about May 29, 1991, DANEAULT sent two of his employees to Jenner's where they picked up the tickets and filed the bed of DANEAULT's pick-up truck with boxes of losing tickets. Also, on or about May 29, 1991, DANEAULT caused to be delivered to William Jenner a letter, which read in pertinent part:

The purpose of this letter is to acknowledge receipt of

While at Jenner's home, DANEAULT's employees delivered to Jenner a

[12] DANEAULT's employees then transported the losing tickets to DANEAULT's office, in Lowell, where the losing lottery tickets were bundled and bound in stacks of 100, by type of ticket, and were arranged in a conference room.

[13] Later, DANEAULT invited CAPPELLA to view the tickets he had procured for the audit. The government was prepared to show at trial the [sic] DANEAULT assembled over 45,000 of Jenner's instant scratch tickets; 5000 Massachusetts lottery tickets; and approximately 16,000 losing racetrack tickets from various tracks, such as Rockingham, Seabrook, Suffolk Downs, and Wonderland. A DANEAULT employee prepared a tally sheet to be given to the IRS auditor which summarized the gambling losses by type and amount.

[14] At a strategy session before the audit, DANEAULT and CAPPELLA agreed that one of DANEAULT's employees would try to explain away the sheer volume of the losses by falsely telling the IRS auditor that CAPPELLA was a member of Gambler's Anonymous. DANEAULT arranged for one of this employees to meet with the IRS auditor on June 13, 1991, at which time the auditor was told that the losing tickets were CAPPELLA's. The IRS auditor viewed the tickets and the tally sheet, but disallowed the gambling losses.

[15] At the federal hearing today, DANEAULT also pleaded guilty to aiding and assisting in preparation and presentation of a false federal income tax return. At trial the government would have proved that DANEAULT fabricated false and fraudulent expenses for another client without their knowledge or consent.

[16] The investigation was conducted by Special Agents of the IRS's Criminal Investigation Division. The prosecution is led by Special Assistant U.S. Attorney John M. Hodgens, Jr., a Tax Division trial attorney assigned to Stern's Economic Crimes Unit.

[17] Press Contact: Joy Fallon or Anne-Marie Kent, (617) 223- 9445.