Fight the system and lose…go to jail. Or, “Russian Roulette, anybody?”

Would you play Russian Roulette if it involved a really big revolver, say one with a hundred cylinders, and only one of them was loaded? Not me, but again, I’m only an accountant.

A friend called recently. It seems like he has (metaphorically) decided to spin the cylinder, place the gun to his head and squeeze the trigger. For years he has been buying houses from the city that have been boarded up or are being lived in by dope dealers, squatters, etc. He re-habs those houses, then rents or sells them. Now he is being investigated criminally. If you believe what you read in the newspaper, he buys houses for $15,000 and tricks people into buying them for $100,000, profiteering off low-income minorities. The newspaper ignores the cost and value of the rehab in the middle, that he will finance people who cannot get normal bank loans (taking chances that a bank will not), etc. Plus he is well known in his town. All of that makes for a much more interesting (one-sided) read. Ouch.

Tom groans that the $300k it would take to make this all go away (a small part of his net worth) would “hurt him”. But he feels he is right, so will insist on fighting, not realizing that “right” is something that a judge will decide. Plus, his ornery personality will not serve him well in court. I shudder at what will happen when a judge dares to lecture and point a paternal finger at him.

The odds of winning are in Tom’s favor, but he’s almost sixty, and if he loses, his life really changes. We are going round and round on this one. Part of our last conversation was:

“Assume you have to go through this trial a hundred times and that in ninety of them the judge says just what he should, namely, “Wow, you were right; the court apologizes for inconveniencing you”. But in the other ten the judge spanks you with six months of free room and board. Would you (one of the “winning” Toms) pay to keep you (one of the losing Toms) out of jail? Isn’t $300k reasonable?” (note: so far it hasn’t worked — any ideas?)

There are several things he could have done to structure his transactions and set up the business systems and procedures that most likely would have kept this issue from ever coming up. But perhaps his biggest mistake was not realizing the potential political/legal fallout of doing so much buying and selling in poor neighborhoods. One person I know (in the same business) has greatly reduced his risk by serving on various community committees and helping pro-business candidates get elected. He is known locally as a benefactor who restores entire neighborhoods rather than a slumlord profiteer.

The principle in warfare (Sun Tzu) is to not take a superior enemy head-on. Tom can’t see that. As I write this, we are still at the beginning stages, so there is still time to get through to him. Click. Click. Click……. (all clicks so far, but “Bang” is a bummer).
**********
Update from the year following this original post: very sad; he fought; he lost; he went away for a while. Good looking guy, great personality, a fighter. Government’s perception of him (fast talking, smooth walking, owned cool toys, etc.) contributed to results. In dealing with government regulatory agencies (including the IRS), to a certain extent, the perception is the reality.