Tax evasion trial begins for Hoffman

By JANET SHPRINTZ

Suggesting that a brilliant tax attorney does not make mistakes involving $1 million in income, the federal government Wednesdy launched its criminal tax-evasion case against onetime Carolco exec Peter Hoffman.

However, the defense's opening remarks portrayed Hoffman --- a Yale Law School graduate whom many considered the preeminent tax entertainment attorney --- as "very smart" and "very educated" but also "very busy," and not the type to check on the goings-on in Carolco Pictures Inc.'s accounting department.

Though Hoffman never paid tax on approximately $1 million in income, his lawyers said, he didn't commit any crime: They attributed it to an "honest mistake" by Carolco's bookkeeping department, which Hoffman failed to notice on his W-2 form.

In opening statements, assistant U.S. attorney Patrick Fitzgerald described a complex "scheme" under which Hoffman, then CEO of Carolco, received escalating payments between 1986 and 1989 that ultimately totaled more than $1 million.

The 1986-88 fees are not part of the indictment because of the statute of limitations. The indictments include only the 1989 payments of approximately $325,000 that were made directly to Hoffman and $100,000 to third parties for personal expenses such as monthly car payments for himself and his wife, limousine services and the services of his personal accountant.

The government claims these payments were income and taxable in 1989; Hoffman asserts that they were loans. Two additional counts allege that Hoffman received $225,000 in income under his termination agreement with Carolco, but ascribed it to his new company, CineVisions, to obtain illegal tax advantages.

Hoffman claims there was no tax effect in the way the income was handled.

Portraying Hoffman as a meticulous lawyer who would not be careless about accounting matters, the government outlined the evidence that it would use to prove that the payments to Hoffman were income, not loans: No loans were disclosed on Carolco's SEC filings; there was a lack of internal documents showing that the payments were intended as loans; there were "inconsistent" explanations for the payments on the check stubs; and the fact that no tax was ever paid on these amounts.

One of Hoffman's attorneys, Brian Hennigan of Irell & Manella, described Carolco as a tumultuous place, where Hoffman was far too busy and distracted to engage in complex accounting schemes even if he had been so inclined.

The chaos described at Carolco, said Hennigan, included the murder of Jose Menendez, head of Live Entertainment, a Carolco affiliate company; the departure of Carolco principal Andy Vajna; and the company's own roller-coaster finances.

That description was the only hint of the background against which this case has unfolded: the government's ongoing tax investigation of Carolco principals Vajna and Mario Kassar.

A criminal prosecution in Hoffman's type of case is unusual. Typically, it's handled as a civil dispute, with back taxes and penalties simply paid. Several sources have speculated that the purpose of prosecuting Hoffman is to pressure him to cooperate with the Justice Dept. in its ongoing investigation of Vajna and Kassar.

Hoffman's arrangement with Carolco started on a "handshake" basis and was later formalized, said Hennigan. Ultimately, Hoffman's salary was paid in part to his law firm Gipson, Hoffman & Pancione, a portion was placed in a deferred compensation account and, by agreement with Vajna, Hoffman was allowed to borrow money from the company from time to time, according to the defense lawyer.

Hennigan said the evidence will show that the loans to Hoffman were described in a haphazard manner on the pay stubs because there was no real payroll department at Carolco keeping track of how he was compensated.

As for the fact that Hoffman never did pay tax on the loans, Hennigan said that when his deferred compensation clause was closed out, the bookkeeping department forgot to "gross up" the amount in the account; so even though he repaid Carolco, his W-2 form did not reflect the loan payments for income tax purposes.

Insisting that there was no intent to defraud the government, Hennigan said, "This case will turn on ledger-entry mistakes."

The trial in U.S. District Court in L.A., which kicked off Tuesday, completed jury selection Wednesday morning under Judge John Davies and is expected to last three weeks.