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

Heading: Distribution of Payments from the Five to the Parties

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.
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.