Free Govt's Proffer - District Court of Colorado - Colorado

Case 1:04-cr-00354-REB

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Criminal Case No. 04-cr-00354-REB UNITED STATES OF AMERICA, Plaintiff, v. 1. MICHAEL JAY SHIDLER, Defendant.

GOVERNMENT'S PROFFER OF TESTIMONY PURSUANT TO THE COURT'S ORDER MARSHALING EXPERT WITNESS TESTIMONY

The United State of America, by and through its undersigned counsel, hereby submits its proffer of testimony of prospective expert witnesses R. Jonathan Lynch, in accordance with this Court's Court's Order Marshaling Expert Witness Testimony in this case (DE 45).1 Although the government neither contends nor concedes that all of the proffered testimony described herein necessarily falls within the ambit of Fed.R.Evid. 702 and invokes the corresponding disclosure requirements of Fed.R.Crim.P. 16(a)(1)(G), the Federal Rules of Evidence, or Daubert v. Merell Dow Pharmaceuticals, Inc., 509 U.S. (1993), and its progeny,2 the government makes

1

"DE __ " refers to the Docket Entries in this case.

To the contrary, the government maintains that much of the proffered testimony identified herein is essentially background explanatory testimony that is incidental to testimony by the witness in his capacity as a fact witness in the case or as summary witnesses who will testify about his examination of voluminous financial records, pursuant to Fed.R.Evid. 1006. 1

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these disclosures to avoid any claim of surprise by the defendants as to this witness. 2. R. Jonathan Lynch, C.P.A. Revenue Agent, Internal Revenue Service Denver, Colorado

I.

Background. As indicated in his resume, Attachment 2(a), R. Jonathan Lynch is a certified public

accountant who has been employed as a Revenue Agent for the Internal Revenue Service ("IRS") for over twenty five years. Agent Lynch works within the Service's Examination Division and, since 1991, has been assigned to its Special Enforcement Program, which focuses on auditing and examining taxpayer returns and other tax matters involving suspected fraud or the non-filing of returns. For the past ten years, Agent Lynch has focused, in particular, on audits involving complex tax matters concerning the tax liabilities and tax returns of individuals, corporations, partnerships, trusts and other collective entities. Agent Lynch has also assisted the IRS's Criminal Investigation Divisions in the investigation and prosecution of criminal tax matters. Agent Lynch will be called, in part, as a fact witness in this case. In that capacity, he will testify that, in or about July 1997, IRS's Collection Division made a referral to the Examination Division concerning tax returns that co-conspirator Donald Mack filed for tax years 1993 and 1994 and his non-filing of returns for subsequent years. Agent Lynch will testify about how, based on this referral, he commenced a civil audit that concerned Mack's tax return for 1994 and that ultimately extended to his non-filing of returns for tax years 1995 through 1997. Agent Lynch will testify about how he proceeded in this audit, in attempting to determine Mack's true and correct tax liability for tax year 1994 and his income and true and correct tax liability for his 2

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subsequent non-filing years. Agent Lynch will testify about how, in furtherance of these objectives, as part of the civil audit process, he acquired, reviewed and analyzed records received both from representatives of Mack and from third parties. Agent Lynch will testify, in particular, that, during the course of the audit, defendant Shidler submitted a power of attorney form to the IRS to represent Mack concerning these tax matters and that Agent Lynch dealt with defendant Shidler concerning information that he was attempting to obtain about Mack and his related entities. In this connection, Agent Lynch will testify that, on or about February 5, 1998, he conducted an initial interview with defendant Shidler during which interview Shidler provided incomplete information concerning the matters that were the subject of the audit, including false information about Mack's true residence. Agent Lynch will testify that the Examination Division ultimately decided to suspend its audit in September 1999, based on its decision to refer the matters that were the subject to its audit for criminal investigation. Agent Lynch continued his audit work as part of the criminal investigation leading to the separate indictments of Mack and defendant Shidler. He is prepared to testify about the results of his audit and the other matters identified below, based on his review and examination of financial records, real estate transaction records and other records acquired both during the audit and the criminal investigation. II. Statement of Prospective Expert Opinions And Topics Involving Specialized Knowledge. A. Background Concerning Basic Principles of Federal Income Taxation And the Tax Audit Process. As part of explaining his conclusions and opinions and their bases in this case, the government will elicit certain background information from Agent Lynch concerning the federal 3

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income taxation system. This background information may include, as necessary for an understanding of his opinions and conclusions: (a) an overview of applicable filing requirements for income tax and other tax returns for individuals and other types of taxpayers; (b) an explanation about the basic concepts and principles of income, including the basic criteria used by IRS revenue agents to determine a taxpayer's income; ( c) an explanation about the basic concepts of deductions and exemptions, in determining taxable income; (d) capital gains calculations; and (e) income tax and other tax calculations. As part of this background testimony, Agent Lynch will testify that, although the federal income taxation system is predicated on voluntary compliance and reliance on information provided by the taxpayers themselves, there is a system for providing limited tax-relevant information about a taxpayer from third parties through informational filings, such as income and capital gains reporting on IRS Forms 1099 by certain financial institutions and other third parties. Agent Lynch will explain who is required to file such forms with the IRS, the filing requirements for these forms, and how they are used by IRS revenue agents in the audit process. Agent Lynch will also describe the audit process generally, including the other sources of information routinely available to revenue agents and accessed by revenue agents in attempting to determine a taxpayer's income and income tax liability for a given period. Finally, as part of his background testimony in aid of explaining his conclusions and opinions in this case, Agent Lynch will describe certain audit concepts and methods that revenue agents use in assessing the income tax implications of complex business transactions.

B.

Co-Conspirator Mack's Income and Income Tax Liability During the Years Under Investigation. 4

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Agent Lynch is prepared to testify that, based on his review of records and other materials acquired in the civil audit and the criminal investigation, co-conspirator Mack had substantial income and income tax liability during years involving Mack's collaboration with defendant Shidler regarding the matters set forth in the indictment and Shidler's representation of Mack. Agent Lynch is prepared to testify that Mack had the following approximate income and income tax liability: Year 1996 1997 1998 C. Income $1,082,354 $291,282 $68,500 Income Tax Owed $415,049 $78,384 $0

The Source, Use And Movement of Funds Implicatd In the Real Estate and Financial Transactions Involving Defendant Shidler. 1. The Regency Place Property.

Based on his review of the financial records, real estate records and transactional records in this case, Agent Lynch is prepared to offer the following opinions and conclusions concerning the transactions constituting and relating to the acquisition of the residential real property located at 11496 S. Regency Place, Parker , Colorado (the "Regency Place Property"): a. The funds used for the down payment to acquire the Regency Place

Property in the name of Suzette Mack, co-conspirator Mack's then-spouse, were distributed by defendant Shidler from a bank account in the name of United Royal Investment Company ("URIC") but were actually derived from cash accumulated by Mack, from the liquidation of assets held and owned by him and derived from his income, not from funds provided by an 5

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independent third party as part of a purchase by it of Comtec stock held in the name of Suzette Mack. b. The remaining funds distributed by defendant Shidler to Suzette Mack and

to Mack, via 726 Investments, Ltd. ("726 Investments"), were actually derived from cash accumulated by Mack, through the liquidation of assets held and owned by him and derived from his income, not from funds provided by an independent third party as part of a purchase by it of Comtec stock held in the name of Suzette Mack. c. The Comtec stock in the name of Suzette Mack that was purportedly

exchanged for the Regency Place down payment funds and other monies distributed by defendant Shidler from a bank account in the name of URIC was re-registered in the name of URIC and deposited into a brokerage account in the name of URIC. The stock was then sold for approximately $22,000 and the proceeds transferred to a bank account in the name of URIC and withdrawn as cash or transferred to another bank account in the name of Milagro and withdrawn in cash.3 d. Co-conspirator Mack realized approximately $22,000 from the ultimate

sale of the Regency Place Property. 2. The Acquisition of the Delbert Road Ranch Property.

Based on his review of the financial records, real estate records and transactional records in this case, Agent Lynch is prepared to offer the following opinions and conclusions concerning the transactions constituting and relating to the acquisition of the ranch property
3

The government anticipates establishing through the testimony of other fact witnesses and the account records themselves that the cash realized from these stock sales was provided to Mack 6

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located at 9137 Delbert Road, Parker , Colorado (the "Delbert Road Ranch Property"): a. The down payment for the acquisition of the Delbert Road Ranch Property

in the name of Dale Cephers, a nominee, was derived from funds in accounts owned and controlled by co-conspirator Mack, which funds were, in turn, derived from or constituted assets held and controlled by Mack in his own name or purportedly in the name of the Mack Family Trust. b. The purported purchase of the Delbert Road Ranch Property by defendant

Shidler acting in the name of American Industrial Supply Company ("AISC") did not involve the exchange of any actual funds or real consideration. No loan funds were provided by an entity called Trinity Land, as represented in a real estate closing statement generated in connection with the purported transaction. Moreover, there is no evidence of any funds paid by or for AISC to Trinity Land that could be characterized as a loan repayment. The Trinity Land mortgage loan was thus a sham, used to suggest as source of purchase funds for AISC independent of Mack. 3. The Funding of the Periodic Mortgage Payments for the Delbert Road Ranch Property.

Based on his review of the financial records, real estate records and transactional records in this case, Agent Lynch is prepared to testify that the periodic mortgage payments for the mortgage loan taken out to purchase the Delbert Road Ranch Property in the name of Dale Cephers ­ though nominally paid through checks drawn from a bank account held by defendant Shidler in the name of AISC ­ were ultimately actually funded by co-conspirator Mack, through cash he derived from assets controlled by him and primarily owned and realized through his income-producing activities.

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4.

The Re-Financing Transaction of the Delbert Road Ranch Property Using Shidler's Client, Peggy Beeghly, as a Nominee Purchaser.

Based on his review of the financial records, real estate records and transactional records in this case, Agent Lynch is prepared to testify that, though nominally characterized as a purchase and sale transaction, defendant Shidler's purported sale of the Delbert Road Ranch Property to his client, Peggy Beeghly, in 2000, was not a true purchase and sale but really a refinancing transaction using Beeghly as a nominee and distributing funds realized from the refinancing (net of the payoff of the Cepher mortgage) to Mack, in the guise of "seller's" proceeds nominally to Shidler (minus fees to Shidler and Beeghly). These proceeds distributed to Mack, though portrayed as a loan from FinNet, a shell company, were actually used by Mack either to fund periodic mortgage payments on the purchase mortgage loan in the name of Beeghly or used for his own personal purposes. D. The Consequent Effect of the Transactions Involving the Regency Place Property and the Delbert Road Ranch Property.

Agent Lynch is prepared to testify that the transactions relating to the purchase of the Regency Place Property appeared to be designed to, and did, in fact, operate to, conceal coconspirator Mack as the true source of the down payment funds for the property. These transactions also appeared to be designed to, and did, in fact, operate to, transform Mack's asset holdings from cash to stock held in the name of an entity that did not appear to have any connections to him. The transactions allowed Mack to use cash to acquire real property in his then-spouse's name while at the same time exchanging such cash for an asset (Comtec stock) held in the name of a shell company with no apparent connection to him. Agent Lynch is prepared to testify that the transactions relating to the purchase and 8

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maintenance of the Delbert Road Ranch Property appeared to be designed to and did, in fact, operate to, conceal co-conspirator Mack as the true source of the down payment and mortgage loan payment funds for the property; and conceal his actual beneficial ownership and control of the property. The transactions allowed Mack to convert assets previously held in the name of entities having some connection to him to real property that had no apparent connection to him except as an arms-length tenant paying rent to occupy the property. Moreover, the transactions had the effect of falsely portraying the Delbert Road Ranch Property to be encumbered by two mortgage loans (the purchase mortgage loan to Cephers and the "mortgage loan" to AISC) instead of one mortgage loan (to Cephers). The transactions involving both properties also had the consequent effect of impeding and impairing the IRS in its ability to identify the properties as being assets funded by Mack and, with respect to the Delbert Road Ranch Property, an asset controlled and owned by him. The transactions appeared to be designed to, and did, in fact, operate to defeat third party reporting requirements to the IRS that could have otherwise indicated a connection between Mack and these properties or assets and funds used to purchase and maintain them. The transactions also had the effect of defeating third party reporting concerning any funds realized from transactions involving these properties. The transactions had the effect of impairing the IRS in its ability to determine Mack's true income and income tax liability by attempting to conceal his connection to assets that would have revealed sources of income. The Comtec stock transfers and transactions relating to and arising from the Regency Place Property acquisition allowed Mack to conceal from the IRS proceeds realized by him from the sale of Comtec stock in 2000. These transfers and 9

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transactions allowed Mack to convert cash into another asset that he could hold and then use without detection by the IRS. III. Discussion of Opinions And Conclusions And Their Bases. A. Background And Methodology.

As part of explaining the basis for his opinions and conclusions, Agent Lynch will testify about the procedures he follows and the methods of analysis he employs in conducting his audits of taxpayers and their returns. Agent Lynch will testify that the procedures include checking information in the IRS's database for the taxpayer. This information is organized, for the most part, in accordance with a taxpayer account that is identified by a unique identifying number for each taxpayer; with individuals having a number corresponding to their social security account numbers and corporations and similar entities having an employer identification number obtained by application. Using this identification number, the revenue agent will query the taxpayer's account to determine his filing history and to obtain tax information about him from tax returns that are on file with the IRS. Agent Lynch will also testify that the IRS maintains tax information about taxpayers reported to the IRS by third parties in information filings such as on IRS Forms W-2, 1099, and 1098. The filings include information about income and receipts received by the taxpayer from

wages, interest-bearing bank accounts, sales of assets involving possible capital gains and interest on mortgage loans and real estate taxes paid by a taxpayer. Agent Lynch will testify about the various criteria used to determine the circumstances under which these informational filings are issued and their contents. The substance of his anticipated testimony on these topics is set forth in a separate narrative annexed as Attachment 2(e). Agent Lynch will testify that the 10

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revenue agent will review these informational filings to help in the audit in determining a taxpayer's income and assets. Additionally, Agent Lynch will relate, a revenue agent has access to currency transaction reports prepared by businesses and financial institutions concerning currency transactions involving more than $10,000. Agent Lynch will testify that, in conducting audits, revenue agents may query Department of Treasury databases reporting such transactions on IRS Forms 8300, in the case of businesses receiving more than $10,000 in cash in the course of trade or business, and on Treasury Department Forms 4789, in the case of financial institutions dealing in such cash transactions. The reports include information identifying who is conducting the cash transaction and for whose benefit the transaction is being conducted. Revenue agents may look at data from such reports in attempting to determine a taxpayer's assets and income streams from assets. Agent Lynch will also testify that, as part of the audit process, revenue agents will also search public records of various governmental entities to help determine or verify a taxpayer's assets and income. They will query public databases for assets titled or registered in the name of a taxpayer; such assets include real property, automobiles, boats and other vehicles. They will use this information to help determine the source of funds to acquire and maintain such assets and to help determine whether those funds were derived from income activities of a taxpayer. For similar reasons, as part of the audit process, revenue agents will query databases maintained by states to determine if a taxpayer is a registered agent or otherwise connected in some manner to corporations, partnerships or other entities required to be registered with the state. These connections may indicate assets and streams of income from assets attributable to the taxpayer associated with the registered entities. Revenue agents will also check recent 11

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bankruptcy filings by a taxpayer for the same reasons. Agent Lynch will further testify that, although his primary task as a revenue agent is to determine the accuracy of tax returns and determine a taxpayers income and income tax liability, he is also responsible for determining what assets a taxpayer may have that are available for collection by the IRS when he determines that a taxpayer may have a tax liability resulting from his audit work. Accordingly, as part of his responsibilities, Agent Lynch may attempt to determine assets that a taxpayer has available to him even if they are not directly related to the determination of income tax liability. Finally, Agent Lynch will testify that when reviewing transactions as part of audits he applies to main principles of analysis employed by tax auditors. First, Agent Lynch will attempt to discern the economic substance of a transaction and will not simply rely on its stated form. This is because it is well settled that any transaction which lacks an economic purpose, other than tax reduction, will not be recognized for tax purposes. A transaction will be accorded tax recognition only if it has economic substance and is not shaped solely by tax avoidance features that have meaningless labels attached. A transaction will be considered a sham and disregarded for tax purposes if the transaction did not have any practical economic effects other than the creation of income tax reductions. Second, Agent Lynch will testify that the taxability of financial transactions are not viewed in isolation. For income tax purposes, the entire proceeding or series of transactions must be viewed. The tax consequences are determined upon the completion of the plan not at the time of the fulfillment of one of the steps. The entirety of the plan must be viewed in its totality, rather than taking each particular transaction in isolation. This method of analysis is commonly referred to as the "step transaction doctrine" and is widely 12

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employed by tax auditors in assessing complex business transactions. B. Agent Lynch's Conclusions Re: Mack's Income And Income Tax Liability.

Agent Lynch's conclusions about co-conspirator Mack's income and income tax liability for tax years 1996 through 1998 are set forth in a series of work sheets previously provided to the defense as part of the discovery in this case. Agent Lynch's actual tax calculations are set forth in a summary document entitled Income Tax Examination Changes, IRS Form 4549A, annexed hereto as Attachment 2(b). This summary document sets forth the figures for various income components that Agent Lynch derived from his analysis (capital gains/losses, line 1a; management/consulting fee income, line 1e; salary income, line 1f.; installment sale, line 1g; and interest income, line 1i). The summary document also sets forth certain adjustments to the resulting gross income (such as standard or itemized deductions and business expense deductions) to arrive at a total taxable income figure for the given year (line 2). The remainder of the summary document performs tax calculations with respect to this taxable income figure to derive a figure for total tax liability (line 11). Agent Lynch's analysis of Mack's various income components is reflected, in turn, in a series of additional worksheets made available to the defense. The principal summary worksheet, entitled Summary of Unreported Income, is annexed as Attachment 2( c). The summary sheet reflects that Agent Lynch determined three main components of income for Mack for the years in question: salary paid to Mack in cash by his then-employer, Comtec; salary paid to Mack by that employer in the form of Comtec stock; and management/consulting fees paid to Mack by Comtec in his capacity as a purported consultant.

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Agent Lynch will testify that he determined Mack's compensation in the form of Comtec cash salary payments and Comtec management/consulting fee payments by reviewing bank account records for Comtec during the relevant years and identifying Mack either as the payee or beneficiary of checks written on the accounts. He then reviewed the characterization of these checks in Comtec's accounting records to determine if the payments were classified as salary payments or consulting fee payments and classified them accordingly. With respect to his determination of Mack's income from the issuance of Comtec stock for the particular year in question, Agent Lynch would testify that he first determined all of the shares issued to Mack in his name by reviewing Comtec's transfer agent's records. Using these records, he determined how many shares were issued to Mack for a given year. Using Comtec's accounting records and its Board of Director Minutes, Agent Lynch then determined whether the stated purpose of the stock issuance was for compensation and, if so, the number of shares issued for that purpose. In order to place a fair market dollar value on these shares, Agent Lynch looked to the trading prices for the particular shares at the point in time that trading restrictions on the shares were lifted. He obtained these trading price figures from records of Comtec's auditors.4
4

In using fair market value of the shares on the date that trading restrictions were lifted, Agent Lynch followed the guidance provided by Internal Revenue Service Code Section 83. Using transfer agent records and brokerage account records for accounts maintained by Mack in his own name and the name of the Mack Family Trust, Agent Lynch also determined that Mack received funds during the years in question from market sales and privately arranged sales of Comtec stock previously issued to him or the trust. Agent Lynch determined that, viewing the transactions in the light most favorable to him, Mack would have arguably sustained capital losses from the sales because the selling prices were lower than the imputed value of the shares at the time that they first became available to him. His total capital losses for the year would have been capped at $1,500, however. (continued...) 14

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An explanation of the remaining components of Agent Lynch's income tax analysis is set forth in a written narrative set forth as Attachment 2(d). C. Agent Lynch's Conclusions Re: Transactions Involving the Regency Place Property. Analysis Regarding The Funds Involved In the Transactions. Agent Lynch is prepared to testify that, in determining the source of funds for the down payment for the Regency Place Property and the source of funds for related transactions, he looked at the real estate closing records for the sale of the Regency Place Property to Suzette Mack and identified, as the down payment, a $106,569 cashiers check, purchased on March 5, 1997, and made payable to Suzette Mack and drawn on Guaranty Bank in Denver, Colorado. Using bank records, Agent Lynch traced the purchase of this check to an account in the name of URIC; the cashier's check was purchased by defendant Shidler, the sole signatory on the account, using funds in the account. Agent Lynch will testify that, based on his review of the bank account records for the URIC, he determined that the account was opened a short period of time before the purchase of the cashiers check and that the check was funded by a cash deposit of $104,000 on March 4, 1997 and a cash deposit of $6,000 the following day. These cash deposits funded the cashier's check for the Regency Place Property down payment. Agent Lynch will further testify that Guaranty Bank currency transaction reporting was (...continued) Agent Lynch's approach to analyzing Mack income from Comtec stock involved a two step approach, requiring an initial valuation of the stock at its issuance in order to determine income from the stock grant and a capital gain/loss analysis when the stock was ultimately sold. Agent Lynch is prepared to testify about the income and income tax analysis that would result from simply approximating Mack's income from the Comtec stock by using the total proceeds received from the ultimate sale, a one-step approach. 15
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only generated for the March 4th deposit, because it was in an amount over $10,000, and the $6,000 cash deposit was ostensibly not deemed by the bank to be part of the same currency transaction, but that the currency transaction report for the $104,000 cash deposit, on Treasury Form 4789, only reflected that the deposit was on behalf of URIC. Accordingly, there were no direct records showing the source of either deposit other than URIC. Notwithstanding, Agent Lynch reviewed the account records for the bank accounts that were used and controlled by Mack during this period and determined that Mack had made a series of cash withdrawals that were consistent with accumulating a cash hoard sufficient to fund the $110,000 in cash deposits to the URIC account on March 4th and March 5th. Agent Lynch determined from the bank account review, in particular, that, between January 1, 1997 and March 2, 1997, Mack made combined cash withdrawals of at least $94,000 from two bank accounts he maintained in the names 726 Investments and Horse Cents, LLC, a shell corporate entity nominally owned by his family trust. The bank account records for the 726 Investment account showed, in particular, that between February 21 and February 25, 1997 Mack made four sub-$10,000 cash withdrawals totaling $35,000.5 From his review of the banking activity in these accounts for the latter part of 1996, Agent Lynch determined that Mack also had available to him additional cash from prior cash withdrawals from these accounts. Bank account records for accounts for Comtec revealed additional cash sources for Mack in the latter stages of 1996, based on Mack's negotiation of Comtec salary checks for cash. Agent Lynch will testify that, based on his review of Mack's

The significance of these structured transactions as part of the overall design and effect of the transactions related to Regency Place is addressed below. 16

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financial records, he found no other disposition of this cash. Based on this, and given the close proximity in time of these cash withdrawals, Agent Lynch concluded that Mack's cash withdrawals from the 726 Investment and Horse Cents bank accounts, together with cash available from cashing Comtec checks payable to him, were the probable sources of cash for the $110,000 in cash deposits into the URIC bank account over the course of March 4 and March 6, 1997.6 Agent Lynch's testimony in this regard, the government will show, is consistent with and corroborates testimony of various fact witnesses who will provide direct testimony that Mack was the source of these cash deposits.7 Agent Lynch will testify that he reviewed, in turn, the bank account records for the accounts from which Mack's cash withdrawals were made to determine the likely source of funds for these withdrawals. Based on his review of the deposit activity into these accounts, Agent Lynch determined from the deposits into the accounts that all of the funds came from Mack or Mack-related entities. Agent Lynch will testify that the sources of funds included deposits of checks from Comtec reflecting salary payments to Mack, loan advances or reimbursements to Mack from Comtec or related-entities or payment of consulting fees to Mack from Comtec. The deposits were also funded by sales of Comtec stock either in Mack's name or the name of his

Agent Lynch's conclusion that Mack's cash withdrawals and cash accumulations funded the deposits is further supported by his conclusion, discussed further below, that there were no other sources of funds identified for URIC and that there was no evidence that URIC had economic activity or otherwise functioned other than as a bank account controlled by defendant Shidler. In addition to eliciting testimony from Mack, himself, that he had stockpiled cash from withdrawals from these accounts and delivered the cash to defendant Shidler's law office, the government anticipates eliciting testimony from employees within Shidler's office who received the cash from Mack and counted the cash. 17
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family trust, the Mack Family Trust. Agent Lynch will testify that he reviewed the bank account activity for the URIC bank account at Guaranty Bank and saw additional disbursements from the account between March 13 and March 24, 1997. These disbursements totaled approximately $33,000. Agent Lynch reviewed the check items themselves used to make the disbursements, together with correspondence purportedly written by Suzette Mack to defendant Shidler directing him to make the disbursements, in order to determine the disposition of these disbursements. The records reflected that $20,000 was paid out to Mack's company, 726 Investments, with the remainder disbursed, in accordance with her correspondence, to Suzette Mack or certain of her creditors. The correspondence and related records, Agent Lynch will further testify, depict these disbursements as being the distribution of the remainder of proceeds from the purported sale of Comtec stock held in Suzette Mack's name for $140,000 to URIC. The records depicting this, include a stock purchase agreement provided by Suzette Mack purportedly between her and URIC and a letter from Suzette Mack to 726 Investments agreeing to pay 726 Investments a 10% commission for purportedly arranging the Comtec stock sale to URIC. Agent Lynch will testify that he reviewed the bank account records for URIC to find the source of funds for these additional disbursements. Using the same method of analysis as he employed for determining the source of the Regency Place Property down payment, Agent Lynch determined that the funds for these disbursements came from a $30,200 cash deposit on or about March 17, 1997, together with the residual funds in the account after the purchase of the cashier's check for the Regency Place Property down payment. Agent Lynch will testify that, as with the prior cash deposits into the URIC account, there was no source of the deposit other than 18

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URIC itself identified in any currency transaction reporting by the bank.8 From his review of the records of Mack-controlled bank accounts, Agent Lynch determined that Mack had additional cash available to him from cash withdrawals from his bank accounts between March 3 and March 17, 1997. Agent Lynch's review of the deposits of funds into these accounts revealed that they came from similar sources connected to Mack. Agent Lynch will testify that as part of his analysis of these transactions he sought to rule out the possibility that there were funds available to URIC other than from the $140,200 in cash deposits into the URIC account to fund the purported $140,000 purchase of Suzette Mack's Comtec stock or that there was other evidence that there were funds available to URIC (other than from Mack) sufficient to support the stock purchase. Agent Lynch found no other deposits into the account supporting such a purchase. Nor did he find any assets or other sources of funds (save Mack) connected to URIC that could have functioned as a source for the $140,200 in cash deposits that he traced into the account.. Agent Lynch will testify that, based on his review of bank account and public records, evidence of URIC's operations and existence appears to have been limited to State of Colorado incorporation records filed by defendant Shidler forming URIC immediately before opening the URIC bank account, a taxpayer identification application filed by Shidler with the IRS in order to facilitate the opening of the bank account, and the bank account opening documents executed by Shidler himself to open the account.
8

Agent Lynch will testify that, as with the other $10,000-plus cash deposits into the URIC bank account, Guaranty Bank was required to complete and file with the Department of Treasury a currency transaction report on Form 4789 identifying persons on whose behalf the cash transactions are being conducted. Agent Lynch will testify that he reviewed the currency transaction report for the $30,200 cash deposit prepared by the bank, and the form identifies defendant Shidler as the person conducting the cash transaction but only URIC as the person on whose behalf the transaction was being conducted. 19

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Further, Agent Lynch found no records indicating that URIC had any employees or operations. The bank account itself, Agent Lynch will testify, appeared to function primarily only as a conduit for the deposit and distribution of the $140,200 and ceased to be actively used after the disbursement of these funds.9 Agent Lynch will conclude that, overall, URIC appeared to function as a shell entity to facilitate the transfer and movement of funds. As a remaining part of his analysis to determine whether the transactions at issue involved a legitimate sale of stock to an independent entity, Agent Lynch will testify, he looked to other evidence to determine whether the parties took other actions consistent with treating the transactions as part of a stock sale. Agent Lynch will testify that if the funds deposited into the URIC account and then used for the Regency Place Property down payment and other disbursements were really considered to be stock sales proceeds, then defendant Shidler, acting on behalf of URIC, should have prepared, distributed to Suzette Mack and filed with the IRS an IRS Form 1099 reporting these funds as stock proceeds to Suzette Mack. However, no such Form 1099 was received by the IRS. Agent Lynch will testify that he also looked to the ultimate use and disposition of the Comtec stock purportedly received by URIC in exchange for the $140,000 in cash to determine whether it was received by an independent party as part of an arms-length transaction. Agent Lynch will testify that based on his review of Comtec transfer agent records he determined that defendant Shidler caused the transfer agent to reissue in the name of URIC the shares of stock previously in Suzette Mack's name. Reviewing transfer agent and brokerage firm records, Agent

Agent Lynch saw one deposit and simultaneous withdrawal from the URIC account in August 1997, leaving the account with a $10 ending balance. 20

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Lynch traced these shares, in turn, into a brokerage account opened by defendant Shidler in the name of URIC in or about June 2000. However, Agent Lynch will testify, his review of the brokerage account records indicated that shares were shortly thereafter sold and the cash disbursed into accounts opened for URIC by a friend of Mack and the funds then either transferred to Mack or used for business investments he was pursuing.10 Finally, as part of tracing the disposition and use of funds and assets in connection with the Regency Place Property, Agent Lynch will testify that he reviewed real estate settlement records showing the ultimate disposition of sellers proceeds when Suzette Mack sold the property and saw that approximately $22,500 was disbursed to Mack ostensibly as a payoff on a second mortgage he held in the property. Agent Lynch will testify that based on his review of the financial records this disbursement really appeared to be payment for an equity interest that Mack retained in the property beneficially but not of record. Effect of the Transactions. Agent Lynch's conclusion that the foregoing transactions had the effect of concealing Mack as the source of the down payment for the Regency Place Property and allowed him to change the form of assets that he held to conceal his continuing interest in them follows from the above analysis. Agent Lynch is prepared to testify that particular aspects of the transactions also operated to conceal Mack's connection to them from the IRS. The deposit of cash stockpiled by Mack into an account in the name of URIC helped conceal Mack's connection
10

Agent Lynch will base this conclusion, in part, on the records showing the stock being liquidated and the cash proceeds being transferred to Mack in the form of checks to cash negotiated by him and, in part, from anticipated testimony of Mack and from Martha McGowan, the friend who executed the stock trades and who made the deposits and wrote the checks on these accounts. 21

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to the funds because URIC had no formal connection to Mack. In forming the entity, defendant Shidler did not list Mack or any one associated with him as being a director, officer, registered agent or shareholder. The only records associated with URIC indicated a connection to Shidler. Any currency transaction reporting that was generated in connection with the cash deposited into the URIC account failed to reveal Mack as the source of the cash, identifying only URIC as the source of the currency being deposited. Similarly, the asset that Mack received in exchange for the $140,200 in cash deposits was titled in the name of URIC, concealing Mack's interest in the stock. The IRS was not even apprised that there was a sale of stock by Suzette Mack, as no Form 1099 report was generated by defendant Shidler on URIC's behalf. The $140,200 in cash deposits were themselves portrayed as a stock sale so that, if there was in fact an audit, the funds to Suzette Mack could be explained as being derived from an ostensibly arms-length sale to an ostensibly independent third party. Mack's cash was used, moreover, to purchase real property titled only in his then-spouse's name. The cash was moved from accounts in the names of entities with which Mack had a more direct connection in the public records.11 Finally, Agent Lynch would testify that, when the Suzette Mack Comtec stock that was re-registered in the name of URIC was ultimately sold in 2000, the brokerage firm would not have identified and reported the stock sales proceeds as gross income to Mack. The account being titled in the name of URIC and no other connection between URIC and Mack being apparent, the brokerage firm would have had no record that Mack was connected to URIC or the beneficial owner of the funds. Accordingly, Agent Lynch will testify that any informational
11

Agent Lynch would testify that State of Colorado records reflect, for example, that Mack was the registered agent for 726 Investments, the name of one of the accounts used by Mack 22

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reporting would have designated URIC as the seller and recipient of the stock proceeds and not Mack. D. Agent Lynch's Conclusions Re: Transactions Involving the Delbert Road Ranch Property. Analysis Regarding The Funds Involved In the Transactions Agent Lynch is prepared to testify that, based on his review of the real estate and public records acquired in this case, he identified the Delbert Road Property as being transferred to AISC as a result of the closings of two purchase and sale transactions, the first involving the sale of the property nominally to Dale Cephers by its owner and the second effectuating the transfer of record ownership from Cephers to AISC, a corporation formed by defendant Shidler, according to public records, in 1996 with a family member of Shidler listed as registered agent. Agent Lynch will testify that, in coming to the conclusion that funds and assets owned and controlled by Mack were ultimately used for the purchase of the Delbert Road Ranch Property, he sought to determine the source and origin of the funds used for the down payment provided in the initial purchase of the property in the name of Dale Cephers. Agent Lynch reviewed the $195,774 cashier's check tendered as the down payment funds at the closing of this transaction, together with related bank records, and determined that check was purchased with funds in an account set up by defendant Shidler at Guaranty Bank in the name of AISC several weeks before the closing. He then looked at the bank account records to determine the source of funds for the purchase of this cashier's check and, using bank records, identified the funds as deriving from a $200,000 wire transfer into the AISC account from AALL Trust and Banking, an apparent offshore banking entity located in the Cayman Islands.

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In seeking to determine the source of funds for this wire transfer, in turn, Agent Lynch reviewed bank account records for domestic bank accounts held or controlled by or otherwise associated with Mack or Shidler.12 Agent Lynch will testify that he identified two wire transfers of funds totaling $178,000 to the bank account at the Bank of Bermuda of April Gold, Inc., an off-shore entity: The first wire transfer was of $100,000 and was made on May 6, 1997 from Mack's bank account for 726 Investments; the second was of $78,000 and was made on June 11, 1997 from Mack's bank account for the Mack Family Trust.13 As part of the bank account analysis, Agent Lynch sought to further trace back the source and origin of these funds by examining the proximate deposits into these bank accounts and, taking into consideration the available cash on hand in those accounts prior to the deposits, determining the net cash available in the accounts for the respective wire transfers. Agent Lynch would testify that, using this approach, and operating on a premise that the more recent deposits in a bank account fund the first disbursements out of an account (a "last in, first out" approach), he determined that the $100,000 wire transfer from the 726 Investment account was funded by a combination of deposits into the account of checks payments to Mack by Comtec and funds which Mack received in 1996 from the private sales of Comtec stock held in the name of the Mack Family

Agent Lynch would testify that he focused on these domestic accounts because such a domestic source of funds would be consistent with written proposals drafted by defendant Shidler outlining plans by which Mack, through Shidler's help, would move his assets off-shore and repatriate them in various forms, including real estate purchases. One proposal, in particular, discussed using AISC as a shell vehicle to purchase ranch property for Mack. The government will establish through the testimony of Donald Mack that the additional $22,000 needed to fund the $200,000 wire transfer to defendant Shidler's AISC bank account came from a loan from an off-shore banker that Mack and Shidler used to facilitate the movement of the funds off-shore.. 24
13

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Trust. He determined that the $78,000 wire transfer from the Mack Family Trust bank account was ultimately derived from funds received by Mack from the private sales of Comtec stock in the name of the trust.14 As part of his analysis, Agent Lynch also sought to determine whether any funds were actually exchanged in connection with the second real estate closing, which transferred title to the property from Cephers to AISC. Agent Lynch will testify that, according to the real estate documents generated in connection with it, this second transaction essentially called for AISC to assume the payment obligations of the purchase mortgage loan obtained in Cephers' name as part of the initial purchase.15 According to the settlement statement for this second purported purchase and sale, AISC had already supposedly provided an earnest money deposit for the transaction of $200,774, indicating that Cephers, as the purported seller, was entitled to net sellers proceeds in excess of $179,000 as a result of the second transaction. Agent Lynch will testify that, based on his review of the public records concerning the property, he found a deed of trust and promissory note executed by the defendant on behalf of AISC and in favor of an entity identified as "Trinity Land." The recorded instruments appeared to depict a $200,000 loan from "Trinity" to AISC, secured by the ranch property. Agent Lynch

Agent Lynch would testify that the funds held in these accounts were co-mingled by Mack and the subject of inter-bank account transfers and transactions with other related Mack entities. The co-mingled funds in these accounts ultimately were derived from several discrete sources, however, all connected to Mack The sources of funds included checks that Mack received from Comtec for salary and other forms of compensation and checks or wire transfers he received for proceeds of the sale of Comtec stock either in Mack's own name or the name of the family trust. The real estate documents that Agent Lynch will rely on in connection with a discussion of this analysis include the settlement statement, promissory notes and deed of trusts, and title company accounting records concerning the receipt and disbursement of funds 25
15

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will testify that, while these recorded instruments appear to suggest that "Trinity Land" was the source of all but $774 of the purported $200,774 earnest money deposit by AISC, he found no evidence that the title company received such money. Nor did he find any evidence that AISC ­ which, Agent Lynch will testify, appeared to have no more substance that URIC ­ had received such funds; Agent Lynch will testify that he found only one deposit of $200,000 that could have funded the purchase transactions for the ranch property and that the bank records reflected that that deposit, the off-shore wire transfer discussed above, was used to fund the down payment for the first purchase by Cephers ­ not AISC's purchase of the property from Cephers. Moreover, Agent Lynch will testify, he saw no evidence of any actual payments to Cephers consistent with acting as a true seller of the property and consistent with the stated terms of the second transaction. He found no evidence of actual payments corresponding to the net proceeds that Cephers should have received as the seller in the second transaction either from the bank account records for AISC or the title companies escrow disbursement records.16 Nor did Agent Lynch find any Form 1099 reports filed by the title company in connection with Cephers' purported sale of the property to AISC. Similarly, Agent Lynch will testify, he found no evidence that AISC made any payments to Trinity Land in repayment of the purported $200,000 loan. Notwithstanding, public records indicate that defendant Shidler actually subsequently filed a

Both Agent Lynch and witnesses for the title company will testify that there is no evidence from the actual banking records that Cephers received the seller's proceeds check for him referenced in the title company records. Agent Lynch will testify that handwritten receipts that he reviewed and a confidentiality agreement executed by Shidler and Cephers reflect that Cephers did get certain payments in connection with the Delbert Road Ranch Property but these payments were in cash as a fee for acting as a nominee and did not exceed $45,000. 26

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release of the deed of trust in favor of Trinity Land when efforts were being made to re-finance the property. No informational filings were made by or on behalf of Trinity Land with the IRS reporting the payment of any loan interest by AISC. Agent Lynch will testify that he came to conclude that the mortgage loan payments servicing the Cephers purchase mortgage loan for the ranch property were funded by Mack from assets and funds he controlled through the following analysis: Using the bank account records and mortgage lender records, Agent Lynch traced the actual payments to the mortgage lender back to checks issued by Deb's Escrow and Lee's Servicing, two real estate escrow entities. Agent Lynch also reviewed the bank account records for AISC's account at Guaranty Bank and saw corresponding checks to these escrow servicing companies funding these mortgage payments. Agent Lynch reviewed the deposits into the AISC bank account to determine the source of the funds for AISC's payments to the escrow servicing companies and found, in turn, corresponding periodic deposits consisting of a combination of checks drawn on Mack's Horse Cents and 726 Investment bank accounts, and cashier's checks indicating that the remittor was Horse Cents or Donald Mack. Agent Lynch will testify that, based on his review of these bank accounts and Mack's identified sources of funds, he determined that the funds used for these deposits into the AISC bank account were ultimately derived primarily from checks to Mack from Comtec for salary, other compensation or reimbursement and from the proceeds of the sale of Mack's own Comtec stock. Agent Lynch will further testify that Mack's funding of the Cephers purchase mortgage loan payments in this manner was further concealed by being disguised as payments on a lease that Horse Cents had purportedly entered into with AISC to occupy the property. Agent Lynch 27

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will testify that he examined lease agreements entered into by Mack's father on behalf of Horse Cents with AISC . Based on the terms of the lease and the notations on the checks deposited into the AISC account, Agent Lynch concluded that AISC made no substantial profit from "renting" the property to AISC and that its bank account was simply used as a conduit to pass through funds to pay the Cephers mortgage on the ranch property. Agent Lynch will testify that he based his conclusion that the Shidler-Beeghly purchase and sale transaction was really a re-financing of the Delbert Road Ranch Property on behalf of Mack ­ and not a true purchase and sale ­ based on the following analysis: As an initial factor, he examined and considered the source and use of the funds involved in the transaction. He reviewed the real estate closing records and related bank account records for the closing on this transaction and determined that Beeghly, Shidler's law practice client, did, in fact, fund the initial down payment for the purchase out of her own funds and obtained a purchase mortgage loan in her name for the remainder of the purchase funds. However, Agent Lynch traced the net seller proceeds of approximately $286,060 from this transaction into a personal bank account maintained by defendant Shidler and found that, subsequent to the receipt of these funds, Shidler issued a two checks to Beeghly: one check for $166,476.51, reimbursing her for down payment funds; the other check for $10,000. Agent Lynch will testify that this second check is consistent with a fee that Shidler promised Beeghly to act as a purchaser for the property set forth in a written proposal that he drafted for the transaction. Agent Lynch will testify that, using the bank account records, he traced the remainder of the purported sales proceeds from the Shidler-Beeghly transaction from Shidler's personal account and found that ­ with the exception of $10,000 which he paid to his law firm as a fee ­ 28

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the remainder of the "seller's proceeds" funds were distributed by Shidler to Mack. Defendant Shidler, Agent Lynch will testify, provided Mack two checks drawn on his personal ­ one made out to Mack for $60,000 and the other made out to Merrill Lynch for $35,000. Agent Lynch will testify that he traced the $60,000 check made payable to Mack to a series of cashier's checks purchased by or for Mack. Agent Lynch will testify that he reviewed handwritten accounting records prepared by Mack corroborating his receipt and use of this money. Agent Lynch will testify that, although the other check was made out to Merrill Lynch, it was not tendered to that financial institution but was endorsed by defendant Shidler and re-deposited into one of Shidler's accounts and used to purchase additional cashier's checks provided to Mack.. Agent Lynch will testify that he saw a promissory note executed by Mack to an entity called FinNet that purported to characterize Mack's receipt of this money as a loan from that entity. Agent Lynch will testify that he examined other records purportedly generated around the time of this promissory note indicating that defendant Shidler incorporated an entity called FinNet and applied for an employer identification account number with the IRS for this entity. Agent Lynch will testify that he further traced the cashier's checks obtained with the foregoing funds and found that these checks were used, in turn, in part to fund payments that were made to Beeghly's mortgage lender. The payments were purportedly characterized as lease payments consistent with a written lease that Beeghly and Mack executed allowing Mack to rent the ranch property from Beeghly. The lease agreement reflected, Agent Lynch will testify, that Mack leased the property for monthly lease payments that matched the mortgage payments owed on the Beeghly mortgage loan. Agent Lynch will testify that he formed his conclusion that Beeghly acted as a nominee 29

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for Mack in the foregoing transaction based, in part, on his analysis of the source and use of the funds involved in the transaction, indicating that Beeghly did not stake or have at risk her own funds as a purchaser in the transaction, that she was paid a fee consistent with acting as a nominee (and not a true purchaser) , and that most of the purported seller proceeds went to Mack or for his benefit. Agent Lynch will testify that additional factors he considered in forming this conclusion include anticipated evidence from other witnesses and lease records indicating that Beeghly did not physically possess the property; evidence from lease and mortgage records indicating that Beeghly derived no economic benefit from leasing the property to Mack; and anticipated evidence from witness and records (including Shidler's written proposal) indicating that Beeghly did not negotiate the terms of the purported purchase from Shidler. Effect of the Transactions. Agent Lynch's conclusion ­ that the foregoing transactions had the effect of concealing Mack as the source of the down payment and mortgage payment funds for the Delbert Road Ranch Property and allowed him to change the form of assets that he held in the form of funds held in bank accounts in the names of entities having some connection to him into equity interest in real property held in the names of a nominee individual and nominee shell company ­ follows from the foregoing analysis. Agent Lynch is prepared to testify that particular aspects of the transactions also operated to conceal Mack's connection to the property from the IRS and to impair its ability to identify and reach his assets and income. The use of Cephers as a nominee in tandem with AISC to purchase and hold the Delbert Road Ranch Property through two separate transactions helped make it appear that Mack was completely disconnected from the purchase and holding of this asset. Agent Lynch will testify 30

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that AISC had no apparent connections to Mack and that its only connections from public records and bank account records was to defendant Shidler. By funneling the down payment funds to a bank account for this shell entity through off-shore facilities defendant Shidler and Mack further concealed any connections between Mack and the purchase funds. Agent Lynch will testify that there was no way for the IRS to determine from informational reporting to it or public records the true source of the inbound $200,000 wire transfer that was used to fund Cephers down payment. The second closing was constructed to make it appear to any auditor, moreover, that AISC purchased the property from Cephers as part of a arms-length transaction with additional funds provided by Trinity Land, a purported offshore entity. Defendant Shidler's recording of a

deed of trust portraying the property as encumbered by AISC's purported debt to Trinity Land for the funds, serving to make it appear to the IRS or other actual or prospective creditors that the property had less equity in it than was the case. The second transaction did not generate, moreover, a Form 1099 informational filing with the IRS that would have revealed that Cephers received proceeds from the sale from AISC. The machinations undertaken to service the Cephers mortgage loan further operated to conceal Mack's connection to the ranch property through the funneling of Mack's payments to the lender through AISC's bank account and two escrow servicing companies. These payments were derived, in turn, from bank accounts that were not in Mack's name and were portrayed as lease payments by an entity supposedly owned by his family trust. The lease documents executed by Shidler made it appear that the property was leased by Horse Cents for horse-breeding activities and that Mack's occupancy was simply incidental. Reporting to the IRS of mortgage interest and real estate tax payments was structured to make it appear that Cephers had made the 31

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payments, not Mack. The Beeghly re-financing transaction was designed to make it appear that Beeghly was a bona fide purchaser of the property with her own funds and that Shidler was the seller. The transaction was structured and operated to allow Mack to realize increased equity in the property while concealing his interest in the property and his connection to the re-financing proceeds. The proceeds that were distributed to Mack were characterized as a loan, the funds for which appear to be subject to the interests of a fictitious creditor; the loan allowed Mack to claim, if necessary that the receipt of the funds was neither the proceeds of a re-financing transaction of his own property nor income to him but simply the result of a loan from a party unconnected to the property. The lease agreement with Beeghly made it appear that his interest was simply that of

a tenant and any informational reporting by Beeghly's lender would have indicated that the mortgage interest and tax payments on the property were being paid by Beeghly, not Mack. Real estate closing records, supported by testimony from title company employees, will reflect that defendant Shidler provided the title company with a taxpayer identification number for his law practice in connection with title company's request for information about the seller. Agent Lynch will testify that title companies are required to solicit and obtain such taxpayer identification information in connection with their obligations to make informational reporting to the IRS of real estate transactions. Agent Lynch will testify that title companies are required to

issue and file with the IRS Forms 1099 for real estate transactions where the seller is identified as an individual but not when the seller is a corporation or other collective entity. Agent Lynch will testify that, by providing the title company with an employer identification number for his law office, he caused the seller on the Beeghly transaction to be identified as a non-individual, 32

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causing the title company not to issue a Form 1099 reporting the sale to the IRS. Agent Lynch will testify that, based on his review of IRS records and records generated by the title company subsequent to the sale, despite not getting a Form 1099, defendant Shidler reported the sales price of the transaction involving Beeghly on his individual tax return for 2000, consistent with treating the property as a personal asset instead of an asset held for Mack. E. The Methods of Analysis and Facts and Data Used in Agent Lynch's Analysis.

Agent Lynch's method of analysis and the analytical steps that he undertook to arrive at his conclusions are detailed in the discussion of his various conclusions and opinions above. So too are the factual sources upon which he relied in arriving at those conclusions and opinions. A further listing of the materials that he considered is set forth in Attachment 2(f). Broadly speaking, Agent Lynch attempted to discern the economic substance of the various transactions described above by employing the step transaction doctrine approac