Defense accountant: Kelley was right to wait to pay taxes

Troy Kelley was right to hold off on paying about $1 million in taxes on money he says he earned, an accountant said Thursday in the state auditor’s criminal trial.

Kelley faces 16 felony charges over his former business practices in the real-estate services industry. The case is expected to go to the jury Tuesday after nearly six weeks.

Joseph Dawson, managing partner of a Seattle accounting firm, testified Thursday as an expert witness for the defense.

Dawson said Kelley didn’t need to report portions of fees as taxable income before and during 2008, because there were competing claims on the money — from homeowners who paid the fees and companies that played middleman between them and Kelley.

“There was a possibility that they would attempt to get the money back,” Dawson said, adding that the law “permitted him, required him really, not to report it yet.”

The homeowners and companies did try to get it back, in lawsuits pending between 2008 and 2011 that culminated in Kelley paying one company to settle. The resolution of the lawsuits set the stage for Kelley to finally report the money, Dawson said.

Dry and complex matters of tax law took center stage Thursday, challenging jurors’ patience.

What would seem to go faster, Kelley’s defense attorney asked at one point: minutes spent on this topic, or a viewing of the entire movie “Top Gun?”

Dawson hadn’t seen the film, but he acknowledged: “Almost anything would go faster than a discussion of revenue recognition.”

Under cross-examination by the prosecution, Dawson acknowledged he hasn’t examined Kelley’s books to see what accounting method he used.

Assistant U.S. Attorney Katheryn Frierson asked Dawson whether a taxpayer must report stolen money as income. Yes, he said, in most cases.

Can a thief wait to report stolen money if the true owner sues to get it back?

“No,” Dawson said, “not if you stole it.”

That is the question at the heart of the case: Did Kelley steal the more than $3 million in business revenue he set aside between 2006 and 2008?

Prosecutors say yes. They contend that revenue came from charges above the $15 to $20 he promised escrow companies he would keep — out of fees of more than $100 paid by homeowners at closings — in exchange for his services tracking property records.

They said he should have routinely refunded the money after paying any third-party charges as part of making sure the documents were properly recorded.

Kelley says he earned the money as soon as he received the fees and never promised how much he would send out in refunds.

Prosecutors say that when Kelley finally started paying taxes on the money, he reduced his tax burden through improper deductions.

The questioned deductions include meals some witnesses say either didn’t happen or weren’t related to his former business.

Other expenses included family vacations, Egyptian cotton sheets, toys for Kelley’s children and a trip to Paris by his wife, a French professor at the University of Puget Sound.

His defense contends the prosecution is making a criminal case out of tax deductions taken by Kelley that should be a matter for an audit.

In an audit, Internal Revenue Service agents can interview a taxpayer and find out their intentions in taking the deductions, Dawson said. Sometimes that is enough to resolve a case.

“We’ve resolved a lot of them,” he said. “I’ve never had a criminal case. So yeah, that’s where you do it.”

Asked about deductions for meals, Dawson recalled a case of a jeweler who kept working to maintain relationships with former customers after his business foundered, in hopes of starting it up again. Those were deemed legitimate, he said.

As for foreign travel, he said deductions could be OK — within strict limits — if Kelley’s wife wasn’t reimbursed by her employer. Similarly, deductions are allowed within reason for portions of family trips if Kelley was working during the vacations, he said.

Dawson said that while he could imagine legitimate deductions for sheets and toys — “I get paid for being creative” — those generally aren’t proper.

“No,” he said, “you can’t deduct them.”

This story was originally published April 14, 2016 at 5:57 PM with the headline "Defense accountant: Kelley was right to wait to pay taxes."