Florida man, who operated in Mississippi, pleads guilty in tax shelter scheme

DELRAY BEACH, Fla. — A Florida man who operated in Mississippi pleaded guilty to a tax shelter scheme.

Stephen T. Mellinger III, of Delray Beach, admitted to orchestrating a nearly decade-long scheme to promote an illegal tax shelter and commit wire fraud. He also pleaded guilty to assisting in the preparation of false tax returns for tax shelter clients.

According to court documents and statements made in court, Mellinger was a financial advisor, insurance salesman, and securities broker operating in Florida, Michigan, Mississippi, and elsewhere. Beginning in late 2013, he conspired with others to promote an illegal tax shelter that allowed clients to claim false tax deductions for so-called “royalty payments” to fraudulently reduce their taxes.

In reality, as Mellinger knew, the “royalty payments” were a circular flow of money designed to create the appearance of genuine business expenses. Typically, a client would send money to bank accounts controlled by Mellinger and his co-conspirators, who then sent the money—less a fee—back to a different account controlled by the client. This allowed participants to retain control of the money while falsely deducting the transfers as business expenses on their tax returns.

More than $106 million in false tax deductions were claimed, causing an estimated $37 million tax loss to the IRS.

Mellinger and a relative, who was also a co-conspirator, earned approximately $3 million in fees from promoting the scheme.

In January 2016, Mellinger learned that several of his clients were under investigation and that the United States had begun seizing their funds. He and a relative then stole more than $2.1 million from some of those clients, using part of the money to buy a home in Delray Beach.

Mellinger will be sentenced Sept. 16. He faces up to five years in prison for conspiracy to defraud the IRS and commit wire fraud, and up to three years for aiding in the preparation of false tax returns. A federal judge will determine the final sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

Acting Deputy Assistant Attorney General Karen E. Kelly of the Justice Department’s Tax Division, supervisory official Antoinette T. Bacon of the Justice Department’s Criminal Division, and acting U.S. Attorney Patrick A. Lemon for the Southern District of Mississippi made the announcement.

IRS Criminal Investigation and the Department of Defense, Office of Inspector General, Defense Criminal Investigative Service are investigating the case.

Trial attorneys Richard J. Hagerman, William Montague, and Matthew Hicks of the Tax Division, Assistant U.S. Attorney Charles W. Kirkham for the Southern District of Mississippi, and trial attorneys Emily Cohen and Jasmin Salehi Fashami of the Criminal Division’s Money Laundering and Asset Recovery Section (MLARS) are prosecuting the case.