Scheme to evade federal income taxes costs local defense subcontractor a $1 million fine.

Scheme to evade federal income taxes costs local defense subcontractor a $1 million fine

An Inglewood-based defense subcontractor was fined $1 million late last month for evading roughly $2 million in federal taxes through an elaborate siphoning scheme, the Justice Department announced.

Marvin Engineering Co., a medium-sized machine shop that produced bomb ejection racks for Rockwell International's B-I Bomber program, pleaded guilty to two counts of tax evasion in a Los Angeles Federal Court May 25. Gerald M. Friedman, the company's executive vice president and co-owner, was sentenced to two years in prison and fined $200,000 for his role in masterminding the diversion of funds.

"This was an ingenious plot, no question about it," said Attorney George W. Newhouse, who handled the case for the Justice Department. "It took an alert government official to figure it out."

Friedman's chicanery occured between 1982 and 1986, when he used some of Marvin Engineering's corporate funds to pay all the production and sales expenses of Wimbledon Industries, an exercise bicycle firm that he and a business partner owned. The exercyles, marketed under the trade name Heartmate, were manufactured on Marvin's premises.

The $3.7 million generated by the exercycles was never reported on Marvin Engineering's tax returns, nor on returns filed by Wimbledon and its owners. Instead, the money was used to help pay off $7 million in personal loans from Bank of America that benefited Friedman and Marvin Gussman the companies' principal owners.

"All of the revenues made by Wimbledon was kept off everyone's books," Newhouse said. "Those funds were used to pay down a corporate line of credit that Gussman and Friedman took out personal reasons."

Newhouse said Friedman used some of that money to buy expensive jewelry and provide financial support for his mother.

The conviction was the result of a two-year probe by the Internal Revenue Service. Documents filed during the sentencing hearing showed Marvin Engineering's payment of income taxes increased 500 percent after it learned in May 1986 of the pending federal grand jury investigation.

Gussman, who owns 55 percent of Marvin Engineering, was not charged by the government. The company, which employs 250 people, is still operating. Company officials did not return telephone calls.