In Part 1 of this series, Miss Fortune analyzed the December 3 court order granting Steven Ingersoll a delay in his federal fraud trial, with a particular focus on Ingersoll's corporate entities and potential defense strategies.
In Part 2, I focus on the legal abracadabra offered as
IT'S EMBEZZLEMENT, IT'S A LOAN...IF I SAY IT IS!
At the beginning of each fiscal year, the Grand Traverse Academy board would pass a resolution authorizing payment of funds for the next fiscal year starting each year on July 1st.
Ingersoll's Smart Schools Management, Inc. would then draw on the funds and use it on school business throughout the year. The management contract required Smart Schools to provide all the services necessary for running the Academy, such as paying teachers’ salaries.
In return for operating the Grand Traverse Academy, Smart Schools Management was entitled to up to a 12 percent management fee not to exceed $2 million annually.
Counts 6 and 7 of the April 26 superseding indictment allege that Steven Ingersoll underreported his taxable income for 2010 and 2011, but they do not identify the source of the unreported income. The superseding indictment did not specify that the alleged unreported income was distributed to Steven Ingersoll by Smart Schools Management and Smart Schools Incorporate, two wholly-owned Ingersoll entities.
After the superseding indictment was returned on April 26, Ingersoll's forensic accountant (David J. Hammel) and counsel for Ingersoll (Jan Geht, Martin Crandall) focused only on a limited set of transactions—those transactions between Smart Schools Management and Grand Traverse Academy.
At that time, Ingersoll's defense team believed the tax evasion counts related to Grand Traverse Academy's disbursements to Steven Ingersoll and his closely held corporate entities.
In other words, “Smart Schools Management had earnings and profits because of unrecognized taxable income. It then distributed that money to Dr. Ingersoll, which constitutes a dividend to Dr. Ingersoll.”
So, defense counsel for Steven Ingersoll believed that the government was pursuing a “constructive dividend” theory that focused on the distributions from the Grand Traverse Academy to Smart Schools Management and Steven Ingersoll. Ingersoll's defense team focused only on this theory of tax liability when it originally employed forensic accountant David J. Hammel.
However, in an effort to learn the government’s theory of the case, Ingersoll requested a bill of particulars with respect to the tax evasion charges, which the court granted on October 22, 2014.
In light of the bill of particulars, defense counsel learned that the government was not focusing specifically on the funds distributed from the Grand Traverse Academy to Steven Ingersoll’s closely held corporations.
Instead, the government was focusing on the “unreported distributions to Steven Ingersoll from SSM and SSI.” The Bill of Particulars identifies $894,500.00 in distributions received by Steven Ingersoll from Smart Schools Management and Smart Schools Inc. in 2009 and $2,180,113.98 in distributions in 2010.
Having better learned the government’s theory of the case, Steven Ingersoll has
Loans? What, what?
Follow along: if the money was truly a loan, it would not be considered taxable income.
Thus, according to defense counsel, the main issue for the forensic accountant is to identify any repayments Steven Ingersoll made to the corporations, which was the reason a trial delay was requested.
Hammel, the forensic accountant, said it would take him 60 days to properly review the transactions at issue.
Pay no mind to the fact that there are no loan documents, no collateral, no terms, no nothing.
But, as Ingersoll's defense counsel was quoted in the December 3 court order, “Dr. Ingersoll is not the first businessman who does not observe corporate formalities.”
Hmm, he says that like it's a minor thing — like not tipping your hat to a lady!
But what about the “corporate formalities” that make it legally impossible for a Michigan public school academy to loan money — taxpayer money?
The government did not let that one slide!
A LEGAL IMPOSSIBILITY... THEY'RE NOT LOANS!
The government opposed Ingersoll's November 18 request for an extension of time for several reasons.
First, the government contended that it had several communications with defense counsel regarding the transactions that comprise the tax evasion charges:
“[A] year ago, a little more than a year ago, Agent Michael Kaza from the IRS, Agent Pemberton from the EPA, [counsel for Steven Ingersoll] and I met and — with regards to the pending investigation and at that time the discussion was the flow of funds as far as Mr. Ingersoll, Steven Ingersoll, from GTA to SSM to SSI to Steven Ingersoll, even then.”
In addition, the government asserted that all the discovery it provided to defense counsel focused on the flow of money through the corporations to Steven Ingersoll — but did not assert that the funds should be characterized as constructive dividends to Ingersoll: “With regards to the contention that it’s a dividend, we’ve never, ever, in the course of this case from the Government’s side, construed these transactions as a dividend of any kind. That’s never been the analysis.”
The Assistant US Attorney continued: “But if you look at the indictment, it doesn’t charge GTA, it doesn’t charge Smart Schools Management, it doesn’t charge Smart Schools Incorporated. It charges Steven J. Ingersoll in Count 6 and 7 for underreporting his income. And to try to re-characterize it as we didn’t understand, we thought it was something else, I don’t think makes sense.”
In addition, in this exchange quoted in the December 3 order, the government contended that Steven Ingersoll could not receive a loan from SSM or SSI as a matter of law:
AUSA: There are far more funds that we can show as alleged in the bill of particulars than what shows upon the Ingersoll tax return.
The Court: Well, but if they were loans—
AUSA: Well, the problem is, that’s a legal impossibility. They’re not loans.
The Court: Well, only because of state law.
AUSA: Well, that is a significant and I think sufficient impediment to construing them as loans. Plus, there are no loan documents. There’s nothing saying that the board of the school authorized GTA, the school, to make a loan to SSM and then to SSI and then to Steven Ingersoll.
As part of its argument that the distributions cannot be characterized as loans, the government claimed that the distributions from SSM to Steven Ingersoll consisted of embezzled funds:
The Court: What does the Government consider [the distributions] to be?
AUSA: Embezzled funds.
The Court: And, therefore, taxable income to him?
The AUSA provided a further analogy:
If he (Ingersoll) goes and robs a bank, and I go, can I borrow that money from you, it’s still proceeds of the bank robbery. It’s still an illegal act, and I don’t know any way that you can just put the label “loan” on it and make it into an innocent transaction when it’s a transaction that is—or a series of transactions that are conducted without authority using state funds.
In the December 3 order, Ingersoll's defense counsel framed the trial issue as follows:
“I have to keep coming back to, we’re asking for time to develop a fact pattern. We’re not arguing the merits of whether or not we win as a matter of law. For now all we’re saying is, and this comes loud and clear, this was about GTA and Smart Schools Management, and what — but the mechanics of it now affect Dr. Ingersoll, and those mechanics are quite important, and those mechanics do go to what happens in ’11 and ’12.”
In ordering a trial delay, Judge Ludington cited justifications presented by defense counsel—the identification of a new theory of liability, the need for a forensic accountant to review the transactions at issue — when granting an extension.
“Respectfully, the fact that there is at least some justification at this stage for understanding a little bit more specifically the Government’s theory; and, in fact, its potential relationship with Counts 1 and 2 would suggest to me that the continuance should be granted. I think there are reasons for both the defendants and, frankly, the addition of the additional information may, in fact, be also helpful to the Government, notwithstanding their opposition to the motion.”
Part 3: Prepaid Expenses, Donations, and Missing Millions — And A (Formerly) Secret Delaware Corporation!