2135 1 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK 2 - - - - - - - - - - - - - - X 3 UNITED STATES OF AMERICA, : CR 96 1016(S-1) 4 v. : U.S. Courthouse 5 Uniondale, New York BRUCE W. GORDON, WHO'S WHO 6 WORLD WIDE REGISTRY, INC., : STERLING WHO'S WHO, INC., 7 TARA GARBOSKI, ORAL FRANK : OSMAN, LAURA WEITZ, ANNETTE 8 HALEY, SCOTT MICHAELSON, : STEVE RUBIN, and MARTIN 9 REFFSIN, : TRANSCRIPT OF TRAIL 10 Defendants. :January 30, 1998 11 - - - - - - - - - - - - - - X 1:15 o'clock p.m. 12 BEFORE: 13 HONORABLE ARTHUR D. SPATT, U.S.D.J. and a jury 14 APPEARANCES: 15 For the Government: ZACHARY W. CARTER 16 United States Attorney One Pierrepont Plaza 17 Brooklyn, New York 11201 By: RONALD G. WHITE, ESQ. 18 CECIL SCOTT, ESQ. Assistant U.S. Attorneys 19 For the Defendants: NORMAN TRABULUS, ESQ. 20 For Bruce W. Gordon 170 Old Country Road, Suite 600 21 Mineola, New York 11501 22 EDWARD P. JENKS, ESQ. For Who's Who Worldwide 23 Registry, Inc. and Sterling Who's, Who, Inc. 24 332 Willis Avenue Mineola, New York 11501 25 (cont'd)
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2136 1 APPEARANCES (cont'd): 2 GARY SCHOER, ESQ. For Tara Garboski 3 6800 Jericho Turnpike Syosset, New York 11791 4 ALAN M. NELSON, ESQ. 5 For Oral Frank Osman 3000 Marcus Avenue 6 Lake Success, New York 11042 7 WINSTON LEE, ESQ. For Laura Weitz 8 319 Broadway New York, New York 10007 9 MARTIN GEDULDIG, ESQ. 10 For Annette Haley 400 South Oyster Bay Road 11 Hicksville, New York 11801 12 JAMES C. NEVILLE, ESQ. For Scott Michaelson 13 225 Broadway New York, New York 10007 14 THOMAS F.X. DUNN, ESQ. 15 For Steve Rubin 150 Nassau Street 16 New York, New York 10038 17 JOHN S. WALLENSTEIN, ESQ. For Martin Reffsin 18 215 Hilton Avenue Hempstead, New York 11551 19 20 Court Reporter: HARRY RAPAPORT, CSR United States District Court 21 Two Uniondale Avenue Uniondale, New York 11553 22 (516) 485-6558 23 Proceedings recorded by mechanical stenography, transcript 24 produced by Computer-Assisted Transcription 25
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2137 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 2138 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
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2139 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?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2140 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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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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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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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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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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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
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REPORTER 2147 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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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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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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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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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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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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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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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
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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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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
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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?
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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?
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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
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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?
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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?
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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
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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
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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
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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.
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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?
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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
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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
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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
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CP, CM OFFICIAL COURT REPORTER 2189 Rosenblatt-direct/White
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
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2197 Rosenblatt-direct/White
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 2200 Rosenblatt-direct/White
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 2202 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 2203 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 2204 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.
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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.
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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
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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?
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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.
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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
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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
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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?
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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.
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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
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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
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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
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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.
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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
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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
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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,
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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?
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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
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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.
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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
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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.
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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.
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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
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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.
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2230 Rosenblatt-cross/Wallenstein
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.
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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,
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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 the corporation would 11 be able to convert an asset into an expense or a liability 12 at a time when the corporation itself was in Chapter 11 13 reorganization? 14 A I couldn't answer that. 15 Q Would the fact though that the corporation was now in 16 bankruptcy and was under the control of the bankruptcy 17 court, or at least under the scrutiny of the bankruptcy 18 court, be a factor you might consider in determining 19 whether or not the
taxpayer was at that point in time 20 genuinely intending to repay those loans but unable to do 21 so for a variety of factors? 22 A I don't think the corporate bankruptcy would have any 23 effect on that. 24 Q Would the -- withdrawn. 25 Assume for a moment in a Chapter 11 bankruptcy
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1 situation that the corporation is in fact prevented from 2 converting assets into expenses. 3 If that is so it would be a fair statement that 4 the taxpayer would then be unable to pick up additional 5 income from the corporation in the same fashion he had 6 done previously, correct? 7 A Based on what you are telling me, yes. 8 Q And would you then consider the fact -- again, 9 assuming what I am saying is correct, that the bankruptcy 10 prevents the converse of an asset into an expense, would 11 you consider that although the taxpayer had in previous 12 periods recognized part of the loan as income by picking 13 up that expense, would you recognize that he was presented 14 from doing so by the bankruptcy and, therefore, consider 15 that he was at least at that point in time and with 16 respect to that acting in good faith and unable to repay? 17 A I can't follow your question. I am sorry. 18 Q If you lost me, I am sure they have. 19 JUROR NO. 6: Yes. 20 Q Assuming I am correct, that the bankruptcy court, the 21 Chapter 11 reorganization of the corporation, prevents the 22 corporation from converting an asset that would be the 23 loan account over to the taxpayer, into an expense that 24 would be the pickup of the additional income by the 25 taxpayer without a corresponding check; are you with me?
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1 A Okay. 2 Q But in previous years, before the bankruptcy he had 3 in fact done just that, come the end of the year, come tax 4 time, he picks up some additional number, 30,000, 50,000, 5 whatever it may be as income, thereby reducing the loan 6 account and paying taxes, he has done that a year, two 7 years, three years running. And now in the third and 8 fourth year, he is prevented from doing that because of 9 the bankruptcy. Are you with me so far? 10 A Okay. 11 Q Would you agree with me that at that point his 12 inability to pick up that additional income and repay 13 another portion of the loan would at point be something 14 you would consider in his favor because it is to some 15 extent outside of his control, it is under the bankruptcy? 16 A It would be another factor, yes.
17 Q You indicated the length of time that the obligation 18 to the corporation is outstanding is a fact. Is there any 19 particular length of time in your mind that is reasonable 20 or unreasonable? 21 A It depends on the facts on a case by case basis. 22 Q All right. 23 Is two years unreasonable? 24 A In this case? 25 Q Yes.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2245 Rosenblatt-cross/Wallenstein
1 A I would say yes. 2 Q Why? 3 A There is a three and a half million dollar liability 4 owed. All of these monies are being taken out by the 5 shareholder. There is no indication of an ability to 6 repay them. 7 Q But he is repaying it from either current income or 8 projections of future income, maybe not at the rate you 9 like, but he is repaying, correct? 10 A That's correct, however, income
to an individual is 11 generally taxable when it is received on a cash basis. 12 Now, the loan account would be taxable each year 13 it is received. 14 Now, with a three and a half million dollar debt 15 and the inability to pay that, or the attempt to only 16 repay $150,000 to wipe that out would certainly impact on 17 this. 18 MR. TRABULUS: Move to strike beyond the first 19 part, when he -- beyond when he said that's correct. 20 MR. TRABULUS: I join in that application. 21 MR. WHITE: If you read it back, your Honor, it 22 is directly responsive. 23 THE COURT: Let me hear the question and answer, 24 please. 25 (Whereupon, the court reporter reads the
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2246 Rosenblatt-cross/Wallenstein
1 requested material.) 2 THE COURT: Motion granted. Everything after 3 "that's correct" is stricken. And the jury is instructed 4 to disregard it as not being responsive. 5 Q Let me shift gears a little bit. We are done with 6 the loan factors for now. 7 A Okay. 8 Q There was an offer in compromise in this case; is 9 that correct? 10 A Yes. 11 Q And tell us what that is. 12 A An offer in compromise is basically that there is an 13 outstanding liability that is in this case three and a 14 half million dollars, and the taxpayer is seeking to wipe 15 that out by just paying a certain amount of money, and 16 then the rest of the liability is just erased. 17 Q An offer in compromise to wipe out a tax liability is 18 an every day occurrence in the IRS; is that correct? 19 A I don't deal with it everyday. 20 Q You are familiar with it? 21 A Yes. 22 Q Would it be fair to say that that it is a regular 23 procedure?
24 A In collection, probably. 25 Q Okay.
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1 Is it unusual? 2 A No. 3 Q In fact, the IRS has forms for it; is that right? 4 A Yes, without a doubt. 5 Q The IRS has forms for everything, right? 6 A Yes, absolutely. 7 Q And an offer is just that, isn't it? 8 A Yes. 9 Q It is an offer? 10 A Yes. 11 Q I propose to you that I may owe you three and a half 12 million dollars, there is no way I will ever have three 13 and a half million dollars, therefore, you know it, I know 14 it, I will pay you less, I will offer you ten bucks, will 15 you take it? That's an offer? 16 A That's correct. 17 Q A $150,000 is an offer too, isn't it? 18 A Sure. 19 Q Until the point where somebody who has the authority 20
from the Internal Revenue Service says, okay, I will take 21 your $150,000, sign here, it is just an offer, right? 22 A That's correct. 23 Q Is it fair to say that the procedure involved is that 24 the taxpayer generally through an attorney or accountant, 25 comes to the IRS and makes a proposal, correct?
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1 A I don't know the procedure. 2 Q Do you have some general familiarity with it? 3 A Generally. 4 Q Would it be fair to say that in general the procedure 5 is that the taxpayer acting through his attorney or his 6 accountant or some other intermediary, proposes to the IRS 7 that they will pay a particular amount of money to get rid 8 of the entire amount, correct? 9 A As far as I know they do that on the designated form. 10 Q And that would be what is
in evidence here as Exhibit 11 420-A, Government's Exhibit 420-A; is that correct? 12 A I don't know the numbers, I am sorry. 13 Q Do you have that? Do you have 420? Because it has a 14 number of attachments. 15 A Yes. 16 Q As long as we are here let's talk about it. 17 The first page of Exhibit 420 is a letter to the 18 IRS on Mr. Reffsin's letterhead, but signed by Mr. Gordon; 19 is that correct? 20 A Yes. 21 Q And that is essentially the cover letter for the 22 offer in compromise? 23 A That's correct. 24 Q Exhibit 420-A is the offer in compromise, correct? 25 A Yes.
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1 Q Do you have the original exhibit? 2 A Yes. 3 Q Can I see it for a minute? 4 A Yes. 5 (Mr. Wallenstein confers with the witness.)
6 Q The offer in compromise is on a preprinted IRS form, 7 656, correct?
8 A Yes. 9 Q Is that numerical out of how many, or just the number 10 they gave it? 11 A You got me. 12 Q It has all kinds of small print in here; is that 13 correct? 14 A Yes, it does. 15 Q And attached to that is a list of exhibits attached 16 to it, and letters A through H; is that correct? 17 A Yes. 18 Q And that includes a couple of 1040 individual income 19 tax returns, and the compensation agreement we talked 20 about here, and the collateral agreement with the 21 Department of Justice; is that correct? 22 A Yes. But this is not part of the form itself. It is 23 not an IRS form. 24 Q I understand that. But it is all being submitted as 25 part of the package which we are calling the offer in
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1 compromise; is that correct? 2 A Yes. 3 Q I mean, the offer itself is not simply fill in the 4 blanks on this one page, 656 form and hand it in, correct? 5 A That's true. 6 Q And the IRS wants to see paper, tons of paper; is 7 that right? 8 A Sometimes that's not enough. 9 Q You want to see everything that the taxpayer has to 10 support the taxpayer's contention that he doesn't owe you 11 any money, or he is entitled to pay you less money than 12 you think he is required to pay; is that fair? 13 A Yes. 14 Q And the attorney, or the accountant acts on behalf of 15 the taxpayer, not on his own behalf, correct? 16 A No, he represents the taxpayer. 17 Q And what he is conveying to the IRS is the taxpayer's 18 position; is that correct? 19 A It should be something discussed with the taxpayer,
20 absolutely. 21 Q Obviously, but it is basically, it is the accountant 22 who is on his knees in your office saying, please, don't 23 make him pay it all, right? 24 A It could be. 25 Q And in that circumstance the accountant or the
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1 attorney, or whoever is putting forth the taxpayer's 2 position, is an advocate, correct? 3 A Yes. 4 Q And he is going to portray the taxpayer's position in 5 the best possible light for the taxpayer so as to persuade 6 the kindly IRS agent that he really can't afford to pay 7 the whole obligation, correct? 8 A Yes. 9 Q And that in fact is his function, am I right? 10 A He is supposed to be honest and present the best 11 possible case. 12 Q Okay. 13 The taxpayer comes to the accountant or attorney 14 and says, yes, I owe the IRS three and a half million 15 dollars, yes, I owe them the money. I can't pay it, what 16 can you do for me? 17 We will make an offer of compromise, and let's 18 see what we come up with, okay? 19 A Yes. 20 Q He doesn't have to come in with a barrel instead of a 21 suit, but he has to present something, doesn't he? 22 A They have to present their case, surely. 23 Q In the course of that is it a fair statement that the 24 advocate, the attorney or accountant is entitled to give 25 you the best possible version of the taxpayer's
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1 situation? Am I right? 2 A As long as it is honest, yes. 3 Q And the honesty can be based on what the taxpayer 4 says, can't it? 5 A Sure, it can. 6 Q If the taxpayer says, look, I don't have three and a 7 half million dollars. All I can afford to pay them is 8 150,000, and I need a little time to do that, would it be 9 a fair statement that the attorney or accountant in that 10 situation doesn't have to take out all of the taxpayer's 11 books and say, prove it to me? He can go to the IRS and 12 say, look, this is my client's position, what can you do 13 for us? Is that a fair statement? 14 A Yes. 15 Q Is it also a fair statement that in the course of a 16 negotiation, be it this or any other negotiation, there is 17 a little give and take? 18 A Absolutely. 19 Q The taxpayer comes in and says I am going to pay you 20 $150,000, take it or leave it. 21 You stand up and say, I am leaving it, write me a 22 check for three and a half million, and the taxpayer says, 23 wait, wait, wait, I will give you a little more, can it go 24 like that? 25 A That's negotiation, sure.
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1 Q You can say, look, I know you don't have three and a 2 half million dollars, no way will any take 120 thousand, I 3 will take a million. That's negotiation? 4 A Yes. 5 Q In the course of that negotiation, can -- would it be 6 a fair statement that in that circumstance the accountant 7 can go forward and say, now, look, my guy over here is not 8 a multimillionaire. There is no chance he has three and a 9 half million dollars, if you make him pay that money, he 10 will not be able to eat? That's advocacy, a little bit of 11 puffery? 12 A People can say anything. 13 Q It doesn't mean you believe it? 14 A That's true. 15 Q So, if you read it or you hear him say, look, if you 16
make him pay all of this, my guy is not going to be 17 eating, he is going to be out on the bread line, you can 18 look at that and say, uh-uh, I don't buy it. But it 19 doesn't mean the accountant is lying, is it? 20 A It depends on what his knowledge is of the facts. 21 Q Okay. 22 If he gets his knowledge from the taxpayer, and 23 he advocates the taxpayer's position with a little bit 24 hyperbole, that's okay, it is part of the game, part of 25 the negotiation?
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1 A If he has no other knowledge, no. 2 Q Now, would it also be a fair statement that the offer 3 in compromise itself, when these negotiations take place, 4 that both sides expect there is going to be some movement; 5 is that a fair statement? 6 A I have never been involved in one, so I can't
say. 7 Q Have you been involved in negotiations with taxpayers 8 over tax liability? 9 A Sure. 10 Q In those circumstances, is it fair to say that both 11 sides think there is going to be a little bit of movement? 12 A Each case stands on its own. Some cases yes, some 13 cases no. 14 Q When you examine a tax return, you look at it and 15 say, no, I am disallowing that deduction, that has 16 happened, hasn't it? 17 A Sure. 18 Q A taxpayer comes in and says, Mr. Rosenblatt, how can 19 you disallow that deduction, it is legitimate; and here is 20 the back up, and produces a cigar box worth of receipts, 21 that happens? 22 A That happens. 23 Q You at that point can say, I don't want to see that, 24 I am sticking to my guns, or you can say okay, what does 25 it add up to or say something in-between, right?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2255 Rosenblatt-cross/Wallenstein
1 A I personally would not say I will not look at it. 2 Q You look at it? 3 A Yes. 4 Q You look at the cigar box worth of receipts, you will 5 say some are legitimate and some are not? 6 A That might be. 7 Q And they all may be legitimate, too? 8 A Yes. 9 Q And they all may be phony, too? 10 A Without a doubt. 11 Q More than likely the situation is somewhere 12 in-between, isn't it? 13 A Usually it is somewhere in-between. 14 Q So, when you are saying, I am going to disallow this 15 $10,000 entertainment deduction you wish to take, because 16 I don't believe you spent $10,000 in entertainment 17 expense, and the taxpayer is saying, Mr. Rosenblatt, here 18 are my receipts, I really spent $10,000 in entertainment 19 expense, would it be fair to say that in a fair number of 20 situations like that, you wind up saying, now, look, I 21 will give you 6,000, or 5,000, or 4,000, based upon what 22 evidence is presented? 23 A That has happened, yes. 24 Q And that's a negotiation, isn't it? 25 A Yes.
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1 Q And you say, the IRS wants $10,000, or, rather, we 2 will disallow the $10,000 deduction, and the taxpayer 3 says, no, I am entitled to the $10,000 deduction, and you 4 finally agree after give or take that the taxpayer is 5 finally entitled to a $6,000 deduction, is that a fair 6 statement? 7 A Yes. 8 Q Would it be fair to say that situation, when you go 9 in and you do the audit and first sit down at the desk and 10 open your briefcase and the taxpayer finishes quaking in 11 his boots, you say I will disallow a $10,000 deduction, 12 and you know somewhere based on your 26 years experience 13 back here, you will give into him? 14 A Before the point comes when I say I am disallowing 15 the $10,000 deduction, I looked at the books and records 16 to see what the taxpayer has to show to prove it. 17 Q In my hypothetical here, the taxpayer claims the 18 $10,000 entertainment deduction on his 1040, schedule C or 19 whatever it is. And your saying before you sit down with 20 the taxpayer that you have already determined based on 21 your examination of the taxpayer's return and also other 22 documentation that he is not entitled to it? 23 A You have to do an audit before you determine -- or an 24 examination -- before you determine that there is an 25 additional tax, and that there is an adjustment to be
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2257 Rosenblatt-cross/Wallenstein
1 made. 2 Q Is it hard to say examination? 3 After you do that, you got some input, you have 4 seen some paper, you have seen some numbers, and those 5 numbers lead you to the conclusion that you are going to 6 take away this $10,000 deduction and you will disallow it, 7 correct? 8 A Yes. 9 Q The taxpayer has already been through this, too, 10 right? And the taxpayer knows that you are looking to 11 disallow a $10,000 deduction, and he knows he is going to 12 have to pay you something; is that right? 13 A No. 14 Q Well, you are going to go into it saying I am going 15 to disallow this entire deduction, and is it a fair 16 statement that at that point you are willing to compromise 17 if the taxpayer can convince you that you shouldn't 18 disallow it? 19 A At the point this arises a whole audit has been done, 20 the records have been examined, and I would say that there
21 is no substantiation for this $10,000 deduction. 22 Q And that's the point where the taxpayer whips out the 23 box of receipts, right? 24 A He should have given it to me before that. 25 Q But he didn't.
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1 A I would have asked you for it before that. 2 Q He says, all right, I will get it to you, get it 3 together. 4 At this point he has finally brought it in, 5 because now it is show time. You said, I am disallowing 6 it, right? 7 A Yes. 8 Q And before that there was always a chance you 9 wouldn't. Now there is no chance you won't. So now he 10 has to produce the documentation. And although it is 11 late, would you look at it, wouldn't you? 12 A I would look at it. But I would have asked for it 13 before. 14 Q I give you that. But the taxpayer didn't give it to 15 you before, so you couldn't look at it because you didn't 16 have it. 17 Now you have it. 18 Would it be fair to say that there is still room 19 to negotiate? 20 A If I examine the records and they support his 21 deduction, sure. 22 Q Okay. 23 So, he brings in all these receipts and whether 24 or not they are credit cards or cash receipts or whatever, 25 would it be a fair statement that you might satisfy
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2259 Rosenblatt-cross/Wallenstein
1 yourself that those were legitimate businesses expenses 2 and he is entitled to that entertainment deduction? 3 A Absolutely possible. 4 Q And going in to that final session where you have 5 already disallowed the 10,000 and already done the audit, 6 you are still willing to be flexible, and it is still a 7 negotiation; am I right? 8 A The normal procedure is when you have done the audit 9 and you have reached a conclusion, you discuss it, and if 10 no additional records are forthcoming you close the case. 11 Q I understand. But in my hypothetical, you are 12 sitting down with the taxpayer and he has this box. It is 13 sitting on your desk. He is saying please look at it. 14 Are you willing to be flexible in that circumstance? 15 A Yes. 16 Q So we are still negotiating; is that correct? 17 A Yes, that's true. 18 Q You know going into that session, because you called 19 the accountant or attorney or taxpayer himself and say, 20 look, here is the bottom line. I am disallowing the 21 $10,000 deduction, and he says, wait, what do you mean? 22 Let me come in, I can prove I am
entitled to it. And you 23 say, okay, fine, come into my office a week from next 24 Tuesday. Bring money. 25 When he comes in with that box of receipts, you
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1 know going into that meeting under those circumstances, 2 this is a negotiation and you are prepared to be flexible, 3 right? 4 A I am prepared to review the additional records. 5 Q And if he can show you are right -- he is right or 6 you are wrong, you are willing to give him whatever it is 7 he is entitled to? 8 A Absolutely. 9 Q Would the same type of negotiation be true of an 10 offer in compromise? 11 A I can't answer. 12 Q If the government says you owe me 3 and a half 13 million dollars, and the taxpayer says I can't pay it, the 14 only thing I can pay is 150,000, would it
be fair to say 15 that that's the opening shot? 16 A The offer in compromise is the offering shot, sure. 17 Q I am offering you $150,000, you have three options. 18 You can say I will take it, you can say I will not take 19 it, or you can say let's talk about it, right? 20 A That's true. 21 Q If you say, let's talk about it, would it be a fair 22 statement that more often than not, we are going to wind 23 up with an agreement that I will pay you somewhere between 24 my 150 and your three and a half million? 25 A I can't answer that.
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1 Q It as possible, isn't it? 2 A It is possible, but I don't know the procedure for 3 investigating an offer in compromise. But if records are 4 asked for and they are not provided, the whole offer might 5 as well
be torn up, I think. 6 Q You have 26 years with the IRS, correct? 7 A Yes. 8 Q And you have a bachelors in accounting, and an MBA in 9 taxation; is that right? 10 A Yes. 11 Q And you have taken all the continuing professional 12 education provided by the IRS and elsewhere, correct? 13 A Yes. 14 Q And you have 26 years of experience with the IRS; is 15 that correct? 16 A Yes. 17 Q And is all of that in the examination division? 18 A Yes. 19 Q Or its predecessor? 20 A All in examination. 21 Q Never been in collection? 22 A No. 23 Q Never talked to anybody from collection? 24 A Sure. 25 Q You are testifying here as an expert in federal tax
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1 matters; is that correct? 2 A That's true. 3
Q There is an offer in compromise that is an issue in 4 this case; is that correct? 5 A Yes. 6 Q And you have heard the testimony of revenue agent 7 Gagliardi and revenue -- I am sorry, revenue officer 8 Gagliardi, and revenue officer Peters, correct? 9 A Yes. 10 Q And they were the ones who -- that division is the 11 one that deals with the offers in compromise; is that 12 correct? 13 A Yes. 14 Q And would it be fair to say that the procedures of 15 the Internal Revenue Service with respect to offers in 16 compromise are within your purview as an expert in federal 17 tax matters, and particularly in this case as a summary 18 and expert witness? 19 A Would you repeat that, please, or rephrase it? 20 Q I can repeat it this time. 21 Would it be fair to say that it is within your 22 purview as both a summary and expert witness in federal
23 tax matters to discuss the procedures of the Internal 24 Revenue Service with respect to offers in compromise? 25 A I am not an expert in procedures of other divisions.
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1 I am involved in the examination division, in auditing tax 2 returns, determining what is income, what is not income, 3 what expenses should be allowed, what shouldn't be 4 allowed. I mean, I don't have the involvement in offers 5 in compromise. 6 THE COURT: Mr. Wallenstein, do you want to slow 7 down somewhat? Quite a bit. The hour is late. You are 8 wearing out our reporter. 9 MR. WALLENSTEIN: I wouldn't object to give him 10 the weekend to recuperate. 11 THE COURT: There is an outstanding public 12 servant. Slow down. 13 THE COURT: Slow down. 14 MR. WALLENSTEIN: Yes. C
an we approach? 15 THE COURT: Yes. 16 17 (Whereupon, at this time the following took place 18 at the sidebar.) 19 MR. TRABULUS: I think Mr. Wallenstein is going 20 to join in this. 21 At this point I would move to strike all of the 22 witness' testimony on direct that pertained to what 23 revenue agent Gagliardi would have done if he had known 24 that there had been disclosures to him about the ownership 25 interest of Mr. Gordon in Who's Who. He testified that
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2264 Rosenblatt-cross/Wallenstein
1 there would have been a referral by revenue officer 2 Gagliardi under those circumstances to the 3 examination/audit division. And then he testified about 4 all kinds of things that would have followed if it got to 5 the hands -- 6 THE COURT: You have to slow down. 7 MR. TRABULUS: Shall I start again? 8 THE COURT: I think we have it. 9 MR. TRABULUS: He testified first -- he testified 10 as to the -- as to what Gagliardi would have done, that 11 there would have been a referral. 12 In every other respect he has denied knowledge of 13 any familiarity with the procedures there, and he just 14 said he wasn't an expert. He is only an expert in his own 15 division. His testimony concerning Gagliardi, what he 16 would have done should be stricken. And although he might 17 be able to testify what would have happened had there been 18 a referral since he is an expert in his own division, the 19 predicate for that is gone and it should be stricken as to 20 that. 21 MR. WALLENSTEIN: I join in that. 22 THE COURT: Your motion is denied. 23 24 (Whereupon, at this time the following takes 25 place in open court.)
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1 Q Mr. Rosenblatt, you heard all the testimony that has 2 gone on in this case so far; is that right? 3 A Yes. 4 Q Did you hear the testimony of Maria Gaspar? 5 A Yes. 6 Q And she testified that she was the controller and 7 chief financial officer of Who's Who; is that right? 8 A Yes. 9 Q And she is the one who kept the books, right? 10 A Yes. 11 Q And so, she would be the one who made the entries in 12 the books; is that correct? 13 A Yes. 14 Q Did you find that to be so in your -- in the course 15 of your examination of the books? 16 A Excuse me? 17 Q Withdrawn. 18 You did examine the books and the records in 19 question; is that correct? 20 A Yes. 21 Q Can you determine from your examination who actually
22 kept them? 23 A No. 24 Q Well, they came from Who's Who as opposed to from 25 Mr. Reffsin; is that correct?
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2266 Rosenblatt-cross/Wallenstein
1 A That's true. 2 Q Let me go back to focus your testimony to some 3 general accounting principles. 4 You said that the general ledger indicates all of 5 the accounts of the corporation; is that correct? 6 A Yes. 7 Q And that would show assets on the one side and 8 liabilities and capital on the other? 9 A Yes. 10 Q And would that also show operating expenses? 11 A In the general ledger, yes. 12 Q And that would be on a year end basis, for instance, 13 or a fiscal year basis? 14 A It would be usually on a month by month basis. 15 Q Okay, so each month, the bookkeeper, whoever would 16 post the entries from
the checkbook into the general 17 ledger; is that right? 18 A I mean that happens. In this case it was done on a 19 regular basis I believe. 20 Q Irregular? 21 A Regular. 22 Q Regular basis. 23 That could be monthly, it would be quarterly or 24 semiannually, whatever it was, correct? 25 A Yes.
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1 Q And would that be generally a function of the 2 bookkeeper? 3 A I can't speak for the operation of each corporation 4 that does it. But a lot of times it is done by the 5 bookkeeper. 6 Q And would you explain for the jury what it means to 7 post the entries from the checkbook to the general ledger? 8 A Basically taking the checks that are written, and you 9 are classifying them to one account or another. 10 Q So, for example,
a check that the corporation would 11 write to me might be classified by the bookkeeper as a 12 legal expense? 13 A Yes. 14 Q And it might be for something else, correct? 15 A That's true. 16 Q The bookkeeper might not know that at the time that 17 either the check was written or that the expense was 18 posted; is that correct? 19 A Yes. 20 Q And just by way of example, the corporation may have 21 purchased my car, and that particular check was for the 22 pumps of my car, rather than for my services as an 23 attorney; is that correct? 24 A That's possible. 25 Q That might not be readily apparent from the check
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1 stubs, and the bookkeeper knowing my name, or seeing E S Q 2 afterward on the check stub, might automatically classify
3 that as a legal expense, right? 4 A Yes, but there are generally receipts and other items 5 they look at, too. 6 Q For argument sake there is not in this particular 7 case, or they cannot be found for whatever reason, it gets 8 posted to legal expense, and it really belonged in an 9 asset purchase. 10 Is there a way for the accountant, come the end 11 of the year, or whatever period it is that he is reviewing 12 the general ledger, to make up for that error? 13 A Yes. 14 Q And what would that be? 15 A Make journal entries. 16 Q Can you explain that? 17 A A journal entry could take the item out of the legal 18 expense in your example, and put it in an asset, car. 19 Q And that would be what they call an adjusting 20 journal? 21 A Yes. 22 Q Is that correct? 23 A Yes. 24 Q And what happens to that at the end of the year,
to 25 those entries?
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1 A Well, they are posted to the general ledger. 2 Q So, it has got to go from -- he has to take this 3 adjusting journal, and indicate in there that check number 4 12 to Wallenstein for legal expense should really be for 5 asset purchase, and then post that back into the general 6 ledger under the asset column? 7 A Right. 8 Q And at the same time -- 9 A And reduce the legal expense. 10 Q Reduce the legal expense? 11 A Yes. 12 Q Correct? 13 A Yes. 14 Q And increase the asset column? 15 A Yes. 16 Q And that's a fairly standard accounting practice, is 17 it not? 18 A Absolutely. 19 Q It happens everyday in every company in the world? 20 A Absolutely. 21 Q And would it be a
fair statement that when the 22 accountant at the end of the year or period reviews the 23 books of the corporation, one of his major functions is 24 going to be to do this adjustment? 25 A Yes.
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1 Q And would that be the point at which items which 2 belong in one particular loan and exchange account would 3 be moved to a different loan and exchange account for 4 example? 5 A It could be. 6 Q Or from loans and exchanges to payroll expenses for 7 instance? 8 A That could be, too. 9 Q So that if at the end of the year there were carried 10 in the loan and exchange account for Bruce Gordon an 11 amount of money indicating that Mr. Gordon owed the 12 corporation, there would be nothing wrong with Mr. Reffsin 13 reducing that loan balance by,
say, 30,000, or 50,000, if 14 he at the same time increased Mr. Gordon's compensation by 15 that same amount, correct? 16 A That would be okay. 17 Q And that amount by which he has reduced the loan in 18 exchange, has now become income to Mr. Gordon, correct? 19 A Yes. 20 Q But that doesn't require him to write a check, does 21 it? 22 A No. 23 Q It is simply a bookkeeping entry, we are going to put 24 down in this column that the loan balance, instead of 25 being 250, is 200, and we are going to put in this column
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2271 Rosenblatt-cross/Wallenstein
1 that Gordon's income, instead of being 41,000 is 91,000; 2 is that correct? 3 A Yes. 4 Q And that's perfectly proper, perfectly acceptable 5 accounting; is that correct? 6 A Absolutely. 7 MR. WALLENSTEIN:
Bear with me a moment, please, 8 Judge? 9 THE COURT: Yes. 10 (Whereupon, at this time there was a pause in the 11 proceedings.) 12 Q Do you have Exhibit 660? 13 A Would you tell me what it is? 14 Q The general ledger, December 31st, 1993. 15 A No. 16 (Handed to the witness.) 17 Q Would you take a minute to examine Exhibit 660; 18 particularly page 5 in the upper right-hand corner. I 19 don't know if it is in the same order. 20 Do you have that? 21 A Yes, I do. 22 Q Tell us what account 1200 represents? 23 A It is the loan and exchange account BG. 24 Q That's Bruce Gordon? 25 A Yes.
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1 Q And do you see an entry at the bottom of that column 2 on page 5, the last entry in the account 1200? 3 A Yes.
4 Q All right. 5 Can you tell us what that says. 6 A Partial payment loan per M. Reffsin from PRBG. 7 Q And PR means payroll? 8 A Yes. 9 Q BG means Bruce Gordon? 10 A Yes. 11 Q Is it a fair statement that that entry represents a 12 direction from Mr. Reffsin, essentially to the bookkeeper 13 to pick up that amount to almost $23,000 as income to 14 Mr. Gordon? 15 A Yes. 16 Q Would it also be a fair statement that by doing so, 17 he has reduced the loan balance? 18 A Yes. 19 Q There are other such entries in the general ledger, 20 are there not, for that year and others? 21 A I believe there were two other entries like that. 22 Q All right. 23 There came at that time -- I am done with 660 for 24 the moment. 25 There came a time in December of 1992, when the
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RTER 2273 Rosenblatt-cross/Wallenstein
1 corporation wrote a check -- excuse me, made a payment to 2 Dr. Grossman for $400,000; is that correct? 3 A Yes. 4 Q And that was done by two checks which netted taxes 5 totaled 313,000 and change? 6 A Yes. 7 Q And Grossman, Dr. Grossman testified here that he 8 loaned back that 239,000 of that, which was that amount, 9 net of California taxes; is that correct? 10 A I believe it was 239, 235. 11 Q Something like that, 239, I believe it was. 12 A Yes. 13 Q And that would be a loan to Mr. Gordon, correct? 14 A As I recall Dr. Grossman's testimony, it was a loan 15 to Who's Who Worldwide. 16 Q He said that Bruce asked him for it, didn't he? 17 A Yes. 18 Q And he wrote the check to Who's Who Worldwide, didn't 19 he? 20 A Yes. 21 Q If in fact that 313,000, or the 239,
in any event, 22 was in fact a repayment by Mr. Gordon, that would reduce 23 his loan balance; is that correct? 24 A If it was a loan to Bruce Gordon and Bruce Gordon 25 used it to reduce his loan balance, yes.
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2274 Rosenblatt-cross/Wallenstein
1 Q And if that's what the backs and records of the 2 corporation reflected, then the corporation would have 3 been repaid that amount? 4 A The corporation got the money back, yes. 5 Q And it is not income to Mr. Gordon at that point, 6 correct? 7 A No. 8 Q You added that $313,000 back into Mr. Gordon's income 9 for the 1992 year; isn't that right? 10 A That's correct. 11 Q And that was your subjective determination based upon 12 your interpretation of the factors that we have been 13 discussing here; is that correct? 14
A That's correct. 15 Q Let me take you back to Exhibit 420; and that's the
16 offer in compromise with all its attendant documentation. 17 A Okay. 18 Q Now, 420-E -- 19 A E as in Edward? 20 Q E as in Edward, or examination. 21 That exhibit contains a projection of 22 Mr. Gordon's salary and income from 1991 through 1996, 23 correct? 24 A Yes. 25 Q In 1994, however, the corporation declared
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2275 Rosenblatt-cross/Wallenstein
1 bankruptcy; is that correct? 2 A Yes. 3 Q Would it be fair to say that that eliminated the 4 possibility of these projections coming true? 5 A Well, if the company continued in business, not 6 necessarily. 7 Q Well, if the corporation were in Chapter 11 8 reorganization, the bankruptcy court would have the power 9 and the
authority to say -- to set Mr. Gordon's salary? 10 A I don't understand -- I don't have any bankruptcy 11 practice. 12 Q You heard the testimony of Mr. Skalka and 13 Mr. Ackerman who apparently do, correct? 14 A Okay. 15 Q Would it be a fair statement that after having heard 16 their testimony, that the bankruptcy court essentially 17 through the creditor's committee, or through the trustee, 18 depending on the situation, controlled the finances of 19 Who's Who? 20 A Yes. 21 Q In 1995 there was a search warrant executed at the 22 offices of Who's Who; is that correct? 23 A Yes. 24 Q And that led to we are here; is that correct? 25 A Yes.
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1 Q And is it fair to say that subsequent to the 2 execution of that search warrant, Who's
Who was out of 3 business? 4 A Subsequent to the issuance? 5 Q Yes. 6 A Yes. 7 Q And is it fair to say that to prevent these income 8 projections from coming to fruition? 9 A For sure. 10 MR. WALLENSTEIN: Judge, I am getting to another 11 area. Is this a good time to break? 12 THE COURT: Yes, I think so. 13 Members of the jury, we are going to recess until 14 9:30 on Monday. You have a whole weekend to recuperate, 15 to go to work or to relax, or do some of the things you 16 couldn't do while you were here. 17 In the meantime, it is very important to continue 18 not to discuss this case with anyone else or among 19 yourselves, not until you are in the jury room 20 deliberating. 21 Keep an open mind. Come to no conclusions until 22 the entire case is over, until you heard the summations of 23 counsel, my instructions to you
on the law and then until 24 you exchange views with each other. 25 We will recess, as I said until 9:30, and have a
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2277 Rosenblatt-cross/Wallenstein
1 very nice weekend. 2 (Whereupon, at this time the jury left the 3 courtroom.) 4 THE COURT: I just want to put on the record that 5 I did not grant the motion to strike the testimony of this 6 witness with regard to offer and acceptance, because I 7 find that the evidence he gave did not require any 8 expertise other than his being an Internal Revenue Service 9 agent. That's why I denied your motion, Mr. Trabulus. 10 MR. TRABULUS: Okay. 11 THE COURT: All right. 12 9:30 on Monday. 13 MR. DUNN: Can we find out who the witnesses 14 are? 15 THE COURT: Yes. 16 MR. WHITE: After Mr. Rosenblatt, if there is any
17 time left on Monday -- 18 THE COURT: Keep your voice up, please. 19 MR. WHITE: I am sorry. 20 If there is any time left on Monday after 21 Mr. Rosenblatt, we have Ms. Rieger, R I E G E R, 22 Mr. Behrmann, B E H R M A N N, Mr. Rotatori, 23 R O T A T O R I, and Ms. Beck, B E C K. 24 THE COURT: How long are you going to be with 25 this witness? Do you have any idea?
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1 MR. WALLENSTEIN: Well to be honest probably less 2 than an hour. I am not sure. 3 MR. TRABULUS: I will be a while. 4 MR. WALLENSTEIN: I think between the two of us 5 we will take the morning, I am sure. 6 THE COURT: 9:30 tomorrow morning -- I mean 7 Monday morning. 8 MR. TRABULUS: Can I inquire as to what your 9 Honor's intentions are as to next Friday. 10 THE COURT: At this time I think we will not work
11 on Friday. I will let you know for sure on Monday. I do 12 not think we are going to work on Friday. I mean your 13 work here. 14 MR. TRABULUS: I understand. 15 (Case on trial adjourned until 9:30 a.m., Monday, 16 February 2, 1998.) 17 18 19 20 21 22 23 24 25
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER 2279 1 I-N-D-E-X 2 W-I-T-N-E-S-S-E-S 3 PAGE LINE 4 A N D R E W R O S E N B L A T T............. 2140 12 DIRECT EXAMINATION (cont'd)...................... 2140 21 5 VOIR DIRE EXAMINATION............................ 2186 13 DIRECT EXAMINATION (cont'd)...................... 2188 1 6 CROSS-EXAMINATION................................ 2210 19 7 E-X-H-I-B-I-T-S 8 9 Government's Exhibit 1404 received in evidence... 216
5 14 Government's Exhibit 1526 received in evidence... 2183 8 10 Government's Exhibit 1525 received in evidence... 2187 14 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
HARRY RAPAPORT, CSR, CP, CM OFFICIAL COURT REPORTER
