Opinion ID: 77997
Heading Depth: 3
Heading Rank: 1

Heading: Loans and Consulting Fees

Text: Judge Couvillion noted the Commissioner's argument that Kanter used loans and consulting payments to distribute to Ballard and Lisle the funds that the Five paid to IRA. Regarding loans, Judge Couvillion found the following. Ballard and Lisle each established two grantor trusts for the purpose of investing as limited partners in movie shelter partnerships. Each trust financed the acquisition of its partnership interest with a loan from IRA. Each trust gave IRA a promissory note in return. IRA transferred these notes to International Films, Incorporated (IFI), a corporation of which IRA was the majority shareholder. IFI gave IRA promissory notes in return. Although Kanter later claimed that he helped the trusts obtain their partnership interests because the investments seemed promising, the movie ventures ultimately proved unsuccessful. Because Ballard and Lisle were not personally liable for the trusts' loans, and because the trusts had no other assets, the notes from the loans were non-collectible in light of the venture's failure. At some point, IFI loaned Ballard and Lisle money as individuals. Ballard and Lisle gave IFI personal promissory notes in return. In 1987, IRA attempted to collect on IFI's promissory notes. IFI lacked sufficient money to pay the notes, and IRA agreed to accept all of IFI's assets instead. These assets mainly consisted of IFI's stock, the trusts' promissory notes, and Ballard's and Lisle's personal promissory notes. IRA sold the trusts' notes to an unrelated corporation for $1 each. That corporation's president later testified that he was a longtime friend of Kanter's and agreed to purchase the trust's notes, which were essentially worthless because the movie ventures had failed, as a favor to Kanter. IRA forgave Ballard's and Lisle's personal notes. IRA sold IFI's stock to an individual for $1 per share. Then, on its tax return, IRA claimed a loss with respect to its sale of the trusts' notes to the unrelated corporation, deductions with respect to Ballard's and Lisle's personal notes, and a deduction with respect to IFI's stock. After Kanter had become IRA's president in 1989, and the IRS had begun investigating Ballard, Lisle, and Kanter, Kanter sought to collect on Ballard's and Lisle's personal promissory notes. Ballard's notes totaled approximately $196,000. In 1992, Ballard agreed to pay $120,000 in settlement of this debt. Regarding consulting fees, Judge Couvillion found that, beginning in 1983, KWJ Corporation and, later, KWJ Company, paid monthly consulting fees of $1,000 each to Ballard's two daughters and Lisle's son and daughter. In 1988, KWJ Company terminated the fee arrangement as to one of Ballard's daughters. After Kanter had become IRA's president in 1989, and the IRS had begun investigating Ballard, Lisle, and Kanter, Kanter terminated the fee arrangement as to the remaining children. He sent them letters explaining that the arrangements had been made by a different IRA president, Lawrence Freeman, at a time when KWJ Corporation existed as IRA's subsidiary, and should have been terminated long ago, as the children had done nothing to earn the fees for many years. Judge Couvillion also noted that Ballard and Lisle did not receive salaries for managing the assets of TMT and Carlco, respectively, until 1990, when Kanter arranged for TMT to pay Ballard a salary and Carlco to pay Lisle a salary. Judge Couvillion found that the evidence presented at trial did not prove that the loans and consulting payments were a disguised means of transferring to Ballard and Lisle their portions of the Five's payments. Judge Couvillion acknowledged that the loans to the trusts were exceptionally favorable. Judge Couvillion also stated that he did not accept Kanter's testimony that IRA made these loans because the movie ventures seemed promising, reasoning that an arm's-length lender would have at least required that Ballard and Lisle personally guarantee the loans. Judge Couvillion found, however, that Kanter considered Ballard and Lisle extremely valuable business contacts and may have arranged the favorable loans in recognition of this advantage and their friendship. Judge Couvillion reasoned that the consulting payments also may have been arranged by Kanter as favors to Ballard and Lisle or as compensation to Ballard and Lisle in lieu of salaries. Judge Haines concluded that Judge Couvillion's discussion of the loans and consulting fees was incomplete. Indeed, Judge Haines stated that there is little indication [that] any consideration was given to [the Commissioner's] argument that these loans were shams. Accordingly, Judge Haines added the following. Regarding loans, neither Ballard, Lisle, nor their grantor trusts were required to pay interest to IFI or IRA on their loans. Also, in 1987, Ballard reported more than $2.4 million in income on his tax return, such that he had the resources to repay either IFI or IRA for his personal loans and the loans given his trusts. Lisle likewise had the resources to repay his and his grantor trusts' debts. Regarding consulting fees, the money that KWJ Company paid to Ballard's and Lisle's children came from loans from IRA totaling $250,000. Furthermore, in 1982, Ballard received from IRA a $12,500 director's fee, even though, as Ballard had testified at trial, he never served as a director of IRA. Judge Haines stated that these loans and payments were one of Kanter's methods of getting the money earned by Ballard, Lisle, and Kanter to those parties. Judge Haines reasoned that the facts that Ballard and Lisle were not charged interest on their loans or ever forced to repay them, even though they had the financial ability to do so, demonstrated that the loans were shams. Judge Haines reasoned that Kanter's attempts to collect the loans and letters terminating the consulting fees were merely post-investigation window dressing. Regarding Haines's suggestion that Ballard received a portion of the kickback money through a director's fee, Ballard testified at trial that he received the $12,500 payment for consulting services, rather than as a director's fee. Once again, there is a clear difference in the roles of Judge Couvillion and Judge Haines. Judge Couvillion made certain findings based upon the testimony of live witnesses; Judge Haines drew a different conclusion based upon a cold record. Accepting the witnesses statements regarding consulting fees and the loans at issue, there is nothing manifestly unreasonable about the findings of Judge Couvillion.