Retired car dealer James Pfleuger and his son Alan were indicted Wednesday by a federal grand jury for tax fraud.
The senior Pflueger, 84, could face up to 21 years in federal prison if he's convicted. His son Alan, 43, faces a maximum sentence of 14 years in prison, although federal prosecutors said those maximum sentences are unlikely for the two businessmen without criminal records.
The indictment claimed James Pflueger tried to hide assets from the Internal Revenue Service at a time when he was being sued for the Kaloko Dam disaster on Kauai, which killed seven people. James Pflueger faces a manslaughter trial for the Kauai deaths in state court that's still pending.
The indictment charged James Pflueger defrauded the IRS by filing tax returns for three years that did not accurately reflect his income. His federal tax returns reported that he earned $707,871 in 2004 and $4.8 million in 2007. The indictment claimed he “received income in addition to the total income reported,” but it did detail how much more money Pflueger made those years.
His son Charles Alan Pflueger, who is called Alan, now owns the family Honda auto dealership at the corner of Bishop and Beretania Streets downtown. The indictment charged him with filing three years worth of false tax returns.
The indictment charged the younger Pflueger received "substantial income in addition to" the $695,724 reflected on his IRS returns for 2005, $241,114 for the year 2004 and $198,213 in 2003. But federal prosecutors did not detail how much more money the younger Pflueger received.
Alan’s attorney David Scheper spoke to KITV 4 News from Los Angeles, and said his client will be vindicated.
"We are of course deeply disturbed and disappointed by the IRS' decision to prosecute this case as a criminal case, rather than resolving this as they should have through the audit process," Scheper said.
The indictment also claimed James Pflueger set up a trust in the Cook Islands -- located in the South Pacific -- to hide money from the sale of property in California in 2007.
"Proceeds from that sale of the California property went to the trust account which was located in Switzerland. Mr. Pflueger is also charged with not disclosing the existence of that account to the federal government," said Clare Connors, an assistant U.S. attorney in Honolulu who is prosecuting the case.
The indictment also charged the car dealership, Pflueger Incorporated, improperly paid $87,000 worth of personal expenses to Alan and James Pflueger and others, including other members of the Pflueger family who were not named in the indictment.
"Those expenses were deducted as business expenses by Pflueger Inc., and therefore that reduced the liability that Pflueger Inc. had to the IRS," Connors said, noting the recipients of the expenses also did not disclose that income on their tax returns.
James Pflueger's attorney, Steven Toscher from Los Angeles, denied he'd done anything wrong.
"If there were any errors in the tax returns, and I'm not saying there are, if there were, there are errors or good-faith mistakes. Mr. Pflueger has always dealt with his taxes in good faith. We simply think the indictment is erroneous," Toscher said. “He committed no crime and we plan to show that.”
“I believed up until a week ago that the government would not bring criminal charges,” Toscher said, noting that the Pfluegers became aware of the tax investigation in 2008.
He said he has presented defenses to the federal government for each one of the charges in the indictment as part of an administrative investigation, before the case went criminal.
The U.S. Department of Justice also charged Pflueger Inc. Chief Financial Officer Randall Ken Kurata, Charles Alan Pflueger's executive assistant Julie Ann Kam and California resident Dennis Lawrence Duban, the Pflueger's accountant, on conspiracy charges.
Federal prosecutors said Kurata filed a false corporate tax return for the company that included payment for personal expenses for the Pflueger family that were deducted as business expenses.
"If these professionals made any mistakes, Alan is confident that they were unintentional and simply the product of human error, and not part of any criminal conspiracy. Moreover, we feel not only that we will win this case but are confident that at the end of the day the IRS will owe Alan a refund," Alan Pflueger's attorney Scheper said.
In state court, James Pflueger still faces seven counts of manslaughter in connection to the Ka Loko Dam failure in 2006.
He is accused of being reckless in the way he modified the Kaloko Reservoir, which he owns. A torrent of water poured from the reservoir, killing seven people downstream after a heavy rainstorm.
Last fall, James Pflueger settled civil lawsuits against him in connection with the deaths. The settlement amount was not released.
Pflueger also agreed to pay a $7.5 million settlement for violating federal clean water laws. It is the largest storm water settlement for violations by one landowner at a single site in U.S. history.
(Brent Suyama contributed to this report)