A financial advisor from Florida has been sentenced to eight years in prison for promoting an illegal tax shelter and stealing client funds. Stephen T. Mellinger III, based in Delray Beach, was involved in a scheme that spanned nearly a decade, according to court documents.
Mellinger worked as a financial advisor, insurance salesman, and securities broker across several states including Florida, Michigan, and Mississippi. Starting in late 2013, he conspired with others to create an illegal tax shelter that allowed clients to claim false deductions through "royalty payments," which were actually a circular flow of money designed to mimic legitimate business expenses. Clients would transfer money to accounts controlled by Mellinger and his co-conspirators, who would then return the money—minus a fee—to another account controlled by the client. This setup enabled participants to falsely deduct these transfers as business expenses on their tax returns.
The fraudulent scheme led to over $106 million in false deductions being claimed on tax returns, resulting in an estimated $37 million loss for the IRS. Mellinger and his relative reportedly earned around $3 million in fees from this operation.
In January 2016, upon learning that some clients were under investigation and their funds were being seized by authorities, Mellinger and his relative stole more than $2.1 million from several clients. Part of these stolen funds was used by Mellinger to purchase a home in Delray Beach.
U.S. District Judge Keith Starrett of the Southern District of Mississippi imposed additional penalties on Mellinger: three years of supervised release following his prison term and approximately $37 million in restitution payments to the United States.
The announcement was made by Acting Deputy Assistant Attorney General Karen E. Kelly of the Justice Department’s Tax Division; Matthew R. Galeotti from the Justice Department’s Criminal Division; Acting U.S. Attorney Patrick Lemon for the Southern District of Mississippi; Special Agent Demetrius Hardeman of IRS Criminal Investigation's Atlanta Field Office; and Deputy Inspector General Kelly P. Mayo from DCIS.
The case is being investigated by IRS Criminal Investigation alongside the Department of Defense Office of Inspector General’s Defense Criminal Investigative Service (DCIS). The prosecution team includes Trial Attorneys Richard J. Hagerman, William Montague, Matthew Hicks from the Tax Division; Emily Cohen and Jasmin Salehi Fashami from MLARS; and Assistant U.S. Attorney Charles W. Kirkham for the Southern District of Mississippi.