Opinion ID: 813649
Heading Depth: 2
Heading Rank: 1

Heading: CTS's Mode of Operation

Text: In 1998, Powers and Mahan started CTS. CTS's Articles of Organization listed Powers and Mahan as the agency's sole directors, with Mahan as President and Powers as Treasurer and -3- Clerk. Before starting CTS, Powers and Mahan had both worked at another temporary employment agency, Daily A. King (DAK). CTS provided temporary workers to facilities such as warehouses and recycling plants to perform manual labor. CTS entered into contracts with client companies that set out the rates which the clients would pay CTS per worker hour. Clients called CTS to request a particular number of workers and CTS communicated the client order to recruiters, some of whom had been temporary workers themselves before CTS approached them to recruit workers for CTS. CTS told the recruiters how many men and women were needed, what clothes the workers should wear, and how to get to the client facilities. The recruiters then found workers for CTS. Powers set the workers' rate of pay and CTS informed the recruiters what the rate was. CTS did not ask recruiters how much it would cost to find workers, and recruiters did not provide a quote to CTS for how much workers would cost. Recruiters did not send CTS invoices for finding workers. CTS paid the recruiters a commission of fifty cents per hour for each worker, plus an extra fifty cents per hour if the recruiters transported the workers to the client company. CTS provided client companies with blank timesheets that the clients filled out and returned to CTS each week. CTS then created invoices listing workers' names, the hours they worked, and the billing rate, and submitted them to clients. After CTS had -4- collected and added up the timesheets each week, Powers or Mahan wrote a check for the total amount, sometimes above $100,000, that would be cashed and the cash distributed to the workers. Powers and Mahan divided the cash into separate quantities for each recruiter and placed the cash in bags, working from paysheets that listed workers' names, the hours they worked, and their pay rate. Each bag was then given to a recruiter with a paysheet so the recruiters could pay the workers. CTS also paid recruiters and some CTS office workers in cash. Between January 1, 2000 and June 30, 2004, CTS cashed checks totaling $26,563,854. B. CTS's Failure to Pay Payroll Taxes or File Forms 1099 Employers report payroll paid to employees to the IRS each quarter using a Form 941. Employers pay FICA taxes, also known as payroll taxes, in connection with the filing of Form 941. The total payroll tax rate during the relevant period was 15.3% of an employee's wages; employers are to withhold half of the payroll tax amount from employees' paychecks, and to pay the other half themselves. Employers are also supposed to withhold federal income tax from employees' wages. CTS filed Forms 941, but it did not report the cash wages paid1 and did not pay payroll taxes or withhold any taxes. Powers and Mahan did not instruct recruiters to withhold taxes from wages paid to temporary workers. Joseph 1 CTS filed Forms W-2 disclosing wages paid to Powers, Mahan, and four or five other CTS employees, but did not file Forms W-2 for temporary workers or recruiters. -5- Guidoboni, a revenue agent in the IRS Special Enforcement Program, estimated at trial that the total tax due on the unreported payroll was $7,592,003.55. When a company uses contract laborers rather than employees, it is still required to file a Form 1099 whenever it has paid an individual or unincorporated business more than $600 in a calendar year. In 2000, Powers and Mahan hired Joyce Christensen, a certified public accountant, to prepare their corporate and personal tax returns. Powers and Mahan told Christensen that $1,923,155 was to be deducted on CTS's tax return as contract labor, and that these contract laborers were temporary workers. Christensen told the defendants that CTS needed to file a Form 1099 for anyone classified as a contract laborer and explained how to determine if someone was an employee (requiring the filing of a Form W-2) or a contract laborer (requiring the filing of a Form 1099). Christensen sent a letter to the defendants on March 9, 2000, reiterating that properly classified independent contractors should receive a Form 1099 at the end of each calendar year. If you fail to provide the proper forms, you could have exposure to a large tax liability. Christensen stopped working with the defendants for the 2000 tax year because they would not follow her advice. During the charged conspiracy period, from 2000 to 2005, CTS did not file any Forms 1099 with the IRS. -6- C. CTS's Underreporting of Payroll to Insurance Carriers With certain exceptions not relevant here, Massachusetts employers are responsible for maintaining workers' compensation insurance for everyone to whom the employer makes payments. Upon the expiration of each policy term, the insurance company audits the employer and reviews the employer's records to determine, inter alia, the actual remuneration paid by the employer to individuals and businesses during the previous year, including payments to subcontractors or contract labor. The audit then arrives at a final premium figure for the policy term that determines whether the employer owes additional money to the insurer or the insurer owes the employer a rebate. CTS was audited by its workers' compensation insurance carriers several times. CTS failed to report all of its payroll to its auditors, resulting in its carriers underbilling it by more than $200,000 between June of 2000 and February of 2005. D. Powers' and Mahan's Statements in the DAK Investigation In April of 2000, Powers met with Federal Bureau of Investigation (FBI) agent Nancy McCormick and a representative of the U.S. Attorney's office to discuss the business practices of DAK, his previous employer. Powers explained that DAK was a temporary employment agency, and said that the majority of DAK's payroll involved off-the-books cash payments. Powers described how he cashed checks for DAK, and how this cash was then divided into -7- envelopes and given to lieutenants to distribute to temporary workers. Powers provided Agent McCormick with a hard drive containing Excel spreadsheets recording cash payments to temporary workers that were not disclosed on DAK's Forms 941, and also said that DAK's cash payments were designated as contract labor on DAK's tax returns. Powers stated that DAK's cash payments had not been reported to DAK's workers' compensation insurance carriers and that DAK had withheld no tax from these cash payments. Powers was the first person to meet with Agent McCormick and provide information about DAK, and he ultimately spoke with Agent McCormick five times between April of 2000 and May of 2001. In 2002, Mahan met with Joel Burman, an IRS Criminal Investigation special agent, to discuss DAK. During Mahan's interview, he explained that DAK and its affiliated companies paid their employees with cash and used managers to recruit, pick up, transport, and pay their employees. Mahan stated that DAK underreported its payroll to its workers' compensation carriers in order to reduce its premiums. Federal agents then obtained a search warrant on June 25, 2001 to search the offices of DAK and its affiliated companies. The investigation culminated in the indictment, trial, and conviction of DAK's owners for mail fraud, procuring false tax returns, and conspiring to defraud the United States of employment -8- and income taxes and to commit insurance fraud. See United States v. McElroy, 587 F.3d 73, 74, 76 (1st Cir. 2009). E. Massachusetts Department of Unemployment Assistance Proceedings Against CTS Massachusetts employers are required to contribute to the state unemployment assistance fund in an amount determined, in part, by how many employees they have. Employers report the information upon which their contributions to employment assistance are based to the Massachusetts Department of Unemployment Assistance (DUA) each quarter, and some employers are then selected to be audited. In July of 2000, Roberta Davis of the DUA notified CTS that it had been selected for an audit focusing on CTS's operations during 1998. CTS retained attorney Edward DeFranceschi with respect to the DUA matter. On September 1, 2000, CTS provided Davis with a transaction report that reflected a number of cash disbursements. During a follow-up meeting with Davis, DeFranceschi and Powers characterized the recipients of these disbursements as subcontractors. Davis requested additional documentation, whether it's business cards, invoices, contracts, Yellow Pages, something to show me that these people are in business for themselves, as well as Forms 1099 and other back-up documentation. Davis asked for more documentation about one of CTS's recruiters, Jose Gramajo, and his wife, Delmy Gramajo, who transported workers for CTS. -9- In February of 2000, DeFranceschi sent Davis a letter, with a copy to Powers, in which he stated: CTS routinely calls Delmy and Jose to handle certain jobs that it has acquired. Delmy and Jose, however, are not CTS employees. Each of them and several others quote a price. If the price is within the profit targets CTS quotes the customer, they complete the job and are paid. On February 21, 2000, DeFranceschi sent Davis another letter stating that: You asked about invoices from the persons who had received large payments from Commonwealth Temp Services (CTS). I have enclosed three invoices from 1998 and a current invoice. . . . CTS solicits situations requiring unskilled labor. . . . If CTS successfully bids the job, it contacts various parties that it has done business with in the past and inquires if they are interested in doing the job at a fixed rate for labor and transportation. CTS usually finds someone to organize the labor for the job. The invoices I have enclosed represent the billing for the jobs to CTS. . . . Please note the detail in the February 4, 2001 invoice from K & S Comm & Domestic Services. The job, the labor and the transportation are all separately stated. Two of the enclosed invoices purported to be from Delmy Gramajo. Powers had faxed the enclosed invoices to DeFranceschi on an undisclosed date with the note: 3 early and 1 recent invoice -- These are good representatives of the type of invoices we rec'd then and now. In fact, Delmy Gramajo never submitted any invoices to CTS, much less the invoices that DeFranceschi provided to Davis. Neither did Jose Gramajo. The invoice that DeFranceschi identified as from K & S Comm & Domestic Services was actually a paysheet that CTS had originally provided to Jose Gramajo. -10- On April 6, 2004, the DUA issued a determination to CTS that twelve listed individuals and others similarly employed were in 'employment,' making them your employee(s) and not independent contractor(s). CTS appealed and hearings were held on June 9, 2004 and July 1, 2004, which Powers, Mahan, and attorney DeFranceschi attended. Powers testified under oath that he did not know the medium of payment between the recruiters and the temporary workers; that for each new job he contacted the recruiters to solicit a price from them for which they would be willing to find workers; that the recruiters, at least initially, invoiced CTS for the services they performed; and that he did not have direct knowledge of the amount the temporary workers were paid. The DUA, in an undated decision signed by review examiner Scott E. Pachico, affirmed the determination that an employer-employee relationship existed between [the listed] individuals [and others similarly employed] and Commonwealth Temporary Services, Inc. This decision made CTS liable for unemployment contributions for its temporary workers, and Powers and Mahan then shut down CTS's operations in December of 2004. F. Powers' Statements to IRS Criminal Investigators During a 2006 interview with IRS Agent David Butka, Powers stated that CTS used subcontractors, but had no contracts with these subcontractors and paid them in cash, which the -11- subcontractors paid to the workers. Powers stated that the subcontractors requested that the payments be in cash and that he did not know whether the temporary workers were paid in cash. Powers said that the subcontractors initially submitted invoices to CTS but that CTS eventually began directly incorporating information from the subcontractors into its internal spreadsheets. Powers admitted that CTS did not issue Forms 1099 to the subcontractors, but insisted that accountants never discussed Forms 1099 with him and that he was not familiar with the Form 1099 filing requirements.