Wednesday, September 26, 2018
Judge Properly Barred Ex-CEO’s ‘Return-of-Capital’ Defense
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has affirmed the tax-fraud conviction of the chief executive officer of what had been Hollywood’s top payroll-services company, rejecting his contention that he did not steal money from the company he controlled and failed to report it as income because he permissibly took funds to recoup his investment.
A three-judge panel—comprised of Circuit Judges Kim Wardlaw, Jay B. Bybee, and Sandra Ikuta—on Monday affirmed a jury’s conviction of John Visconti on charges of conspiracy to defraud the United States, attempted evasion of income tax, and making a false tax return, saying that he failed to put forth a solid basis for the barred defense he wanted to present.
Visconti headed Axium International which had been billing in excess of $1 billion a year to studios, television and cable companies, and other Hollywood concerns before its fall in 2008 following a determination that it owed back taxes of more than $100 million. The mess-up in its finances apparently stemmed from Visconti, in tandem with the chief operating officer, Ronald Garber, diverting more than $5 million to their own uses, including plunking Axium’s tax refund checks in their secret bank accounts.
Also, Visconti loaned himself $1.9 million from Axium’s coffers, and made no repayments.
Actions on the part of Visconti were justified, San Diego attorney Devin Burstein of Warren & Burstein contended at oral argument in Pasadena on Aug. 30, under a “return-of-capital” defense. That defense, the U.S. Supreme Court said in its 2008 decision in Boulware v. United States, requires:
“(1) a corporate distribution with respect to a corporation’s stock, (2) the absence of corporate earnings or profits, and (3) the stockholder’s stock basis be in excess of the value of the distribution.”
“Mr. Visconti took distribution from Axium, and was authorized to do so, pursuant to his right to receive a return of his capital investment.”
Queried by Bybee as to how distribution to Visconti, but not all shareholders, could be justified, Burstein embarked on one track, then snapped his fingers, and said:
“Oh—even better—the only person who put capital in is Mr. Visconti.”
Visconti purchased Axium for $4.9 million and transferred real property to it which he contended was worth $8.3 million—but which the government contended had a value of $6.3 million. Even if his basis was $10 million, Burstein said, and acknowledging that there was distribution to Visconti of $4 million, “10 minus four is $6 million,” he noted, and what “the government says he took was less than $6 million.”
Under questioning by Ikuta, he acknowledged that Visconti testified that receipt of $4 million was all that he could “recall.” But he insisted that the matter “is a classic jury issue,” and queried:
“Why are we not trusting a jury to get this right?”
Arguing for the government, Assistant U.S. Attorney Angela J. Davis of the Central District of California maintained that “the facts categorically refute the return-of-capital defense” because Axium was primarily owned not by Visconti, but by United American Fund (“UAF”).
In rebuttal, Burstein declared that it was Visconti who owned UAF which, he noted, the bankruptcy trustee determined “is the alter ego of defendant Visconti” and that “any separateness has ceased to exist.”
Discretion Not Abused
In Monday’s decision, the judges said that District Court Judge Jesus G. Bernal of the Central District of California did not abuse his discretion in disallowing a return-of-capital defense because an inadequate factual foundation was shown for the defense.
“Visconti failed to establish that his stock basis exceeded the value of the distributions,” the opinion says.
“The defendant bears the burden to establish factual support for a finding that his stock basis exceeded the value of the distributions,” it points out, finding that “Visconti’s lone declaration giving his estimate of the value of the property as $8,250,000 and stating that he only recalled one $4,000,000 payment” is an insufficient” showing.
A spate of alleged errors in the District Court, neither singly nor collectively, suffice to relieve the opinion declares.
The case is United States v. Visconti, 17-50091.
Bernal last year sentenced Visconti to two years in prison—taking into account his age at the time of sentencing—74—and his ill health, and also ordered him to pay $1.75 million in restitution to the Internal Revenue Service.
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