Adult Storeowner, Accountant Plead Guilty to Tax Fraud

Tod Hunter
NASHVILLE, Tenn. — Jerry C. Pendergrass, owner of various adult bookstores in Chattanooga and elsewhere, and James M. Hammonds, a former IRS agent from Cleveland, Tenn., pled guilty Tuesday to eight counts each related to filing false income tax returns before U.S. District Judge Robert L. Echols in Nashville.

Both will be sentenced early next year.

Pendergrass owned or was involved in adult entertainment establishments including adult bookstores in the Clarksville, Nashville and Chattanooga areas, and was also the sole shareholder of 822 Corporation, doing business as Metro News, aka the World’s Largest Adult Bookstore. Also, Pendergrass was involved in the Outer Limits of Nashville, a now-closed nightclub.

Hammonds, a former special agent with the Internal Revenue Service (IRS) Criminal Investigation Division, operated Financial Investigations Inc.

Pendergrass admitted to filing false personal income tax returns and false corporate tax returns with the IRS for tax years 1999 through 2002, and that he failed to report more than $3 million in income on his personal income tax returns for that period of time. The unreported income included rental payments and cash received from Metro News.

Pendergrass also admitted that his corporate tax returns filed for those years included approximately $423,000 in false deductions and approximately $195,000 in false cost of goods sold computations. These false items included payments for personal expenses of Pendergrass that were falsely claimed as corporate expenses.

Pendergrass admitted to owing approximately $1,354,000 in income taxes to the U.S. as a result of filing these false returns.

Hammonds admitted to preparing Pendergrass' false and fraudulent personal and corporate tax returns. Hammonds also admitted to making fraudulent adjustments to 822 Corporation’s balance sheet for 1999 through 2002 because he knew Pendergrass had diverted corporate funds for personal use.

Hammonds admitted that Pendergrass had received substantially more income in each year than he reported on his personal income tax returns, and that the false returns resulted in a tax loss to the U.S. between $80,000 and $200,000.

Pendergrass and Hammonds were charged in a 19-count indictment returned on Aug. 18, 2006: Pendergrass with two counts of conspiracy to defraud the U.S., one count of income tax evasion and eight counts of filing false income tax returns, and Hammonds with one count of conspiracy to defraud the U.S. and eight counts of aiding and assisting in the preparation of false income tax returns.

On May 18, Pendergrass was found guilty by a jury on one count of income tax evasion with an additional tax loss of $428,704. The trial on the remaining counts of the indictment was scheduled to begin Tuesday, but both defendants pled guilty rather than proceed to trial.