OCEAN CITY – The town’s city solicitor is in the process of evaluating Ocean City’s position regarding the owner of multiple town franchises who was recently sentenced to prison for tax evasion.
Ocean City is in its beginning stages regarding the position being taken on Patrick McLaughlin, 43, of Ocean City, who was sentenced to 10 months in jail followed by one year of supervised release last Friday, for failing to file individual income tax returns and failing to report employment tax withholdings. McLaughlin holds the title to both of the town’s beach photo franchises and a large percentage of the town’s beach equipment franchises.
On Tuesday, City Manager David Recor said following the announcement of McLaughlin’s sentence, City Solicitor Guy Ayres was directed to immediately evaluate the contracts signed between McLaughlin and the town to determine the city’s position and its options moving forward.
“I knew there would be interest not only from the council on what our options would be but the other vendors as well,” Recor said.
The city has not reached a formal determination on where McLaughlin stands in his franchise agreements with Ocean City as the contracts are in the initial phase of being evaluated. However, Recor’s understanding is that McLaughlin was sentenced with two misdemeanors and there is no termination provision within the agreement regarding such a conviction.
Once Ayres has completed a full analysis of the franchise agreements, Recor suspects the feedback will be given to the Mayor and City Council behind closed doors as it’s a contractual matter.
The agreements signed by McLaughlin for the beach photo franchise and the beach equipment franchise states, “The operator agrees to … comply with all Town, County, State or Federal laws and regulations”, as well as the operator must comply with Chapter 39, Article III, of the town code.
Section 39-55 of the town code outlines the provisions for termination or revocation of a franchise, which includes any franchise shall be immediately revoked upon the nonpayment of the franchise fees when due. Recor’s understanding is that McLaughlin is all paid up with the town.
If the town finds no reason to terminate McLaughlin’s contracts, other measures can be taken under Section 39-54, titled Mediation of Disputes and Hearing Complaints, which is the Beach Mediation Board will mediate all disputes between operators and any other complaints from other sources in respect to the operators’ methods.
In the event that it is unable to mediate and/or reconcile the complaints or disputes, the board may make a report and/or recommendation to the Mayor and City Council, which may undertake further action in regards to the dispute or complaint.
In December of 2010, McLaughlin was the only bid for both of the town’s beach photo franchises after the Mayor and City Council had voted to decrease the minimum bid a couple of months earlier in an effort to help the hurting industry.
McLaughlin, who owned the franchise at that time under United Beach Photo Inc., presented the council a bid of $220,000 per year for one beach photo franchise, a total of $880,000 in the four-year term, and $175,000 per year for the second franchise, with a total of $700,000 in the four-year term.
The bids were accepted by the Mayor and City Council in a four-year contract and McLaughlin has the option to re-new the contract at its end.
McLaughlin operates several concession businesses in Ocean City including: photo companies Sunbeach Studios, Ltd. and United Beach Photo, Inc.; Arctic Inventions, Ltd., which operated a fleet of retail ice cream trucks; and 85 N Sunny, which provided beach equipment rentals to tourists.
McLaughlin failed to file corporate tax returns for Sunbeach, Arctic and United for tax years 2003 to 2009. As a result, McLaughlin failed to pay $10,239 in corporate taxes for United alone, from 2007 to 2009.
McLaughlin also did not file individual income tax returns for tax years 2005 to 2009, thus failing to pay a total of $151,114 in federal income taxes earned from his businesses. When in December of 2010, IRS agents notified McLaughlin that he was under criminal investigation, McLaughlin submitted corporate and individual income tax returns for the missing years thereafter.
“Corporations are required to file tax returns just like individuals,” said Rick A. Raven, Special Agent in Charge, IRS Criminal Investigation, Washington DC Field Office. “Mr. McLaughlin’s willful actions of failing to file multiple corporate and individual tax returns violates federal tax law. IRS Criminal Investigation will continue to pursue corporations and individuals who willfully fail to file correct and accurate tax returns.”
From 2006 to 2008, McLaughlin also failed to report and remit Social Security and Medicare taxes (employment taxes) withheld from his employees’ wages, resulting in a total employment tax loss to the government of $135,348.46.
For example, during 2007, McLaughlin and United withheld $29,381 from the United employees, which McLaughlin had to pay as an employment tax, along with an additional $14,355. Instead, McLaughlin did not report any withholdings nor make any employment tax payments.
Similarly, in 2007 and 2008, McLaughlin and 85 N Sunny withheld more than $8,000 and $12,000 respectively in employment taxes, which he had a duty to pay, along with an additional $21,259. Instead, McLaughlin did not report any withholdings and made only a one-time payment of $230.
As a result of McLaughlin’s failure to pay corporate, individual and employment taxes, the total tax loss to the government is $296,701.46.