By Jeff German

Wed, Apr 2, 2008 (2 a.m.)

Former Internal Revenue Service agents expect the federal agency’s tax evasion probe at Pure and LAX nightclubs on the Strip to spread to the casino partners that share revenue with the clubs.

Karl Oroz, a 25-year IRS veteran who works as an Atlanta-based private investigator specializing in criminal tax cases, said that if he were still with the IRS, he would be reviewing the revenue-sharing agreements between the clubs and the casinos and looking at the conduct of any casino executives who oversee those agreements.

If there were any tax evasion or tax fraud connected to the clubs, “there are investigative techniques that can be used to determine whether casino employees are participating in it,” Oroz said.

The revenue-sharing agreements between Pure and Caesars Palace and LAX and Luxor, disclosed by the Sun last week, show that the business dealings are far more complex than simple tenant-landlord relationships. Both casinos receive sizable portions of the tens of millions of dollars the clubs take in each year and have a say in almost every aspect of the clubs’ operations.

The IRS has kept silent on the criminal probe since its agents served search warrants in February.

But former IRS agents said disclosure of the tightknit business arrangements between the clubs and the casinos should cause the IRS to extend the reach of the investigation as far as it can to see whether the casinos or any of their employees can be tied to criminal behavior.

“I would think there would be a good opportunity to push up the chain of command, depending on how the money is distributed,” said David Landrum Jr., a retired IRS criminal agent who now consults on complex tax cases from the Oklahoma City area. “Proving whether the casinos are connected to those particular crimes is part of the IRS’ job.”

Michael McDonald, another former IRS criminal agent, who runs an investigative consulting company in Miami, added, “They will want to play it out ... If we were investigating this thing, we would try to take it as high up as possible, just to see where it stops.”

All three ex-IRS agents said it is unlikely the heavily regulated casinos would risk their reputations and livelihoods to participate in any cash-hiding conspiracies at the nightclubs. It’s possible, however, that rogue casino employees could have been involved without the knowledge of casino management, they said.

That opinion was shared by Steve Johnson, a tax law professor at the UNLV Boyd School of Law.

“I would be astounded if the casinos were participating in a scheme to defraud the IRS,” said Johnson, a former IRS lawyer who dealt regularly with the agency’s Criminal Investigation Division. “They’d be putting their licenses at risk.”

Johnson, however, like the others, said the IRS still is likely to look at potential casino involvement.

“In this case, clearly the IRS would want to develop some reasonable good sense as to where the wrongdoing stopped,” he said.

John Anderson, a former Criminal Investigation Division supervisor who deals with complex tax cases as a Los Angeles-based consultant, said the casinos are more likely victims than conspirators.

“My gut feeling is if these guys are cheating the IRS, they’re probably also screwing the casinos,” he said. “It’s very common when you have revenue-sharing agreements that whoever is sharing the revenue tries to hide some of it.”

One former casino executive who still has strong ties to the industry said he would be “absolutely stunned” if the casinos are found to have participated in the nightclub schemes being alleged by the IRS.

But the executive added: “I think the IRS is out on a hook because of all the media interest in the investigation. They’re going to go as far as they can with it. They’re certainly going to see it through.”

Alan Feldman, a senior executive at MGM Mirage, which owns Luxor, said his company would cooperate with the IRS if it comes knocking. “Our records are completely open to state and federal regulators,” he said.

Internal casino investigations are under way at both Luxor and Caesars Palace, owned by Harrah’s Entertainment Inc., and state gaming regulators told the Sun last week they plan an industrywide review of the business dealings between clubs and casinos in the wake of the IRS probe.

However it winds up, Bill Thompson, a UNLV professor who studies the gambling industry, said the casinos should accept responsibility for the reported nefarious activity taking place at the clubs and stop doing business with them.

“What I would hope is that the casinos are held responsible for everything that goes on under their roof,” he said. “If people are not paying their taxes, the casinos should get them out of the building. They should say, ‘You’ve lost your lease and our agreement is over.’ ”

Jeff German is the Sun’s senior investigative reporter.