[Post updated] Some people say cats have nine lives. Read this story and you will be convinced that the founder of a 1031 exchange company, Daniel Carpenter, has even more than that. For now, however, Carpenter is spending his days and nights at the United States Penitentiary in Canaan, Pennsylvania.
1031 exchanges have long been fraught with fraud. The same is true with so-called 419 plans (also known as welfare benefit plans). The subject of this post, Daniel Carpenter, is at the center of both.
The “1031” in 1031 exchanges and the “419” in 419 plans refer to sections of the IRS Code. The shadowy Carpenter can be found involved with both schemes. Carpenter has been linked to a number of products and companies including Benistar, Nova Benefit Plans, Rex Insurance Services, U.S. Benefits Group, Benefit Plan Advisors and Grist Mill trusts.
The Internal Revenue Code (section 1031) allows the owner of property to defer capital gains taxes on any gain by rolling over the sale proceeds into a new property. These exchanges are often called a “like kind exchange.” IRS rules prohibit the property seller from directly holding the sale proceeds in between the sale of the original property and the purchase of the replacement property. That creates the need for an intermediary such as Benistar.
In the typical 1031 exchange fraud, the intermediary steals the funds. Another variation of the scam occurs when a promoter offers to pool the proceeds from several sellers into a larger investment to be held in a tenant-in-common arrangement. Many of the promoters of these scams, people like Carlton Cabot, almost ruined the 1031 industry.
1031 exchanges are a legitimate tax planning mechanism. Unfortunately some of the promoters involved with them are scam artists.
The typical fraud allegations against bad 1031 promoters and facilitators are different from those directed at Carpenter and Benistar. More on that below.
419 Plans (Welfare Benefit Plans)
Promoters of 419 plans and their cousins, so-called 412 plans, were used by unscrupulous insurance companies and agents to sell expensive, life insurance policies. Simply stated, promoters claimed they had found a loophole that allowed business owners and others with large profits to shelter those profits through life insurance.
Although these arrangements sound good on paper, they are considered abusive tax shelters by the IRS.
In the center of both types of tax schemes is Daniel Carpenter. A lawyer by profession, Carpenter claims that he has done nothing wrong. His legal pleadings suggest he was at worst a bad businessman and at best, got bad advice from banks. No one alleges he was a thief, however.
Carpenter’s Criminal Case
Carpenter was first indicted in connection with his 1031 exchange activities. In the 1990’s, Carpenter helped launch Benistar as a 1031 exchange intermediary. The intermediary takes possession of the funds after the first closing and holds them until their client is ready to close on the replacement property.
Prosecutors say that Benistar and Carpenter claimed they knew the complex exchange rules and were prepared to hold the sale proceeds until the second closing was to occur. Intermediaries serve an important role because if the owner – called an exchanger – gets possession of the funds even just for minutes, all tax benefits of the exchange are lost.
Benistar allegedly promised that their funds would be invested in something “safe” and be available when needed. Prosecutors claimed, however, that Carpenter used Benistar client money to invest in highly speculative options. They also say that the clients were not told of the investments.
The strategy quickly began to unravel. Carpenter may have been exceptionally bright but he failed as an options trader. Beginning in early 2000, Carpenter was losing the money entrusted to him by his clients. By the end of the year he had lost $9 million.
In February 2004, Carpenter was indicted and charged with 14 counts of wire fraud and 5 counts of mail fraud. A year later in July, he was convicted by a Boston jury of all 19 counts.
The story should end here but it doesn’t.
Carpenter appealed and the trial judge tossed the case because of improper gambling remarks made by prosecutors in front of the jury. Later a three judge appeals panel would uphold the new trial order, albeit in a divided decision.
Often prosecutors will offer a very low sentence to keep from having to empanel another jury. No such luck for Carpenter in this case. Prosecutors thought he was guilty and elected to have another trial.
Prosecutors dragged Carpenter back into court where he was again convicted in June of 2013 of all 19 charges.
Carpenter appealed again and once again convinced a judge that he should be granted a new trial. This time the appeals court said no, however.
The re-imposition of the jury’s verdict was vindication for prosecutors. Despite losing in the court of appeals, Carpenter still wasn’t done. This time he filed almost a dozen motions… motions for a new trial, motion for emergency relief, and motion to set aside the jury verdict.
That meant years more of delays. Finally, however, Carpenter was sentenced to prison. (Of course that is under appeal too.)
Prosecutors say that Carpenter lied to his customers when telling them their funds were safe. Instead he essentially gambled their money on speculative stock options.
In asking for 60 months of prison, prosecutors told the court, “In addition to the obvious financial impact, Carpenter’s conduct has caused substantial additional consequences. Two of the victims are in their eighties; one is in his mid-seventies. These three have been forced to spend some of the final years of their lives dealing with the worry and stress of having lost substantial amounts of their life savings.”
Taxes were also an issue. In many instances, Benistar clients suffered collateral financial damages too. These include tax penalties, legal and accounting expenses.
Carpenter’s lawyers paint a very different picture of the man. They said he “devoted his life to bettering the lives of others [and] contributed his time and energy to the causes of others”.
Carpenter’s problems are far from over. Prosecutors in Wisconsin and Connecticut have intermittently considered more charges, this time for his alleged involvement in 419 scams. [We remind everyone that defendants are considered innocent until proven guilty.]
Updates: Yes, Daniel Carpenter has filed more appeals. Despite his seemingly great luck in avoiding prison, he remains incarcerated. That hasn’t stopped him from filing appeals, however.
In December 2018, Carpenter was sentenced again. He received 30 months in prison on various charges of wire fraud, mail fraud, criminal conspiracy, money laundering and illegal money transactions. The sentences were to run concurrently. And yes, he appealed again.
As of this update, a federal appeals court denied his request for bail while awaiting a decision on his appeal. The court wrote, “It is hereby ORDERED that Appellant’s motion is DENIED, because he has failed to show that his “appeal raises a substantial question of law or fact” that is “likely to result in reversal or an order for a new trial.”
419 Plans – Bad News for Investors
Although the IRS has been sounding the alarm on 419 plans, 412 plans and welfare benefit plans since 1995, we continue to see them. In almost every instance, they are considered to be abusive tax shelters by the IRS. Worse, just having one can subject you to an IRS penalty of up to $200,000 per year for simply having the plan and not telling Uncle Sam about it.
That’s right, the IRS requires that you report abusive tax shelters each year on a special form, IRS form 8886, Reportable Transaction Disclosure Statement.
Having one of these plans often means: 1) you will owe substantial taxes on the income you were previously told was not taxable, 2) you may owe huge penalties and 3) often the promoters of these schemes are fraudsters who stole the money. We have represented many clients, for example, who invested in a scheme run by Nikolai Battoo, Tracy Sunderlage and PIWM. (Again, we have no information that Carpenter ever stole any funds.)
There is nothing worse than losing all your money and having to pay taxes and penalties on money you don’t have.
If you have invested in a 419 Plan (or any of its derivatives), contact us immediately. We can help go after the promoters of these schemes. Even of the promoters are no longer in business, one can often recover from third parties such as accountants who “blessed” the plans or the insurance agents who sold them.
For more information, visit our cornerstone content on welfare benefit plan scams. Ready to see if you have a case? Contact attorney Brian Mahany at or by telephone at (202) 800-9791 (direct). We consider and accept cases nationwide.
MahanyLaw – America’s Fraud Recovery Lawyers