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Saturday, September 12, 2015

STEVE'S TAX SHELTER: All Distributions Were Loans; Some of the Distributions Were Loans??

Back on August 24, U. S. District Judge Thomas L. Ludington ordered attorneys for Steven Ingersoll and Roy C. Bradley, Sr. to “file a supplemental brief concerning a
defendant's ability to provide testimony at sentencing that might contradict with a jury finding.”
 


While this is an examination of attorney Jan Geht's supplemental brief filed September 11 on behalf of his client, Steven Ingersoll, Bradley's attorney (Mark Satawa) filed a “joinder” concurring with Ingersoll's brief — with one exception:

“Specifically, Roy Bradley would state that he actually overpaid his taxes in 2011, regardless of whether you review the tax liability as calculated under Bradley’s 2011 tax return filed April 17, 2012, or Bradley’s 2011 amended tax return filed October 22, 2012.”

Yeah, sure!

EIGHT-FACTOR TEST: IS IT A LOAN, OR INCOME?

Before we examine the brief, let's determine whether a payment to a shareholder is proceeds from a tax-free loan from the corporation to the shareholder (or a tax-free repayment of a loan from the shareholder to the corporation) as opposed to a potentially taxable corporate distribution to the shareholder — in this case, Ingersoll.

The Tax Court says courts have looked at the factors shown in the chart at left. 

The big question — was there a genuine intention to create a debt, with a reasonable expectation of repayment, and did that intention comport with the economic reality of creating a debtor-creditor relationship?  The transaction will come under special scrutiny where the borrowing entity is controlled by the lender and/or members of his or her family.  In that case, especially, can it be shown that there was a realistic expectation of repayment?  Would a third party lender have made the loan on similar terms?  Was there an actual transfer of funds in conjunction with any notes, or did the issuance of notes seek to “recharacterize” the nature of the cumulative funds previously transferred to the entity by the purported lender? (See “substantial unauthorized transfer of funds” for more information.)

This information is important, as Ingersoll's attorney likely presumes you don't know jack about the “eight-factor test” — but now you do.

THE CASE BACKGROUND

The case began in 2009 when Ingersoll caused the Grand Traverse Academy to pay his closely-owned corporations, Smart Schools Management and Smart Schools Incorporated, the entire school management fee when GTA received its funds from the State of Michigan. Then these two corporations made distributions to Steven Ingersoll personally, which he did not report as taxable income— forming the basis for the tax evasion counts (Counts 6 and 7). The distributions at issue were demonstrated during Ingersoll's federal trial by introduction of the relevant bank records and IRS agent Michael Wisniewski’s testimony that Ingersoll underreported his 2009 taxable income by approximately $123,000.00 and his 2010 income by approximately $531,000.00.

In addition, the government alleged that when Ingersoll found that he needed to repay funds to the Grand Traverse Academy, he and the other defendants engaged in a series of circular, unexplained, and purposeless transactions that shuffled proceeds from a Chemical Bank loan through various parties’ bank accounts. Ultimately, the funds ended up in the Ingersolls’ personal bank account at Fifth-Third Bank and later, at the Grand Traverse Academy. These allegations formed the basis of Count 1, conspiracy to commit bank fraud.
 


On March 4, 2015, Ludington granted the defendants' motion for acquittal on the conspiracy to commit bank fraud charge, concluding that “I don’t see a theory of fraud, let alone evidence of a conspiracy to commit bank fraud on those facts. I don’t believe that there’s a reasonable interpretation of the evidence that would allow a reasonable juror to convict the defendant beyond a reasonable doubt on the basis that’s been submitted with respect to Count One.”

And on March 10, 2015, the jury acquitted Deborah Ingersoll, Gayle Ingersoll, and Tammy Bradley of the remaining charges against them.

However, the jury convicted Steven Ingersoll of conspiracy to commit tax evasion (Count 2) and tax evasion (Counts 6 and 7), and convicted Roy Bradley of conspiracy to commit tax evasion (Count 2).
 


COUNT 2: CONSPIRACY  

Both Ingersoll and Bradley were convicted by the jury on Count 2,  conspiracy to defraud the United States. Count 2 charged Steven Ingersoll, Gayle Ingersoll, and Roy Bradley with conspiracy to commit tax evasion related to the use of the January 2011 Chemical Bank loan. (The relevant time period for Count 2 is from April of 2010 to October 15, 2012.) Unlike Counts 6 and 7, an existence of the tax deficiency is not an element of the conviction under Count 2.

In this case, Geht asserts, “the jury was never asked to determine tax loss.” Citing United States v. Kosinski, 127 Fed. Appx. 742, 751 (6th Cir. 2005) (“Kosinski I”), Geht states that the Kosinski I Court reversed the district court stating that “[w]ithout the district court’s factual determination of tax loss, the offense level would be 10, corresponding to a sentence of 6 to 12 months.”


You see, the whole point of this supplemental brief is to address presentencing issues that could help carve time from Ingersoll's sentence.

Geht continues, stating that on appeal following remand, the Sixth Circuit held that “the district court has discretion to calculate and consider the tax loss amount for sentencing purposes provided that 1) the district court does not consider itself required to do so, and 2) as long as the calculation is based on reliable information and supported by a preponderance of the evidence.” Based on the two Kosinski cases, Geht asserts the Court can therefore either (a) assume the base offense level of 10 or (b) calculate the actual tax loss amount provided the Court views the Guidelines as advisory. 

“The Sixth Circuit remanded, noting that the Sentencing Guidelines had been amended in 2013 to allow the defendant to reduce his tax loss by inter alia unclaimed deductions. The remand was necessary so that the district court can determine whether to retroactively apply the 2013 Guidelines. In this case, it is clear that those Guidelines are in effect. Thus, the Court can sentence Defendants based on actual loss in Count 2, not the intended loss.” 


Geht states “the Court can conclude that the actual tax loss is less than $5,000.”

As you can see from the table at left, it's a relatively low level, and packs a “Grey Bar Hotel” stay of 6-12 months.


And how does Geht arrive at that conclusion?

Ye olde “loan theory”!

COUNTS 6 & 7: TAX EVASION

Ingersoll was convicted by the jury on Counts 6 and 7 for failing to claim as income certain distributions made by his entities. Judge Ludington gave the jury an instruction (for those counts only), that the jury were to acquit Ingersoll if they found those transactions to be loans. 

Geht's arguing that Judge Ludington should allow Ingersoll to argue at sentencing that either all or some of those distributions were, in fact, loans.

In this case, whether the distributions were or were not a loan is not an element of the crime. Instead, this was an affirmative defense and a number of courts have expressly distinguished between “elements” and “affirmative defenses”. (Translation: even though the Grand Traverse Academy's attorney, Margaret Hackett, testified during Ingersoll's trial, telling the jury that during a May 20, 2013 Academy board meeting, Ingersoll asked the board to characterize his $3.5 million dollar indebtedness to the charter school as a “loan”, Ingersoll has not been charged with embezzlement — yet!)

Geht trots out this approach: “Federal and state legislatures may reallocate burdens of proof by labeling elements as affirmative defenses, or they may convert elements into “sentencing factor[s]” for consideration by the sentencing court.”

In simpler terms, “because the question of whether distributions were a loan is not an element of the offense, it can be decided by the Court by the preponderance of the evidence.”

Geht states that in the event the Court concludes that it is bound by the jury’s verdict rejecting the “loan” defense as to all distributions, the Court can still find that most of the distributions were “loans” without contradicting the jury’s verdict. 

So “most” were loans, but not “all”.  

In this case, the government grouped all distributions made by Smart Schools Management, Inc.(SSM) and Smart Schools Incorporated (SSI) together in arguing that Ingersoll had failed to report taxable income. 

On cross-examination, IRS Agent Wisniewski testified that $32,000 went from SSI to Webster House, LLC in 2009 and in 2010 (for a total of $64,000). Webster House, LLC is a separate entity. On re-direct, Wisniewski explained that he included those payments because Ingersoll had direct access and control of that account. (The Webster House is a bed-and-breakfast in Bay City, and served as ground-zero for the Ingersoll defense team).

Geht states that the “Court can conclude, after hearing all the testimony, that the eight-factor test regarding what constitutes a loan cannot be met with respect to the distributions to Webster House, LLC because it may reject the idea that SSI could have a corporate purpose in running a bed-and-breakfast. This would validate the jury finding that not all distributions were loans. If it does so, the Court can find that other distributions were still non-taxable loans without directly conflicting the jury since the jury never had to determine the amount of the tax loss.” 


There it is, all wrapped up neat — like a pound of cow's tongue sausage!

The government has until September 25 to file its response.

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