Bogus Shelters for the Stars

By Charles P. Alexander

For a time, young Edward Markowitz of Washington, D.C., seemed to have everything going for him. While still in his early 30s, he became a successful promoter of tax shelters and earned enough to buy a Rolls-Royce, several racehorses, a $500,000 home overlooking Washington's Rock Creek Park and a 2.5% stake in the Washington Capitals ice-hockey team. Among the investors who flocked to his deals were a host of celebrities, including Filmmaker Woody Allen, Comic Bill Murray, Actors Christopher Walken and Frank Langella, TV Personality Dick Cavett and Author Erica Jong.

But Markowitz, now 35, publicly admitted last week that the shelters were part of a colossal sham that authorities called "the largest tax-fraud case ever prosecuted." In a federal district court in Manhattan, he pleaded guilty to conducting a scheme that enabled about 200 taxpayers to take illegal income tax deductions amounting to more than $445 million. Allen, Cavett and the other celebrities who participated in the shelters were named as unwitting victims of the fraud.

Markowitz recruited investors for several partnerships he set up to trade Government securities and other investments. For every dollar the partners put in, they took what they thought were legitimate tax deductions ranging from $4 to $10. The rationale for the deductions was that the partnerships suffered huge losses in their securities deals, which are perfectly legal tax write- offs. Government attorneys charge, however, that many of those transactions never took place, and that the losses occurred only on paper.

A graduate of M.I.T. and a for mer Merrill Lynch commodities trader, Markowitz set up his own offices in Washington, New York and Chicago during the early 1980s. A profile published in the Wall Street Journal said that associates described him as "a short, overweight young man who liked to wear jeans and deck shoes to the office and who didn't always pay attention to business details." His empire started to collapse in 1983, when the Internal Revenue Service became suspicious of his dealings.

Markowitz faces a sentence of up to 16 years in prison and a $310,000 fine. In addition, he could owe as much as $4.5 million to the IRS. The Government has already moved to confiscate the racehorses, his Park Avenue apartment in New York City and his interest in the Washington Capitals.

Like many tax-shelter deals, Markowitz's scheme attracted money from wealthy celebrities, who often leave their financial affairs to lawyers or accountants. Some of the big names invested hundreds of thousands of dollars with Markowitz. They will not be prosecuted, said U.S. Attorney Rudolph Giuliani, because they "didn't know Markowitz directly and thought the transactions were legal." Having lost their investments, they face huge bills from the IRS for back taxes. Charges may eventually be filed against some accountants and advisers who steered the stars into the shelters.

Celebrities generally crave publicity, but not in this case. Said Cavett: "I just came back from Japan, and I much prefer taking a bath in public their way. Show people tend to treat their finances like their dentistry. They assume the man handling it knows what he is doing." Other well-known investors were not talking about their tax-shelter troubles, but a clue to Jong's possible feelings can be found in a scene from her latest novel, Parachutes and Kisses, which is some what autobiographical. The book's central character, Isadora Wing, learns from her accountant that she may have to pay a million dollars in back taxes if one of her shelters, of which she is barely aware, is disallowed. "This was a nightmare out of Kafka," wrote Jong. "She could wind up owing more than she'd ever known she had."

With reporting by Thomas McCarroll/New York and Christopher Redman/Washington