Justice Department Seeks To Block Alleged Tax Scam Involving Native American Casino Distributions

WASHINGTON, D.C. - The Justice Department announced today that it has sued two certified public accountants in U.S. District Court in Los Angeles, seeking to bar them from operating an alleged tax scam involving tribe members’ income from the Chumash Casino Resort in Santa Ynez, Calif. According to the government's civil injunction complaint, the two professionals—Stephen Drake of Prescott, Ariz., and Kenneth Sorenson of Buellton, Calif.— devised and operate a tax fraud scheme that helps some members of the Santa Ynez Band of Chumash Indians claim bogus deductions on their federal income tax returns to offset income the members receive from the Band's casino operations.

The government complaint alleges that 32 of the 156 members of the Santa Ynez Band who received taxable distributions of the casino's income in 2004 were customers of the defendants and used the scheme. Each Band member received over $300,000 in casino distributions in 2004 and over $400,000 last year. The complaint estimates that Drake and Sorenson's scheme has cost the federal Treasury approximately $3.3 million so far, and says that the loss increases each month.

According to the government filing, Drake and Sorenson, the Band's accountant, cause the Band to pay casino earnings to customers’ sham businesses. Drake and Sorenso then allegedly transfer the casino earnings from the sham businesses’ bank accounts to the account of Benecorp, a firm that Drake and Sorenson control. The suit alleges that the defendants mischaracterize the payments to Benecorp as tax deductible business consulting fees. After deducting a fee, Benecorp then allegedly returns the casino distributions to customers in the form of purported loan proceeds that are not subject to income tax. According to the complaint, Band members who participated in the scheme transferred more than $9 million of casino distributions to Benecorp including over $2 million in fees paid to Drake and Sorenson.