Date: June 9, 2020
SAN DIEGO — A husband and wife pleaded guilty today in federal court to using a charity to defraud donors and to evade taxes.
Geraldine and Clayton Hill appeared before U.S. Magistrate Judge Linda Lopez to admit that they used On Your Feet, Inc. ("OYF"), a.k.a. Family Resource Center ("FRC"), a 501(c)(3) tax-exempt non-profit organization that operated in Spring Valley, California, to defraud donors and the Internal Revenue Service ("IRS"). FRC/OYF claimed to provide "assistance to low income families and individuals in need to better their living conditions and quality of life." According to documents filed in court today, beginning at least as early as March 2009, the Hills conspired to fraudulently obtain charitable donations of clothing and other items from multiple companies by falsely promising and certifying that they would not to sell the merchandise for profit.
The Hills admitted today to violating those promises by knowingly reselling donated merchandise and using the proceeds from the sale of donated items to financially support themselves, their family members and other associates. Forever 21, Feed the Children, Brooks and Goods360 were among the defrauded companies. The Hills tricked these companies such as Forever 21, Feed the Children, Brooks and Goods360 into donating millions of dollars of goods to OYC/FRC through their fraud. Based on the false representations, Feed the Children and Forever 21 – just two of the Hills multiple victims – donated over $16 million in goods between 2010 and 2017.
The Hills admitted today that between 2011 and 2016, they personally received proceeds from the fraud totaling over $1.3 million and paid no income taxes.
In soliciting donations from Forever 21, the Hills falsely claimed in their marketing materials that "[t]he merchandise is never sold by On Your Feet Incorporated . . . Every individual receiving a donation is required to register and sign a form saying none of the merchandise will be resold." The Hills also falsely represented to Forever 21 that the "[m]ajority of the [OYF/FRC] personnel are volunteer members and are all required to sign a consent form stating that merchandise may not be taken or sold." In an email on May 20, 2015, to Forever 21, Geraldine Hill falsely claimed that the "routine for processing donated items" included "cutting [the] inside label in half" and "defacing [the] inside label with permanent marker," and further claimed that "we've never had a problem with any donations we have received that companies have been so kind to donate."
In fact, Geraldine Hill knew at the time she sent that email to Forever 21 that the statement was false because at least as early as May 30, 2012, Goods360 had alerted Geraldine Hill that Disney no longer wanted their donations to go to OYF/FRC because the donated goods were appearing at local flea markets and being sold. For example, in June 2015, Forever 21 donated to OYF/FRC approximately 161 pallets of clothing, which was valued by Forever 21 at $2.9 million (cost)/$5.6 million (retail). Immediately upon receiving the pallets from Forever 21, the Hills sold donated goods to an operator of for-profit discount retailers. In September 2016, the Hills solicited additional donations from Forever 21 by promising to use them for a "Christmas Giveaway," causing Forever 21 to donate another 16 pallets of clothing on October 27, 2016, which the Hills acknowledged in a letter to Forever 21 that the donated goods had a retail value of $314,371. Immediately upon receiving the pallets from Forever 21 in October 2016, the Hills sold the donated goods to the same for-profit discount retailer.
Instead of paying income taxes, the Hills spent nearly $380,000 of the fraudulent proceeds on personal expenses including luxury retail purchases, vacations, entertainment, and vehicles, in addition to spending more than $322,000 in cash.
In order to conceal their income from the IRS and obstruct the IRS's ability to monitor the charity's tax-exempt status, the Hills filed false charitable tax returns. The charity's tax returns falsely claimed that OYF received less than $25,000 in gross receipts in tax year 2009, and less than $50,000 in tax years 2011-2015. As a result of the Hills' fraudulent concealment of their income, they caused an estimated U.S. individual income tax loss for 2013-2014 of $50,933.
Although the Hills had no legitimate payroll through OYF, they falsified pay stubs purporting to show salaries paid and taxes withheld in order to advance other fraudulent schemes. For example, they falsified pay stubs claiming that defendant Clayton Hill earned over $100,000 salary (even though OYF had never issued paystubs or W2s, and Hill was not claiming income in any tax filing) and used the false pay stubs for a rental application to rent a home that cost $6,000 per month.
"Geraldine Hill and Clayton Hill exploited the public trust and charitable giving by using their charity to solicit over $16 million in goods from hardworking businesses and falsely promising to donate those goods to assist low income families and individuals in need," said Ryan L. Korner, Special Agent in Charge of the IRS Criminal Investigation division. "Instead, the Hills resold the goods and profited over $1.34 million which they spent on vehicles, vacations, and entertainment, as well as personal expenses for their family members. The Hills concealed their fraud by filing false tax returns on behalf of the charity and failing to report their illicit income to the IRS. Their guilty pleas are evidence of the hard work of IRS Criminal Investigation Special Agents to bring to justice those that defraud businesses in the name of charity, and who benefit themselves instead of serving those most in need."
"While fraud is always wrong, the theft of charitable donations that were to be used to help San Diego's low income families is particularly disheartening," said Acting FBI Special Agent in Charge Omer Meisel. "This type of fraud and deceit for personal gain simply cannot be tolerated. The FBI is committed to ensuring that white collar predators don't prevent those less fortunate from receiving all the benefits that generous donors provide to seemingly legitimate non-profit organizations."
U.S. Attorney Robert Brewer expressed his appreciation to Assistant U.S. Attorney Rebecca Kanter, Principal Deputy Assistant Attorney General Richard E. Zuckerman and Trial Attorney Valerie Preiss of the Justice Department's Tax Division for supporting this prosecution.
"I am committed to using the resources of the U.S. Attorney's Office in the Southern District of California to aggressively pursue fraudsters and tax cheats," said Brewer. "The conduct by Geraldine and Clayton Hill is particularly offensive because they used the benefits afforded by the 501(c)(3) status of their charity to defraud donors and conceal their profits. By abusing the generosity of companies and individuals who put their faith in the promises made by the Hills, the Defendants threatened to undermine the trust and integrity underpinning charitable giving."
Sentencing is scheduled for August 28, 2020 before U.S. District Judge Dana M. Sabraw. At sentencing, the Hills face a maximum sentence of five years in prison for each mail fraud conspiracy and tax evasion charge. The Hills also face a period of supervised release, restitution, and monetary penalties.
This investigation was conducted by the Internal Revenue Service Criminal Investigations and the Federal Bureau of Investigation.