San Diego ‘Underground Economy’ Case Nets Guilty Pleas

March 8, 2004

Two San Diego County men who owned several Southern California construction companies pleaded guilty to six felony counts, including state income tax evasion, conspiracy to file false tax returns, payroll tax evasion and insurance fraud, in a case involving the Underground Economy Task Force, according to the Franchise Tax Board (FTB).

In a negotiated plea agreement, Robert Covington, 44, of Fallbrook, and Donald Huffman, 62, of Del Mar, were ordered to pay restitution of more than $1.2 million to the victims of their fraud: FTB, the Employment Development Department (EDD), and State Compensation Insurance Fund (SCIF). Both men face up to five years and eight months in state prison as well as four years of probation.

Covington and Huffman indirectly owned and operated C & H Framing, an area construction company. Court documents indicate C & H Framing was involved in a “cash pay” scheme involving subcontractors James Joseph doing business as Joseph and Sons Construction, and Frederick Flores doing business as Pacific Landmark Framing. The fraudulent scheme illegally reduced their company payroll taxes and workers’ compensation insurance through cash payments erroneously reported as “cost of goods sold.” As a result, C & H Framing overstated its expenses by more than $1.8 million for the tax years ending 1999, 2000, and 2001. Covington and Huffman each pleaded guilty to one count of filing a false 2001 state income tax return and one count of conspiracy to file false state tax returns. Joseph and Flores have already pleaded guilty to similar tax evasion charges and are awaiting sentencing.

Notable in this case is that the corporation’s primary business deduction, more than $1.8 million in labor costs, was disallowed because the businesses paid their employees with cash under the table to avoid reporting the wages to the EDD in order to save on payroll taxes.

Covington and Huffman paid restitution of more than $182,000 to the Franchise Tax Board which includes delinquent tax, interest, and the cost of investigation. The pair will have to pay additional restitution of more than $1 million to EDD and SCIF within 90 days. San Diego County Superior Court Judge Judith Hayes heard the pleas. Both men will be formally sentenced on March 25 in San Diego County Superior Court.

The Underground Economy Task Force investigates construction industry contractors and developers who illegally pay workers under the table or fail to report all their income through various kickback and evasion schemes. Participants in this case include the FTB, San Diego County District Attorney, SCIF, and EDD. San Diego County Deputy District Attorney Ernie Marugg prosecuted the case.

Topics Construction

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