Infamous Illinois Whistle-Blower Loses Wine Tax Case

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By Jennifer McLoughlin

Prolific tax whistle-blower Stephen B. Diamond couldn’t convince an Illinois appellate court to side with him in another action brought under the Illinois False Claims Act.

The Illinois Appellate Court, First District, ruled against Diamond in a March 28 decision that found the so-called qui tam king failed to proffer evidence of a false representation or record made by Winetasting.com and TSG, LLC ( State v. The Winetasting Network , 2017 BL 98737, Ill. App. Ct., 1st Dist., No. 1-15-2829, 3/28/17 ).

The appellate court’s decision affirmed the lower circuit court in dismissing Diamond’s complaint for failure to state a cause of action.

Characterizing his complaint as a cause of action for “reverse false claims,” Diamond argued that the companies sold wines without paying all taxes required under the Retailer’s Occupation Tax Act. Alleging the companies sold wines they didn’t produce, Diamond asserted they acted as liquor retailers and were obligated to collect local taxes in addition to the state sales tax. The state declined to intervene in the matter.

The appellate court noted that a reverse false claims case “requires proof that the defendant ‘knowingly’ made, used or caused to be made a false record or statement to avoid an obligation.” And any complaint alleging an False Claims Act violation must satisfy the specificity requirements for pleading a fraud claim—including identification of the time, place and contents of the false representations, and how a defendant profited through those representations.

Finding that Diamond’s complaint failed to include any factual allegation of a false statement in documents produced, the appellate court concluded the complaint didn’t raise a viable claim.

According to the Illinois Attorney General’s Office, Diamond has served as relator in at least 911 qui tam actions in Cook County Circuit Court over the last 15 years. An investigation by Bloomberg BNA revealed that Diamond has collected almost $12 million though this pattern of litigation.

No False Representation

Diamond’s complaint identified email order confirmations, invoices, accounting records and “other documents"—and attached several copies of order confirmations and invoices—as proof of the place, time and content of the companies’ false representations. Specifically, he alleged that documents “falsely omit” the Retailer’s Occupation taxes, as they only show a 6.25 percent tax charged for each transaction in accordance with Illinois use tax.

“The emails, invoices, and accounting documents that accurately reflect the collection of the use tax on the price of the wine, and no other taxes, cannot constitute the requisite fraudulent representations for purposes of the IFCA,” according to the opinion. “Diamond may have adequately alleged a violation of the Liquor Control Act (see 235 ILCS 5/5-1(d) (West 2014)), but not every statutory violation involves a false representation.”

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

The Illinois Appellate Court decision is at http://src.bna.com/nsV.

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