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1 A F T E R N O O N S E S S I O N
2
3 (Whereupon, the following takes place in the
4 absence of the jury.)
5 THE COURT: I don't know if you all got a fax
6 letter from Mr. White which I got about 20 minutes ago.
7 It may have come earlier, but that's when I got it. Are
8 there times here? 12:33; is that right?
9 MR. WHITE: Your Honor, Ms. Scott faxed it from
10 Brooklyn. I was out here.
11 THE COURT: Excuse me, it is signed by
12 Ms. Scott. Your name is typed first.
13 Do they call this typed?
14 MR. WHITE: A word processor.
15 THE COURT: I have not had a chance to go over
16 it; I know one case, Cohen, C O H E N --
17 MR. WHITE: Ms. Scott just got here, and I
18 believe she has copies to give it out.
19 THE COURT: You have to give them copies of it.
20 MR. WHITE: We can dispense with this for the
21 moment, your Honor.
22 THE COURT: Your letter is interesting. I see
23 parts in here that I don't agree with -- not that I don't
24 agree with, but aren't proven.
25 MR. WHITE: I hope there are parts that you do
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 agree with.
2 THE COURT: Yes, I agree with the law. But
3 whether you approved this sufficiently to put in a
4 summary, where jurors can say it is a fate accompli, that
5 I do not think. Can we leave it alone for the time
6 being?
7 MR. WHITE: Your Honor, we reworked all the
8 charts so the amount of income attributable to Mr. Gordon
9 is the fair rental value.
10 We put in the letter where we should be able to
11 argue at least in summation, here is our figure and it
12 could be higher, because Mr. Gordon really owned the
13 condominium.
14 THE COURT: You might. I have to see the proof
15 at the end of the government's case.
16 MR. TRABULUS: I have not seen the letter, your
17 Honor.
18 THE COURT: It goes through the alter ego
19 situation.
20 MR. TRABULUS: If your Honor reads the count of
21 the indictment, I submit that a fair reading of the
22 indictment does not include that theory. It is not
23 encompassed within the indictment. And that theory would
24 represent a variation.
25 THE COURT: That is another problem. I will take
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1 a look at that. I will give you a chance to respond over
2 the weekend, whoever wants to respond.
3 MR. TRABULUS: Thank you.
4 THE COURT: Mr. Wallenstein and Mr. Trabulus, I
5 assume, since you just saw it for the first time.
6 MR. WALLENSTEIN: Just handed to me moments ago.
7 MR. TRABULUS: While I am speaking to not -- I
8 got it.
9 MR. WHITE: I have not seen the final version
10 either.
11 THE COURT: I saw it. It is a pretty good job.
12 I thought you did it. But now I see Ms. Scott did it. My
13 compliments.
14 I am looking into United States against Cohen,
15 which is interesting.
16 A nice job, Ms. Scott?
17 MS. SCOTT: Very good, your Honor.
18 THE COURT: Where is the witness?
19 Is Mr. Neville here?
20 MR. NEVILLE: Ready and willing.
21 THE COURT: I have to keep track of you,
22 Mr. Neville?
23 MR. NEVILLE: I know you do and I appreciate it.
24 MR. TRABULUS: May I leave for a moment to get
25 Mr. O'Connor?
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1 THE COURT: Yes.
2 THE CLERK: Jury entering.
3 (Whereupon, the jury at this time entered the
4 courtroom.)
5 THE COURT: Good afternoon, members of the jury.
6 Please be seated.
7 You are getting better and better as we are going
8 along. We are actually starting two minutes early today.
9 Thank you very much.
10 You may proceed.
11
12 A N D R E W R O S E N B L A T T ,
13 called as a witness, having been previously
14 duly sworn, was exami
ned and testified as
15 follows:
16
17 THE COURT: You are still under oath,
18 Mr. Rosenblatt. Are you aware of that?
19 THE WITNESS: Yes, your Honor. Thank you.
20
21 DIRECT EXAMINATION (cont'd)
22 BY MR. WHITE:
23 Q I put before the jury Exhibit 837. Do you recall
24 that chart that you prepared?
25 A Yes.
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Rosenblatt-direct/White
1 Q And that makes reference to a company called Registry
2 Publishing; is that right?
3 A That is correct.
4 Q Now, have you reviewed the bank records of Registry
5 Publishing?
6 A Yes.
7 Q Can you tell us if Registry Publishing conducting any
8 business?
9 A Not that I was able to determine.
10 Q Did Registry Publishing have any employees?
11 A Not that I am aware of.
12 Q Do you know if Registry Publishing filed tax returns?
13 A As far as I know, they did not.
14 Q And this chart also makes reference to Publishing
15 Ventures, Inc. have you reviewed the bank records of
16 Publishing Ventures?
17 A Yes.
18 Q Did it have any employees?
19 A No.
20 Q Did it do any business other than owning the
21 condominium on Hummingbird Road?
22 A No.
23 Q Did it file tax returns as far as you know?
24 A Not that I am aware of.
25 Q Now, you testified yesterday that Registry Publishing
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1 had multiple bank accounts; is that right?
2 A Yes.
3 Q And how many different bank accounts did it have
4 during this period in 1994?
5 A I believe there were four separate accounts in four
6 different banks.
7 Q Now, were you present earlier in the trial for the
8 testimony of Mr. Ackerman?
9 A Yes.
10 Q And do you recall Mr. Ackerman's testimony with
11 respect to his conversation with Mr. Gordon regarding
12 transfers among corporations that Mr. Gordon controlled?
13 A Yes.
14 Q Tell us what Mr. Ackerman said.
15 A I believe --
16 MR. WALLENSTEIN: Objection.
17 THE COURT: Well, if you have what Mr. Ackerman
18 said in the record, I think we ought to have that rather
19 than what this witness remembers. If you want to read it
20 in, you can, if you think it is part of your next
21 question.
22 MR. WHITE: Okay. I will come back to that.
23 Q Now, as part of your duties as an IRS revenue agent,
24 do you have occasion to investigate taxpayer's financial
25 conditions?
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Rosenblatt-direct/White
1 A All the time.
2 Q And for how long have you been doing that type of
3 work?
4 A Approximately 26 years.
5 Q And in your experience, does the existence of
6 multiple corporations with multiple bank accounts at
7 multiple different banks make it more or less difficult
8 for the IRS to determine a taxpayer's true financial
9 condition?
10 A It certainly impedes the IRS.
11 Q Now, with respect to the Hummingbird Road
12 condominium, and the charts you looked at yesterday, you
13 indicated that Mr. Gordon paid rent to PVI; is that
14 correct?
15 A Yes.
16 Q Tell us approximately when -- well, tell us if you
17 know, when Mr. Gordon first began paying represents to
18 PVI?
19 A I believe it was February of 1993.
20 Q Let me show you Government's Exhibit 617, which is in
21 evidence.
22 (Handed to
the witness.)
23 Q Can you look at the top check and tell us who it is
24 made out to?
25 A John Kevorkian, K E V O R K I A N.
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Rosenblatt-direct/White
1 Q And how much is it for?
2 A $4,500.
3 Q And does it have -- who is it signed by?
4 A Signed by Bruce Gordon.
5 Q And does it have anything in the memo parts of the
6 check?
7 A Yes. February 1st, 1992 rent.
8 Q Let me show you Government's Exhibit 618, which is a
9 lease.
10 Can you tell us who that lease is between?
11 A It is between Bruce Gordon tenant and John Kevorkian,
12 landlord.
13 Q And for what property does the lease apply to?
14 A A condominium at 10 Bluff Road, Glen Cove, New York.
15 Q What does it say that the time period is that the
16 lease covers?
17 A The lease date is May 27th, 1991, and the term is 18
18 months. It begins June 1st, 1991, ending November 30th,
19 1992.
20 Q So, the lease goes to November 1992?
21 A That's correct.
22 Q And the check to Mr. Kevorkian from Mr. Gordon is
23 dated when?
24 A January 20th, 1992.
25 Q And the first rental check is when?
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Rosenblatt-direct/White
1 A I believe February of 1993.
2 Q That's for the rental of condominium?
3 A Yes.
4 Q Now, Mr. Rosenblatt, if you can step down for a
5 moment, I am going to put up on the easel here,
6 Exhibit 405-A and 405-B, the collection information
7 statements for Mr. Gordon.
8 Can you look at page 4, first of all, and tell us
9 what the date is that this information was filed with the
10 IRS?
11 A July 8th, 1993.
12 Q And July would be how many months after Mr. Gordon's
13 first payment for the condominium on Hummingbird Road?
14 A Approximately five.
15 Q Five months after he first started paying rent?
16 A Yes.
17 Q Could you look at page 1 and read for us what the
18 address on this 433 is for Mr. Gordon in July of 1993?
19 A 10 Bluff Road, Glen Cove, New York.
20 Q Is that the apartment leased from Mr. Kevorkian?
21 A Yes.
22 Q And do you recollect from the testimony so far
23 whether the IRS made any efforts to visit that property at
24 10 Bluff Road?
25 MR. WALLENSTEIN: Objection.
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Rosenblatt-direct/White
1 THE COURT: Overruled.
2 A My recollection is that the revenue officer,
3 Mr. Gagliardi, I believe, went to that address.
4 Q Now, Mr. Rosenblatt, let me show you Exhibit 420,
5 which is the July, 1993 offer and compromise submitted by
6 Mr. Gordon and Mr. Reffsin.
7 Look at 420-A. What is 420-A?
8 A It is the offer and compromise.
9 MR. WHITE: That has been passed out to the jury
10 before, it should be in your binder.
11 Q 420-A is an IRS form?
12 A Yes, it is.
13 Q Would you look at the bottom and tell us if there is
14 a signature of the taxpayer?
15 A Yes.
16 Q And is it Mr. Gordon's?
17 A Yes, it is signed by Bruce Gordon.
18 Q And what is the date?
19 A August 9th, 1993.
20 Q Is there any declaration above his signature?
21 A Yes.
22 Q What does it say?
23 A Under penalties of perjury, I declare that I have
24 examined this offer, including accompanying schedules and
25 statements, and to the best of my knowledge and belief it
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT
REPORTER
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Rosenblatt-direct/White
1 is true, correct and complete.
2 Q Could you tell us what address is listed for
3 Mr. Gordon on that form?
4 A 10 Bluff Road, Glen Cove, New York.
5 Q How many months is that after his first rental
6 payment at the condominium?
7 A Approximately six.
8 Q Let me show you Government's Exhibit 428, which is
9 the revised offer and compromise.
10 (Handed to the witness.)
11 Q Can you tell us when that was filed?
12 A It is signed on October 18th, 1994.
13 Q And who is it signed by?
14 A I believe it is Martin Reffsin.
15 Q Tell us what address is listed for Mr. Gordon on that
16 form?
17 A 10 Bluff Road, Glen Cove, New York.
18 Q How many months is that after he first started to pay
19 rent at the condominium?
20 A About a year and a half.
21 Q Take a look at Exhibit 4
25.
22 THE COURT: What was the exhibit just before
23 that, Mr. White?
24 MR. WHITE: 428.
25 (Handed to the witness.)
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Rosenblatt-direct/White
1 Q Now, on 425, if you can look at Exhibit 425-C, and
2 that's a letter from Maria Gaspar; is that correct?
3 A Yes.
4 Q I will read the bottom of it.
5 The compensation agreement between Who's Who
6 Worldwide Registry and Mr. Bruce Gordon became effective
7 January 1st, 1993.
8 Do you see that?
9 A Yes.
10 Q Now, if you flip back to the cover page, 425, and
11 look at the numbered paragraph three, could you tell us
12 what Mr. Reffsin says in there about that letter?
13 A It says it is the letter from the controller of Who's
14 Who Worldwide Registry, Inc. verifying the compensation
15 agreement of Mr. Gordon began January 1993. She verified
16 this with the shareholders of the corporation.
17 Q And can you tell us what was the testimony with
18 regard to whether or not Ms. Gaspar verified this with the
19 shareholders of the corporation?
20 MR. WALLENSTEIN: Objection.
21 THE COURT: Yes, sustained. If you have the
22 record, read the record.
23 MR. WHITE: I will come back to that.
24 Q Now, if you can look at 420-H, which is in front of
25 you, and that's the collateral agreement.
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Rosenblatt-direct/White
1 A Yes.
2 Q Now, if you look on page 2, paragraph 3, could you
3 just review it, and then tell us in layman's terms, what
4 that means.
5 A It goes toward the computation of the amount of
6 payments that Mr. Gordon would have to pay under this
7 agreement, and this
paragraph specifically talks about if
8 he directly or indirectly controls or owns any
9 corporations, then the income of those corporations should
10 be used in the computation of the payment that is due.
11 MR. WALLENSTEIN: Your Honor, I have a motion and
12 move to strike the last answer.
13 THE COURT: On what ground?
14 MR. WALLENSTEIN: I believe it is an inaccurate
15 summary of what the document says. The document is in
16 evidence and speaks for itself. And I don't believe
17 Mr. Rosenblatt's interpretation is correct.
18 THE COURT: Then you contest it on
19 cross-examination.
20 One of the reasons I am allowing this witness to
21 testify is to explain certain concepts in IRS language,
22 tax language, to the jury, because it would not be within
23 their ken to know these things. If this expert is wrong,
24 you will point it out. And I tell the jury that they do
25 not have to -- they have to consider this testimony, but
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Rosenblatt-direct/White
1 it is just like any other witness. If they don't agree
2 with this testimony, disregard it.
3 Q Let me put Exhibit 405-A and 405-B back on the
4 easel.
5 (Whereupon, at this time there was a pause in the
6 proceedings.)
7 Q And you can tell us if box 18 -- if you can step
8 down, please.
9 Box 18 asks for securities; is that right?
10 Stocks?
11 A Yes, that's right.
12 Q What is listed there?
13 A None.
14 Q And the date of this 433-A form is what?
15 A July 8th, 1993.
16 MR. WHITE: While they are looking for this, I
17 would like to read from some of Mr. Gordon's prior
18 testimony, which is already admitted.
19 MR. TRABULUS: What exhibit?
20 MR. WHITE: 804, 804, 815 and 799.
21 815 is from a deposition of Mr. Gordon in Blanche
22 Brodie against Who's Who Worldwide, Inc. and Bruce Gordon,
23 in the Nassau County Supreme Court on October 22nd, 1992.
24 I am reading from page 5, line 19.
25 Question: Are you a shareholder in Who's Who
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Rosenblatt-direct/White
1 Worldwide?
2 Answer: Yes.
3 Question: I am going to use Who's Who as a
4 shorthand. Is that all right with you?
5 Answer: Fine.
6 Question: How many shares of Who's Who do you
7 own?
8 Answer: I don't know.
9 Question: Are there any other shareholders?
10 Answer: Yes.
11 Question: Can you tell me --
12 MR. TRABULUS: Your Honor, the copy of the
13 exhibit that I was given does not contain the page being
14 read from now.
15 THE COURT: What page is this?
16 MR. WHITE: Pages 5 and 6 of Exhibit 815.
17 MR. TRABULUS: I don't have it.
18 THE COURT: This is all on one page, you know.
19 MR. WHITE: It goes over to the next page.
20 THE COURT: I have four pages on one page, one of
21 those mini scripts.
22 MR. WHITE: No, that's 816. This is 815.
23 THE COURT: I beg your pardon.
24 MR. TRABULUS: I have just seen it. It is all
25 right. I would like to have a copy.
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Rosenblatt-direct/White
1 THE COURT: I see it, I am sorry.
2 MR. WHITE: I will pick up the last question.
3 Question: Are there any other shareholders?
4 Answer: Yes.
5 Question: Can you tell me who they are?
6 Answer: Dr. Richard Grossman.
7 Question: Are there any other shareholders?
8 Answer: No.
9 This is from Exhibit 802 in Reed Publishing
10 versus Who's Who Worldwide Registry, the deposition of
11 Mr. Gordon on September 25th, 1992; reading from page 48.
12 Question: Are you the sole owner of Who's Who
13 Worldwide Registry, Inc.?
14 Answer: No, I'm not.
15 Question: Who else is?
16 Answer: Dr. Richard Grossman.
17 Question: How much did he own?
18 Then there is an objection and the question is
19 rephrased on the next page.
20 Question: What is the extent of Dr. Richard
21 Grossman's ownership interest in Who's Who Worldwide
22 Registry, Inc.?
23 Answer: 25 percent.
24 Question: 25 percent?
25 Answer: Yes.
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Rosenblatt-direct/White
1 Question: Do you own the other 75 percent?
2 Answer: That is correct.
3 Question: Is this a subchapter S corporation?
4 Answer: No, it is not.
5 Question: Is it a regular corporation?
6 Answer: Regular corporation.
7 Question: Have there ever been any other owners
8 of the company besides you and Dr. Grossman?
9 Answer: No.
10 Finally from Exhibit 804, and this is trial
11 testimony of Mr. Gordon on February 17th, 1994, in Reed
12 Publishing versus Who's Who Worldwide Registry. Starting
13 at page 2, line 19.
14 Question: Mr. Gordon, are you still president of
15 Who's Who Worldwide Registry, Inc.?
16 Answer: Yes.
17 Question: Is that still the corporate name?
18 Answer: Yes.
19 Question: Are you still an owner?
20 Answer: Yes.
21 Question: What percentage do you own?
22 Answer: 75 percent.
23 Question: I have read a recent Dunn & Bradstreet
24 that indicated that I think it is your brother-in-law,
25 Richard Grossman, owns a hundred percent. Is that wrong?
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Rosenblatt-direct/White
1 Answer: Wrong.
2 Question: Do you know how they got that
3 information?
4 Answer: Umm, probably from me. They probably
5 misunderstand. I said I may sell my shares to them. This
6 was a few months ago when something happened in my
7 personal life that I had a severe loss. And when you lose
8 your oldest son, I think that you change your values in
9 your life, and I think I was a little depressed and
10 demoralized and came very close to do that, but I never
11 did it. And I think I told D & B that I was considering
12 doing that.
13 Q Mr. Rosenblatt, if you take a look at Exhibit 671,
14 tell us what that is.
15 A A telecopier cover sheet from Steven Adler, attorney
16 at law to Marty Reffsin, dated March 30th,
1994.
17 Q And if you can flip in that exhibit to the letter
18 that has Joyce Grossman and an address typed at the top?
19 A Yes.
20 Q And if you look at the first paragraph, what
21 percentage of the company does it say that Joyce Grossman
22 owns?
23 A 75 percent.
24 Q And if you could read aloud the last sentence for us
25 of the whole letter?
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1 A In addition, if you should find it desirable in
2 advancing the corporation's interest, I authorize you to
3 state to third parties that you are the owner of my shares
4 in the corporation.
5 Q And the fax cover sheet indicates that it was faxed
6 from Mr. Adler to Mr. Reffsin on what date?
7 A March 30th, 1994.
8 Q And that is subsequent to the testimony that I just
9 read before; is
that right?
10 A Yes.
11 (Whereupon, at this time there was a pause in the
12 proceedings.)
13 Q Let me read from 799, a deposition of Mr. Gordon,
14 April 14th, 1994, in connection with the Who's Who
15 Worldwide bankruptcy proceedings, and I will begin reading
16 at page 30, line 9.
17 Question: Does Who's Who Worldwide Registry have
18 any preferred stock?
19 Answer: No.
20 Question: Does it have only a single class of
21 common stock?
22 Answer: I believe that is the case.
23 Question: Under item 5 -- which is I believe a
24 reference to the bankruptcy petition -- under item 5 there
25 is only a single name indicated, a person who holds 20
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 percent or more of the voting securities of debtor; is
2 that wrong?
3 Answer:
I believe Joyce Grossman, and there is a
4 trust. I am not sure, I don't know.
5 Question: I thought you indicated earlier that
6 you had the authority to vote all of the stock?
7 Answer: Yes, that's true.
8 Question: So, item 5 then should list your name
9 I suppose. I know you can't read it because it's small
10 writing. It says, quote, list the name of any person who
11 directly or indirectly owns, controls or holds with power
12 to vote, unquote.
13 Answer: I have the power to vote a hundred
14 percent of the stock.
15 Question: And the names of the people who
16 actually own the stock would be Richard Grossman, Joyce
17 Grossman and perhaps a trust?
18 Answer: I believe that to be accurate.
19 Question: At the time of the trial I believe you
20 owned 75 percent of the stock of Who's Who Worldwide
21 Registry; is that correct?
22 Answer: No, I am not sure if I could vote 75
23 percent of the stock or 100 percent of the stock. It is
24 something that is not important in the operation of my
25 business.
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Rosenblatt-direct/White
1 Mr. Flaum: The question was not voting. The
2 question was ownership. Could you read the question back,
3 please.
4 The record is read back.
5 Answer: There has been a change in ownership.
6 Question: Perhaps you can explain then how you
7 owned 75 percent of it then, but apparently you own none
8 of it now?
9 Answer: I think there was a little confusion.
10 It is that I have an employment agreement where up to a
11 certain point I get 75 percent of the profits and Joyce
12 and the rest get the remaining 25 percent. However, I do
13 have the ability, the voting rights on the stock,
and
14 that's what I meant.
15 Question: Perhaps you will recall at trial I
16 indicated to you that Dunn & Bradstreet recently listed
17 Dr. Grossman as owning a hundred percent of the stock, and
18 I had asked you if that is correct. And you said that's
19 not right, that you own 75 percent. You had contemplated
20 selling it to him or this trust, but you had not done so.
21 Do you recall that testimony?
22 Answer: Yes, I recall D & B had that. That's
23 what I recall. And I had indicated to you that -- was
24 this something about an employment agreement also in it?
25 Question: This is the first I heard of it, so I
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1 am not aware of the employment agreement?
2 Answer: I'd vote 100 percent of the stock. I
3 also have permission to tell people that I vote 100
4 percent of the stock in writing, and that's what I meant.
5 That's the end of the transcript.
6 (Whereupon, at this time there was a pause in the
7 proceedings.)
8 Q Now, Mr. Rosenblatt, the part I just read, I also
9 have permission to tell people that I vote 100 percent of
10 stock in writing, and that's what I meant. That's from a
11 deposition on April 14th, 1994.
12 How long before that deposition testimony was
13 that letter faxed from Mr. Adler to Mr. Reffsin?
14 A About two weeks.
15 Q And in that letter Joyce Grossman indicates that she
16 is conferring the voting power of her stock; is that
17 right?
18 A That's correct.
19 MR. WHITE: Your Honor, I would like to read
20 Mrs. Joyce Grossman's testimony from this trial, from
21 January 21st, 1998. It is at page 704 of the trial
22 transcript.
23 The letter we are discussing is read to her. And
24 she is asked: Do you see that, Mrs. Grossman?
25 Answer: Yes, I do.
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1 THE COURT: You better refresh our recollection.
2 What letter are you talking about?
3 MR. WALLENSTEIN: What page did you say,
4 Mr. White?
5 MR. WHITE: 704 of the trial transcript.
6 Your Honor, we have an enlargement of it so
7 everyone knows what we are referring to.
8 THE COURT: If you go back to these matters, it
9 would be wise to refresh our recollection as to what you
10 are talking about. I am sure the jury remembers it very
11 well. I am the one who has trouble.
12 MR. WHITE: Your Honor, it is Exhibit 582. The
13 enlargement is 582-A.
14 (Whereupon, the exhibit/exhibits were published
15 to the jury.)
16 Q The letter itself is
dated January 10th, 1990. A
17 draft of the letter was faxed from Mr. Adler to
18 Mr. Reffsin on what date, Mr. Rosenblatt?
19 A March 30th, 1994.
20 Q So, at page 704 of the trial transcript, that letter
21 was read to Mrs. Grossman, or the first paragraph of it
22 was.
23 Question: Do you see that, Mrs. Grossman --
24 THE COURT: Is that a question?
25 MR. WHITE: Yes, question.
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1 Do you see that, Mrs. Grossman?
2 Answer: Yes, I do.
3 Question: Now, did you or your husband have
4 anything to do with the incorporation of Who's Who
5 Worldwide in New York State?
6 Answer: No, we did not.
7 Question: Did you ever personally own 75 percent
8 of the shares of the corporation?
9 Answer: No, I did not.
10 Question: Did you or your
husband or any of your
11 family entities ever own 75 percent of the shares of the
12 company?
13 Answer: No, we did not.
14 Then the third paragraph of the letter was then
15 read to Mrs. Grossman.
16 Question: Do you see that, Mrs. Grossman?
17 Answer: Yes, I do.
18 Question: To your knowledge, were you ever the
19 majority shareholder?
20 Answer: No, I was not.
21 Question: And did you ever authorize your
22 brother, Mr. Gordon to state to third parties that he was
23 the owner of your shares?
24 Answer: No, I did not.
25 Question: Did you ever grant voting control of
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1 the shares that you and your husband and your family trust
2 owned to Mr. Gordon?
3 Answer: No, I did not.
4 Q Now, Agent Rosenblatt -- Mr. Rosenblatt,
let me show
5 you Exhibit 797.
6 (Handed to the witness.)
7 Q Let me stand over your shoulder. It is a document
8 that the parties stipulated was a business record of Who's
9 Who Worldwide.
10 Can you tell us the date, and then read the first
11 two paragraphs.
12 A It is dated June 13th, 1991.
13 It says, Liz. These are Mr. Gordon's tax returns
14 for 1990. Since he has no personal checking account, I
15 suggest you get money orders to pay the tax. Sending a
16 Who's Who check isn't a good idea.
17 Q Now, in payment of tax obligations does the IRS
18 accept checks?
19 A Yes.
20 MR. TRABULUS: Objection. Asked and answered.
21 THE COURT: Overruled. I assume he is getting
22 into another subject and refreshing our recollection.
23 Q Now, if you can go back to the collateral agreement,
24 420-H, which you had in front of you before, and if you
25 can look again at paragraph 3 that defines what you
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 summarized for us before.
2 Let me show you Exhibits 416, 417 and 418, Who's
3 Who Worldwide tax returns for 1991, '92 and '93.
4 (Handed to the witness.)
5 Q Now, under paragraph 3 of the collateral agreement,
6 if Who's Who Worldwide were a closely held corporation --
7 was a company owned or controlled by Mr. Gordon, you said
8 before that his income would be subject to that collateral
9 agreement; is that correct?
10 A Yes.
11 Q And is there a definition as to what corporate income
12 would be subject to the agreement in that paragraph?
13 A Yes.
14 Q And the definition that is there, does that
15 correspond to any particular line of a corporate tax
16 return?
17
A Yes.
18 Q And what line does it correspond to?
19 A It would be line 28 on each of the forms.
20 Q Looking at the corporate tax return, tell us what
21 line 28, what is supposed to be reported on line 28.
22 A Line 28 is the taxable income before net operating
23 loss deduction and special deductions.
24 Q Now, take a look at Exhibit 416. And what year is
25 that the Worldwide return for?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 A That's the 1991 tax return.
2 Q And tell us what is on line 28.
3 A $14,707.
4 Q And if Who's Who Worldwide were owned and controlled
5 by Mr. Gordon, would that amount be subject to the
6 collateral agreement?
7 A That amount, subject to some adjustments that are
8 required.
9 Q All right.
10 Take a look at 417. Tell us what is on line 28.
11 A $516,208.
12 Q And if Mr. Gordon owned or controlled the company,
13 would that be subject to the collateral agreement?
14 A Yes, subject to some adjustments, yes.
15 Q Looking at 418, the return for 1993, tell us what the
16 figure is on line 28.
17 A $1,286,588.
18 Q And, again, subject to various adjustments, would
19 that be subject to the collateral agreement if he owned or
20 controlled the corporation?
21 A Yes.
22 (Whereupon, at this time there was a pause in the
23 proceedings.)
24 Q Mr. Rosenblatt, let me show you
25 Government's Exhibit 1404.
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1 (Handed to the witness.)
2 MR. WHITE: Your Honor, this is the modified
3 version of the chart we discussed yesterday.
4 THE COURT: Very well.
5 (Handed to the
Court.)
6 Q Now, Mr. Rosenblatt, have you prepared an analysis of
7 the taxable income of Mr. Gordon for the years 1991
8 through 1994?
9 A Yes.
10 MR. TRABULUS: Objection, your Honor.
11 THE COURT: On what grounds?
12 MR. TRABULUS: The same grounds we discussed
13 before at the bench concerning yesterday, concerning legal
14 conclusions.
15 THE COURT: That is overruled.
16 When you say taxable income, you say it is the
17 government's contention that this is taxable income; is
18 that correct?
19 MR. WHITE: Correct, your Honor.
20 THE COURT: Okay.
21 Q And have you prepared a summary of that analysis?
22 THE COURT: That is based on the evidence that
23 you say that has already been admitted?
24 MR. WHITE: Correct.
25 A Yes.
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1 Q Is Exhibit 1404 a copy of that summary?
2 A Yes, it is.
3 MR. WHITE: The government offers Exhibit 1404.
4 MR. TRABULUS: Objection, your Honor. But on the
5 grounds you just overruled.
6 THE COURT: Any other objections other than what
7 we discussed previously?
8 MR. TRABULUS: No.
9 THE COURT: I assume you have the same objection,
10 Mr. Wallenstein?
11 MR. WALLENSTEIN: I do.
12 THE COURT: Overruled.
13 Government's Exhibit 1404 in evidence.
14 (Government's Exhibit 1404 received in evidence.)
15 Q Now, can you first tell us whether you have included
16 in your summary as income the personal expenses paid for
17 Mr. Gordon by his corporations?
18 A Yes, I have.
19 Q Can you tell us what the totals are for those years?
20 A For 1991, $145,499.
21 For 1992, $237,078.
22 For 1993, $132,865.
23
For 1994, $377,675.
24 Q Let's take 1991 first of all.
25 From what corporation were those expenses paid?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 A 1991 from Who's Who Worldwide Registry, Inc.
2 Q And for '92?
3 A The same, Who's Who Worldwide Registry, Inc.
4 Q And '93?
5 A The same again, Who's Who Worldwide Registry, Inc.
6 Q And how about in 1994?
7 A There is a combination of corporations that paid.
8 Q Okay.
9 Tell us the corporations and the breakdowns.
10 A Who's Who Worldwide Registry, Inc. paid $141,025.
11 Sterling Who's Who, Inc. paid $106,846. Registry
12 Publishing, Inc. paid $74,816. Who's Who Executive Club,
13 Inc. paid $54,988.
14 Q Now, did you include in your calculations of income
15 anything with respect to the condominium -- I am sorry,
16 pentho
use in Manhattan?
17 A Yes, I did.
18 Q What did you include in your computations?
19 A The total amount of payments made by Sterling Who's
20 Who for the rental of that penthouse in 1994.
21 Q And what company paid those payments?
22 A Sterling Who's Who, Inc.
23 Q And what is the total for 1994?
24 A $72,963.
25 Q Did you include in your competition Mr. Gordon's
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1 income for these years anything with respect to the use of
2 the condominium in Manhasset?
3 A Yes.
4 MR. WHITE: Your Honor, a little late, but we
5 have copies for the jury to follow along.
6 THE COURT: All right.
7 Before you do, members of the jury, this is a
8 summary of what the government contends is taxable income
9 to Mr. Gordon. It is according to the government
based on
10 proof in the record. If it does not accurately portray
11 the proof in the record, you may disregard this or any
12 part of it. This document, 1404, is not evidence in and
13 of itself. It is not a record made and kept in the
14 regular business of the company. It is a summary, a
15 computation. And you are to accept it only if you find
16 the government proved beyond a reasonable doubt the
17 figures that are in this schedule. If the government
18 doesn't, disregard it.
19 (Whereupon, the exhibit/exhibits were published
20 to the jury.)
21 Q Now, with respect to the Manhasset condominium, have
22 you made a calculation of the income of Mr. Gordon with
23 respect to his use of it?
24 A Yes.
25 Q Tell us first of all how you arrived -- let me back
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1 up.
2 For 1993 have you arrived at a figure, income
3 figure with respect to his use of the condo?
4 A Yes.
5 Q What is that?
6 A $41,000.
7 Q And for 1994?
8 A $45,500.
9 Q Now, can you tell us how you arrived at those
10 figures, first for 1993?
11 A We know the condo was rented to -- I can't remember
12 his name.
13 Q Mr. Chase?
14 A Mr. Chase. And he was paying $5,250 a month. So we
15 took that value as the fair rental value. We multiplied
16 it by 12, which I believe is $63,000.
17 Since Mr. Gordon in 1993 paid 22,000, we reduced
18 it by the amount he paid, and that's how we got the
19 41,000.
20 Q Now, Mr. Chase began renting the condominium when?
21 A I believe it was 1996.
22 Q Now, how did you arrive at the figure for 1994?
23 A Again, we took the same 5,250 times 12 months,
24 63,000, and because Mr. Gordon in 1994 paid 17,500, we
25 reduced it by the amount that he paid. And that's how we
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 got the 45,500.
2 Q Now, Mr. Rosenblatt, if you could step down for a
3 moment, we are looking at Exhibit 1512. And that's your
4 summary of the deposits and disposition of monies to
5 Publishing Ventures for 1994; is that right?
6 A Yes.
7 Q Now, show us where Mr. Gordon's rent payments are
8 reflected on this chart.
9 A There is a box, Bruce Gordon, and there is an amount,
10 $17,500 coming out of Publishing Ventures.
11 Q And can you tell us where the 17,500 to Mr. Gordon
12 came from?
13 A $5,000 was transferred from Who's Who Worldwide
14 Registry, Inc. to Bruce Gordon; and 12,500 was transferred
15 from Registry Publishing to
Bruce Gordon.
16 Q And the 17,500 transferred to Publishing Ventures for
17 rent, that's what you say you credited Mr. Gordon with?
18 A Yes.
19 Q And if you look to the right side, does it indicate
20 Mr. Gordon got any money out of Publishing Ventures?
21 A Yes.
22 Q How much?
23 A 7,500.
24 Q Was that included in your calculations of his income?
25 A No, it was not.
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1 Q You credited him with that?
2 A Yes.
3 Q Resume your seat?
4 THE COURT: Wait a moment, Mr. Trabulus wants to
5 see it.
6 MR. WHITE: I am sorry.
7 (Whereupon, at this time there was a pause in the
8 proceedings.)
9 Q Based on the personal expenses paid by the
10 corporations, as well as the two residences you described,
11 did you come up with a figure for the unreported income of
12 Mr. Gordon for the years '91 through '94?
13 A Yes, I have.
14 MR. TRABULUS: Objection, your Honor.
15 THE COURT: On what grounds.
16 MR. TRABULUS: To form and characterization. He
17 says unreported, but better to say reported and improperly
18 characterized.
19 MR. WHITE: It is unreported.
20 THE COURT: This is the government's contention;
21 isn't that correct? As to the unreported income.
22 MR. WHITE: As I said before, yes, your Honor.
23 THE COURT: Overruled.
24 Q For 1991, what do you calculate the unreported income
25 for Mr. Gordon was?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 A $147,176.
2 Q What do you calculate --
3 A Excuse me, would you ask that question again. I
4 think I might have read from the wrong number.
5 Q What do you calculate Mr. Gordon's unreported income
6 for 1991 was?
7 A $145,499.
8 Q And what do you calculate his unreported income for
9 1992 was?
10 A $237,078.
11 Q What do you calculate his unreported income for 1993
12 was?
13 A $173,865.
14 Q And what do you calculate his unreported income for
15 1994 was?
16 A $496,138.
17 Q Now, have you calculated any adjustments or
18 deductions that would have been due Mr. Gordon in those
19 years?
20 A I don't understand your question.
21 Q Well, have you calculated what the additional taxable
22 income would have been on that unreported income?
23 A Yes.
24 Q And before you do that, is it necessary to apply any
25 deductions or exemptions to that income?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 A Yes.
2 Q And did you do that in this case?
3 A Yes, I did.
4 Q Okay.
5 Tell us for 1991, were there any exemptions that
6 Mr. Gordon was entitled to?
7 A Mr. Gordon, because his income reached a certain
8 level, lost part of his exemption for himself in the
9 amount of $1,677.
10 Q Now, when you say he lost that exemption, explain
11 what you mean.
12 A Under the tax code as it existed at that time, when
13 income was at a certain level the taxpayer would lose the
14 ability to deduct the exemption, or part of it.
15 THE COURT: What do you mean by exemption? What
16 exemption?
17 THE WITNESS: The personal exemption we all can
18 claim.
19 THE COURT: For himself?
20 THE WITNESS: Yes.
21 THE COURT: That's like in addition to a child,
22 you have one for your own self?
23 THE WITNESS: Right, if you are single you are
24 entitled to one exemption.
25 Q You are saying you are not entitled to that full
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 exemption if your income reaches a certain level?
2 A That's right.
3 Q On his 1991 return as filed by Mr. Gordon, was that
4 exemption claimed?
5 A Yes, it was.
6 Q And with the additional income that the government
7 contends is attributable to him, he would have lost part
8 of the exemption; is that what you are saying?
9 A That's correct.
10 Q Now, did you perform a similar calculation for 1992?
11 A Yes.
12 Q And what is the results of that?
13 A In 1992, because of the income level, the entire
14 exemption of $2,300 was lost.
15 Q Were there any other exemptions or adjustments for
16 1993?
17 A For 1993, again, because of the income level, the
18 entire exemption of $2,350 is lost. In addition, the
19 itemized deductions which are also affected by the amount
20 of income, were reduced to the amount of the standard
21 deduction.
22 Q And what were the results of that analysis for 1994?
23 A For 1994, similarly the exemption which was I believe
24 original claimed, was lost in full in the amount of
25 $1,862, and the itemized deductions were again reduced to
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 the amount of the standard deduction. They were reduced
2 by $6,416.
3 Q Now, adding all that in, have you calculated the
4 additional taxable income for Mr. Gordon for the years '91
5 through '94?
6 A Yes, I have.
7 Q Can you give us the figure for 1991.
8 A $147,176.
9 Q For 1992.
10 A $239,378.
11 Q For 1993.
12 A $178,849.
13 Q And for '94?
14 A $504,416.
15 Q And can you tell us what the grand total is of all
16 the taxable income for all those years.
17 A All the additional taxable income totals $1,069,819.
18 Q Mr. Rosenblatt, let me show you
19 Government's Exhibit 1405.
20 (Handed to the witness.)
21 Q Now, have you compared the taxable income figures
22 that you just described for us with the tax returns as
23 actually filed by Mr. Gordon?
24 A Yes.
25 Q And have you prepared a summary of that analysis?
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1 A Yes, I have.
2 Q Is Exhibit 1405 your summary?
3 A Yes.
4 MR. WHITE: Your Honor, the government offers
5 1405.
6 THE COURT: Any objection?
7 MR. TRABULUS: The same one
we talked about and
8 that you overruled. Aside from that, no.
9 MR. WALLENSTEIN: I join in Mr. Trabulus'
10 objection.
11 THE COURT: Same ruling.
12 Members of the jury, again -- I got to have eye
13 contact here.
14 Members of the jury, again I tell you that this
15 summary is not in and of itself independent evidence. It
16 is not like a tax return. It is not like a business
17 record. It is not like a letter, an original document.
18 This is a compilation of what the government says is
19 already in evidence, both as to the documents and the
20 testimony.
21 If you find that the government failed to prove
22 beyond a reasonable doubt any of these underlying
23 evidence, disregard the summary. The summary is only as
24 good as the underlying evidence.
25 MR. WHITE: Your Honor, I will pass out copies to
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1 the jury.
2 THE COURT: Very well.
3 (Whereupon, the exhibit/exhibits were published
4 to the jury.)
5 THE COURT: Do you have another copy for myself
6 and the reporter?
7 MR. WHITE: I do, your Honor.
8 (Handed to the Court.)
9 Q If you can start with the year 1991, can you tell us
10 how much taxable income was reported by Mr. Gordon on his
11 return for that year?
12 A $44,455.
13 Q And how much additional taxable income did you
14 calculate that he had?
15 A $147,176.
16 Q And can you tell us how much tax did Mr. Gordon
17 actually pay in connection with his '91 file as filed?
18 A $9,808.
19 Q And how much did you calculate based on the
20 additional income he should have paid?
21 A $55,281.
22 Q So what is the additional tax that is due and owing
23 for that year?
24 A $45,473.
25 Q Now, for 1992, how much did Mr. Gordon report on his
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 actual return?
2 A $42,180.
3 Q And what is the additional tax -- what is the
4 additional taxable income you calculated for him for that
5 year?
6 A $239,378.
7 Q So, what is the taxable income as corrected for that
8 year?
9 A $281,558.
10 Q And how much tax did Mr. Gordon actually pay in '92?
11 A $9,021.
12 Q What is your calculation of how much tax he should
13 have paid in 1992?
14 A $82,937.
15 Q What is the total of the tax due and owing for '92?
16 A $73,916.
17 Q Now, for 1993, how much income did Mr. Gordon report
18 on this return?
19 A $82,524.
20 Q And how much additional
taxable income did you
21 calculate he had in that year?
22 A $178,849.
23 Q So, what is his total income for that year as
24 corrected?
25 A $261,373.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 Q And how much did he pay, actually pay in 1993 in
2 taxes?
3 A $21,105.
4 Q And what is your calculation of how much tax he
5 should have actually paid in 1993?
6 A $84,276.
7 Q So, what is the additional tax due and owing for the
8 year 1993?
9 A $63,171.
10 Q Now, for 1994, how much taxable income did the
11 Mr. Gordon report on his return for 1994?
12 A $127,369.
13 Q And how much additional taxable income did you
14 calculate he had in '94?
15 A $504,416.
16 Q So what is his taxable income as corrected?
17 A $631,785.
18 Q And how much did Mr. Gordon actually pay in taxes in
19 1994?
20 A $35,492.
21 Q And what is your calculation of how much tax he
22 should have paid in 1994?
23 A $230,826.
24 Q So, how much additional tax was due and owing for
25 1994?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 A $195,334.
2 Q Now, according to your calculations, how much
3 additional tax did Mr. Gordon owe the U.S. government for
4 the years 1991 through 1994?
5 A $377,894.
6 Q Let me show you Government's Exhibit 1526.
7 (Handed to the witness.)
8 Q Now, Mr. Rosenblatt, have you prepared a summary of
9 the additional tax owing to the IRS for the years 1981
10 through 1994 for Mr. Gordon?
11 A Yes.
12 Q And is 1526 a copy of that summary?
13 A Yes.
14 MR. WHITE: Your Honor, the government offers
15 1526.
16 THE COURT: Any objection?
17 MR. TRABULUS: Yes, to part of it is the same
18 objection that was made before and is overruled.
19 I am comparing 1526 to 823, which I think is in
20 evidence. Because some of this is not disputed as to some
21 of the earlier years. Bear with me a moment. Of course,
22 the objection is only partial.
23 I am not sure of their computation from '88
24 through '90. From '81 through '86 is no objection. '88
25 through '90, I am not sure of the basis, but there is no
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 objection. '91 through '94 is objected to.
2 THE COURT: Let me get it clear. You are
3 objecting to the figure for the government's contention as
4 to the tax liability from 1991 through 1994, which is what
5 the witness has just gone through; is that correct?
6 MR. TRABULUS: Yes.
7 THE COURT: That's on the same basis as before?
8 MR. TRABULUS: Right.
9 THE COURT: Overruled.
10 Mr. Wallenstein.
11 MR. WALLENSTEIN: Judge, with respect to the '91
12 through '94, I join in Mr. Trabulus' objection, which I
13 know you have overruled.
14 With respect to the '81 through '86, and '88
15 through '90, I don't dispute the calculation of the
16 number. But I would like a limiting instruction with
17 respect to the applicability of that number. Mr. Reffsin
18 is not charged with anything having to do with that
19 number.
20 MR. WHITE: Your Honor, I don't believe that's
21 correct.
22 THE COURT: All right, come up, counsel.
23
24
25
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1 (Whereupon, at this
time the following took place
2 at the sidebar.)
3 MR. WHITE: Your Honor, I can explain the chart,
4 and it may clear it up.
5 THE COURT: Go ahead.
6 MR. WHITE: The figure from 1981 through '86, and
7 '88 through '90, it represents the past due tax
8 obligations of Mr. Gordon.
9 THE COURT: That's what I assumed.
10 MR. WALLENSTEIN: That's what I understood, too.
11 MR. WHITE: It is not in dispute. He is not
12 charged with the evasion of those taxes. It is assessed.
13 He is charged with evasion of payment of those.
14 Mr. Reffsin is charged with the assistance of Mr. Gordon
15 with the evasion of the payment of those as well.
16 THE COURT: Is that clear in the indictment?
17 MR. WHITE: Yes. I think it is count 60, the
18 Klein conspiracy which I believe charges Mr. Gordon and
19 Mr. Reffsin with conspiring to frustrate the IRS by
20 evading the payment of that past due tax obligation.
21 THE COURT: Where is this now?
22 MR. WHITE: I believe it is count 60.
23 THE COURT: Conspiracy to impair -- where is
24 that?
25 MR. WALLENSTEIN: Isn't count 60 the one that
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1 only charges Gordon?
2 MR. WHITE: Count 46, which has the charging
3 language --
4 THE COURT: Paragraph 46?
5 MR. WHITE: Yes, paragraph 46, says that Gordon
6 and Reffsin conspired to frustrate the IRS, I am
7 paraphrasing, in the ascertainment, computation and
8 assessment and collection of revenue, to wit, the federal
9 income taxes of the defendant Bruce Gordon.
10 47. It was part of the conspiracy that they
11 attempted to evade the payment of a large portion of
12 Gordon's outstanding obligations for the year '88 through
13 '90.
14 In addition, Count 61 charges both Gordon and
15 Reffsin of the same thing, attempting to defeat and evade
16 a payment of the large part of that tax.
17 MR. WALLENSTEIN: I withdraw my objection.
18 THE COURT: It wasn't clear to me either,
19 Mr. Wallenstein.
20 MR. WHITE: It took me a while, too.
21
22
23
24
25
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1 (Whereupon, at this time the following takes
2 place in open court.)
3 THE COURT: Mr. Wallenstein, you are withdrawing
4 your objection?
5 MR. WALLENSTEIN: Yes.
6 THE COURT: Government's Exhibit 1526 in
7 evidence.
8 (Government's Exhibit 1526 received in evidence.)
9 MR. WHITE: Your Honor, I will pass that out to
10 the jury as well.
11 THE COURT: Yes.
12 (Whereupon, the exhibit/exhibits were published
13 to the jury.)
14 Q Okay.
15 Now, did you calculate what the tax due and owing
16 by Mr. Gordon for the years 1981 through '86, and '88
17 through 1990 was?
18 A Yes.
19 Q Tell us what that is?
20 A $844,349.
21 Q Now, is that part of the tax obligation that was
22 offered to be compromised in 1993?
23 A Yes.
24 Q Now, did you calculate the total additional income
25 tax liability for the years '91 through '94?
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1 A Yes.
2 Q And what is that?
3 A $377,894.
4 Q Now, can you tell us what the total tax due and owing
5 by Mr. Gordon to the U.S. Government is for the years '81
6 through '86, and '88 through '94.
7 A $1,222,243.
8 Q Now, you described before the collateral agreement;
9 do you recall that?
10 A Yes.
11 Q And whether or not the corporate income would be
12 subject to that; is that correct?
13 A Yes.
14 Q Excluding that for a moment, was Mr. Gordon's
15 personal income subject to that collateral agreement?
16 A Yes, it was.
17 Q Now, tell us just in layman's terms how that worked.
18 In other words, what income would be subject and if he
19 earned it what would happen to it?
20 A Basically his adjusted gross income, less the amount
21 of tax that was due and paid on that amount, less any
22 payments that were made to the Department of Justice.
23 Q And was there a formula by which the amount of tax he
24 would owe on that income -- let me withdraw that.
25 Was there a formula to determine the amount of
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1 payments he would make each year under that agreement?
2 A Yes.
3 Q Can you give us in layman's terms again an
4 explanation of what those terms were?
5 A I believe it was on the first 25,000, there was no
6 payment due. And for the next 10,000 dollars it was at 10
7 percent. For the next $15,000 it was a 20 percent, and
8 everything above and over $50,000 would be 50 percent.
9 THE COURT: Would be what?
10 THE WITNESS: 50 percent.
11 THE COURT: 5 0?
12 THE WITNESS: Right.
13 Q So, it was a sliding scale of sorts?
14 A Yes.
15 Q Now, approximately how much money or how large a tax
16 obligation did that collateral agreement cover?
17 A I believe it was $254,000.
18 Q And was that part of or in addition to the three and
19 a half million back taxes that we were talking about?
20 A It was part of that
amount.
21 Q Now, have you calculated how much -- have you
22 calculated using your figures of additional taxable
23 income, how much additional Mr. Gordon would have had to
24 pay under the collateral agreement?
25 A Yes.
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1 Q Let me show you Exhibit 1525.
2 (Handed to the witness.)
3 Q Now, Exhibit 1525, is that your summary of that
4 analysis?
5 A Yes, it is.
6 MR. WHITE: Your Honor, the government offers
7 Exhibit 1525.
8 THE COURT: Any objection?
9 MR. TRABULUS: May I have a voir dire?
10 THE COURT: Surely.
11 MR. TRABULUS: Thank you.
12
13 VOIR DIRE EXAMINATION
14 BY MR. TRABULUS:
15 Q Hello, Mr. Rosenblatt.
16 A Hello.
17 Q In preparing this exhibit, 1525 you sought to make a
18 computation, is that your testimony, giving effect to the
19 collateral agreement?
20 A That's correct.
21 Q And by giving effect to the collateral agreement, do
22 you mean you would be including in Mr. Gordon's income,
23 income that was received by Who's Who Worldwide, for
24 example, in 1991 or 1992 or '93?
25 A This chart does not include any of the corporate
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 income. This is based solely on Mr. Gordon's personal tax
2 returns, and the adjustments I have proposed to them.
3 MR. TRABULUS: I see. Thank you.
4 No further questions. The only objection is the
5 one that is always overruled, and I am just restating and
6 preserving that.
7 THE COURT: Other than that?
8 MR. TRABULUS: No.
9 THE COURT: Mr. Wallenstein?
10 MR. WALLENSTEIN: No other
objection, your
11 Honor.
12 THE COURT: Overruled.
13 Government's Exhibit 1525 in evidence.
14 (Government's Exhibit 1525 received in evidence.)
15 MR. WHITE: Your Honor, may I pass it out to the
16 jury?
17 THE COURT: Yes, under the same admonition. It
18 is also a schedule based on other evidence. It depends on
19 whether you accept the other evidence. If you don't, then
20 you don't accept this either.
21 (Whereupon, the exhibit/exhibits were published
22 to the jury.)
23
24
25
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1 DIRECT EXAMINATION (cont'd)
2 BY MR. WHITE:
3 Q Now, Mr. Rosenblatt, let's start with the year 1991.
4 First of all, tell us whether in 1991 Mr. Gordon
5 made -- actually made any payments pursuant to this
6 collateral agreement?
7 A No, he did not make any payments.
8 Q Can you show us on this chart where that is
9 reflected?
10 A It is the second line up from the bottom in the left
11 column, under the year 1991.
12 Q Now, have you calculated how much -- let me rephrase
13 the question.
14 Using your calculations of his additional taxable
15 income, have you calculated how much -- how great an
16 additional payment he would have had to make under the
17 collateral agreement?
18 A Yes.
19 Q For 1991, what is that figure?
20 A He would have been required to pay $72,167.
21 Q And can you tell us without going into all the
22 numbers and everything, tell us again in layman's terms,
23 how you calculated that?
24 A Well, I -- the adjusted gross income is the starting
25 point, and that would be the top line. And then to that
HARRY RAPAPORT, CSR,
CP, CM OFFICIAL COURT REPORTER
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1 we add what I believe to be the unreported income. And
2 then there were adjustments for non-taxable income. And
3 less federal income tax due and paid in that year, and
4 less any payments made to the Department of Justice. So
5 we come up with the annual income subject to payment per
6 the collateral agreement, which is in the middle of the
7 page.
8 Q Now, is it correct that that is the income that is
9 subject to this formula in the agreement?
10 A Yes, it is.
11 Q So, once you come up with that figure, you apply the
12 formula?
13 A That's correct.
14 Q Okay.
15 How did you compute it then?
16 A Well, basically in each of the years, the income is
17 over 50,000. So, since the first $25,000 is no payment
18 due, the next 10,000 would be at 10 percent. That's the
19 thousand dollar items you see under the columns 1991, '92
20 and '93.
21 The next 15,000 would be at 20 percent. So,
22 therefore, there is 3,000 in each of the columns under
23 1991, 1992 and '93. And the excess over $50,000 would be
24 then computed, which in 1991 was $68,167; in 1992 it was
25 $111,435. And in 1993 it was limited to $63,179.
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1 Q Okay.
2 Now, let's go to 1992. Tell us how much
3 Mr. Gordon actually paid under this agreement?
4 A Mr. Gordon actual made payments of $2,414.
5 Q And what is your calculation of what payment should
6 have been made for 1992?
7 A $115,435.
8 Q What is the difference?
9 A 113,021.
10 Q For 1993 how much did Mr. Gordon actually pay?
11 A $1,158.
12 Q What is your calculation of how much should actually
13 have been paid?
14 A 67,179.
15 Q And what is the understatement?
16 A $66,021.
17 Q Now, for 1994, how much did Mr. Gordon actually pay?
18 A $14,025.
19 Q Did you calculate whether or not he would have owed
20 anything using your additional taxable income figures for
21 1994?
22 A Yes.
23 Q Okay.
24 And how much would he have owed?
25 A He would have owed nothing in that year.
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1 Q Why is that?
2 A Because by the end of 1993 he would have paid off the
3 entire amount of $254,781.
4 Q So that would have been completed -- and the
5 collateral agreement was signed when?
6 A November 20th, 1991.
7 Q And if his income had been properly reported it would
8 have been paid off by 1993; is that right?
9 A That's correct.
10 Q Now, of the approximately 254,000 that he owed, can
11 you tell us or give us an approximate figure of how much
12 he actually did pay from '91 to '94?
13 A Approximately $17,000.
14 MR. WHITE: Your Honor, I need to pull out a
15 document, I see it is near 3:00 o'clock. I don't know if
16 you want to take a break.
17 THE COURT: Members of the jury, we will take a
18 ten-minute recess. Please do not discuss the case, and
19 keep an open mind.
20 (Whereupon, at this time the jury leaves the
21 courtroom.)
22
23 (Whereupon, a recess is taken.)
24
25 THE COURT: Mr. White, how much more do you have
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1 on direct?
2 MR. WHITE: I think about a half an hour.
3 THE CLERK: Jury entering.
4 (Whereupon, the jury at this time entered the
5 courtroom.)
6 THE COURT: Please be seated, members of the
7 jury.
8 You may proceed.
9 Q Mr. Rosenblatt, on the easel is
10 Government's Exhibit 837. And that's your summary of
11 transfers from Who's Who Worldwide from February to
12 December 1994; is that right?
13 A Yes.
14 Q And you were asked before if the existence in your
15 experience as an IRS revenue agent, if in your experience
16 of multiple corporations, multiple bank accounts, at
17 multiple banks, made it easier or harder for a taxpayer to
18 determine a taxpayer's true tax picture, and your answer
19 was what?
20 A It makes it a lot harder to investigate the case.
21 MR. WHITE: Your Honor, you said I should find
22 the precise testimony rather than to have the witness
23 recall it earlier.
24 THE COURT: Yes.
25 MR. WHITE: Let me read from page 1402 of the
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1 trial transcript, and this is Mr. Ackerman's testimony.
2 MR. WALLENSTEIN: What day was that?
3 MR. WHITE: January 26th, 1998.
4 Page 1402, line 7.
5 Question: Now, did Mr. Gordon ever tell you
6 anything regarding transfers as between his companies, as
7 it related to his situation with the information?
8 Answer: In terms of post-bankruptcy?
9 Question: At any time.
10 Answer: There was one occasion, I don't remember
11 when, when we were talking. And to the best of my recall
12 I asked him why there had been the sort of transfers that
13 occurred here as opposed to putting everything into one
14 company's name. And we talked about the other family
15 corporations. And I asked him, was he scared of Reed? Is
16 that why he did this? And he said, no, he was never
17 scared of Reed. He didn't think that Reed was going to
18 beat him. And that was never the reason for any of the
19 transfers.
20 Question: And in that discussion did he offer
21 any reason why he had undertaken these transfers?
22 Answer: I don't want to hedge. I don't recall
23 if there was a reason. But at that point he mentioned he
24 owed money to the IRS, and the conversation just left off.
25 Then I am reading from later in the page, page
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1 1403.
2 Question: Mr. Ackerman, let me show you
3 Government's Exhibit 3500-5-A. If you can look at pages
4 20 to 23 to yourself.
5 Answer: Yes.
6 Question: Now, does that refresh your
7 recollection, Mr. Ackerman, that Mr. Gordon told you that
8 one of the reasons for these transfers was the fact that
9 he owed the IRS money?
10 Answer: It came up in the context of this
11 conversation that I definitely recall why he had done the
12 transfers.
13 Question: And is it your recollection therefore
14 that Mr. Gordon told you one of the reasons of why he did
15 those transfers was the fact that he owed the IRS money?
16 Answer: I don't know if he used the words, one
17 of the reasons I am doing this is because I owed the IRS
18 money. But I remember it came up in the course of this
19 conversation. I do remember that I did not pursue it
20 much.
21 And then I would also read from page 1435,
22 starting at line 8, cross-examination of Mr. Ackerman by
23 Mr. Trabulus.
24 Is your recollection --
25 THE COURT: Question.
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1 MR. WHITE: I am sorry.
2 Question: Is your recollection of that
3 conversation very clear, the one you had with Mr. Gordon?
4 Answer: It is pretty clear.
5 Question: Is it not true that in talking about
6 the transfers you merely think that it was at that point
7 that he mentioned that he owed taxes?
8 Answer: It was in the context of that
9 conversation.
10 Question: Is it possible in that conversation
11 Mr. Gordon may have said that there were tax reasons for
12 the transfers, but not talking about the taxes that he
13 owed?
14 Answer: Not to the best of my recall.
15 Question: Your recollection is -- your
16 recollection is that he linked it to his own obligations?
17 Answer: He didn't link it. He said it.
18 Question: He said what?
19 Answer: He said, I have tax obligations. I was
20 asking why he had done -- why these things were done. And
21 he said, I have past -- I have back due taxes.
22 Q Mr. Rosenblatt, can you explain how it is that
23 multiple corporations, multiple bank accounts at multiple
24 different banks impedes the IRS in determining a
25 taxpayer's true finances?
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1 MR. TRABULUS: Objection.
2 THE COURT: Overruled.
3 A It makes it harder to trace the money. If the money
4 goes from one corporation to another, to a different bank
5 account, to a fourth bank account, it makes it much harder
6 to trace.
7 Q Now --
8 A Excuse me, can I add something to that?
9 Q Yes.
10 A In addition, in this case it was not disclosed to the
11 revenue officers that Mr. Gordon had any connection with
12 these companies, other than being an employee of Who's
13 Who.
14 MR. WALLENSTEIN: Objection. Move to strike as
15 not responsive.
16 MR. TRABULUS: Join in the objection.
17 THE COURT: Motion granted. It is not responsive
18 to the particular question. The latter part is stricken.
19 The jury is instructed to disregard it.
20 Q In this case, can you explain how the use of multiple
21 bank accounts and corporations might make it more
22 difficult for the IRS to determine a taxpayer's true
23 condition?
24 A When Mr. Gordon filled out the 430's, or Mr. Reffsin,
25 whoever filled them out, and there were discussions with
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1 the revenue officer, they never made him, the revenue
2 officer, Mr. Gagliardi, aware that Mr. Gordon was a
3 shareholder of Who's Who Worldwide, or that he had any
4 connection with any of the other companies.
5 Q Now, are you familiar with the IRS's procedures
6 regarding referral of matters from one division to
7 another?
8 A Yes.
9 Q And is there such a thing at the IRS of the
10 examination division?
11 A Yes.
12 Q Tell us what the examination division does?
13 A I am in the examination division. And the
14 examination division is responsible for the auditing of
15 tax returns to determine the correct tax liability.
16 Q And a revenue officer, such as Ms. Peters or
17 Mr. Gagliardi, what division are they in?
18 A They are in the collection division.
19 Q And what is their function in the collection
20 division?
21 A The collection division secures delinquent tax
22 returns, and they are responsible for collecting the taxes
23 that are assessed.
24 Q Is the collection division responsible for auditing
25 or investigating or examining a taxpayer's finances?
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1 A They do not audit the taxpayer.
2 Q Now, are you familiar with the procedures by which a
3 matter may be referred from the collection division to the
4 examination division?
5 A Yes.
6 Q Now, tell us --
7 THE COURT: Examination or audit?
8 MR. WHITE: I am sorry, examination division.
9 THE COURT: That's different from audit?
10 THE WITNESS: The same thing. It used to be
11 called the audit division. Now it is called the
12 examination division.
13 THE COURT: So, if the IRS wants to audit my tax
14 return, they now they now say they want to examine it?
15 THE WITNESS: You will get a letter from the
16 examination division.
17 THE COURT: I will?
18 THE WITNESS: One never knows.
19 MR. WHITE: You will not hold that against us, I
20 hope.
21 THE COURT: I am reserving decision on it.
22 Q Mr. Rosenblatt, are you familiar with the procedures
23 by which a matter could be referred from the collection
24 division to the examination division?
25 A Yes.
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1 Q Tell us how that would work.
2 A If the collection division is working on a case, and
3 they come across an incident where an audit has to be done
4 of a related party, they will refer it to the examination
5 division.
6 Q Now, when you say a related party, what do you mean?
7 A It could be another corporation, or another
8 individual, where there are transactions between parties.
9 Q Now, in your experience as an IRS revenue agent, are
10 you familiar with the circumstances under which a matter
11 would be referred from collection to examination?
12 A Yes.
13 Q Now, in this case if Mr. Gordon had disclosed to the
14 IRS that he had an interest in Who's Who Worldwide, would
15 such a referral have taken place?
16 A Yes.
17 Q Explain to us why.
18 A Because the revenue officer would want to see if the
19 proper income is being reported by Mr. Gordon; if there
20 are any other assets that he has in his possession, or has
21 in ownership. The revenue officer looks to collect an
22 existing tax liability. He wants to know what assets are
23 available to pay it, what income is available to pay it.
24 Q And if a matter we reported to the examination
25 division, what sort of official would be assigned to that
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 examination?
2 A A revenue agent, such as me.
3 Q Would you tell us what the typical modes of
4 investigation a revenue officer like yourself would follow
5 in those circumstances?
6 A He would examine the books and records of the entity
7 involved, he might make third-party contacts, serve
8 records on banks if records were not forthcoming, contact
9 payees on checks to determine the nature of an expenditure
10 and what it was for, things of that sort.
11 Q Now, in this case, if the books and records of Who's
12 Who Worldwide had been examined by a revenue agent such as
13 yourself, would the loan account of Mr. Gordon have been
14 discovered?
15 A Absolutely.
16 Q If in the course of a revenue agent's examination,
17 transfers to other corporations were identified, what in
18 the typical practice would a revenue
agent do?
19 A Identify the amount of the transfer and the purpose
20 for the transfer.
21 Q And if for example a transfer were to accompany, say,
22 Registry Publishing, what would you do with respect to
23 Registry Publishing?
24 A You would check their books and records to see what
25 they are doing.
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1 Q In this case if that had been done in 1994, would the
2 transfers reflected on Government's Exhibit 837 have been
3 disclosed or identified?
4 A Yes, they would have been identified.
5 Q Okay.
6 Now, if you can get out Exhibit 425, and it
7 should be in front of you.
8 A Yes.
9 Q Again, could you read for us the paragraph number 3
10 with respect to the compensation agreement of Mr. Gordon.
11 A Letter from the controller of Who's Who Worldwide
12 Registry, Inc. verifying the compensation agreement,
13 Mr. Gordon began January 1993. She verified this with
14 shareholders of the corporation.
15 Q And who is Exhibit 425 signed by?
16 A Martin Reffsin.
17 MR. WHITE: Your Honor, I have the actual
18 testimony cite now that I didn't have before.
19 I am going to read from the testimony of
20 Ms. Gaspar on January 27th, 1998 at page 1672.
21 MR. TRABULUS: Your Honor, objection.
22 THE COURT: What grounds?
23 MR. TRABULUS: Basically these are not forming
24 the predicates for questions to be asked of the witness.
25 It is virtually like a summation, referring to portions of
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 the testimony already in the record. In doing this he has
2 not sought to ask the witness anything about it.
3 THE COURT: I think the last time he did. I am
4 not quite sure.
5 What question are you going to ask this witness
6 based on this testimony?
7 MR. WHITE: Your Honor, I am going to ask him
8 what the affect would have been if this allegedly false
9 statement had not actually been made to the IRS.
10 THE COURT: You are referring to
11 Government's Exhibit 425?
12 MR. WHITE: Yes.
13 THE COURT: Paragraph 3 of that letter?
14 MR. WHITE: Yes.
15 THE COURT: Now, what is this testimony that you
16 are going to read have to do with that?
17 MR. WHITE: Paragraph 3 indicates that Ms. Gaspar
18 verified this agreement with the shareholders of the
19 corporation. That's what Mr. Reffsin told the IRS.
20 Ms. Gaspar testified she did not.
21 THE COURT: Why would that have to be brought up
22 now with this witness?
23 MR. WHITE: I will save time and I will skip it.
24 THE COURT: Your objection is sustained.
25 MR. WHITE: Your Honor, at this time I want to
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 read from Exhibit 816, which is in evidence, and not yet
2 read to the jury, which is Mr. Reffsin's deposition.
3 THE COURT: Has this got to do with a question to
4 this witness?
5 MR. WHITE: Yes.
6 THE COURT: All right.
7 MR. WHITE: Your Honor, I was going to began
8 reading a short portion on page 67. That testimony makes
9 reference to a financial document, which is at this trial
10 Government's Exhibit 660, the Who's Who Worldwide general
11 ledger for 1993.
12 Question: Next item, account 2011 investment
13 Publishing Venture -- let me go back and identify the
14 date.
15 This is a deposition of Mr. Reffsin from
May 3rd,
16 1994 in connection with the Who's Who Worldwide bankruptcy
17 proceedings.
18 Question: Next item, account 2011 investment
19 Publishing Ventures, Inc. with a little over one million
20 dollars. Do you know what that is?
21 Answer: That's an investment in a piece of real
22 estate, I believe in Port Washington.
23 Question: Do you know who the owner of
24 Publishing Ventures, Inc. is?
25 Answer: I believe they are the same as the
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 owners of Who's Who Worldwide Registry, Inc.
2 Question: The piece of real estate in Port
3 Washington, is that residential or commercial?
4 Answer: Residential.
5 Question: Do you know who resides there?
6 Answer: I am not sure. I think originally it
7 was set up to accommodate visitors for Who's Who
8 Worldwide. Mr. Gordon may use it on occasion.
9 Question: Is it his former residence?
10 Answer: No.
11 Question: Did he at one time reside there on a
12 full-time basis?
13 Answer: This is relatively new. It only
14 happened at the end of 1992, beginning of '93.
15 Question: Do you know, is this a single family
16 residence or condominium?
17 Answer: It's a condo.
18 Question: And the purchase price of the condo is
19 presumably approximately a million dollars?
20 Answer: No. There was, I believe, the original
21 purchase price was substantially less than that. But
22 there was a major renovation made to it.
23 Question: Is there a note that represents or
24 reflects this investment?
25 Answer: Yes.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 When was it --
2 THE COURT: Question.
3 MR. WHITE: When was it --
4 THE COURT: Question.
5 MR. WHITE: I am sorry, your Honor.
6 Question: When was it converted from an
7 investment to a note?
8 Answer: I believe the note was created early
9 '93, if I recall the date.
10 Question: Sometime --
11 Answer: Sometime around the time that the
12 property was acquired.
13 Q Now, Mr. Rosenblatt, tell us from your review of the
14 Publishing Ventures record when the Hummingbird Road
15 condominium was acquired by Publishing Ventures?
16 A I believe the down payment of $60,000 was made at the
17 very end of 1992.
18 Q And when was the closing on the condo?
19 A In early 1993. I am not sure of the date.
20 Q And, Mr. Reffsin's testimony there indicated that the
21 note between PVI and Worldwide was created around the time
22 the property was acquired; is
that right?
23 A Yes.
24 Q And take a look at Exhibit 671.
25 MR. TRABULUS: Objection, your Honor.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 Can we approach on this?
2 THE COURT: All right, come up.
3
4 (Whereupon, at this time the following took place
5 at the sidebar.)
6 MR. TRABULUS: Your Honor, what Mr. White is
7 doing here is utilizing questions and answers to
8 recapitulate testimony that has been given by other
9 witnesses on matters that this witness has no personal
10 knowledge on. And he is doing that to in a sense organize
11 it, really for summation type purposes. But he is trying
12 to establish that there is evidence now in the form of
13 671, which shows that the note was created not in 1993,
14 but around March 30th, of 1994. That evidence is already
15
in the record. All that is happening here is it is being
16 repeated. I think it is prejudicial. He can certainly
17 ask the witness would it have made a difference? Had it
18 affected the IRS's determination if the note had been
19 created in 1990 --
20 MR. WALLENSTEIN: Don't give him any ideas.
21 MR. TRABULUS: I am trying to say it is being
22 done in a way which is just repeating the testimony.
23 THE COURT: I agree. It is like you are over
24 doing this. It is like asking the physician a
25 hypothetical based on the hospital record, that's one
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 thing. A lot of this is just reiterating what is in the
2 record already.
3 MR. WHITE: Your Honor, I agree -- I have to
4 humbly agree is that what I was doing a little while
5 before. This conflict has not yet been brought out.
6 THE COURT: What conflict?
7 MR. WHITE: I just read for the first time to the
8 jury Mr. Reffsin's statement that the promissory note was
9 created around the time the property was acquired, late
10 '92, early '93.
11 We have on this exhibit, in fact a draft of this
12 note was faxed to Mr. Reffsin, March 30th, 1994.
13 THE COURT: It is in evidence already.
14 MR. WHITE: Yes.
15 THE COURT: Tell the jury about it in summation.
16 You will not go over everything twice.
17 MR. WHITE: Your Honor, it is my last question,
18 if he can identify the date and this contains --
19 THE COURT: Why does he have to? It is in
20 evidence.
21 MR. WHITE: We have 20 volumes of documents in
22 evidence, we have to be able to present it in a way
23 comprehensible to the jury.
24 THE COURT: Why does this witness have any
25 ability to do that?
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1 MR. WHITE: He doesn't. But at this point is
2 when I just read it in. I can have a witness read from a
3 document in evidence.
4 THE COURT: The jury heard that, and they heard
5 this, 671. You already brought in evidence that these
6 notes were made in 1994. That's enough. You can comment
7 on it in summation.
8 MR. WHITE: Your Honor, the jury hasn't been
9 handed this --
10 THE COURT: They have not been handed 671?
11 MR. WHITE: I don't believe so.
12 MS. SCOTT: They have.
13 MR. WHITE: Okay.
14 THE COURT: They have it and it is done already.
15 MR. WHITE: I have not pointed out at this point,
16 that we focussed on other documents, including this fax,
17 and not the one we are talking about now.
18 THE COURT: What is it
true one we are talking
19 about now?
20 MR. WHITE: There is a document right here, which
21 is the note that Mr. Reffsin says was created two years
22 earlier. In fact, it was created two weeks before this
23 testimony I just read.
24 THE COURT: How much more of this type do you
25 have?
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1 MR. WHITE: This is my last one.
2 THE COURT: I will allow it. Overruled, on that
3 representation.
4
5 (Whereupon, at this time the following takes
6 place in open court.)
7 Q Mr. Rosenblatt, do you have Exhibit 671 in front of
8 you?
9 A Yes.
10 MR. WHITE: That has been handed out to the jury.
11 Q If you can take a look at the first two-pages after
12 the fax cover sheet, just tell us what that is.
13 A It is a promissory note
between Publishing Ventures,
14 Inc. and Who's Who Worldwide Registry, Inc.
15 Q If you look on the second page of the note, is it
16 signed?
17 A No.
18 Q If you look at the top, does it have a date on it?
19 A The top of page 2?
20 Q I am sorry, the top of page 1 of the promissory note?
21 A Yes.
22 Q What does it say?
23 A January 31st, 1993.
24 Q If you flip back to the cover page of 671, what is
25 the date this was fax by Mr. Reffsin to Mr. Gordon?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-direct/White
1 A March 30th, 1994.
2 Q Does the fax cover page make reference to the
3 promissory notes?
4 A Yes.
5 Q And Mr. Reffsin's deposition testimony that I just
6 read was from May 3rd, 1994. When is that in relation to
7 when this fax was sent?
8 A About a month later
-- yes, about a month later.
9 MR. WHITE: No further questions, your Honor.
10 THE COURT: Cross-examination.
11 MR. TRABULUS: Your Honor, Mr. Wallenstein is
12 going to precede me.
13 MR. WALLENSTEIN: If I can have just a moment,
14 your Honor?
15 THE COURT: Do you want to take down this barrier
16 between me and the jury?
17 MR. WHITE: Yes, your Honor.
18
19 CROSS-EXAMINATION
20 BY MR. WALLENSTEIN:
21 Q Good afternoon, Mr. Rosenblatt.
22 A Good afternoon.
23 Q Mr. Rosenblatt, you testified there are a number of
24 divisions to the IRS?
25 A Yes.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2211
Rosenblatt-cross/Wallenstein
1 Q You are part of the examination division?
2 A Yes.
3 Q Which used to be the audit division?
4 A Yes.
5 Q With a kinder and gentler IRS you are
now examining
6 things and not auditing them?
7 A I guess.
8 Q We don't have to be afraid of you any more, you are
9 now just examining.
10 The collection division is the one looking for
11 the money?
12 A That's correct.
13 Q And your division is the one that is really doing the
14 hard digging; is that a fair statement?
15 A We do the investigation to make the assessments.
16 Once the assessments is on the books, it is up to the
17 collection division to collect.
18 Q Okay.
19 If something is being handled by the collection
20 division, and the revenue officer such as Mr. Gagliardi in
21 the collection division comes up with something that they
22 feel ought to be examined by your division, do they have
23 the authority to refer it over to you?
24 A Yes.
25 Q And if a revenue officer such as Mr. Gagliardi feels
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 he needs more documentation, does he have the power to ask
2 for it?
3 A Yes, he does.
4 Q And if he is not getting it from the taxpayer, does
5 he have the authority to obtain it from other sources?
6 A Yes.
7 Q If, for instance, he needs a return of a corporation
8 in which the taxpayer is a shareholder or an officer, and
9 the taxpayer refuses to produce the returns, could he go
10 to the corporation to get it?
11 A Yes.
12 Q Can he get them from the IRS's own files?
13 A Yes.
14 Q Does he need any particular authority to do that, or
15 can he simply say I need these in connection with this
16 investigation, and, therefore, please provide these
17 copies?
18 A He has to have an open investigation to be able to
19 show that it is related.
20 Q So, if, for example, a revenue officer in the
21 collection division were examining Mr. Gordon's personal
22 taxes, and made a determination that Mr. Gordon was the
23 president of Who's Who Worldwide, and felt that he needed
24 the returns of Who's Who Worldwide in order to determine
25 whether or not Mr. Gordon was appropriately reporting
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2213
Rosenblatt-cross/Wallenstein
1 income, all he had to do was get them; is that a fair
2 statement?
3 A I can't answer that yes or no.
4 Q Would he have the authority to obtain the returns of
5 Who's Who Worldwide in that circumstance?
6 A No.
7 Q Why not?
8 A Mr. Gordon -- in that circumstance Mr. Gordon is not
9 known to be an owner. He is a president. He is an
10 employee. You can't just obtain the employer's tax
11
returns.
12 Q If there were information before that revenue
13 officer, which indicated that Mr. Gordon was a
14 shareholder, without regard to percentage, would that be
15 sufficient to enable him to obtain the corporate returns?
16 A If he knew he was a shareholder, I would say yes.
17 Q Now, you said that Mr. Gordon -- if Mr. Gordon had
18 revealed a relationship with Who's Who Worldwide in
19 connection with Mr. Gagliardi's investigation, that he
20 would have referred it to your division?
21 A Could have referred it.
22 Q Could have revered it?
23 A Could have referred it.
24 Q Would it be a fair statement that your testimony here
25 in 19knee is to some extent based on 20/20 hindsight?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2214
Rosenblatt-cross/Wallenstein
1 A It is based upon the same thing that all examinations
2 are. You never examine someone before a return is filed.
3 It is always after it is filed.
4 Q Well, at the point in time where you undertake your
5 investigation, there are facts known to you or on file
6 with the IRS that were not known at the time of the
7 initial filing; is that a fair statement?
8 A It is possible.
9 Q Can we refer --
10 (Counsel confer.)
11 MR. WALLENSTEIN: Bear with me a minute, Judge?
12 THE COURT: Yes.
13 (Whereupon, at this time there was a pause in the
14 proceedings.)
15 Q Do you have Government's Exhibit 1404?
16 A Yes.
17 Q And that would be your computation of Mr. Gordon's
18 additional taxable income for the years, 1991 through
19 1994; correct?
20 A Yes.
21 Q Would it be a fair statement that your computation of
22 the additional taxable income is based on the additional
23 income which you imputed to Mr. Gordon?
24 A It is based on my belief that certain items are
25 income, yes.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 Q And would it be a fair statement that there might be
2 another revenue agent somewhere in the IRS hierarchy who
3 would disagree with that assessment?
4 A Possible.
5 Q And would it be a fair statement that there are
6 accountants, tax preparers, tax attorneys, and so on who
7 might also disagree with that statement?
8 A That's also possible.
9 Q Reasonable men can differ, correct?
10 A Yes.
11 Q And would it be a fair statement that the basis of
12 this additional income is, as you said, your belief that
13 the payments made by Who's Who Worldwide and the other
14 companies on behalf of Mr. Gordon for personal expenses
15 were income
rather than loans?
16 A That's correct.
17 Q If in fact those items were determined to be loans,
18 they would not be income to him; is that correct?
19 A Yes.
20 Q And, therefore, if they were determined to be loans
21 and not income to him, this exhibit means nothing, because
22 all of these numbers are irrelevant; is that correct?
23 A Just the top part of the exhibit.
24 Q Well --
25 A The first four lines. It would have nothing to do
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 with the condominium or the penthouse.
2 Q Let's talk about that for a minute.
3 The 1993 payments of $41,000 is the fair rental
4 value of the condominium, correct?
5 A Yes.
6 Q And the same would apply to the $45,000 figure for
7 1994; is that correct?
8 A Yes.
9 Q The same would
apply to the roughly $3,000 figure for
10 the penthouse?
11 A Yes.
12 Q And that's based on factors you used for the loans or
13 based on something else?
14 A It is based on the factors that this appears to be
15 Mr. Government's residence, both of them, and he was
16 receiving the benefit that the corporation was paying for
17 it.
18 Q But if those were in fact loans to him as well, and
19 if he intended to, and ultimately did pay them back, they
20 would not be income here either; is that right?
21 A I can't answer that yes or no.
22 Q But if they were in fact loans, if that were the
23 determination, based on the factors which you outlined,
24 they would then not be income; is that right?
25 A If they were loans, yes. But they were not recorded
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2217
Rosenblatt-cross/Wallenstein
1 as loans.
2 Q Now, the factors that you used to determine whether
3 something is a loan, would it be a fair statement that
4 those factors are somewhat subjective?
5 A Yes. They are based upon facts and circumstances,
6 and it varies from case to case.
7 Q And examiner to examiner?
8 A It could, yes.
9 Q It is not an unusual circumstance to have a
10 corporation pay expenses on behalf of an executive, is it?
11 A No.
12 Q Particularly, if that executive is a shareholder,
13 correct?
14 A That's correct.
15 Q And that would be particularly so in a corporation
16 owned by a small number of shareholders as opposed to a
17 large public corporation, correct?
18 A Yes.
19 Q If those loans are made to the corporate executives,
20 you use a number of factors to decide as to whether they
21 are really loans or really income; is that correct?
22 A Yes.
23 Q How often does such an examination occur in your
24 experience?
25 A It could happen on almost every corporate audit that
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2218
Rosenblatt-cross/Wallenstein
1 happens, takes place in the United States.
2 Q Do you do it on a corporate audit or an individual
3 audit? And is there a difference?
4 A When you do a corporate audit you will see the loans
5 to shareholder account. And that's where the issue always
6 arises, unless it is a very small amount. In any other
7 case, that is going to be an item that is going to be
8 looked at.
9 Q You are going to see a loan to shareholder or loan to
10 officer account in virtually every small closely held
11 corporation in America, isn't that right?
12 A No, I wouldn't say all.
13 Q Is it a common practice for a closely held
14 corporation to lend money to it officers or shareholders?
15 A It is a common practice.
16 Q In fact, it is a way for officers or shareholders to
17 take compensation over and above W-2 compensation; is that
18 correct?
19 A It is a way for them to get money.
20 Q All right.
21 It may be as a result of the cash flow of the
22 corporation; is that right?
23 A I don't see where it would benefit them in the cash
24 flow. Money is still going out, whether they call it
25 salary or loan.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2219
Rosenblatt-cross/Wallenstein
1 Q Whatever they may call it, they may be looking for
2 some additional monies over and above their weekly draw;
3 would that be a fair statement?
4 A Yes.
5 Q So they take a loan and ultimately either pay it back
6 or call
it what it really is, which is salary, and pay
7 taxes, correct?
8 A Yes.
9 Q And that's not uncommon, is it?
10 A No.
11 Q It is not improper either, is it?
12 A No.
13 Q In fact, if a shareholder or an officer were to take
14 a couple of hundred thousand dollars from the corporation
15 over a period of time, and pay it back over a period of
16 time by declaring it as income, even in increments, that
17 would be okay, right?
18 A That would be one factor to look at, yes.
19 Q Well, if that were done, would there be anything
20 wrong with it?
21 A You are not giving me enough information.
22 Q Okay.
23 Supposing -- well, if a shareholder of a
24 corporation were to take over the course of two years
25 $200,000 from the corporation in the form of loans, by
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2220
Rosenblatt-cross/Wallenstein
1 having that corporation pay certain personal expense and
2 recording every dollar on the books of the corporation as
3 a loan to an officer, and then at the end of the year when
4 it became tax time, to pick up a percentage of that as
5 income, without taking a check for it -- for instance, in
6 the example that I am not so very well attempting to give
7 you, if the $200,000 were borrowed, and at the end of the
8 first year, the taxpayer were to pick up an additional 30
9 or 40 thousand dollars as income, without taking the money
10 at that time, and were to do the same thing the following
11 year, not maybe the same amount, but a good number, would
12 there be anything wrong with that situation?
13 A There could be.
14 Q Well, would that be something that you would consider
15 to be a loan?
16 A The 30,000 that was paid back w
ouldn't be.
17 Q Now, at the point the taxpayer takes the 30,000, and
18 calls it salary or dividend or some kind of personal
19 distribution, and reports it on his personal 1040, he pays
20 taxes on it at that point. Is that correct about?
21 A Yes.
22 Q He reports it as income?
23 A Yes.
24 Q He is not taking a check from the corporation, he is
25 already taking that income from the corporation paying his
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2221
Rosenblatt-cross/Wallenstein
1 expenses; is that right?
2 A Yes.
3 Q At the point in time the corporation writes the check
4 for expenses, be it American Express, Toyota, whatever it
5 may be, when the corporation writes that check and puts on
6 the books as a loan to an officer, at that point in time
7 it becomes an asset of the corporation; is that correct?
8
A Yes.
9 Q It is money that is owed to the corporation?
10 A Yes.
11 Q And if the taxpayer takes money from another source,
12 whatever the source and pays it back to the corporation,
13 that wipes out the loan; it is a repayment; is that
14 correct?
15 A If the individual to whom the money went to, pays it
16 back, yes.
17 Q Does it have to be the individual to whom the money
18 went to?
19 A I mean, you can't just say that money coming into the
20 corporation to purchase a product of the corporation can't
21 just be converted from income of the corporation to a
22 repayment of the loan.
23 Q I agree with that.
24 But, supposing that I owe the corporation
25 $200,000, and I go to my brother-in-law, and I say, look,
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2222
Rosenblatt-cross/Wallenstein
1 I have to
pay this loan back, and I haven't got it. Can I
2 borrow $200,000 from you, and he says sure.
3 Who do you want to make the check out to?
4 Make it to the corporation.
5 I deposit the check to the corporation account.
6 And I say that that check now is a repayment to my loan.
7 Anything wrong with that?
8 A Nothing. But you have a loan to the other party.
9 Q Yes. I owe my brother-in-law $200,000, he is never
10 going to see it, but the corporation sees it?
11 A Yes, the same as if you went out to the bank and
12 borrowed the money.
13 Q I no longer have a loan to the corporation, and that
14 loan was an individual loan, to the extent it was paid
15 back; is that right?
16 A Yes.
17 Q And my obligation to my brother-in-law is completely
18 outside the scope of the corporation at this point; is
19 that correct?
20 A Yes.
21 Q It has
nothing to do with anything, whether I pay him
22 back a dollar a week or never pay him back is something
23 you will not be concerned with; is that correct?
24 A No.
25 Q Why are you going to be concerned with?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2223
Rosenblatt-cross/Wallenstein
1 A There is a phrase called forgiveness of debt which
2 could become income, too.
3 Q If at some point he decides to forgive the debt, at
4 that point the $200,000 that he loaned me to pay back the
5 other debt becomes income to me, correct?
6 A Yes.
7 Q Would it be fair to say though that the passage of
8 time would be a factor in your determining as to whether
9 or not that debt has been forgiven?
10 A It is one factor to look at.
11 Q If I borrow money from a bank, I have to sign a note
12 and they have to make me pay it back at X dollars a note
13 over X interest rate over a period of years; is that
14 correct?
15 A Yes.
16 Q If I don't make those installment payments they are
17 coming after me, right?
18 A Yes.
19 Q My brother-in-law may not have those resources, and
20 he may not care how long it takes me to pay back that
21 $200,000; is that right?
22 A Possible.
23 Q Now, let's assume he doesn't, and he says to me,
24 look, I will lend you the money. Pay it back when you
25 can, and the fact that I don't pay it backs for a number
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2224
Rosenblatt-cross/Wallenstein
1 of years, doesn't mean he has forgiven the debt, does it?
2 A No.
3 Q It doesn't become income to me to the point in time
4 he says to me, forget it, I know you will never have it, I
5 know you will never pay it, so don't
bother. At that
6 point it becomes income to me, right?
7 A Yes.
8 Q If at that point I say to him, no, no. I insist. I
9 will pay it back. I just can't do it right now, is it
10 income?
11 A Based upon the simplified process you are going
12 through, no.
13 Q And the amount of time that passes before there is
14 either a repayment or a forgiveness or some actions with
15 respect to the loan is a subjective factor, but one you
16 would use in determining whether or not that was really
17 income; am I right?
18 A Yes.
19 Q So, if, for instance, my brother-in-law was to lend
20 me that $2,000 in January of 1993, would it be a fair
21 statement that it might not be until 1997, 1998, or even
22 the year 2005 before the IRS says, wait a minute, he has
23 really forgiven that loan?
24 A You have to be under audit first for the IRS to say
25 anything.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
2225
Rosenblatt-cross/Wallenstein
1 Q All right. But if you did an audit in 1996, for
2 instance, and you saw that loan from my brother-in-law
3 which was not paid, and doesn't bear any interest, and
4 there has been no efforts made to repay that loan because
5 he is my brother-in-law, and he knows I am a deadbeat, and
6 if at that point three years after he has made that loan
7 to me, would that be considered forgiveness, or is it
8 still considered a loan at that point if both of us say
9 so?
10 A If there is an agreement at that point that no one is
11 trying to collect and no one is trying to default, yes, it
12 is still a loan.
13 Q It is still a loan?
14 A Yes.
15 Q And it is not income to me, is it?
16 A No.
17 Q I have already wiped out the other loan by taking the
18 money from him and paying back the corporate debt back in
19 1993; is that correct?
20 A Yes.
21 Q If for example at the end of 1992 I owed the
22 corporation, which is my employer $250,000 in round
23 numbers, and it is carried on the books of the corporation
24 as a loan to me, and in January of 1993 I borrow that
25 money, or part of it anyway, from my brother-in-law by
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 asking him to write a check to the corporation, which he
2 does, which gets deposited into the corporate accounts,
3 and I say to him, thanks, I appreciate it, I have now paid
4 back my loan to the corporation, there is nothing wrong
5 with that, is there?
6 A No.
7 Q And at that point the money, the $250,000 that I owed
8 to the corporation is now, A, no longer owed to the
9 corporation, and, B, not income to me. Am I right?
10 A That's correct.
11 Q Some of the factors you use in deciding what is a
12 loan and what is not a loan are to a large extent your
13 personal belief, correct?
14 A No.
15 Q Let me rephrase that.
16 The factors themselves are laid out for you in
17 the case law in IRS practice, in revenue rulings and such,
18 correct?
19 A Yes.
20 Q Your application of them is just that, your
21 application of them; is that correct?
22 A That's true.
23 Q The degree of corporate control we indicated was one
24 of the factors, correct?
25 A Yes.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 Q That refers to the control that an individual has
2 over the assets and liabilities of the corporation?
3 A Over the assets and liabilities of the check account,
4 over the decision making.
5 Q Okay.
6 Does the percentage of the corporation which that
7 individual owns enter into your calculation?
8 A No, because the percentage is not relevant in saying
9 who has control over the checking account and who writes
10 out the checks and signs the checks.
11 Q Now, that is one factor, correct?
12 A Yes.
13 Q Of the factors you enumerated yesterday, which is the
14 most important event?
15 A I couldn't just say one. If I had to say, it would
16 be the amount of control and the ability to repay.
17 Q That's two.
18 A That's what I am saying. I couldn't say one.
19 Q The others are less important than those?
20 A They are all important. It is hard to say one is --
21 I wouldn't use the term lesser. The other might be more
22 important. The others are
important as well.
23 Q I got seven. How many did you have?
24 A I have no recollection of how many I listed.
25 Q Okay.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 I may have taken them down in a different order
2 than you gave them to us.
3 Are you saying then, Mr. Rosenblatt, that there
4 are none of the factors more important than the other, and
5 none more significant in your analysis?
6 A No, I think the two I just mentioned may be more
7 significant.
8 Q Okay.
9 Would it be a fair statement that there are other
10 revenue agents who might disagree with that?
11 A It could happen on a case by case basis, yes.
12 Q Well, the factors that you talked about are written
13 down some place, in a manual for revenue agents or
14 something similar to that?
15 A I don't know if they are in a manual, but they are
16 certainly in the case law.
17 Q Does every revenue agent in the IRS use the same set
18 of factors?
19 A Like in any other field and endeavor, there are some
20 agents who are better than others. Some might do more
21 research than others. I mean all the material is
22 available for each one of us.
23 Q Is there a memo, a manual, a directive, office
24 policy, anything like that in the IRS that says when you
25 do this examination, these are the factors you do in
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 determining whether a particular dollar amount is a loan
2 or income?
3 A There might be in the manual, there might be
4 references to loans from shareholder accounts, what to
5 look for.
6 Q You are familiar with the manuals, no?
7
A I haven't read it in a quite a while.
8 Q When is the last time you read it?
9 A Different sections at different times.
10 Q When is the last time you read the section that deals
11 with loan to shareholder accounts?
12 A It could be 20 years ago.
13 Q Would you say there might be some changes in the law
14 and the factors between then and now?
15 A Not really.
16 Q So, the IRS is operating on 20 year old principals?
17 A No. I mean the same factors would apply.
18 Q And those factors are laid out in the manual, under
19 loans to shareholders, this is what you look for, or
20 something similar to that?
21 A They could be. I am not sure.
22 Q Do you have a copy of that manual?
23 A No.
24 Q Can you get us one by Monday?
25 A I haven't gotten a manual in say, 20 years.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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1 Q Can you get us the 20 year old manual you last read?
2 A I wouldn't even know where to look.
3 MR. WALLENSTEIN: Judge, I think we would be
4 entitled to that since he apparently relied on it in his
5 determinations.
6 THE COURT: He says he doesn't have one and
7 hasn't seen one for probably 20 years. What would you
8 like him to do?
9 Q It is an IRS official publication, is it not,
10 Mr. Rosenblatt?
11 A The internal revenue manual, yes.
12 MR. WALLENSTEIN: The IRS would --
13 THE COURT: You want an IRS manual, the IRS
14 manual on the factors in determining whether a payment of
15 money is a loan or taxable income?
16 MR. WALLENSTEIN: Yes.
17 THE COURT: Is there such a manual?
18 THE WITNESS: I am not sure. There might be. I
19 am not sure. There might be.
20 THE COURT: Would you look over the weekend?
21 That is not going to give you much time. Does the
22 government pay you overtime if you look over the weekend?
23 THE WITNESS: No.
24 THE COURT: Well, look anyway. See if you can
25 find it.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 Q You indicated one of the factors you employ is the
2 repayment history; is that correct?
3 A Yes.
4 Q And is that related specifically to that particular
5 loan or to a general repayment history on the part of the
6 taxpayer?
7 A On that particular loan.
8 Q So, to go back to my example, if I borrowed $250,000
9 from the corporation over the course of a year or two
10 years by virtue of having the corporation pay my expenses,
11 if I then go and pay back $200,000 of that or more, and
12 then have the corporation continue that practice, would
13 that repayment be a factor that would be in the taxpayer's
14 favor in that circumstance?
15 A I don't know what you meant when you put in, and
16 continued that pattern.
17 Q Okay.
18 The taxpayer causes the corporation to pay his
19 personal expenses for the years 1991 and 1992, American
20 Express, BMW, Mercedes, rent, whatever it might be. By
21 checks on a regular basis, irregular basis, some small,
22 some large. But the total at the end of 1992 is somewhere
23 in the neighborhood of $250,000.
24 In January of 1993, the taxpayer borrows $235,000
25 from his brother-in-law and gives it to his corporation,
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
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Rosenblatt-cross/Wallenstein
1 to the corporation, and on the books of the corporation
2 they indicates that the loan account has now been repaid
3 by that amount.
4 Thereafter, after that $235,000 is recorded on
5 the books as a repayment of a loan, the taxpayer continues
6 to cause the corporation to pay his personal expenses.
7 You are with me so far?
8 A Yes.
9 Q When it comes time in 1994 for you to look at whether
10 or not that additional expense, those additional loans are
11 loans or income, would you look at that $235,000 payment
12 as a positive factor for the taxpayer in terms of the
13 repayment history factor?
14 A I would want to see if it was a bona fide loan. If
15 it was a bona fide loan, yes, then it would be in the
16 taxpayer's best interest.
17 Q Now you lost me.
18 You would want to know if the original 250 was a
19 bona fide loan or the 235 used to repay?
20 A The 235.
21 Q If the taxpayer says my brother-in-law wrote the
22 checks. Here they are. He wrote it to the corporation,
23 because I said to my brother-in-law, I would like to
24 borrow some money, and he said oh; and I put it back in
25 the corporate account and I paid off the loan. And in
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1 fact, my brother-in-law said, that's right, I asked him to
2 borrow some money, and I loaned it to him. Does that make
3 it a bona fide loan?
4 A I would also want to see if there are any loan
5 documents between the two.
6 Q There are not. My brother-in-law trusts me, fool
7 that he is. There are no documents, no notes. There is a
8 check. And I say that that check was money that I
9 borrowed from me, and he says that that check was money I
10 borrowed from him. Is that a loan?
11 A I would like to see where he came up from the money,
12 if money from the corporation went to him to pay the loan
13 or something of that sort.
14 Q What difference would it make to where he came up
15 with the money? It is his money?
16 A If the money came from the corporation that was
17 paying the expenses of the individual, and that
18 corporation sent money to the brother-in-law who then gave
19 it back to the corporation, it would be very questionable.
20 Q In your hypothetical, which I assume is only a
21 hypothetical.
22 If the brother-in-law got the money from the
23 corporation in the form of whatever you want to call it,
24 corporate distribution, salary, dividend, because the
25 brother-in-law was a shareholder of the corporation, and
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1 had rendered some services to the corporation, and the
2 brother-in-law paid taxes on that amount of money,
3 declared it as income and paid his taxes on it, it is his
4 money, isn't it?
5 A At that point it is his money to do with it as he
6 pleases.
7 Q Including lending it to me a month later to do with
8 it as I see fit; is that right?
9 A That's his right.
10 Q So, if my brother-in-law, for instance, were to get
11 $400,000 in 1992, from a corporation that I controlled in
12 the form of some corporate distribution, and the way he
13 got that was in a couple of checks which totalled $400,000
14 net of federal taxes, and, therefore, 300 some odd
15 thousand, and he were to take that money and pay his state
16 taxes on it, assuming for a moment that my brother-in-law
17 lives in California, and he pays his state taxes on it,
18 and what he has left is $235,000, and a month later I call
19 him up and I say, look, can you do me a favor, I need some
20 money, can I borrow say $235,000?
21 He says, sure, no problem. Who do you want me to
22 make the check out to?
23 I say, you know, make it out to the corporation,
24 because I owe the corporation some money any how, and
25 that's really what I am going to use it for.
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1 THE COURT: Please slow down, Mr. Wallenstein.
2 MR. WALLENSTEIN: I got lost in my own argument.
3 Q If I take at that time $235,000, and I then put it
4 back in the corporation, and on the books of the
5 corporation I record that as a repayment of the loan that
6 I owe, would it be a fair statement that under those
7 circumstances I have borrowed the money from my
8 brother-in-law, and I have an obligation to him, but I no
9 longer have that obligation to the corporation; is that
10 correct?
11 A In your hypothetical, if the loan from the
12 brother-in-law was to you, the individual, yes.
13 Q In order for it to be a loan to me, the individual,
14 it doesn't necessarily have to be a check made out to me,
15 does it?
16 A No.
17 Q I can use -- I can ask him to make the check out
18 directly to the person or entity that I owe the money to,
19 right?
20 A Yes.
21 Q And under that hypothetical, it is my
22 brother-in-law's money, he can do what he wants with it,
23 and what he has chosen to do is to lend it to me for my
24 own purposes. And what I have chosen to do was to pay off
25 my debt to the corporation. All of that is kosher and
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1 above board, yes?
2 A In your hypothetical, yes.
3 Q Would
that be considered by you, that repayment, that
4 $235,000, would it be considered by you in the taxpayer's
5 favor, in this case, me, when you are looking at my books
6 in 1994 or 1995 and deciding whether or not the expenses I
7 decided to pay off since that time were loans or income?
8 A Again, it would go back to whether the loan was bona
9 fide. If it is a bona fide, loan, yes.
10 Q Under the circumstances I have outlined, and I will
11 not go through with that -- through this again, it is a
12 bona fide loan?
13 A It is a bona fide loan, yes.
14 Q Thank you.
15 You indicated the presence or absence of loan
16 documents or some kind of formalization of the loan would
17 be a factor?
18 A Yes.
19 Q And that refers to whether or not the monies from the
20 corporation used to pay my personal expenses are loans or
21 just anyone?
22 A Can
you repeat that?
23 Q I don't think so. Let me rephrase it.
24 A Rephrase it.
25 Q The presence or absence of loan documents is a
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1 factor?
2 A Yes.
3 Q And would that apply to any loan or simply a loan
4 carried on corporate books because personal expenses were
5 paid?
6 A It would have nothing to do with the personal
7 expenses. It would have to do -- it is basically
8 something you look at in a situation where there is
9 controlling shareholder and his corporation. It wouldn't
10 account -- you know, be taken into account when you deal
11 with taking a loan from a bank, because there are always
12 documents.
13 Q So, you are looking then for loan documents in a
14 close situation rather than an arms length bank type
15 situation?
16 A Yes, that's the -- what the loan to shareholder
17 situation is.
18 Q You will not always find documents in a situation; is
19 that right?
20 A No.
21 Q In a situation where you don't find documents, does
22 that mean the loan -- situation is not a loan?
23 A No, that's one of the factors.
24 Q What is a loan document?
25 A A float, a promissory note, a repayment schedule,
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1 some kind of security interest, like I am loaning you this
2 money, and I want title to your car if you don't repay it
3 or something.
4 Q Would a cancelled check be a loan document?
5 A Yes.
6 Q Would an entry on corporate books that ultimately
7 finds it way through the corporate accounts and on to a
8 form 1120, a corporate tax return, would that be a loan
9 document?
10 A Yes. That's why in this case the formalized
11 documents aren't as important, because the individual is
12 in control of the corporation.
13 Q Would the fact that the books of the corporation,
14 although kept by a full-time employee are ultimately
15 reviewed by an outside certified public accountant make
16 them more or less suspect in your mind?
17 A If the accountant is not certifying these records;
18 like if IBM files a tax return or financial statement, or
19 someone says we reviewed all of this and in typical
20 language for it, I mean it wouldn't apply here.
21 Q The fact that an accountant didn't certify the
22 financial statements is not a reflex on either the
23 accountant or the corporation, is it?
24 A No.
25 Q Only in certain circumstances where financial
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1 statements are required to be certified; is that correct?
2 A Yes.
3 Q The Securities and Exchange Commission for example?
4 A Yes.
5 Q And you under the circumstances here, in this case,
6 the books of Who's Who were not required to be certified;
7 is that correct?
8 A To my knowledge.
9 Q The term of the note -- excuse me, the term of the
10 loan is something that you said was a factor in
11 determining whether or not it was a loan or income; is
12 that correct?
13 A Yes.
14 Q And by the term of the loan, you mean the maturity,
15 how long it is going to take before it is to be repaid; is
16 that correct?
17 A Yes.
18 Q The interest rate, if any?
19 A Yes.
20 Q What else would be the terms that you would be
21 concerned with?
22 A The length of time it is outstanding.
23 Q At what point does a loan become unreasonable or
24 become considered by you to be income if it is outstanding
25 for too long?
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1 A That's a subjective determination made on a case by
2 case basis.
3 Q All right.
4 Five years, ten years?
5 A Five years without any repayments, yes.
6 Q Ten years without repayments?
7 A Absolutely.
8 Q How about three years with some repayments?
9 A It depends on the amount of the loan, the amount of
10 the repayments.
11 Q What about a situation where although there is a
12 substantial amount of money loaned, again by virtue of
13 payment of personal expenses, the repayments are smaller
14 than you would like to see, but in fact are based upon
15 current income and projections of future income? Is that
16 clear?
17 A No.
18 Q I didn't think so.
19 Supposing a corporation is owed $250,000, and
20 what is paid back is about $50,000 at the end of a
21 particular year, say a year and a half or two years into
22 the loan, by not -- not by direct payment, but by the
23 taxpayer's recognition of $50,000 as income that would be
24 an appropriate method of repayment?
25 A Yes.
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1 Q And at that point the taxpayer becomes liable for the
2 taxes on the $50,000 that he has recognized; is that
3 right?
4 A Yes.
5 Q Is it the corporate asset, which is the money that is
6 owed to him has in fact been reduced and become an expense
7 in the form of payroll or salary; is that correct?
8 A Yes.
9 Q Thereby reducing the corporate tax liability as well,
10 correct?
11 A Yes.
12 Q Well, at the same time increasing the individual's
13 tax liability?
14 A That's correct.
15 Q Because he now has to pay taxes on that 50 grand that
16 he has recognized?
17 A That's correct.
18 Q If that repayment occurs say two years down the line,
19 and the following year the taxpayer recognizes more income
20 in the same fashion, and the year after that, the company
21 files for bankruptcy, thereby putting everything that the
22 corporation has to do financially under the microscope of
23 the bankruptcy court, would you at that point look at
24 those two recognitions of income as a repayment in the
25 taxpayer's favor? Let's start with that question.
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1 A
Yes. When it was recognized as income, yes.
2 Q And would you recognize at that point that the
3 corporate bankruptcy has a substantial effect on the
4 ability of the corporation to make -- withdrawn.
5 Does the fact that the corporation declares
6 bankruptcy, prevent the corporation from converting assets
7 into expenses?
8 A I am not familiar with bankruptcy court policy.
9 Q Okay.
10 Do you know whether or not |