Egyptian Cotton Sheets Presented As Evidence Of Tax Crimes In Troy Kelley Trial
Egyptian cotton sheets, meals with his campaign manager and a trip to Paris for his wife, a French professor. These are among the “disallowed’ tax deductions Washington State Auditor Troy Kelley claimed on his business tax filings during the years 2011 and 2012.
That was the testimony Tuesday of an IRS agent in Kelley’s real estate services and tax fraud trial in federal court in Tacoma. The charges against Kelley relate to his past business practices before he was elected state auditor.
“Are Egyptian cotton sheets ordinary and necessary to a document tracking business?” Assistant U.S. Attorney Katheryn Frierson asked Paul Shipley of the IRS.
“No,” Shipley responded.
Thousands in questionable deductions
How and when Kelley paid taxes, the deductions he took and whether he had criminal intent were issues that took center stage as jurors endured week five of the trial and the prosecution prepared to rest its case. The timing was noteworthy, if not coincidental. This is tax filing week and April 15 will mark one year since Kelley’s indictment was made public.
Shipley testified that in 2011 and 2012, Kelley claimed thousands of dollars in questionable business tax deductions -- for toys, pet products, family trips, a tennis club membership and other “personal items.”
Kelley also claimed more typical business deductions for things like vehicle depreciation and fuel. However, Shipley testified those were also inappropriate deductions because the IRS doesn’t believe Kelley was operating an active business during those years.
“It’s just somebody going and filling up a car with gas, but it doesn’t make it a deductible expense,” Shipley said.
On cross-examination, defense attorney Angelo Calfo suggested that questions about Kelley’s business tax deductions were a matter for a civil tax audit, not a federal criminal prosecution. He noted the feds had even checked with the Tacoma zoo about a deduction Kelley took on his membership.
Prosecutors have alleged that Kelley took more than $60,000 in business deductions in 2011, and again in 2012 -- many of them questionable.
Calfo also sought to establish that for the jury to convict Kelley on the tax charges, it would have to find that he intended to evade paying taxes. “It isn’t enough in this case … to find he took illegal deductions,” Calfo said. “There needs to be intent.”
Sitting on millions
At issue in the case is whether, as prosecutors allege, Kelley illegally pocketed millions of dollars in homeowner fees that should have been refunded and then attempted to conceal the money and avoid paying taxes on the funds. Or, as the defense maintains, did Kelley rightfully earn the money and then embark on a legitimate and legal plan to draw down the money and pay taxes on it over 10 years?
To bolster their case against Kelley, prosecutors highlighted the fact that he didn’t report to the IRS that he was sitting on millions of dollars until after he had shuttered business operations in Washington in 2008.
“What is your conclusion about whether he should have reported that cash on hand,” Frierson asked Agent Shipley.
“He clearly should have,” Shipley answered.
Defense attorney Calfo took issue with that conclusion. In a lengthy cross-examination of Shipley that often felt like a sparring match, Calfo sought to show that Kelley had always intended to pay taxes on the money based on a business accounting practice that delays the recognition of income.
It was a premise Shipley refused to accept.
“Mr. Kelley consistently applied a theory of how the income should be reported and he did it before the IRS even had a glimmer [of a case against him],” Calfo suggested to Shipley.
“It’s not a proper winding up of a business,” Shipley replied.
Reporting the income -- eventually
In 2008, Kelley shuttered his company, the Post Closing Department, after class action lawsuits were filed against some of his title company clients over a certain kind of tracking fee charged at real estate closings.
Prosecutors allege Kelley then consolidated more than $3.6 million of these reconveyance fees that he had collected from his clients and proceeded to move the money through a series of wire transfers until it ultimately reached a Vanguard account in the name of a new company Kelley had created, Berkeley United.
That’s when Kelley first reported the presence of the money to the IRS. Kelley later moved most of the funds to a bank account in the name of his Nevada holding company, Blackstone International.
Ultimately the class action lawsuits were dismissed. But in 2011, Kelley paid more than $1 million to settle a lawsuit filed against him by his former client, Old Republic Title, over unrefunded homeowner fees. After that, Kelley started drawing down the remaining funds in $245,000 annual installments and paying taxes on the money.
“You agree he can report this [income] under the accrual method over time,” Calfo asked Shipley on cross-examination.
“No, I do not agree with that,” Shipley answered.
An ‘exasperated’ jury
In a separate line of questioning, Calfo sought to show that the feds pursued the case against Kelley under pressure from then-U.S. Attorney Jenny Durkan even though they knew proving the case would be tough. Calfo introduced notes Shipley had taken during pre-trial meetings with federal prosecutors in which he wrote “pressure from U.S. Attorney to proceed” and “hard tax case.”
“I don’t remember any additional pressure,” Shipley testified.
As the day wound down, prosecutors called their final witness, an FBI forensic accountant who traced the money Kelley is alleged to have illegally withheld.
As the testimony stretched on, Judge Ronald Leighton admonished the prosecution. “Pay attention to the jury,” he said. “They’re exasperated.”
The defense is expected to call its first witness Wednesday. The case could go to the jury next week.