Kwame Kilpatrick on trial: Day 47
Prosecution attacks Bernard Kilpatrick on under-reported tax returns.
Local 4 is inside the courtroom for the federal corruption trial of former Detroit Mayor Kwame Kilpatrick, Kilpatrick's dad Bernard Kilpatrick and his childhood friend Bobby Ferguson. Each day we bring you information from inside federal court as it happens.
And we're back! It's been nearly 2 full weeks of holiday break in the Kwame Kilpatrick federal corruption trial.
And it seems like it was a pretty eventful break for the defendants. Kwame has been keeping busy over the holidays by posting a series of tweets.
On Christmas day, he posted about the smattering of snow in Dallas:
Family, Food, Fun, Basketball & even snow in DFW on Christmas Day. I'm bout this life! :-) #blessedandhighlyfavored
Later on in the day, he posted a picture of his mother, Carolyn Cheeks Kilpatrick, and father and co-defendant, Bernard Kilpatrick along with the following tweet:
Today...one of the best days ever! I even snapped a picture of my Mom & Dad together. LOL! #miraclesdohappen #muchlove pic.twitter.com/9vDvBlCN
On New Year's eve:
HAPPY NEW YEAR FAMILY! Millions didn't make it, but YOU were one of the ones who did. Rise Up, Show Up & Show Out in 2013. #togodbetheglory
But it's back to reality now and Kwame is back in Detroit. Yesterday he tweeted:
Arrive in DET. Woman says "nobody shoveled the snow, too many homicides & its too damn cold outside. All your fault KK!" Yall crazy as Hell!
Not to be forgotten, over the break defendant Bobby Ferguson was ranked 19th worst boss in the U.S. by Las Vegas-based website Ebosswatch.com. This despite the fact that his company doesn't even exist anymore. And if that wasn't bad enough, the Michigan Court of Appeals ruled against Ferguson last week in a civil case in which he was found liable for pistol whipping a former employee.
8:59AM Video is on and Bernard is first in the courtroom again. Ferguson follows and Kwame enters shortly thereafter.
Our last witness before the break was Kwame's former fraterniny borther Marc Andre Cunningham. The government should be calling a new witness shortly.
Kwame is sporting what we in the media room are calling the "giant Steve Urkel" look- peacock blue v-neck sweater under his dark suit jacket.
9:04AM Judge Nancy Edmunds enters the courtroom and says that the witness is delayed.
Looks like Bobby's lawyer Susan Van Dusen is not back in the courtroom after that terrible fall she suffered in December.
A sick-sounding government attorney Jennifer Blackwell tells the court about filings for 2 witnesses: Steve Lawrence with GSA and agent Joe Jensen with FBI who transported $90,000 in a calibration test. Says that the defense has been well apprised of the witnesses. Talking about an experiment with calibrating a metal-detector and says that the defense does not need to have those numbers.
This woman has no voice. This has to do with the testimony of Mahlon Clift who talked about taking $90,000 through an airport metal detector.
Jim Thomas, Kwame's lawyer, says the defense filed their objection to the government's proposed demonstration with the metal detector. Thomas objects to the government showing a stack of $90,000 going through a magnatometer, aka metal detector.
Thomas says in Clift's testimony he placed the money in his pockets before going through the magnatometer. He says that whether it goes off has to do with the sensitivity of the settings.
Thomas says the accuracy of this test is misleading because government tested it with money in waistband of pants as opposed to testimony that said money was in the witness's pockets.
"I suspect there are limitations," says Thomas referring to the test.
"This does not satisfy scientific methodology," says Thomas.
Blackwell says the government plans to show portions of video of agent Jensen carrying the money through a magnatometer to the jury.
Judge says she is permitting the prosecution to show the results of the metal detector test. She'll ask them to specify settings and says this doesn't require an additional hearing. The judge will look at the unredacted version of the test results in chambers to see if she sees a problem with the redacted version.
Judge says she has been trying to expedite entrance procedures into the courthouse to no avail. Apparently there was an incident yesterday at the courthouse where someone tried to bring in a magazine with clips. Not an actual gun but still a serious security issue which accounts for the long lines and thorough checks into the building.
9:22AM Jury is seated and greeted by Judge Edmunds.
US Attorney Michael Bullotta recalls IRS agent Ron Sauer. Discussing Cunningham's testimony and talking about his and wife Laurie's bank records between 2006-2008.
Sauer says he saw quarterly $25,000 payments along with a $35,000 payments. Bullotta asks about cash withdrawals that would match payments to Bernard. Sauer says he saw such withdrawals.
Looking at a deposit slip of a $20,000 Syncom check from July 7th, 2006 deposited on July 10th. Next document says $20,000 related to consulting fee for Syncom.
Looking at deposit slip on October 3rd, 2006 for another $20,000. Another Syncom check deposited at Comerica Bank.
Check on October 4th, 2006 check payable to cash for $4,000. So check coming out of the account around the time Cunningham was being paid by Syncom- money government contends was for Bernard.
January 19th, 2007, a $35,000 check from Syncom to Andre Cunningham deposited in the account. The check was paid out by Syncom on January 17th.
A check was drawn on the Comerica account in the amount of $10,000 on January 29th, 2007. Again, this matches prosecution's contention about Cunningham paying Bernard a cut of the Syncom money.
Looking at a summary chart of payments by Syncom and large cash withdrawals close in time to the deposits. On June 27th, 2007, a check deposited on that date for $25,000 from Syncom. On that same date, there was a withdrawal of $12,000 in cash.
On September 27th, 2007 there was a deposit for $25,000 and then a cash withdrawal of $5,000.
On October 9th, 2007 there was a cash withdrawal of $3,000.
So between October 4th, 2006 and October 9th, 2007, approximately $34,000 was withdrawn from the Comerica account.
9:35AM John Shea. Bernard's lawyer, cross-examines Sauer.
Shea reminds Sauer that Cunningham pleaded guilty to paying off a relative to $15,000. correct says Sauer. so obviously says Shea Cunningham was taking money out for other purposes. Correct says Sauer.
Shea goes over a series of $25,000 deposits of checks from Syncom with no related withdrawals.
9:37AM Bullotta redirects. Total amount of checks deposited from Syncom was $250,000 and the total amount of withdrawal was $60,000. The pension fund deal was worth $30 million.
Saeur steps down. New witness.
9:39AM Blackwell calls Cassandra Jones of Alan C Young and Associates, a CPA firm. Worked there for 15 years. Was a staff accountant. Trained in yearly seminars at University of Michigan.
Knows Bernard Kilpatrick for 15 years. Assisted in preparing his returns for personal and business purposes.
Jones talks about questionnaire clients fill out about any financial activity during the year. Witness says this is important to document all taxable income received during the year. This is then given to the IRS.
Jones says she would explain by letter and over the phone what she needed from Bernard to calculate his taxes.
Looking at 2004 tax return for Bernard. It's his personal return- on the income section, his wages indicates $2,500. also looking at his gambling winnings and losses for 2004. Total income received for the year was $336,625 as indicated by form. Jones believed this was correct due to the documentation she received. Witness says this would have changed if there was additional income Bernard received that he had not received.
In 2004, $123,700 in cash was deposited into Bernard Kilpatrick's personal account. Witness was not aware of this. Jones says this would have impacted her calculations because she would have questioned what it represented. Particularly if it was taxable income.
Total tax liability was more than $91,000 in 2004 based on Jones's calculations. This would have changed had there been additional income she knew of- it would have increased.
Jones says she reviewed it with Bernard and he never made any changes and authorized it as was.
9:50AM 2005 tax return for Bernard Kilpatrick. Net income from Maestro was more than $220,000. Jones determined this amount from bank statements. Total income line was based on computer calculations received for 2005- $220, 259. Jones says she was not aware of a disbursement to Bernard from an employee profit sharing plan to Bernard. This would have been taxable.
Jones says she did not review the 2005 return with Bernard. It was filed electronically.
Tax liability was $52,808 for 2005. That would have increased had she known about additional income.
Looking at 2007 tax return for Bernard. Total income for the year was based on 2006 numbers. Says they did that because they did not have 2007 information before the IRS deadline. Had already filed 2 extensions on Bernard's behalf. Bernard did not provide them with information. Jones told him she was using 2006 numbers.
Witness says she can't remember Bernard's response to using 2006 numbers.
The income filed for 2007 was $70,259. Tax liability was $10,825. This tax return was never amended and was filed to the IRS electronically.
Jones says it is common practice to review returns with clients before submitting them to the IRS.
10:00AM Shea cross-examines. Says he has a cold like everyone else.
Shea says that now Jones is an independent contractor to the CPA firm. Has been that way for 4 years now.
Shea says that firm prepares lots of tax returns. Witness concurs though auditing is primary source of business.
Witness says Bernard did not fill out firm questionnaires. This meant that Jones had to call and follow up with him to get his documentation.
Shea says so Bernard was not exactly engaged in the process. Jones agrees.
"At some point, Mr. Kilpatrick would enter with a shoebox filled or whatever of documents you needed," asks Shea. Correct says witness.
Form 1120s was prepared by Jones for Bernard for his business attributes. Witness says she asked for Maestro's bank statements for January through December and all the check stubs.
So essentially his business check book says Shea. Correct says Jones.
You didn't ask him for personal accounts asks Shea. Correct says Jones.
Jones agrees that it wouldn't be standard practice for her firm to ask for that.
Judge says it may be useful if witness explains subchapter S corporation to the jury. Sounds enthralling.
Jones says then she prepares the 1040, the personal tax return. Witness says sometimes under S corporation, profits can be included in the personal returns.
Jury seems to be lost in all of this so we are going through it again. Uggh.
Witness says the benefits of S corporation is that you only get taxed once. So business won't get taxed if it goes into personal return.
Shea consults with Thomas.
Shea says so the S corporation process allows corporate taxes to be taxed only once at the individual level and it's a benefit to small businesses.
All returns are reviewed by firm's principal Alan Young. After he has reviewed them, the firm efiles the returns.
If Bernard owed mony on his returns, he was advised either by witness or her boss Young.
Talking about tax years we looked at 2004, 2005 and 2007. Shea says you did not ask Mr. Kilpatrick about money not accounted for. No says Jones.
Shea says cash being deposited into personal accounts doesn't equate to income necessarily. Right says witness.
So that doesn't mean it was being kept from you. Right says witness.
Were you aware about an inheritance for Bernard in 2004. No says witness.
Inheritance money would not have been taxable it seems.
Shea says in 2005 you did not request any personal bank information from Mr. Kilpatrick. Correct says the witness.
In 2002, Bernard rolled over a retirement account.
10:20AM Shea says in addition to returns, the CPA also provided clients with financial ledgers and IRS documents to accompany the tax returns.
Now in 2007, witness had been doing Bernard's taxes for 7 or 8 years. Jones was filing extensions on his taxes this year. Witness recalls that there was a lot of controversy going on in 2008 with Kwame and that was why she was having a hard time getting information from Bernard.
In the years prior to 2008, did Bernard not ultimately get the information to you in a timely fashion. Yes says witness.
Shea says that in 2008 Bernard explained he simply hadn't had time to get her what she needed. Witness says at some point a conversation was had that Bernard had to file something.
Witness can't remember whose idea it was to file an estimated return but it was not Bernard.
Witness thought that an amended return would be filed at a later point once the documentation came in.
Shea says so the ultimate failure to file an amended return was not anticipated by anybody. Correct says witness.
In order to electronically file, the client is supposed to sign a document. Shea says there is no such signed document for Bernard for 2004. Witness says she does not know.
In 2007 returns, witness agrees Bernard never signed anything in her presence to file the returns.
Shea says if there are any signed client documents for efiles, there should be a copy somewhere. Yes says witness.
Penalty for late tax filing is 25% says witness.
Shea says that in some years the 1120 never got filed, were you aware of that? No says the witness.
But it's normal that some things fall through the cracks when filing returns. Witness agrees.
10:33AM Shea has nothing further. Judge Edmunds calls for a 20 minute break.
10:56AM Quiet day at the snackshop. Not much to report except that defense lawyer Alex Brennan paid for Kwame and Bernard's snacks.
Will be continuing with the engrossing testimony of CPA Cassandra Jones. It has been an extremely slow morning thus far.
11:00AM Blackwell redirects. Going over the details of S corporation again.
Blackwell asks witness if she expects clients to give her all sources of income for the taxable year. Yes says the witness.
So it's up to the tax payer to provide all the pertinent information? Yes says witness.
11:02AM Shea back at cross.
Shea says you can't remember exact conversation with Bernard in 2005 about 2004 tax return. No says witness.
Witness agrees that with clients of many years, some things are just assumed when filing their returns.
Shea says some clients are more accurate than others when reporting. Yes agrees the witness.
11:05AM Blackwell calls new witness, Alan Young head of the CPA firm Alan Young & Associates, to the stand. Has been managing director for 30 years. Has undergrad degree from Michigan State and is a CPA.
Witness says he manages a 30 member firm.
Has known Bernard since early 1990s. Started doing his returns in mid-1990s.
Says returns primarily done by Cassandra Jones and he reviewed them.
Witness's firm also help set up Maestro Associates. Taxed like a partnership as an S corporation.
Witness says they had discussed that all business money should be deposited into business accounts. Young says this was to be able to track income going into the business.
Witness says that income that goes into personal accounts not as important.
Young says with corporare entities all deposited for business were to be deposited into corporate account and all expenditures were to be deducted from that account.
Young says that had he known about large deposits into Bernard's personal account, he might have questioned it.
Young says he is pretty sure he reviewed Bernard's 2004 tax return. Blackwell shows document with Young's signature at the bottom. Majority of income that year came from Maestro Associates.
Young not aware Bernard deposited more than $123,000 into his personal account in 2004. Young says if that was money from the more than $300,000 reported income than it wasn't a problem but if it was additional income than it would have been a problem.
Young not aware of disbursement from employee pension plan in 2005 that should have been reported.
Was the 2005 tax return filed under penalty of perjury for Bernard? Yes says witness.
Looking at authorization to efile 2005 tax return. Bernard Kilpatrick's signature clearly on the document. Witness says that there should be ones for 2004 and 2007 but they could not locate the signed forms for them because they are only required to keep them for 3 years.
Witness says that 2007 tax returns were prepared using 2006 numbers to get it filed by October 15th deadline. Young says Jones discussed this with Bernard. The idea was to get an amended return later but it was never done.
Young says he did not personally go over the 2004, 2005 and 2007 returns with Bernard but expected that someone in his firm would have.
Young says he would not have efiled returns without the authorization of the client.
111:24AM Shea cross-examines.
Shea says witness knew Bernard when he was married to Betty Kilpatrick. Witness agrees that he did both their tax returns.
Shea says that at the beginning of the early calendar year, there is an organizer sent by the CPA firm to remind clients about tax returns. Witness agrees that Bernard was not one to return the organizer and was pretty hands off when it came to his returns.
Shea saying you probably only had one conversation about keeping personal and business stuff separate. Correct says witness.
Shea says you are relying on them to take your advice and it's not your place to babysit. "I agree," says Young.
Shea says clients have different levels of engagement in tax process. True says witness.
Some are more accepting of conclusions you draw for them and Mr. Kilpatrick is in that category. Correct says Young.
Witness says he didn't ask for personal bank information. Assumed Bernard would keep that separate.
Witness says as a matter of practice does not ask clients if they have kept things separate.
Shea says $123,000 cash could reflect what went into Bernard's personal bank account. Witness agrees that the money goes into the personal account does not reflect necessarily unreported income. It could be a transfer or a loan would not be unreported income.
Same thing with inheritance says Shea. Witness agrees that is not unreported income and would not have further tax implications.
Bernard's date of birth is March 17th 1941 according to Bernard and thus was of retirement age, 62, in 2004. So says Shea, he could have rolled over retirement funds. Young agrees.
Shea says there was probably no meeting about rolling retirement benefits into business. Witness says no he did not.
Shea says that sometimes there is not adequate between client and firm about material needed for taxes. Witness agrees that happens.
Shea going over how in 2008 Bernard was exceptionally late with filing documents because everything that was going on with Kwame at the time. Witness says he did not have direct conversation with Bernard on the subject. Internally, the firm filed based on 2006 numbers after phone conversations between Bernard and Cassandra Jones. Jones and Young believed that there would be an amended return. Witness agrees that to the best of his knowledge it was Bernard's intention to file an amended return as well.
11:44AM Witness says he can't know for sure that they got a signature from Bernard to file the 2004 returns. Witness says there may be an exception.
Shea says that the witness was asked by an IRS agent in 2006 for authorized 2004 form so if he couldn't produce it, it wasn't because the 3 years were up.
Shea says IRS agent asked for every scrap of paper available on Bernard. Witness believes so yes.
11:50AM Looking at fax cover sheet addressed to IRS on February 20th 2007 from Cassandra Jones. the second page is an IRS efiling authorization. Juror asks to blow up the document on the overhead. Shows a signature line to authorize efiling but no signature is on the line.
Shea says this is submitted per IRS request within 1 and 1/2 yrs. of filing but the 2004 form has no signature on it signaling that Bernard did not give official signatory authorization. Witness says his firm does not have any authorized signed document for 2007 returns either. So Shea says for both 2004 and 2007, the firm has no signed documents by Bernard for authorizing tax returns under penalty of perjury.
11:56AM Blackwell redirects. Asks about depositing of income into accounts and asks if witness wouldn't have wanted to know about it. Witness says he would have. Blackwell says disbursement of $180,000 would have been personal income to Bernard. Witness agrees.
Witness also says he would not have filed 2004 and 2007 tax returns without Bernard's approval. Says that is standard business practice.
Witness steps down and we are taking a 5 minute break.
12:12PM Court back in session. And the government recalls agent Rowena Schuch.
Discussing Bernard's tax returns in 2004, 2005 and 2007. Schuch went over bank records, tax returns and subpoenas of third parties.
Looked at deposits into bank accounts. Both personal and business in order to get full financial profile.
Looked at Maestor- an 1120s. It's incorporation where income flows through to shareholder on personal tax return.
Schuch says that income that income coporation earns flows through to shareholder so corporation itself does not pay taxes. Shareholder in this case is Bernard Kilpatrick.
Looking at summary of total deposits into Maestro Associates' account: $2,231,518.14 in the period from 2002 through 2008.
Looking at list at source of deposits to Maestro. In 2005, only $35 in cash deposited into Maestro account. In 2002, there was only slightly more than $3,000 in cash deposited. None in 2003 and 2004 in terms of cash deposits.
Schuch says other money went into personal accounts.
Looking at summary of all of deposits into all of Bernard's accounts, both personal and business.
Foe example: Comerica Bank account, personal held jointly with daughter Diara
Maestro account: 2004, $147, 640
Business account: $372, 674 in 2004
Personal account: in 2004 more than $35,000 in 2007 more than $161,000
In total 9 accounts.
Total of all accounts in 2004: $882,074.70
Total of all accounts in 2007: $606,225.52.
Witness aware of Bernard's gambling activity. Analyzed bank activity against gambling winnings.
Looking at net losses/gains from gambling in 2004, 2005 and 2007.
Charts based on info from various casinos.
in 2004, net losses from gambling totaled $88,385. In 2005, total losses from gambling $87,144. In 2007, net losses of $42,322. Gambling winnings in those years offset by the losses says the witness.
Schuch determined that in 2004, 2005 and 2007 there was an understatement in Bernard's tax returns. Appears he did not report all his income says witness.
Shea stands up to object. Blackwell asks to discuss at sidebar. First one of the day.
According to Schuch, she determined that Bernard did not accurately report all his income in 2004. In his return, he reported $336,625. According to the witness's calculations, Bernard's total bank deposits were $882,074.70 in 2004. Including taxes withheld and currency expenditures, the total number was $883,067.75.
Schuch then subtracted transfer sums as well as other sums and got a Corrected Total Income of $387,019.87 that should have been reported in 2004. Thus, it came to an understatement of income by $50,394.87. Schuch says this is a conservative estimate.
In terms of tax liability for 2004, it should have been $106,681.01 and additional tax owing should have been $17,457.91. Bernard paid more than $91,000 in taxes in 2004.
Schuch says she did not find an inheritance in 2004, it was in 2002.
Inheritance from a step-brother was deposited in September 2002 according to witness.
Schuch determined Bernard's tax returns in 2005 were not accurate because they did not include disbursement. Reported income was $220,259 in 2005 per Bernard's returns. Corrected Total Income should have been $400,259. Understatement of Total income: $180,000 (2 disbursements, $100,000 had been declared by Maestro on this).
Schuch says it was Maestro's responsibility to issue tax form on the $180,000 disbursement.
Tax liability for 2005 should have been $112,983.24. Paid $50,771. Additional taxes owing for 2005: $62,212.24.
1:00PM Judge Edmunds asks Blackwell is she intends to go through similar numbers for 2007. Blackwell says she does. Judge says we will take it up in the morning and court is adjourned until 9AM tomorrow.
About the author
Alexandra Harland is a Princeton undergrad and has a masters degree in International affairs with Columbia. A Montreal native, she worked with the Daily Telegraph newspaper for a few years before transitioning to TV, when she worked at ABC News with Peter Jennings. Alexandra has also worked in newsrooms in both Detroit and Boston.