Mob’s Role in V.I.P. Strip Club Excuses Taxes, Judge Says

from – The estate of a businessman held to be responsible for taxes on a once-prosperous Manhattan strip club does not have to pay more than $4 million in back taxes because the club became so thoroughly infested by organized crime that it was unmanageable, a state administrative law judge has determined.

While the late Frank A. Marchello was properly held by the New York State Department of Taxation and Finance as being a responsible officer for the V.I.P. Club, Administrative Law Judge Winifred M. Maloney concluded that Marchello was thwarted, through no fault of his own, in carrying out his corporate duties by mob influence that one federal prosecutor said had “bled the club dry” financially.

The same was true of Steve Aslan, a man Marchello hired to manage the club at 20 West 20th St. that was popular with financial services industry workers, athletes and others in the late 1990s and early 2000s, Judge Maloney held.

“Given the extent to which organized crime controlled the operations of the V.I.P. Club during the audit period, it was impossible for either Mr. Aslan or Mr. Marchello to exercise any actual decision-making or other authority over Club V.I.P.,” the administrative law judge wrote in Matter of Marchello, DTA No. 821443. “Accordingly, it is concluded that Frank Marchello is not responsible for the collection and payment for sales tax pursuant to Tax Law §§1131 and 1133.”

Maloney’s ruling outlined a nightmarish scenario for a businessman trying to operate legitimately.

Gambino crime family figures Salvatore “Fat Sal” Scala and Thomas “Monk” Sassano muscled their way into club operations and began collecting “protection payments” ranging from $2,500 to $15,000 every two weeks from Aslan and co-manager Jon Vargo, the decision said.

In addition, between five and seven associates of Scala and Sassano were on the club’s payroll at any one time. The associates did nothing but hang around and run up food and drink tabs that they did not repay.

To compound matters, Judge Maloney’s determination indicated that Vargo was also making payments of about $5,000 a week to the Genovese crime family and that, over time, Vargo took more than $1 million out of the club to pay gambling debts he had incurred with Genovese bookies. Aslan testified before Judge Maloney that he often made payments to Vargo, Scala and Sassano under the threat or fear of physical violence.

In all, Judge Maloney calculated that at least $4 million was siphoned from the club through extortion and other payments related to organized crime between the club’s opening in 1996 and 2002, when it collapsed financially.

Scala and Sassano were convicted of extortion in 2007 in the Southern District of New York for their roles in looting the V.I.P. Club and related criminal activities. Scala, who was also convicted of income tax evasion, was sentenced to 72 months in prison. Sassano received a maximum term of 40 years.

Marchello, who successfully built trucking and oil companies in New Jersey before venturing into the adult entertainment business in the early 1990s, was not a member of an organized crime family nor was he ever suspected by the federal government of engaging in mob activity, according to Judge Maloney’s determination.

Under his arrangement with Aslan, Marchello ceded day-to-day management of the club while receiving weekly payments of $2,884. The payments were to stop when they reached $750,000, which Marchello had calculated as his investment in making physical improvements to the club.

Marchello held a long-term lease on the West 20th Street property, which he assigned to Aslan. Marchello had earlier operated other strip clubs at the site called “Texas Gold” and “Silverado” and Marchello’s Dezer Entertainment Concepts, Inc., held cabaret and liquor licenses. Those licenses were also assigned to Aslan and three corporations he created to operate the V.I.P. Club.

Judge Maloney’s determination indicated that Marchello had fewer and fewer direct dealings with Aslan as time went on, especially in the last year of his life. He never asked to see the books of the corporations Aslan set up in connection with the club, Judge Maloney wrote.

Marchello died of cancer in January 2002.

An audit by the state of the club’s books for 1996 through 2002 revealed $46.8 million in unreported taxable sales at the V.I.P. Club and the state tax department sent Marchello’s estate a notice in 2004 of liability for nearly $4.4 million in unpaid sales and use taxes.

Judge Maloney rejected a series of challenges that Marchello’s estate made to his status as being responsible for collecting and remitting tax payments. She determined that while Marchello’s hands-on operation of the strip club had passed to Aslan, Aslan and the management companies he set up were still employed by Marchello and his Dezer Entertainment.

Under such an “agency relationship,” Marchello retained responsibility for the tax payments and there was a “rational” basis for the tax department to seek the payments from his estate, Judge Maloney concluded.

But she cited a 1998 Tax Appeals Tribunal ruling in Matter of Goodfriend, for reducing, or absolving altogether, the duty of responsible corporate officers for tax liability if circumstances beyond their control prevent them from exercising those duties.

Alvan L. Bobrow, a Hodgson Russ attorney in Manhattan representing the Marchello estate, argued that Marchello was neither an owner, operator nor even an investor in the V.I.P. Club. The club was Aslan’s, Bobrow said Wednesday in an interview.

Despite Judge Maloney’s holding that Marchello was a responsible officer of the club, Bobrow said Marchello was, in fact, only the “landlord” who sought to continue to make income from the strip club because he was locked into a long-term lease on the building.

Bobrow noted that at one point in her ruling, Judge Maloney affirmed that payments for exotic dancing performed without another commercial transaction, such as the purchase of drinks, are not subject to state sales and use taxes. That finding was similar to one made earlier this year in another ruling in the tax liability of an Albany, N.Y.-area strip club (NYLJ, March 26).

Jack Trachtenberg, a Buffalo, N.Y.-based Hodgson Russ attorney, also represented Marchello’s estate. He has since become a counsel for the Department of Taxation and Finance.

Osborne K. Jack argued on behalf of the state. The agency can appeal the decision to the Tax Appeals Tribunal.

Aslan was not the only one who reported intimidation attempts by organized crime figures.

According to Judge Maloney’s ruling, attorney Alan M. Kapson was hired by Marchello’s estate to liquidate its assets, including the ultimate sale for $1.5 million of the club, following his death. Late one night at the club in the summer of 2002, Sassano threatened Kapson’s life, pressed his head against the bar and screamed at him, “You don’t own this bar, Sal and I own this bar.”

Kapson resigned as the estate’s representative the same night, according to Judge Maloney’s determination.

A “new” V.I.P. Club has reopened at the West 20th Street site under new management.

The tax department did not respond to a request for comment.

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