IRS may take interest in suit over Paterakis estate amid allegations of tax fraud, experts say

Beyond the family feud over millions of dollars of cash the late John Paterakis allegedly left behind, the suit filed by his widow includes allegations of tax fraud that could attract the attention of state and federal authorities.

Among the allegations Roula Paterakis made in the lawsuit filed Monday is that her late husband’s children took and concealed “millions of dollars in cash hoards,” filing “false tax returns” on behalf of him and his companies.

Whether that triggers any investigation remains to be seen, but tax experts said the IRS already may be interested in Paterakis’ estate.

“At the quarter-billion-dollar level, virtually every estate would be audited by the IRS regardless of these allegations,” said Bobby Waldrup, a certified public accountant and interim associate dean of the Sellinger School of Business at Loyola University Maryland.

But who gets what percentage of the bakery magnate and developer’s estate is likely of no concern to the IRS, he said.

“In a sense, a squabble like this falls beneath what the IRS is interested in,” Waldrup said. “It’s interested that the estate pay its fair share of taxes.”

A spokesman for the Internal Revenue Service declined to discuss the allegations of unreported assets, saying the agency is prohibited from commenting on the tax matters of specific taxpayers.

The office of Maryland Comptroller Peter Franchot, which collects state taxes, also declined to comment.

“We don’t comment on cases that are being litigated and in fact, by law we couldn’t comment on whether we are or aren’t investigating any particular individual or business,” said Joseph Shapiro, assistant comptroller for communications.

“In general,” he added, “I’d say that enforcing Maryland’s tax laws fairly and efficiently is a top priority for Comptroller Franchot, and the agency takes very seriously any tips or allegations of tax fraud.”

The lawsuit’s allegation that Paterakis had millions of dollars in “cash hoards” and “play money” accounts may seem at odds with his business, at least in its current incarnation. Although H&S Bakery began as a small family operation, it grew into a huge conglomerate with $800 million in annual revenue by the time of his death in October 2016.

He married Roula Paterakis in 2015 after living with her since 2001, according to the suit.

Her suit said Paterakis accumulated cash throughout his career, including from cash sales at H&S outlet stores and cash paid by customers to bakery truck drivers. It alleged that his son, William Paterakis, and other H&S executives helped divert the cash.

“To hide these activities from view, William caused the preparation and filing of false tax returns for bakery entities and for John personally,” according to the suit.

A lawyer representing some of the nine defendants — Paterakis’ six children, one of his grandchildren, a son-in-law and a business associate — previously denied the allegations in the suit. Another family attorney called the allegations “outrageous.”

William Paterakis could not be reached for comment.

A call seeking comment from H&S Bakery and Paterakis’ Harbor East development company was not returned.

Simply having a lot of cash on hand isn’t necessarily a problem, Loyola’s Waldrup said.

“Your choosing to have a million dollars in cash is not an illegal act,” he said.

Gerald Kelly, a tax lawyer based in Columbia, said that even today, and even among large companies, some transactions still are made in cash.

“If you have a customer who is not reliable,” he said, “you would want the payment upfront.”

The suit also alleges that two of Paterakis’ children filed “a false and fraudulent inventory” of their father’s estate in the Orphans Court for Baltimore County. They did not include his “cash hoards” or “play money,” money diverted to an irrevocable trust, or his interests in his H&S businesses.

Angela Vallario, an associate professor of trusts and estates at the University of Baltimore Law School, said the lawsuit, with its narrative depictions of the courtship of John and Roula Paterakis, the alleged “malice” the children from his first marriage felt toward her as the second wife goes well beyond what are normally staid documents.

“It’s trusts and estates with a twist,” she said. “I think it’s throwing everything against the wall to see what sticks.”

But clearly, Vallario said, Roula Paterakis is making a case to “build the pile” of what is considered her late husband’s estate, because that would increase the size of her claim to one-third of it. That is why she is seeking to have his “cash hoards” and money transferred to various trusts considered part of his estate, she said.

That is also why the suit makes a point that Paterakis maintained 100 percent control of his bakery and development assets, Vallario said.

“All of these things,” she said, “are going to be closely examined for federal estate taxes.”

jean.marbella@baltsun.com

twitter.com/jean_marbella

Copyright © 2017, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad
43°