Opinion ID: 77997
Heading Depth: 3
Heading Rank: 2

Heading: Transfers of IRA's Income

Text: Aside from the above discussion of loans and consulting fees paid to Ballard, Lisle, their trusts, and their children, Judge Couvillion did not address the Commissioner's so-called flow of funds argument. In this argument, the Commissioner analyzed IRA's distribution of its income and transfers of its interests in KWJ Corporation and Essex Partnership and argued that, by way of these distributions and transfers, the money from the Five made its way to Ballard, Lisle, and Kanter. Judge Haines concluded that it was error not to address this argument. Accordingly, Judge Haines added the following facts. By 1983, IRA had accumulated $5,056,929 in payments from the Five. [8] IRA reported this income on its consolidated tax returns. In 1984, Kanter recommended that TMT, Carlco, and BWK be removed from IRA's consolidated group of corporations. Kanter testified that he was concerned that Carlco's investments might interfere with certain deductions normally claimed by IRA. Kanter also testified that he wanted to shelter Ballard and Lisle from any second-guessing by IRA officers. Also in 1984, Kanter directed that IRA's free cashflow, including its accumulated assets and future income, be distributed in the ratio of 45% each to TMT and Carlco and 10% to BWK. Accordingly, approximately $4.2 million of the more than $5 million that IRA had accumulated was transferred to TMT, Carlco, and BWK. These subsidiaries called the money capital contributions and reported it on their tax returns. During this period, IRA also held large amounts of cash that were invested in certificates of deposit, rather than allocated to TMT, Carlco, and Kanter. At trial, Kanter testified that the allocation of IRA's free cashflow would allow for diversification of IRA's investments. Specifically, he testified that Ballard was to invest TMT's money primarily in real estate, Lisle was to invest Carlco's money primarily in municipal bonds, and Kanter was to make assorted investments with BWK's money. Along with this $4.2 million influx of money, TMT, Carlco, and BWK each also received a portion of the future payments made by the Five. This income totaled more than $4 million. [9] Once the money was in TMT substantial portions were invested in certificates of deposit, savings and money market accounts, and a brokerage account. The Ballards had signatory authority over one of these savings accounts. TMT did make loans to, and investments that benefitted, Ballard and his family. From 1984 to 1989, TMT made loans to Ballard equaling $146,943 and to Mary Ballard equaling $160,000. While the Ballards agreed in 1986 to repay the $160,000 loaned to Mary Ballard, there is some question concerning whether or not it was repaid in accordance with the agreement. During these years, TMT also loaned $135,155 to Seabright Trust, which benefitted Ballard's children, and $41,520 to Seabright Corporation, which was owned by a trust that also benefitted Ballard's family. As of trial, these loans to Seabright Trust and Corporation had not been repaid. In 1986, TMT also loaned $4,000 to Ficom International, Incorporated (Ficom), a corporation organized by Melinda Ballard. Later, in 1988, TMT invested $15,000 in Ficom. TMT later claimed a loss on its tax return for the $15,000 investment. TMT likewise transferred to Ballard shares of stock in Fairfield Planting Company (Fairfield). In return for these shares, Ballard executed a promissory note to TMT for $100,000 and the right to receive 90% of Fairfield's dividends. Ballard secured this note by pledging 1,000 shares of Fairfield common stock. There is some question as to whether or not TMT received any payments with respect to this note. After Ballard began working at Goldman Sachs, he was required to submit disclosure statements informing the firm of outside business involvement. In a 1988 disclosure statement, Ballard indicated that he was involved in farming operations individually and through two corporations owned by family trusts. At trial, Ballard testified that the corporations to which he referred were TMT and Fairfield. Ballard also indicated that he served as director for a friend's unrelated corporation. Judge Haines concluded that the transfers of IRA's cash flow to TMT, Carlco, and BWK were another of Kanter's methods of getting the payments earned by Ballard, Lisle, and Kanter to those parties for their personal use and enjoyment. In reaching this conclusion, Judge Haines reasoned that Kanter removed TMT, Carlco, and BWK from IRA's consolidated group of corporations to reflect the reality that those corporations were owned and controlled by Ballard, Lisle, and Kanter. Judge Haines stated that Ballard's use of TMT money to make loans to Ballard and his family, trusts, and corporations, and subsequent failure to repay these loans, demonstrated self-dealing and Ballard's treatment of TMT as a personal pocketbook, or alter ego. Judge Haines also stated that Ballard's failure to disclose to Goldman Sachs that he managed TMT demonstrated that he was not managing TMT for IRA, but rather was completely in control of TMT. Judge Haines also reasoned that Kanter's testimony on these matters was not credible. Specifically, Judge Haines stated that Kanter's explanation that he deconsolidated IRA because certain of Carlco's investments might imperil IRA's deductions was not credible because it did not apply to TMT and BWK. Judge Haines noted that there was no indication that TMT's or BWK's investments imperiled IRA's deductions. Also, Judge Haines stated that Kanter's explanation that he deconsolidated IRA because he wished to save Ballard, Lisle, and himself from second-guessing by IRA officers was not credible because TMT, Carlco, and BWK remained subject to these officers' directions as IRA subsidiaries. Judge Haines further stated that Kanter's explanation that the 45%-45%-10% split was an effort at diversification was not credible because the only assets transferred to TMT, Carlco, and BWK were traceable to the Five and IRA held other large sums of money that it invested in certificates of deposit rather than distribute. Judge Haines reasoned that the 45%-45%-10% transfer to TMT, Carlco, and BWK was part of preexisting agreement between Kanter, Ballard, and Lisle. Judge Haines further reasoned that Ballard's testimony on these matters was not credible. Specifically, Judge Haines stated that Ballard's testimony that Fairfield was a family-trust owned corporation through which he was involved in farming operations lacked credibility, as Ballard, rather than a family trust, owned Fairfield. With regard to Judge Haines's statements that Ballard had not repaid his Fairfield loan, Ballard testified at trial that he borrowed approximately $200,000 from TMT to purchase Fairfield. He acknowledged that the loan remained outstanding, but stated that Kanter refused to accept repayment. Ballard explained that the loan was worth more to TMT so long as it remained unpaid, given that it was accompanied by a right to receive 90% of Ballard's distributions from Fairfield. Indeed, Ballard stated that the deal turned out bad for him, but good for TMT. Only one familiar with the use of corporations, partnerships and trusts, as well as the complexities of our tax laws could evaluate the transactions involved. Judge Couvillion did just that knowing the background of Kanter and the legality or illegality of these moves. While either finding may be plausible, we conclude nothing is clearly erroneous about the findings made by Judge Couvillion.