# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo. 1991-614

UNITED STATES TAX COURT

JERRY R. AND PATRICIA A. DIXON, ET AL.,' Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9382-83,
17640-83,
4201-84,
15907-84,
40159-84,
30010-85,

16900-83,
19321-83,
15135-84,
31236-84,
22783-85,
30965-85,

Filed December 11, 1991.

30979-85, 29643-86.

Cases of the following petitioners are consolidated
herewith: John R. and E. Maria Cravens, docket Nos. 16900-83,
15135-84; Ralph J. Rina, docket No. 17640-83; John R. and Maydee
L. Thompson, docket Nos. 19321-83, 31236-84, 30965-85; Hoyt W.
and Barbara D. Young, docket Nos. 4201-84, 22783-85, 30010-85;
Robert L. and Carolyn S. DuFresne, docket Nos. 15907-84, 3097985; Terry D. and Gloria K. Owens, docket No. 40159-84; and
Richard and Fidella Hongsermeier, docket No. 29643-86.

SERVED

--

DEC 111991

226

- 2 TABLE OF CONTENTS

Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . |. 6
Findings of Fact. . . . . . . . . . . . . . . . . . . . . . . |. 8

I. Promoter Background. . . . . . . . . . . . . . . . . . 8

II.

Kersting Corporations. . . . . . . . . . .

.

. . . . .10

B.

.
.
.
.

.
.
.
.

A. Generally. . . . . . . . . . . . . . . . . . . . .10
C.

Holding Companies and Subsidiaries .
1. Charter Financial Corporation. .
2. Investors Financial Corporation.
Acceptance Corporations. . . . . . .

.
.
.
.

.
.
.
.

. . .12
. . .12
. . .16
. . i.19

E.
F.

Other Kersting Corporations. . . . . . . . . . . |.26
Books and Records; Tax Return Preparation. . . . |.27

D. Leasing Corporations . . . . . . . . . . . . . . .22
III.

G. Collection Litigation. . . . . . . . . . . . . . |.32
Kersting Investment Programs .

.

.

.

.

.

.

.

.

.

.

.

.34

A. Generally. . . . . . . . . . . . . . . . . . . . .34
B. Stock Purchase Plan. . . . . . . . . . . . . . . .43
C.
D.

Stock Subscription Plan. . . . . . . . . . . . . .46
Leasing Corporation Plan . . . . . . . . . . . . .53

E. CAT-FIT Plan . . . . . . . . . . . . . .. . . . . .61
F. Flow of Funds. . . . . . . . . . . . . . . . . . .66
1. Generally. . . . . . . . . . . . . . . . . . .66
2.
3.
4.

Stock Purchase Plan. . . . . . . . . . . . . .68
Stock Subscription Plan. . . . . . . . . . . .69
Leasing Corporation Plan . . . . . . . . . . .71

5. CAT-FIT Plan . . . . . . . . . . . . . . . . .74

G.
H.
I.

Termination of Stock Programs. . . . . . . . . . .76
Collection Activities. . . . . . . . . . . . . . .80
Notices of Deficiency. . . . . . . . . . . . . . .83

A.
B.

Jerry R. and Patricia A. Dixon . . . . . . . . .
John R. and E. Maria Cravens . . . . . . . . . .

F.

Robert L. and Carolyn S. DuFresne.

G.
H.

Terry D. and Gloria K. Owens . . . . . . . .
Richard and Fidella Hongsermeier . . . . . .

IV. Petitioners. . . . . . . . . . . . . . . . . . . . . .83

.83
.92

C. Ralph J. Rina. . . . . . . . . . . . . . . . . . !.95
D. John R. and Maydee L. Thompson . . . . . . . . . 100
E. .Hoyt W. and Barbara D. Young . . . . . . . . . . 104
.

.

.

.

.

.

. 110

. . 116
. . 125

Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Issue 1:

Validity of Deficiency Notices . . . . . . . .

Issue 2:

04033

Section 163(a) Interest Deductions . . . . . . J35

A. Stock Programs . . .. . . . . . . . . . . . . . . 135
1. Generally. . . . . . . . . . . . . . . . . . 135

2. Sham Analysis. . . . . . . . . . . . . . . . 141
3. Subscription Agreements. . . . . . . . . . . 175
4. Primary Loans. . . . . . . . . . . . . . . . 189
5. Leverage Loans . . . . . . . . . . . . . . . 202
6.
7.

Other Waltz Issues . . .
Collection Litigation. .

.
.

.
.

. .
. .

.
.

. .
. .

. . . 205
. . . 210

8. Summary. . . . . . . . . . . . . . . . . . . 214
B. CAT-FIT. . . . . . . . . . . . . . . . . . . . . 215

Issue 3: Income from Corporate Distributions. . . . . .
Issue 4: Owens Subchapter S Corporations, Mortgage
Funding, and Investment Expenses . . . . . . . . . . .
Issue 5: Section 163(d) Investment Interest Limitation.
Issue 6: Section 6653(a) Negligence . . . . . . . . . .
Issue 7: Section 6651(a)(1) Failure to File . . . . . .
Issue 8: Section 6661(a) Substantial Understatement . .
Issue 9: Section 6621(c) Increased Interest Rate. . . .

226
228
233
234
238
239
240

Joe Alfred Izen, ,Ir., for the petitioners in docket Nos.
9382-83, 17640-83, 4201-84, 15907-84, 40159-84, 22783-85, 3001085, 30979-85, and 29643-86.2
Luis C. DeCastro and Philip J. Hoskins, for the petitioners

in docket Nos. 19321-83, 31236-84, and 30965-85.
John R. Cravens, pro se in docket Nos. 16900-83 and 1513584.
Kenneth W. McWade, Jeffrey A. Hatfield, and Thomas A.

. Dombrowski, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

GOFFE, Judge:

The Commissioner determined deficiencies in

and additions to petitioners' Federal income taxes, as follows:

2
Subsequent to the filing of the Court's opinion in Dixon v.
Commissioner, 90 T.C. 237 (1988), which addresses certain matters
severed from the issues herein, the Court granted the motions of
Robert J. Chicoine, Darrell D. Hallett, and Robert M. McCallum to
withdraw as counsel of record for the petitioners in docket Nos.
9382-83, 17640-83, 4201-84, 15907-84, 40159-84, 22783-85, 3001085, and 30979-85, and the motions of Robert M. McCallum and L. N.
Nevels, Jr., to withdraw as counsel of record for the petitioners
in docket No. 29643-86.

- 8 1983 are liable for the increased interest rate provided in
section 6621(c).
We previously resolved other matters relating to these
cases, concerning the issuance and execution of a search warrant,
in Dixon v. Commissioner, 90 T.C. 237 (1988).

FINDINGS OF FACT

I.

Promoter Background
Henry Kersting (Kersting) created and administered the

investment programs at issue in these cases, and also managed
most of the participating corporations.

Born in Germany in 1923, Kersting emigrated to Canada in
1951.

Before leaving Germany, he graduated from high school,

served in the military, spent several semesters pursuing but not
attaining a college medical degree, and in 1949 married.

In 1952

or 1953, while employed as an aircraft mechanic in Toronto, he
started a mail order business that he managed until moving hi
family to Los Angeles, California, in 1959.

While there he

invested in Eastern Lenders Services, which originated Federally
approved mortgages.

Among the subjects he learned about. from

this investment were originating, warehousing, and selling
mortgages, and negotiating lines of credit.

In about 1964, he

separated from Eastern Lenders Services and invested in a savings
and loan association in Ukiah, California.
1968 and has lived there ever since.

He moved to Hawaii in

- 9 One of the first entities that Kersting incorporated while
living in Hawaii was First Atlas Funding Corporation in 1968,

which engaged in what Kersting termed a "mortgage funding"
business.

A participating investor borrowed approximately 10

times his monthly home mortgage payment from a corporation with
which Kersting was associated and invested this amount to start
the program.

Thereafter, the investor had both an investment

account and a loan account with Kersting.

For the investment

account, the investor typically supplied funds in a constant
monthly amount, and First Atlas Funding6 reported investment

results.

From the loan account, the investor borrowed monthly

amounts, approximately equal to his monthly investments, in order

to make payments on his home mortgage.

To the extent that the

balance in the investment account exceeded the balance in the
loan account, periodic printed statements informed the investor
that the overall account had a "net value."

These statements

also compared the investment earnings to the interest expenses
for "net results."
mid-1970s.

First Atlas Funding ceased operations in the

The State of Hawaii considered it involuntarily

dissolved in 1977 for failure to make required annual filings
with the State.
In 1972 or 1973, Kersting organized his first of many
automobile-leasing entities structured as subchapter S

For convenience, corporations with name endings such as
"Corporation," "Inc.," "Co.," or "Ltd." will often be referred to
without the ending after the first reference.

- 10 corporations.

Prior.to organizing this corporation, he had no

direct experience in the leasing business, having only read about
it.

Over the next few years, this corporation leased 8 to 10

automobiles.7

Kersting's involvement with subchapter S leasing

corporations was considered by this Court in some detail in Pike
v. Commissioner, 78 T.C. 822 (1982), affd. without published !
opinion 732 F.2d 164 (9th Cir. 1984).

Kersting has had no formal education or specialized training
in either business or law.

He and his wife, Ute Charlotte

Kersting (Ute Kersting), have four children, including two
daughters whose married names are Gabriele LeMond and Heidi
Moseley.
II.

Kersting Corporations
A.

Generally

References herein to "Kersting corporations" are to
corporations that participated in the investment programs
Kersting oversaw during the years at issue.

He served as both a

director and president of most of these corporations and also
sometimes owned stock.

For those corporations in which he served

as president during the years at issue, he had exclusive

"Lease" as a verb in ordinary usage can refer to what the
lessor does or what the lessee does. As we use the term herein,
a corporation that "leases" is a lessor and an individual who
"leases" is a lessee.

The "years at issue" outside of part IV of these findings
are 1975 through 1983. The "years at issue" within part IV are
the years before the Court for the particular petitioner or
petitioners being discussed.

management authority.

His administrative assistant and secretary

throughout these years was Sherrill Pang (Ms. Pang)? who knew
nearly as much as he did about the workings of his investment

programs.

Ms. Pang, who was heavily involved in the day-to-day

clerical tasks associated with those programs, worked under
Kersting's managerial control.

For most of the Kersting corporations, Ute Kersting was an
incorporator, an officer, a director, or some combination.

She

did not, however, play any meaningful active role in management
or operations.

Heidi Kersting had a similar status and

eventually asked her father to stop using her name on corporate

documents.

Gabriele Kersting did some work related to the

investment programs, at least to the extent of corresponding with
investors on occasion.
Most of the Kersting corporations most of the time had

Hawaii offices located together, with one benefit being minimized
expenses.

These offices contained the normal trappings of a

business office, including desks, telephones, and personnel.

A

given clerical worker generally performed duties for any of
several corporations depending upon where the need was at the
time.

The Kersting corporations did not each maintain a separate

file for a given investment transaction, but instead shared a
file that was referenced by the name of the investor and one of
the corporations involved in the transaction.
Throughout the years at issue, at least some of the Kersting
corporations solicited proxies from shareholders.and, in

- 12 -

combination rather than separately, held shareholders meetings
that Kersting attended.

Kersting generally held a sufficient

number of proxies from shareholders to take the actions he

desired regardless of how the attending shareholders voted.
Although Kersting announced and attended shareholders meetings
after 1981, he never prepared corporate minutes of these later-

year meetings.
The Kersting corporations did not prepare annual reports

during the years at issue, and there was no active market for
their stock.

Kersting did not participate in any public

offerings of stock during this time.
B.

Holding Companies and Subsidiaries

1.

Charter Financial Corporation

Kersting organized Kershwin, Ltd., in the 1950s while living

in Toronto.

The shareholders during the years at issue were his

four children and a trust for their benefit.

In the early 1970s,

Kershwin, Ltd., acquired most of the stock of Confidential

Finance Company, Ltd., which had been incorporated in Hawaii in
1959.

Confidential Finance had been an industrial loan company

that dealt primarily with local people in Hawaii, and, with

Kersting now the president, activity relating to outstanding
loans continued.
Kersting was initially both a director and the president of
Colt Financial Corporation, which was incorporated in Hawaii in
1975 with Confidential Finance subscribing for the initial

shares.

Ms. Pang was also an initial director and officer.

- 13 -

After a transaction involving exchanges of stock, Kershwin, Ltd.,
became the direct owner of about 80 percent of the Colt Financial
stock, an interest that was first diluted over the years by the
addition of new shareholders and then eventually sold.

Also as a

result of the exchange transaction, Confidential Finance became a
subsidiary of Colt Financial, which in 1976 changed its name to
Charter Financial Corporation.

Kersting acquired the outstanding stock and became a
director of Carey Trading Inc., a Nevada corporation that changed
its name in 1980 to Charter Financial Corporation.

This new

Charter Financial Corporation took over the activities of its
Hawaii namesake, and, without corporate formalities or the
issuance of new stock, Kersting began to treat the shareholders

of the Charter Financial incorporated in Hawaii as shareholders
of the Charter Financial incorporated in Nevada.9

He was a

director and the president of Charter Financial (Nevada) through
the last year at issue.

During this period, Ute Kersting was a

director and both she and Ms. Pang were officers.
Confidential Finance changed its name to Federated Finance
Co., Ltd., in 1976, at which time Kersting was the president and

Ute Kersting held the office of secretary.

The State of Hawaii

granted the renamed corporation an industrial loan business

We sometimes distinguish these entities and others by
parenthetical reference to the State of incorporation, such as
Charter Financial (Hawaii) and Charter Financial (Nevada).
References without State designation are general and not directed
specifically toward either.

- 14 -

license in July of that year.

In May of 1978, Federated Finance

Co. Inc. was incorporated in Nevada.

Kersting was an

incorporator, an initial director, and through the last year at
issue the president of Federated Finance (Nevada).

Ms. Pang and

Heidi Kersting were the other incorporators and initial
directors, and Ms. Pang and Ute Kersting were the other officërs
during this time.

At least most of the lending activity of

Federated Finance (Nevada) consisted of loans to airline pilots

to facilitate their purchases of stock.
Federated Finance (Hawaii) at some point voluntarily
surrendered its industrial loan business license, which the State

of Hawaii then canceled in late 1981.

Sometime before this, with

the exception of outstanding loans owed to and retained by

Federated Finance (Hawaii), the principal activities of that

corporation, including the making of loans for stock purchases,
shifted to Federated Finance (Nevada).

Although Federated

Finance (Hawaii) never formally liquidated, the State of Hawaii
considered the corporation involuntarily dissolved in December of
1983 for failure to make required filings with the State.
In about 1975, the president of Cosmopolitan Financial
Corporation, a widely held Hawaii corporation engaged primarily

in factoring accounts receivable, discussed with Kersting the
possibility of selling the corporation.

Confidential Finance

soon acquired most of the Cosmopolitan Financial stock through a
tender offer, and in 1976 Cosmopolitan Financial changed its name
to Federal Finance & Mortgage Ltd.

Federal Finance & Mortgage

- 15 sometimes made loans to pilots, but it was mainly a licensed
industrial loan company involved in factoring accounts
receivable.

It was not a regular participant in the Kersting

investment programs that are the subject of the instant cases.
Kersting was an officer and director of Federal Finance &

Mortgage for several years, and exercised management control, but
he left these positions near the end of or after the years at
issue.

Federated Finance (Hawaii) was wholly owned by Charter
Financial during the years at issue, and Charter Financial

conducted no significant business other than as a holding
company.

Federated Finance (Nevada) was wholly owned by either

Charter Financial or Federated Finance (Hawaii) during this time.
At least from 1978 through 1981, Federated Finance (Hawaii) and
Charter Financial owned 75 percent or more of the Federal Finance
& Mortgage stock.

At the end of 1983, a wholly owned subsidiary

of Charter Financial named Quintana Investments, Inc., owned 89
percent of the Federal Finance & Mortgage common stock.

Although most of the eventual Charter Financial shareholders
were airline pilots, not all were.
example, was a shareholder.

Kersting himself, for

Even the nonpilots, however,

generally acquired their shares the same way the pilots did, as
part of a Kersting investment program.

An exception was Denis

Alexander (Alexander), a broker and investor who knew that

Charter Financial was a holding company.

Throughout the years at

issue, he held over 100,000 shares indirectly acquired in the

- 16 mid-1970s.

He had lent over $100,000 to assist in the

acquisition of Cosmopolitan Financial, and this creditor's
interest evolved into his stock interest in Charter Financial.
As of December 30, 1988, Charter Financial, as common parent
of an affiliated group, had filed consolidated Federal income tax
returns for calendar years 1976, 1978, and 1979, but had filedi no

returns for 1977 or 1980 through 1983.
2. Investors Financial Corporation

Kersting and Alexander first met in Los Angeles in the early

1960s.

Alexander, who moved to Hawaii in 1964, lent $80,000 to

Kersting's subchapter S leasing corporations during the 1970s,
which he understood would be used to purchase automobiles.

The

two met in about 1977 to discuss the possible acquisition of
First Savings and Loan Association (First Savings) in Honolulu,

Hawaii, a State-chartered and Federally insured institution.
Alexander was a minority shareholder of First Savings and
acquainted with the majority shareholder.

Kersting and Alexander eventually arranged for the
acquisition of most of the stock of First Savings, with 40-some

Kersting clients (including petitioner John R. Thompson) becoming
shareholders.

Alexander, who expected First Savings to profit

from its real estate loans, joined the acquiring group and thus
added to his First Savings stockholdings.

The total cost to the

acquiring group was approximately $2.8 million, with about $1
million of that amount paid in cash.

The remaining $1.8 million

was borrowed from First Hawaiian Bank, which required a pledge of

- 17 -

the First Savings stock as security.

Charter Financial was a

guarantor on this loan, and Kersting corporations rather than the
individual investors paid at least some of the interest.

Kersting was an incorporator, an initial director, and the
initial president of Investors Financial Corporation, which was
incorporated in Nevada in April of 1978, the month after the

acquisition of First Savings.

Ms. Pang and Heidi Kersting were

the other incorporators and initial directors.

Kersting arranged

for the members of the First Savings acquiring group to
relinquish their stock in First Savings and become shareholders
of Investors Financial, which was to be a holding company for
First Savings.

Investors Financial later began to sell its stock

to other people than those in the First Savings acquiring group,
including some of petitioners, thereby diluting the interests of
the acquiring group.
shareholders.

In 1980 Investors Financial had over 200

Although Investors Financial applied to Federal

banking authorities to be approved as a holding company for First
Savings, those authorities never approved the application.
Michael Provan was the president of Investors Financial from
1978 into 1982.
into 1980.

Alexander was an officer, a director, or both

For at least some parts of 1978 and 1979, Kersting

was neither an officer nor a director.
served as secretary/treasurer.

Beginning in 1980, he

He became the president in 1982

and continued at least through 1983, during which time the other
officers included Ms. Pang and Ute Kersting.

- 18 -

Sometime prior to February of 1980, during a period of
sharply rising interest rates, Federal banking authorities
determined that First Savings should be merged with another

institution.

The banking authorities forced a merger with First

Federal Savings of Honolulu in February of 1980, which terminated
the stock interest of Investors Financial in First Savings.
Although the initial arrangement was for First Federal Savings to

assume the liabilities of First Savings and to purchase the
assets at a price somewhat above the audited net worth, First

Federal Savings ultimately paid nothing to First Savings.
Shortly after the forced merger, Federal banking authorities

and First Hawaiian Bank commenced a lawsuit against Mortgage
Guarantee Insurance Corp. based upon a First Savings director
and-officer policy.

Most members of the First Savings acquiring

group assigned their interests in the litigation to First
Hawaiian Bank, which agreed to release them from their

obligations on the First Savings stock acquisition indebtedness.
The parties eventually settled.

Much of the over $3-million

recovery went to First Hawaiian Bank and attorneys, but none óf

it went to the First Savings acquiring group or Investors
Financial.

Almost all members of the First Savings acquiring

group eventually recouped their original cash investments from
Kersting, who used Charter Financial funds.
At the time of the forced merger, the only significant asset

of Investors Financial was its stock interest in First Savings.
Investors Financial has not acquired any additional significant

..

- 19 assets since then.

As of December 30, 1988, Investors Financial

had filed Federal income tax returns for its taxable years ending
in 1978 and 1980, 442
but for no years since.
C.

Acceptance Corporations

The word "Acceptance" in the name of a Kersting corporation
indicated that it was not licensed by the State of Hawaii, which

did require licenses for certain types of lending institutions
such as commercial banks and savings and loan institutions.
Kersting acceptance corporations did not actively solicit
business from the general public, but instead engaged in lending

activity directed primarily at airline pilots.

For each of the following entities, incorporated in Nevada
in the year parenthetically indicated, Kersting was an
incorporator, an initial director, and throughout the years of
corporate existence that coincide with the years at issue the

president of the corporation:

Forbes Acceptance Corporation

(1976), Fargo Acceptance Corporation (1977), Candace Acceptance
Corporation (1978), Mahalo Acceptance Corporation (1978), Windsor

Acceptance Corporation (1978), Delta Acceptance Corporation
(1979), Avalon Acceptance Corporation (1980), and Lombard
Acceptance Corporation (1982).

The Fargo Acceptance

incorporators signed the Certificate of Incorporation on
March 11, 1977, and filed it with the State of Nevada on
March 17, 1977.

Investors Financial, like most of the other Kersting
corporations, used a noncalendar taxable·year.

- 20 -

The other two incorporators and initial directors of these
acceptance corporations were, with one exception, Ms. Pang and
either Ute or Heidi Kersting.

The exception was Larry Rinaldis,

who, along with Kersting and Ms. Pang, was an incorporator and

initial director of Forbes Acceptance.

Rinaldis structured

leases for Kersting's subchapter S leasing corporations.

The

other officers of these acceptance corporations throughout the

years at issue were, with two exceptions, Ms. Pang and Ute
Kersting.

Rinaldis was an officer of Forbes Acceptance until Ute

Kersting replaced him in 1977.

Gabriele Kersting was an officer

of Fargo Acceptance until Ute Kersting replaced her in 1977 or
1978.
Kersting was also a director and the president of Aztec
Acceptance Corporation, which was incorporated in Nevada in the

late 1970s or early 1980s.
Prior to the Nevada incorporation of Windsor Acceptance
Corporation in 1978, Windsor Acceptance Corporation Ltd. had been
incorporated in Hawaii in 1974 with Kersting's mother-in-law as
the initial shareholder.

The initial officers and directors had

been Kersting and his two daughters.

Without consideration of or

adherence to legal formalities, Kersting considered the
corporation shifted from Hawaii to Nevada in 1978.
Norwick Acceptance Corporation was incorporated in Nevada
under another name, Mendocino Financial Corporation, in 1966.

Kersting was an incorporator, an initial director, and the
initial president of Mendocino Financial.

The name change to

- 21 Norwick Acceptance Corporation was filed with the State of Nevada
in 1979, but an entity calling itself Norwick Acceptance engaged
in transactions well before that time in connection with

Kersting's subchapter S leasing corporations.

Kersting was the

president of Mendocino Financial/Norwick Acceptance during all of
the years at issue.

Ute Kersting was also an officer throughout

this period, as was Ms. Pang beginning in 1976.
Except for Windsor Acceptance and Norwick Acceptance, the

shareholders of each of the acceptance corporations were
predominantly or entirely airline pilots.

Although Kersting

required a pilot who became a shareholder to execute what was in
form a subscription agreement for the purchase of additional

stock, the acceptance corporation never issued the additional
stock to the shareholder or otherwise sought to consummate the
stock purchase transaction called for by the agreement.
Sometime after 1981, Kersting authored a form letter'2 to
investors that began as follows:
If you have been with us over the years you will
have noticed that we have organized by now eight
Acceptance Companies. We will list below in which of
these companies you became an investor and shareholder.

All of these companies were structured to make a
profit after a reasonable start-up period. This, in
turn, assured the profit motive which the IRS expects
of you when you engage in investments and the prospects
of taxable income or gains. All of your companies are
Pike v. Commissioner, 78 T.C. 822, 845 & n.36 (1982), affd.
without published opinion 732 F.2d 164 (9th Cir. 1984).

'2
A "form letter" is a typed letter with a general "Dear
Friend" or "Dear Friends" salutation rather than a personalized
one.

- 22 operating and money making entities today. The stock
which you initially purchased has increased in value
intrinsically which, I trust, will some day be
reflected in a market price in excess of your
acquisition cost.
As it would be impractical to take each of the
Acceptance Companies public separately we decided years
ago to combine all of the companies in a Financial
Holding Company * * *

Kersting then discussed the mechanics of exchanging acceptance
corporation stock for the stock of the proposed holding company,
Escon Financial Corporation.
As of December 30, 1988, Federal income tax returns had not

been filed by Avalon Acceptance, Forbes Acceptance, and Lombard

Acceptance for any taxable year that overlaps the years at issue.
Four other acceptance corporations had filed the following
returns on September 25, 1985, for taxable years ending as
indicated, but no other returns that overlap the years at issùe:
Fargo Acceptance for 1977 and 1978, Mahalo Acceptance for 1978

and 1979, Candace Acceptance for 1979 and 1980, and Delta
Acceptance for 1980 and 1981.

Kersting signed each of these

eight returns on September 10, 1985.

Although Fargo Acceptance

reported a tax liability of over $30,000 on its initial return
for a short taxable year ending in 1977, it has made no payments
on this liability.
D.

Leasing Corporations

Kersting was the initial president and an initial director
of Aztec Leasing Inc., which filed articles of association with

the State of Hawaii on October 1, 1974, and Maurier Leasing Inc.,

- 23 which made a similar filing on December 2, 1974.

The other

initial officers and directors of these two corporations were
Gabriele Kersting and Heidi Kersting.

All or almost all of the

leasing activities of these corporations were with their
respective shareholders.

Aztec Leasing filed a U.S. Small Business Corporation Income
Tax Return (Form 1120S) for calendar year 1975 that indicated
December 1, 1974, as its date of election as a small business

corporation.

Maurier Leasing also filed a Form 1120S for

calendar year 1975, which indicated March 15, 1975, as its date
of election.

Aztec Leasing and Maurier Leasing were abandoned as

corporate entities in part due to Internal Revenue Service (IRS)
audit challenges and in part due to the cumbersome administrative
tasks attributable to the large number of Kersting's subchapter S

corporations.
The first Kersting leasing corporation for which subchapter
S status was not sought was Universal Leasing Corporation,
incorporated in Nevada in 1976.

Kersting, who intended

Universal Leasing to replace the several subchapter S leasing

corporations, had the leases transferred from the subchapter S
corporations to Universal Leasing.

Anseth Leasing, Inc., and

Although both names appear on documents in the record,
Universal Leasing Corporation and Universal Corporation are the
same entity.

- 24 -

Escon Leasing Corporation were incorporated in Nevada in 1977.
The Escon Leasing incorporators signed the Certificate of

Incorporation on February 4, 1977, and filed it with the State of
Nevada on February 11, 1977.

Kersting was an incorporator, an initial director, and
through the last year at issue the president of Universal

Leasing, Anseth Leasing, and Escon Leasing.

For Anseth Leasing

and Escon Leasing, the other two incorporators and initial
directors were Ms. Pang and Heidi Kersting, and the other

officers throughout these years were Ms. Pang and Ute Kersting.
Ms. Pang was also an incorporator, an initial director, and an
officer of Universal Leasing.

All three leasing corporations engaged in the business of
automobile leasing, primarily to pilots, and Universal Leasing

also leased other items such as boats and aircraft.

They did not

advertise, employ salespersons, or otherwise actively solicit a
substantial amount of business from the general public.

From its

inception, however, Universal Leasing leased some automobiles to
businesses, as did Anseth Leasing and Escon Leasing in 1980 and
following years.

Kersting's duties included structuring leases,

negotiating purchases and trade-ins of automobiles, monitoring
leasing revenue, and ensuring that the residual values of the
automobiles would be realized.

Unless otherwise indicated, a reference hereinafter to an
unspecified "leasing corporation" or "leasing corporations" is to
one or more of the three non-subchapter S corporations described
in this part II (D).

- 25 The leasing corporations, which annually filed corporate
exhibits with the State of Nevada listing officers and directors,
registered to do business in Hawaii as foreign corporations in

October of 1982.

They repossessed automobiles occasionally and

had dealings with General Motors Acceptance Corp. (GMAC).

For 1977 and following years, Hawaii registration and
ownership certificates that show Escon Leasing as the registered
owner of automobiles also often show Federal Finance & Mortgage
or GMAC as the "legal owner or lien holder."

During this period,

Hawaii registration certificates that show Universal Leasing as
the registered owner show as the "legal owner or lien holder,"
among others, Universal Leasing itself, Federal Finance &
Mortgage, and Federated Finance (Hawaii).
Although Kersting's family-owned corporation, Kershwin,
Ltd., initially subscribed for Universal Leasing stock, new
shareholders, who were airline pilots, gradually replaced it.
The shareholders of Anseth Leasing and Escon Leasing were also,
for the most part, pilots, although beginning in 1978 or 1979

Universal Leasing held a $5,000 stock interest in Anseth Leasing.
Universal Leasing also had a $240,000 investment in Mahalo

Acceptance and a $120,000 investment in Investors Financial that
began at this time.
On September 25, 1985, Anseth Leasing filed Federal income
tax returns for its taxable years ending in 1977 through 1979 and

1981 through 1984.

On the same date, Escon Leasing filed returns

for its taxable years ending in 1977 through 1984.

Kersting had

- 26 -

signed all of these returns for the two leasing corporations on
September 10, 1985.

Although Universal Leasing filed a return in

each of 1979 and 1981 for taxable years ending in 1977 and 1978,

respectively, it did not file returns for its taxable years
ending in 1979 and following until 1985 or later.
E.

Other Kersting Corporations

Atlas Funding Corporation, which made loans primarily to
pilots, was incorporated in Nevada in 1976.

Kersting was an

incorporator, an initial director, and the president through the
last year at issue.
initial director.

Ms. Pang was also an incorporator and
From July of 1977, Ms. Pang and Ute Kersting

were the only other officers.. Kershwin, Ltd., was the initial
stock subscriber and remained the sole shareholder.

As of

December 30, 1988, Atlas Funding had not filed a Federal income
tax return for any taxable year other than that ending in 1976.
Atlas Guarantee Corporation issued interest-bearing
investment certificates as part of the Kersting investment

program called "CAT-FIT," described in part III (E), below.
Kersting and Ute Kersting owned all of the stock.
Ventures Funding Corporation, which became inactive before
the mid-1980s, was incorporated in Nevada in 1978 and made loans
for the purchase of stock in other Kersting corporations.
Kersting was an incorporator, an initial director, and throughout

its active existence the president of the corporation.

The other

incorporators and initial directors were Ms. Pang and Ute
Kersting, both of whom were also officers from 1981 through 1983.

- 27 No one outside of the immediate family of pilot Leon Lipsky, who
was a corporate officer from 1978 to 1981, ever owned stock in

Ventures Funding.

As of January 6, 1989, Ventures Funding had

not filed a Federal income tax return for any year.
F.

Books and Records; Tax Return Preparation

Alice Combs was a bookkeeper, but not a certified public
accountant, from 1942 until her retirement in 1983.

She met

Kersting through her employer shortly before becoming selfemployed in 1971, and she eventually began to keep the books for

some Kersting corporations.

She and her daughter, Margo Akamine,

were both self-employed as bookkeepers in the same office space
in the mid-1970s when Ms. Akamine began to assist her mother with

Kersting's subchapter S corporations.

The women incorporated a

bookkeeping. business in 1980, and when Ms. Combs retired in 1983,
Ms. Akamine continued to perform bookkeeping duties for Kersting
corporations.
Ms. Combs and Ms. Akamine did not keep the books for all of
the Kersting corporations.

Ms. Akamine did no such work, for

example, for Ventures Funding or Windsor Acceptance, and neither
woman did such work for Norwick Acceptance or Atlas Funding.
Federal Finance & Mortgage used its own in-house accountant and

hired outside certified public accountants to prepare audited
financial statements.
The women generated manual journals and ledgers in a doubleentry bookkeeping system, primarily from bank statements and

canceled checks.

Among the records they maintained were accounts

- 28 -

receivable and related subsidiary accounts for the leasing and
acceptance corporations, which accounts corresponded to a list of
promissory notes supplied by the Kersting offices.

The

subsidiary accounts were eventually computerized.

Ms. Combs did

not keep a stock record book per se, but she attempted to keep

records of Kersting's investors by means of general ledger
accounts such as accounts receivable, notes receivable, and
capital stock.

She was not aware of direct transfers of stock

from shareholders to other individuals.

At some point she

suggested to Ms. Pang that better stock records should be kept.
The women prepared financial statements (balance sheets and

profit-and-loss statements) at Kersting's request and not on a
regular monthly or quarterly basis.

He usually requested

financial statements, which were always done by hand rather than
on a computer, at least once a year.

The women also prepared

Federal income tax returns for Kersting corporations, again when

instructed by Kersting, and by 1976 Ms. Combs was experienced in
preparing consolidated returns.

They did not always prepare tax

returns annually, and Ms. Akamine was never certain whether the
returns she prepared were actually filed with the IRS.15

However, as far as Ms. Combs knew, Kersting and his associates
did not alter the tax returns or bookkeeping work she submitted.

'S
The record contains some prepared and signed corporate tax
returns that were not filed with the IRS. In describing return
contents, we refer to both filed and unfiled returns.

- 29 For those acceptance and leasing corporations with
outstanding subscription agreements applicable to their stock,
Kersting often instructed Ms. Akamine to treat the interest

received under those agreements as deferred and thus to exclude
it from current taxable income.

Among the returns that show a

Schedule M adjustment reducing book income for deferred
subscription interest are the following, for taxable years ending
as indicated:

Fargo Acceptance for 1978, Mahalo Acceptance for

1978 and 1979, Candace Acceptance for 1979 and 1980, Delta
Acceptance for 1980 and 1981, Avalon Acceptance for 1981 and
1982, Anseth Leasing for 1977 through 1979 and 1981 through 1984,

and.Escon Leasing for 1977 through 1984.

For at least most of

these corporations, the deferred amounts were not reported as
taxable income in following years.
Based upon her experience with a public accounting firm, Ms.
Combs believed that a 2-percent bad debt reserve, measured
against outstanding receivables, was appropriate for the Kersting

corporations.

Ms. Akamine had been taught in a bookkeeping class

that 1 or 2 percent was an appropriate bad debt reserve figure,
although she had no training relating specifically to reserves in
the tax shelter area.

Kersting told the women that 20 to 25

percent, or higher, was not inappropriate for the corporations.
He directed them generally to set up reserves that would offset
taxable income not otherwise offset by items such as net

operating loss carryforwards.

For corporations with taxable

- 30 -

years ending as indicated, yearend bad debt reserves as a
percentage of accounts receivable were as follows:
Fargo Acceptance

1978

30%

Mahalo Acceptance

1978, 1979

25%

Candace Acceptance

1979, 1980

25%

Delta Acceptance

. 1980, 1981

20%

Universal Leasing

1977
1978
1979
1981
1982
1983
1984
1985

22%
29%
40%
45%
51%
67%
72%
92%

Ms. Combs and Ms. Akamine kept the Kersting records in their
office, which was at a different location than the Kersting
offices.

As detailed in Dixon v. Commissioner, 90 T.C. 237

(1988), Kersting was under criminal investigation when the IRS

executed a search warrant at his offices on January 22, 1981, and
seized voluminous records.

The IRS did not, however, take any

Kersting records from the bookkeepers.

Their work was therefore

largely unaffected, except occasionally when the Kersting offices
informed one of them that the documents she was requesting had
been taken by the IRS.

Neither woman ever thought that anything

she requested from the Kersting offices was intentionally
withheld.
Kersting sent a form letter to clients dated February 15,

1981, in which he began:

Here at last are the tax reporting notices which
we would have mailed to you in January had it not been
for the IRS raid at our offices. I regret very much

- 31 the delay by which these notices will be received by
you.
The IRS accomplished only a temporary disruption
of our operations. We are back today to almost normal
workings, but the shock and distaste will last for a
while.
In a May 30, 1981, form letter devoted largely to this IRS

"raid," Kersting wrote:
Over the weeks which have elapsed since the Raid,
all of the Promissory Notes which are our most valuable
asset have been returned to us. We have made copies of
. all of our records which we need to keep track of our
042
accounts receivable and -payable. It has allowed us to
return to normalcy of operations. * * *
The IRS returned the bulk of the seized Kersting records

beginning in late 1985 or early 1986.

Ms. Akamine prepared only one return for a Kersting
corporation in which she reported significant net taxable income.
This was the Fargo Acceptance initial return for the short
taxable year from March 17, 1977, through June 30, 1977, with
reported interest income of $91,200 and no deductions.

On the

Schedule L balance sheet, she recorded $91,200 as an investment
in Charter Financial and as unappropriated retained earnings, but
she recorded no capital stock amount.

No other acceptance

corporation reported significant net taxable income in returns

corresponding to the years at issue.

Unlike the initial return

of Fargo Acceptance, other initial returns of acceptance
corporations included a bad debt reserve, a Schedule M adjustment

for deferred subscription interest, or both.

- 32 Ms. Akamine generally did not sign the returns she prepared
for Kersting because she was not comfortable with some of the
things he asked the women to do.

In anticipation of selling her

bookkeeping business, she prepared many returns for Kersting
corporations during 1984.

She sold her business in 1985 in part

because Kersting was considering some transactions that she did
not feel comfortable recording.

One such transaction was a

consolidation of several corporations.

Kersting was prompted to

consider these transactions because the bad debt reserves
intended to offset income were so high compared to outstanding

accounts receivable.
By letter dated December 2, 1981, and addressed to an IRS

revenue agent who had sought certain corporate tax returns,

Kersting wrote:
We have held back over the years the Tax Returns
for the Acceptance Companies and some of the Leasing
Companies as we expect that the decision Judge Drennen
of the United States Tax Court is to render will have a
material effect on all of these companies. You will
recall that Norwick Acceptance Company was at issue in
the US Tax Court proceedings and to some extent
Universal Leasing Corporation.
G.

Collection Litigation

For lending and leasing matters originating during the years
at issue but not relating directly to the Kersting investment
programs, Kersting corporations sometimes sought relief in Hawaii

State court.

Delta Acceptance filed a complaint on March 16, 1983, based
upon an $8,000 promissory note with a 1982 date, and obtained a

- 33 default judgment in November 1983.

Fargo Acceptance filed a

complaint on May 12, 1986, based upon a $7,560 promissory note

with a 1982 date.

The court dismissed this case in January 1987

for lack of valid service on the defendant.
Universal Leasing filed a complaint on May 20, 1982, based
upon alleged unpaid lease obligations, and the court granted its

motion for summary judgment in September 1984.

Escon Leasing

filed a complaint on June 23, 1983, based upon alleged unpaid
lease obligations, and obtained a default judgment in December
1983.

Anseth Leasing filed complaints on July 6, 1983, and

June 4, 1986, also based upon alleged unpaid lease amounts.

The

court dismissed the first case for want of prosecution in May

1984, and the second resulted in default judgments against the
defendants in November 1986.
Atlas Funding filed a complaint on June 6, 1983, based upon

a $13,440 promissory note with a 1980 date in favor of Delta
Acceptance.

The court entered judgment for Atlas Funding after a

hearing in October 1983.

As an assignee of Charter Financial,

Atlas Funding filed a complaint on March 8, 1984, based upon a
$22,000 promissory note with a 1981 date in favor of Charter
Financial.

Atlas Funding alleged that this amount had been lent

to Larry Rinaldis to cover a margin call on a brokerage account.

- 34 III.

Kersting Investment Programs

A.

Generally

Most of Kersting's investors, or clients, first heard about
him and his investment programs by word-of-mouth from those

already involved.

He sometimes asked satisfied clients to

introduce him to friends who might need tax assistance.

He also

paid a few "contact men," such as pilots Michael Provan and
Robert Campbell at Continental Airlines, Inc.

(Continental), to

tell other pilots about the basic structure of the transactions
and to encourage them to call or visit Kersting.

Sometimes an

accountant, such as Robert Knapp of Memphis, Tennessee,

recommended to clients that they contact Kersting about his
programs.

Kersting was particularly interested in pilots,

largely because of their high incomes.
Kersting never registered with the Securities and Exchange

Commission, the State of Hawaii, or the State of Nevada any of
the stock sold through his investment programs.

He met with a

Securities and Exchange Commission attorney in California in the

mid-1970s and also spoke on occasion with the Hawaii Corporations
Commissioner, discussing registration requirements with both men.

He never took the procedural steps necessary, however, to
determine formally whether registration was required under either

Federal or State law.
Kersting treated the stock as subject to a private offering

exemption and never prepared any prospectuses.

In a letter dated

- 35 -

November 12, 1980, he described factors he considered important
to exempt status:

As we discussed we are walking on a very fine line
separating us from offering securities publicly. We
have claimed an exemption from registration over the
years on the grounds that we are meeting the tests for
offering securites [sic] without registration, i.e.
that we are dealing with sophisticated investors, that
everyone of our clients has a net worth in excess of
$75,000.00 and that we do NOT SELL ANYTHING AND DO NOT
ASK FOR ANY INVESTMENT, supported by the fact that we

do not engage brokers or salespeople to whom sales
commissions would be paid.
If we were to advertise our services or offer our
services by direct mail we would place the above
mentioned premise in jeopardy. It is important that we
observe that.

Kersting also operated on the premise that registration was
not required for shares of a given corporation if those shares
were offered to existing shareholders of that corporation.

Thus,

he sometimes had an acceptance corporation distribute to a
shareholder a small amount of stock of a second acceptance

corporation, commonly 100 shares, thereby making the investor a
shareholder of the second corporation and setting the stage for
an "exempt" offering of much more stock of the second corporation
during the upcoming year.

The stock subscription agreements used by Kersting,
discussed in more detail below in connection with the specific
investment programs, included representations by the investor

that he was acquiring the subscribed stock for investment

purposes rather than for resale and not as a representative of

- 36 someone else.

An investor made no such representations, however,

for stock purchases not tied to the subscription agreements.
Although a potential investor sometimes met with Kersting in

his Hawaii offices, the first contact for many was by telephone

or letter.

Prior to starting someone in one of his programs,

Kersting questioned him about his general financial situation.
Because of Kersting's largely homogeneous client base and the

relatively standardized salary scales within an airline, he often
knew the prospect's approximate salary even before being told.
He rarely if ever asked for an application form or financial

statements, and credit checks were also rare or nonexistent.

Because he was aware of the grounds for certain IRS audit
challenges to his programs, he sometimes informed a prospect that
he had to have a profit motive.

He never mentioned, however,

that there would be ongoing profits in the form of normal

corporate dividends.

He always discussed anticipated tax

benefits and often sent a pilot the. documents associated with an

investment program so he could examine them before deciding
whether to participate.

Although Kersting sometimes jotted down

some notes while talking to a prospect, he discarded them by the

time participation in his programs commenced.
For those who agreed to participate in one or more of his
programs, Kersting often recommended specific accountants the

investors should consider using to prepare their tax returns.
These included Gilbert Matsumoto, Earl LeMond, and enrolled agent
Philip Scheff.

Matsumoto, who had been the accountant for

- 37 -

Confidential Finance when Kersting became its president in the
early 1970s, had later become the accountant for some of
Kersting's subchapter S leasing corporations.
The four main types of Kersting investment programs under

consideration in these cases will be referred to as a Stock
Purchase Plan, a Stock Subscription Plan, a Leasing Corporation

Plan, and a CAT-FIT Plan.

All involved both "primary" loans and

notes and "leverage" loans and notes with Kersting
corporations.

These notes, along with other investment

initiating documents, sometimes bore a date that was long before
the date on which the documents were actually executed and even
before the date on which the investor informed Kersting he was
ready to commence that investment program.
A primary loan supplied the funds with which the investor
purchased either stock of a Kersting corporation or, in the case
of the CAT-FIT Plan, an investment certificate.

A leverage loan,

almost always made by an acceptance corporation, generally
supplied the funds with which the investor paid interest on the
primary loan and, if applicable, interest on an unpaid

subscription balance.

Sometimes leverage loans, in years after

Although the usual function of a note is to document a
lending transaction, the note and loan must sometimes be
distinguished. Under the Uniform Commercial Code, for example, a
negotiable note and its underlying obligation can be
independently actionable. U.C.C. sec. 3-310(b) (1990).
Nonetheless, because the parties do not attempt to differentiate
between the notes and their underlying obligations in the context
of these transactions, we likewise generally assume only one
obligation, except In our more precise descriptions of collection
litigation undertaken by Kersting corporations.

- 38 the investor's first year in a program, supplied the funds to pay

off an outstanding leverage loan.

In correspondence with

investors and in summary schedules he prepared for their benefit,
Kersting often referred to the amount payable as interest on a

leverage loan as a "fee" or as a deductible "cost" of interest
deductions.

Primary notes (and leverage notes used in the Leasing
Corporation Plan) were detailed, preprinted forms entitled "Note

and Security Agreement" and containing appropriate blanks to be
filled in.

When completed and executed, these notes did not

describe any collateral in the space so designated on the form,

nor did they call for interest to be prepaid annually.
considered the loans to be unsecured.

Kersting

Beginning in late 1979,

the designated space for a description of collateral usually
contained a typed-in statement that the note was nonnegotiable

and nonassignable.

Leverage loans (except for those used in the

Leasing Corporation Plan) were commonly documented with much
shorter and simpler promissory note forms that made no mention of
collateral, negotiability, or assignability.

Both types of

notes, primary and leverage, were in form recourse."
The primary lender in a Kersting investment program was,
except for the very early years, a different Kersting corporation

In the early years of Kersting's investment programs, these
loans were nonrecourse. The sec. 465 at-risk provisions, added
to the Internal Revenue Code by the Tax Reform Act of 1976, Pub.
L. 94-455, sec. 204,. 90 Stat. 1520, 1531-1532, caused Kersting to
make the change from nonrecourse to recourse.

- 39 than the leverage lender.

In Battelstein v. Internal Revenue

Service, 611 F.2d 1033 (5th Cir. 1980), on rehearing en banc 631
F.2d 1182 (5th Cir. 1980), the court concluded that interest
deductions were not allowable to taxpayers who had exchanged
checks with their lender in the amount of the interest due.

When

asked by a concerned client about the implications of the
analysis by the Court of Appeals, Kersting replied by letter
dated January 11, 1981:

042
There seems to be a fundamental distinction
between the moves attributed to the Battlesteins and
the leveraged interest deductions which we engender.
Namely, where the Battlesteins used "the lenders cash"
[sic] in making their interest payments we have always
employed an arms-length-lender to create the second
layer of debt and to engender the cash to make interest
payments. We have studied several Tax Court decisions
of related connotation before arriving at the strategy
which we follow today.

e

In the early phases of our enterprises we retained
a Tax Consultant here in Honolulu, Clyde Lee, who had
been a Conferee at the Internal Revenue Service in
Honolulu. He pointed out to us at that time the perils
which one evokes if "the lenders cash" is being used to
make interest payments on the primary loan granted by
the same lender. We have purposely and by design
circumnavigated over the years the obstacles which the
Battlesteins apparently encountered.
To enable Kersting better to control the flow of funds
through his investment programs, Kersting corporations issued

loan proceeds checks and annual distribution checks that were

either unsigned by the drawer corporation or payable jointly to

- 40 the investor and a Kersting corporation,

or both unsigned and

payable jointly.

A letter preceded or accompanied the first annual cash
distribution made by a Kersting corporation, stating that the
amount being distributed was not taxable to the shareholder.
Subsequent distributions were also represented to be nontaxable.
Often the letter characterized the distribution as a nontaxable

"return of capital."

The stated rationale for the tax-free

status varied, sometimes emphasizing a lack of either corporate

earnings or an earned surplus account, and other times
emphasizing that the corporation charged the distribution on the

corporate books to paid-in capital rather than to earnings.

Regardless of how a letter described a distribution,
Kersting considered the distribution to be a partial return of
the shareholder's investment.

He believed that nontaxable

treatment was available under applicable law, however, only if

the corporation had no current or accumulated earnings and the
books of the corporation reflected a charge to paid-in capital.
He also believed that the trade-off for a nontaxable return-of-

capital distribution was a corresponding reduction of the

We sometimes refer to these checks having "and" between two
listed payees as "two-party" checks.

Paid-in or contributed capital, in this context, is the sum
of capital stock recorded at par value and paid-in surplus.
Paid-in surplus is sometimes known as paid-in capital in excess
of par value or as additional paid-in capital.

- 41 adjusted basis in the stock, which reduction was subject to
"recapture" as a capital gain upon disposition of the stock.
The acceptance corporations that sold their stock at $10 per
share, as described in detail below, generally split contributed
capital as described in this Avalon Acceptance form letter:
However, so that your company will have the means
to pay you later on this year a non-taxable (return of
capital type) dividend we have decided to allocate 10%
of your [stock acquisition] funds towards the common
stock account on your company's books and 90% towards
paid-in surplus. The result will be that your company
can pay you this year a cash dividend which can be
charged against the surplus account without any need to
adjust the common stock account.
Kersting did not believe, however, that a paid-in surplus balance
was necessary to make a distribution nontaxable.

Anseth Leasing,

Escon Leasing, and Universal Leasing made distributions
represented to be nontaxable even though none of the three ever
had a paid-in surplus account during the years at issue.

The

bookkeepers recorded their distributions as debits to capital
(common) stock.

The capital stock account for Universal Leasing,

which was reported at over $11 million in its initial tax return

(for its taxable year ending in 1977), was smaller each

succeeding year and was less than $4 million for its taxable year
ending in 1984.

The capital stock account for Escon Leasing,

which was reported at $925,000 in its initial return (for its
taxable year ending in 1977), was smaller each succeeding year

except one.
$600,000.

The one increase was from a negative $17,360 to over

- 42 Kersting wrote a form letter dated October 1, 1979, in which
he stated:

As we are going today into the last quarter of the
current taxation year it seems appropriate that we
remind you that only a few days will be available to
you (and to us) to record your tax deductions for the
year of 1979.
We produced earlier this year certain documents
which are to generate for you tax deductions which can
be applied against your 1979 taxable income.
Generally
speaking, the tax deductions are to cost you 18% of the
taxes retrieved or 9% of the deduction arranged. * * *
Tax deductions will be of value to you only,
however, if properly documented and recorded. That, in
turn, has to be done well before year-end.
If you have not already returned to us the
documents which were mailed to you earlier this year,
we urge you to attend to the matter at your earliest
opportunity.
On the other hand, if you do not wish to make use
of the tax shelter we will appreciate hearing from you
to that effect.
Kersting often encouraged his investors to adjust their

withholding allowances with their employers.

He wrote in a form .

letter sometime after October of 1979:
So that you will gain maximum advantage from the
Tax Shelter Plans in which you are involved we strongly
suggest to you to file IRS Form W-4 (Employee
Witholding [sic] Allowance Certificate) with your
employer. * * *
Many of our clients have accomplished "wall to
wall" protection from taxation. In that case "EXEMPT"
could be entered on line 3b of Form W-4. No tax will
be witheld [sic].

* * *
If you find that you do not have a sufficient
amount of tax deductions yet for this year please
communicate with us by using attached coupon. We will

- 43 be glad to make suggestions as to how you could reduce
your taxes even further.
B.

Stock Purchase Plan

A participant in the Stock Purchase Plan paid $40,000 or a

multiple thereof for the stock of a Kersting holding company,

either Charter Financial or Investors Financial.

The holding

company issued a stock certificate in the investor's name for the

number of shares corresponding to a per-share price of $10.50.
The stock certificate, as in all of the Kersting investment
programs,
042
was usually unnumbered.

By means of a primary loan, the investor borrowed the funds

from Federated Finance, at an annual interest rate of 18 percent,
to acquire the stock of the holding company.

The primary note

was by its terms payable on demand or in 3 years if not demanded
earlier.

Federated Finance supplied the loan proceeds in the

form of a two-party check made payable to the investor and the
holding company, which, like all of the loan proceeds checks used

in the investment programs, the investor was instructed to

endorse and return.
The investor also borrowed funds from an acceptance
corporation, by means of a leverage loan with a 9-percent annual

interest rate, to prepay the first year of interest on the
primary loan.
year.20

The leverage note was by its terms payable in 1

The^ acceptance corporation, like Federated Finance,

2°
On the short and simple promissory note forms for this and
the other investment programs, Kersting's clerical personnel
always typed in "on demand" before the preprinted words "after
(continued...)

- 44 -

issued a two-party check for the loan proceeds, this time payable
to the investor and Federated Finance.

The investor had the

option of paying the interest on the leverage loan in a lump sum
or in six monthly installments.

Leverage lenders in·this and the

other investment programs frequently provided coupon payment
books to those borrowers who preferred to make installment
payments.

The stock certificate, the primary note, the leverage note,
and the checks representing loan proceeds all bore the same date,
which was early in January or early in July.

Like the initiating

documents in the other investment programs, the investor

generally received all of these documents.together by mail, to be
signed and (except for the stock certificate) returned to the
Kersting offices.
The holding company issued a distribution check,2' dated in
December, payable to the investor in the amount of the principal
balance of the leverage loan.

As already noted, a preceding or

accompanying letter stated that this amount was nontaxable.

The

letter also suggested that the investor endorse the check and

2°(...continued)
date." Because the note contained two typed-in dates, an
effective date and a "due" date, it is not clear from the face of
the note when the demand feature became operative. When we
describe the term of a leverage note as some number of years,
without express reference to a demand nature, we are referring to
the time period between the effective date and the due date.
2'
"Distribution" checks are those issued by Kersting
corporations to their shareholders as part of the investment
programs, and not representing loan proceeds.

- 45 return it to satisfy his obligation for the principal due on the
leverage loan, which, to the best of Kersting's knowledge,
invariably happened.

The leverage note was then returned to the

investor marked "paid."
A condensed example of the Stock Purchase Plan is as
follows.

To make a $40,000 investment in the stock of a holding

company, an investor borrowed $40,000 from Federated Finance (the
primary loan) and $7,200 from an acceptance corporation (the
leverage loan), with the stock certificate, notes, and loan

proceeds checks all bearing the same date.

He applied the $7,200

to prepay the 18-percent annual interest on the primary loan and
paid 9-percent annual interest on this borrowed $7,200, or $648,
in either a lump sum or six installments.

The holding company

issued a $7,200 distribution check to the investor, dated in
December, which he used to pay off the like principal balance of

the leverage loan.
By documents dated in early January or early July of the
following year, the cycle was repeated.

The investor used the

proceeds of a new leverage loan from a different acceptance
corporation, with the leverage note again providing for a 9percent annual interest rate and a 1-year term, to prepay another

year of interest on the outstanding primary loan.

The leverage

loan proceeds took the form of a check made payable to the
investor.

The holding company again issued a distribution check

dated in December and payable to the investor, to enable him to

satisfy his principal obligation on this new leverage loan.

- 46 -

If the investor wished to participate beyond the 3-year term

of the original primary note, he in effect renewed or refinanced
the primary loan by executing a new note in favor of Federated

Finance for another 3-year term.
Both Charter Financial and Investors Financial issued
distribution checks dated December 15, 1980, for investors on a

July annual cycle.
C.

Stock Subscription Plan

In the Stock Subscription Plan, an investor purchased stock

of an acceptance corporation at $10 per share,22 and the
acceptance corporation issued a corresponding stock certificate
in the investor's name.

The investor also subscribed in writing

for additional shares at $1 per share.

The purchase amount and

the subscription amount were equal, so a purchase of 6,000
shares, for example, at $10 per share accompanied a subscription

for 60,000 additional shares at $1 per share.
The subscription agreement began with a statement in the

following form:

"I hereby subscribe for and agree to purchase23

from * * * [a specific acceptance corporation, a specific number
of] shares of common stock of $1.00 par value at a price of $1.00
per share."

The agreement, with an express term of 3 years,

called for the investor to pay 12-percent annual interest on the
unpaid subscription balance.

The agreement also contained a

22

From 1975 into 1978 the cost was $1 per share.

23

The word "buy" often appeared instead of "purchase."

- 47 provision acknowledging receipt by the acceptance corporation of
a specific amount "paid on account" equal to a year of such

interest.

As Kersting viewed it, the subscription agreement did

not give the investor the right to tender payment and thereby
become entitled to the additional shares.

Instead, Kersting

understood the agreement to provide the acceptance corporation
with the right at any time to require the investor to purchase
the shares.

Nonetheless, no acceptance corporation ever

attempted to issue the stock or demand payment of the funds
called for by a subscription agreement.

As with the Stock Purchase Plan, the investor borrowed the
funds necessary for the immediate stock purchase by means of a
primary loan with an 18-percent annual interest rate.

The

primary lender was often Federated Finance, but others included

Atlas Funding, Ventures Funding, and Windsor Acceptance.

The

primary note was by its terms payable on demand or in 2 years if

not demanded earlier.

The primary lender supplied the loan

proceeds in the form of a two-party check made payable to the
investor and the acceptance corporation.

By means of a leverage loan with a 9-percent annual interest

rate,24 the investor borrowed funds from a second acceptance
corporation in order to pay a year of interest on the primary
loan and a year of interest on the unpaid subscription balance.

The leverage note was by its terms payable in 1 year.

This

2"
The annual interest rate was 6 percent during 1975 and 1976
and 7 percent during 1977 and into 1978.

- 48 -

lending acceptance corporation issued a check for the loan
proceeds made payable to the investor.

The investor had the

option of paying the interest on the leverage loan in a lump sum
or in six monthly installments.

In the early years, the investor

could opt for 12 monthly payments.
The stock certificate, the subscription agreement, the
primary note, the leverage note, and the checks representing loan
proceeds all bore the same date, which was usually early in
January or early in July.
At the outset, Kersting instructed those wishing to
participate in the Stock Subscription Plan to open a checking

account in Hawaii at a specified local bank at which Kersting
corporations had accounts.

This was generally Hawaii National

Bank into 1979 and Liberty Bank from 1979 on.
After the investor endorsed the leverage loan proceeds check
and returned it with the other initiating documents, he received

a form thank-you letter with instructions on how to complete the
transaction.23

In this letter, the investor was requested to

send two signed checks drawn on his local account at the

specified bank, along with some deposit slips for that account.
One check was to be payable to the primary lender in the amount

necessary to pay a year of interest on the primary loan.

The

25
Sometimes the instructions on how to complete the
transaction were included with the package of initiating
documents sent to the investor. In such a case, Kersting
expected the investor to return signed initiating documents and
comply with the additional instructions at the same time.

- 49 other check was to be payable to the stock-issuing acceptance
corporation in the amount necessary to pay a year of interest on
the unpaid subscription balance.

The letter also stated that a

deposit (meaning the endorsed leverage loan proceeds check) would
be made to the investor's account to allow his two checks to
clear.

The investor wrote his checks on the account designated

by Kersting.
The stock-issuing acceptance corporation issued a
distribution check, dated in December and payable to the

investor, in the amount of the principal balance of the leverage
loan.

As noted, a preceding or accompanying letter stated that

this amount was nontaxable.

After the investor returned the

endorsed check to the Kersting offices, the leverage note was.
marked "paid" and returned to the investor.
An example of the Stock Subscription Plan is as follows.

To

purchase 6,000 shares of an acceptance corporation, an investor

borrowed $60,000 from Federated Finance (the primary loan) and
signed a subscription agreement for additional shares, also in
the amount of $60,000.

With $18,000 borrowed from a second

acceptance corporation (the leverage loan), he wrote checks for
$10,800 to pay the 18-percent annual interest on the primary loan
and $7,200 to pay the 12-percent annual interest on the unpaid
subscription balance.

The stock certificate, subscription

agreement, notes, and loan proceeds checks all bore the same
date.

The first acceptance corporation issued a check for

$18,000 to the investor, dated in December, which he used to pay

- 50 -

off the like principal balance of the leverage loan from the
second acceptance corporation.

He paid 9-percent interest on the

$18,000 leverage loan, or $1,620, in either a lump sum or six
installments.

Kersting offered the stock of a different acceptance
corporation for each calendar year:

Norwick Acceptance in 1975,

Forbes Acceptance in 1976, Fargo Acceptance in 1977, Mahalo
Acceptance in 1978, Candace Acceptance in 1979, Delta Acceptance
in 1980, and Avalon Acceptance in 1981.

He annually sent

participants in the Stock Subscription Plan an order form with
which they could select the desired amount of·stock for the next

acceptance corporation.

A common format was:

Please arrange for me the purchase and financing
of stock of * * * [a specific acceptance corporation]
for a unit as indicated below:

__
__

Amount of
Shares

Tax
Deduction

30,000
40,000
50,000
60,000

$ 9,000
12,000
15,000
18,000

Anticipated Tax Refunds (Federal only)
30% Tax Bracket
40% Bracket
$2,700
3,600
4,500
5,400

$3,600
4,800
6,000
7,200

Sometimes the order form had an additional column labeled "Actual
Cost to You," with the listed amounts of $810, $1,080, $1,350,

and $1,620.

There was typically no accompanying specific

information about this new acceptance corporation other than that
it would have the "same advantages" as the acceptance corporation

in which the investor already held stock.

An investor named Mil Harr returned to Kersting in January
of 1977 executed initiating documents dated August 1, 1976, for a

- 51 Forbes Acceptance Stock Subscription Plan.

In his accompanying

letter, which listed the enclosed documents, Harr asked Kersting

about his investment:
At this point I am sort of wondering what this is
all about. I basically recognize all this as a deal
where I bought into Forbes Acceptance Corporation and
borrowed money to do it (with resulting interest
deductions on borrowed money), but where does this deal
lead? Is this something you have structured for tax
purposes only, or why am I desiring to be buying stock
in Forbes Acceptance, other than that?
In his written reply, Kersting stated:
has tax deduction purpose only.

"At this time the deal

I can foresee, however, that the

corporation will make a profit in its second year of operation."

He further informed Harr that "The deal is self-liquidating as

you can retire all of your debt by simple surrender of the stock
certificate issued to you."
Kersting wrote to another inquiring investor named Willis

McComas in February of 1978:
When I referred to a "closed deal" I meant to convey
the impression that that deal would be available only
for one year, such as Fargo Acceptance or this year
Mahalo Acceptance Corp. The reason is quickly evident
when you recall that Fargo Acceptance Corp. paid you a
dividend in 1977 of $18,000.00 which was a return of
capital. That can not be done the second year as the
company is expected to make a profit then. Once there
is an earned surplus account all dividends become
taxable dividends (unless the Carter Administration
accomplishes to change that). It is for this reason

that we have organized every year another Acceptance
Corporation allowing us to pay the first dividend as a
"return of capital."

* * *
* * * All notes which you have executed are selfsustaining now. The cash dividends which Fargo
Acceptance Corp. will pay you from now on will be
sufficient to service the debt to which you are a

- 52 -

party. As you will be receiving taxable dividends in
[the] future you will also have a tax deduction in a
like amount. The result will be a washout for taxation
purposes.
Sometime before 1977, Kersting wrote a form letter
describing the Stock Subscription Plan and sent it to some of his
clients, including petitioner Terry D. Owens.

The letter began:

In line with our policy to facilitate your
involvement by arranging the financing we propose to
you the following:
1. We will organize an Acceptance Corporation for the
purpose of lease financing as you know it. You are
invited to acquire equity in the corporation in
$10,000.00 increments. We will arrange a loan for you
for the full amount of the stock you wish to acquire.
* * * The advance will be a non-recourse loan
confining your liability to the value of the stock to
be acquired, none beyond that. * * *
In this letter, Kersting went on to describe both further

mechanics of the program, including the subscription agreement
and leverage loan, and detailed tax advantages.

He also stated

that the corporation would pay a dividend early the next year
that the investor could use to pay off the principal balance of
the leverage loan.

Apart from "the purpose of lease financing,"

Kersting did not mention either the business or the profit

potential of the acceptance corporation.
Sometime later, Kersting wrote a similar tax-oriented letter
entitled "The Acceptance Corporation Plan" that focused
specifically on Candace Acceptance, but he did not refer to
nonrecourse loans and lack of personal liability.

He stated

without elaboration that Candace Acceptance was organized for the

purpose of "automobile and lease financing" and was "expected to

- 53 make profits."

He further stated that the investor's "actual

out-of-pocket expense" and "only expense ever" would be 9 percent
of the leverage loan amount.

The letter ended with a standard

order form for Candace Acceptance stock.
Kersting form letters that transmitted initiating documents

for the Mahalo Acceptance, Delta Acceptance, and Avalon
Acceptance Stock Subscription Plans also stated that the "actual
out-of-pocket expense" would amount to 9 percent of the leverage

loan.

These letters ended with this sentence:

"If you feel that

you have benefited from our services, please introduce us to your
friends who might also need tax assistance."

A package of

initiating documents sent to prospective investors in 1980 or
1981 contained this paragraph:
The funds which will be generated by the
promissory note you are about to execute will be
applied in full to purchase for your account a certain
amount of common stock of Avalon Acceptance
Corporation. The stock which you will acquire will be
equal in value to the face amount of the promissory
note. As we go along the value of your stock is
expected to be higher than the price you are paying
today.
D.

Leasing Corporation Plan

A participant in the Leasing Corporation Plan purchased
stock at $1 per share from a Kersting leasing corporation (Anseth

Leasing, Escon Leasing, or Universal Leasing), and the leasing
corporation issued a corresponding stock certificate in the
investor's name.

The investor also subscribed for additional

shares at $1 per share.

Although a common ratio was a $19,000

stock purchase and a $55,000 subscription agreement, the ratio

,

- 54 -

was often exactly 1 to 3.

The subscription agreement was like

that used in the Stock Subscription Plan, including an express
term of 3 years, an annual interest rate of 12 percent on the
unpaid subscription balance, and an acknowledgment of a year of
interest "paid on account."

The investor borrowed the funds necessary for the immediate

stock purchase by means of a Federated Finance primary loan with
an 18-percent annual interest rate.

The primary note was by its

terms payable on demand or in 2 years if not demanded earlier.
Federated Finance supplied the loan proceeds in the form of a
two-party check made payable to the investor and the leasing

corporation.
By means of a leverage loan with a 15-percent annual
interest rate, the investor borrowed funds from an acceptance
corporation in order to prepay interest on the primary loan and

interest on the unpaid subscription balance.

The leverage note

was by its terms payable on demand or in 1 year if not demanded
earlier.

The acceptance corporation supplied the loan proceeds

in the form of two-party checks, one payable to the investor and
Federated Finance and one payable to the investor and the leasing
corporation, in amounts equal to a year of interest on the
primary loan and a year of interest on the unpaid subscription
balance, respectively.

The investor generally paid annual

interest on the leverage loan in 12 monthly installments.
The stock certificate, the subscription agreement, the

primary note, the leverage note, and the checks representing loan

- 55 proceeds all bore the same date, which was usually early in
January or early in July.
As an example of the Leasing Corporation Plan to this point,
an investor borrowed $19,000 from Federated Finance at 18-percent
annual interest (the primary loan), which he used to purchase
19,000 shares of leasing corporation stock.

He subscribed for an

additional 55,000 shares at $1 per share, agreeing to pay 12percent annual interest on the unpaid balance of $55,000.

With

$10,020 borrowed from an acceptance corporation (the leverage
loan), he used $3,420 to prepay a year of interest on the primary
loan and $6,600 to prepay a year of interest on the unpaid
subscription balance.

All of these documents were dated as of

the same date.
Each of the leasing corporations had two checking accounts
at Liberty Bank, a "general" account and a "special" account.
The leasing corporation annually issued a distribution check,

with a January date, drawn on its general account and made
payable to the investor in the amount of the principal balance of
the leverage loan.

Sometimes the distribution check was in an

amount slightly less than the principal balance of the leverage

loan; for example, the Escon Leasing distribution check
corresponding to a leverage loan of $10,020 was in the .amount of
$9,990.

A letter accompanying the distribution check stated that

the distribution amount was nontaxable to the investor.

This

letter also informed the investor that his endorsed distribution
check, after return to the Kersting offices, would be deposited

i

- 56 -

to the special account, from which the leasing corporation would

disburse funds to establish interest deductions for that year.
The checks drawn on the special account, which were dated
the same as and accompanied the distribution check, totaled to

the amount of the distribution check.

One check, in an amount

equal to a year of interest on the Federated Finance primary
loan, was payable to the investor and Federated Finance.

The

other check, in an amount equal to a year of interest on the

unpaid subscription balance, was payable to the investor and the
leasing corporation.

For the occasional distribution check that

did not equal the leverage loan amount, the check corresponding

to subscription interest was less than a year of such interest by
the same amount that the distribution check was less than the
leverage loan amount.

As a continuation of the example begun above, which is a
$19,000 stock purchase coupled with a $55,000 subscription
agreement, the leasing corporation sent to the investor the

following group of checks:

A distrïbution check from its general

account for $10,020 payable to the investor; a check from its
special account for $3,420 payable to the investor and Federated
Finance; and a check again from its special account for $6,600

payable to the investor and the leasing corporation.
Each year the investor signed a new 1-year leverage note in
favor of a different acceptance corporation, again with a 15-

percent annual interest rate and the same principal amount as the
original leverage loan.

This was in effect a renewal of the

- 57 leverage loan because the loan proceeds were applied to the
outstanding leverage loan.

The loan proceeds took the form of

either a check payable to the investor or a two-party check
payable to the investor and the acceptance corporation on the
expiring leverage note.

If an investor wished to participate in

the Leasing Corporation Plan beyond the 2-year term of the
original primary note, he in effect renewed the primary loan by
executing a new note in favor of Federated Finance for another
2-year term.

The loan proceeds took the form of either a check

payable to the investor or a two-party check payable to the
investor and Federated Finance.

With documents dated a few days before the end of the 3-year
term of the initial subscription agreement, the investor
sometimes both borrowed funds to purchase additional stock from
the leasing corporation and executed a new subscription
agreement.

The number of newly purchased shares plus the number

of newly subscribed shares equaled the number of shares

originally subscribed.

Thus, if the original subscription

agreement covered 55,000 shares, an investor who borrowed $36,000
to purchase 36,000 new shares also executed a new subscription
agreement for 19,000 shares at $1 per share.

The new stock

acquisition note, in favor of an acceptance corporation, provided
for 12-percent annual interest and payment on demand or in 3
years if not demanded earlier.

The new subscription agreement,

with a term of 3 years and an annual interest rate of 12 percent,

- 58 acknowledged receipt of an amount "paid on account" equal to a
year of subscription interest.
In connection with this new stock purchase and subscription

agreement, the leasing corporation again issued a January
distribution check from its general account made payable to the
investor in the amount of the outstanding leverage loan, except

that again there was sometimes a slight difference in amount.
The leasing corporation also issued three checks from its special
account that together equaled the amount of the outstanding

leverage loan.

One check was payable to the investor and

Federated Finance and equal to a year of interest on the renewed
primary note, one check was payable to the investor and the

leasing corporation and equal to.a year of interest on the new
subscription agreement, and one check was payable to the investor

and the new acceptance corporation and equal to a year of
interest on the new stock acquisition loan.
The sale and leaseback of an automobile was sometimes a part
of the Leasing Corporation Plan.26

In a common scenario, a pilot

purchased an automobile outside of the Kersting organization,

financing it through an airline credit union.

The pilot then

sold the automobile to a Kersting leasing corporation, which took
subject to the credit union loan, and became a shareholder of the
leasing corporation.

Thereafter, as the pilot made lease

26
The tax effect of lease payments is not at issue in these.
cases.

- 59 payments to the leasing corporation, the leasing corporation made

loan payments to the credit union.
In a January 1980 letter to a potential client who was
considering the purchase of a new automobile, Kersting urged him
to consider the sale-leaseback benefits associated with the
Leasing Corporation Plan:

"The tax retrievals which this plan is

scheduled to generate for you will fully pay for all lease
payments and other fees you sustain in the program.

The result

of this will be that you will be driving the car entirely free of

any cost to you."
A pamphlet entitled "The Universal Plan," which Kersting
authored or at least authorized, describes an early version of
the Leasing Corporation Plan with emphasis on the mechanics and

the tax advantages.

The cover lists Kersting and Ms. Pang as

sources of further information.

Although the pamphlet mentions

an "investment opportunity," there is no reference to either the
business of "Universal Corp." outside of this program or its
profit potential.

The investment opportunity is described not in

terms of dividends or stock appreciation, but in terms of a tax

savings return on the ultimate cash outlay:

"A taxpayer in the

20% bracket would be entitled to a tax refund of $1485.

In other

words on an investment of $756 [for leverage loan interest] a
return of $1485 can be obtained.

This equals a percentage return

of 196% which is entirely free of tax."
An undated form letter to automobile lessees that included

petitioner Terry D. Owens described, in addition to tax

- 60 advantages, the economic benefits available to shareholders in a

Leasing Corporation Plan:
As the leasing concept gains popularity,
investment opportunities will become available
comparable to the early stages of growth industries

* * *

Profits in leasing are essentially generated from
two sources: lease revenues and realization of
residual values inherent in automobiles or equipment.
Profits are, for all practical purposes, untaxed as
they can be sheltered by generous depreciation
allowances and investment credits. As a consequence,
an accumulation of intrinsic values takes place at a
faster rate than generally attainable if a portion of
profits must be shared with the government. As profits
go untaxed per share earnings will increase and
additions to book value (or shareholders equity) will
rise. This, in turn, will sooner or later be
recognized in the market place if the stock of the
company which we have organized shall be offered to the
public.
Following a description of the stock purchase, the letter stated

that the purchaser "would be an investor only.

He may expect,

however, captial (sic] appreciation and dividend income as the
years go by."

In another undated form letter received by petitioner Terry
D. Owens, this one transmitting initiating documents for
Universal Leasing, Kersting emphasized the tax aspects but also

wrote:
All of your debt, except your monthly payment
obligation, can be discharged at any time at your
option by surrender of the stock certificate which will
be issued to you after we have received the executed
documents from you. As a shareholder of this
corporation you will have access to capital gains
prospects which we intend to develop. If our judgement
is secure and if we are successful in creating a public
market for the stock of this company it is reasonable
to assume that the stock of this company will
eventually sell at an earnings multiplier well in

- 61 -

excess of the price which you are paying today.

We are

convinced of this to the point where we are willing to

accept your stock in settlement of your indebtedness.
Kersting also wrote a form letter, as president of Anseth
Leasing, marking the first anniversary of the recipients'
participation in the Leasing Corporation Plan.

He encouraged the

shareholders to renew their outstanding leverage notes by

executing new ones, and added that "you do have the continuing
option to retire the existing notes by a sale to your corporation
of the stock which you have acquired."
E.

CAT-FIT Plan27

Kersting made the CAT-FIT Plan available to those interested
clients with children, generally at a participation level of
$17,000 per child.

The parent borrowed $17,000 from Windsor

Acceptance by means of a primary loan with an annual interest
rate of 12 percent.

The primary note was by its terms payable on

demand or in 2 or sometimes 3 years if not demanded earlier.

Windsor Acceptance supplied the loan proceeds in the form of a
check payable to the parent, and Atlas Guarantee issued a $17,000
"investment certificate" in the name of the child.

The

investment certificate stated that Atlas Guarantee would pay

interest to the child at an annual rate of 12 percent.
The parent usually borrowed funds from an acceptance

corporation by means of a leverage loan, $2,040 for each child,

to pay the annual interest to the primary lender, Windsor

27
CAT-FIT is an inexact acronym for Children's Assistance To
Financially Indigent (or Indolent) Parents.

- 62 Acceptance.

The leverage note, with a 9-percent annual interest

rate,28 was by its terms payable in 1 year.

The parent endorsed

the loan proceeds check, which was payable to the parent, and,
with the other initiating documents, sent it back to the Kersting
offices.

The parent usually paid interest on the leverage loan

in a lump sum.
The investment certificate, the primary note, the leverage
note (if applicable), and the checks representing loan proceeds
all bore the same date, which was early in January or early in
July.

As with the Stock Subscription Plan, Kersting at the outset
instructed those wishing to participate in the leverage loan
version of the CAT-FIT Plan to open a checking account in Hawaii
at a specified local bank at which Kersting corporations had
accounts.

This was either Liberty Bank or Hawaii National Bank

into 1979 and Liberty Bank from 1979 on.
After the parent endorsed the proceeds check from the

leverage loan and returned the initiating documents to Kersting,
Atlas Guarantee sent a form letter with instructions on how to
complete the transaction.2°

In this letter, Atlas Guarantee

asked the parent to send a signed check drawn on his local

28
The Annual interest rate on CAT-FIT leverage loans was 6
percent in 1976, 6 or 7 percent in 1977, and 7 percent into 1978.

2
Somehimes the instructions on how to complete the
transaction were included with the package of initiating
documents sent to the parent. In such a case, Kersting expected
the parent to return signed initiating documents and comply with
the additional instructions at the same time.

- 63 account at the specified bank and made payable to Windsor
Acceptance in the amount of a year of interest on the primary
loan.

The letter stated that an appropriate deposit (meaning the

endorsed leverage loan proceeds check) would be made to the

parent's account to allow his check to clear.
Atlas Guarantee paid interest on the investment certificates
semi-annually, with checks made payable to the child and dated in
June or July and December or January.

By an accompanying letter

or otherwise, the parent was requested to obtain the child's

endorsement or endorse for the child, and then to return the
check so that Atlas Guarantee could add the check amount to the
face amount of the investment certificate.

The parent usually

agreed to this procedure, but some parents arranged to receive

signed and negotiable interest checks.

Kersting told these

parents not to use the child's earnings from the investment
certificate to discharge their normal parental obligations, such

as the provision of food, shelter, and clothing.

Otherwise,

Kersting believed, the earnings belonged to the parents for
income tax purposes.
For the second and each succeeding year of the CAT-FIT Plan,
the parent participating in the leverage loan version borrowed

funds by means of a new leverage loan in order to pay another
year of interest to Windsor Acceptance.

The new leverage note,

again with a 1-year term and a 9-percent interest rate, was in
favor of a different acceptance corporation than the original
leverage lender.

The loan proceeds, in the amount of the annual

- 64 -

interest payable to Windsor Acceptance, took the form of a check
payable to the parent.

The parent again wrote a check to Windsor

Acceptance drawn on his local account in an amount equal to a
year of interest on the primary loan.
If a parent wished to participate in the CAT-FIT Plan beyond

the term of the original primary note, he in effect renewed or
refinanced the primary loan by executing a new note in favor,of
Windsor Acceptance, again at an annual interest rate of 12
percent.
Kersting at some point authored this description of the CATFIT Plan:

Under existing tax regulations each parent * * *
can make a TAX FREE gift of $3,000.00 per year to each
of their children. Furthermore, they have a lifetime
allowance of $30,000 of TAX FREE gifts to their
children. No gift tax will be payable on either the
annual gifts in the amount of $3,000 or the once-in-alifetime gift of $30,000.

The object of the plan is to shift income from
parents to their children. Children can be taxpayers
in their own right and are permitted to earn as much as
$2,300 per year before they begin to pay taxes.
Although children under the CAT FIT PLAN become
taxpayers by reason of the income they might earn,
their parents will not loose [sic] the exemption,
presently $1,000 [per] child, if they contribute more
than 50% of their children's annual support.
The implementation of the plan requires a few
simple steps:

1. Each parent will make a gift in the amount of
$17,000 to any one or all of their children. A
certificate savings account in the amount of $17,000
will be opened with Atlas Guarantee Corp. in the name
of the child. The account will earn interest at the
rate of 12% per year. The earnings will accrue to the
child.

- 65 2. If the lifetime allowance or any part thereof is
used, the savings account can be increased accordingly.

3. One of our subsidiary acceptance corporations will
make a loan to the parents in the amount of $17,000 or
whatever the savings account in the child's name should
amount to. We will charge interest at the rate of 12%
per year on that loan. The interest payment becomes a
deduction for federal and state tax purposes to the
parents.
The effect of the above-described transaction will
be that the children will earn a return on the savings
account in their names which will be free of income tax
to the point where they reach $2,300 and the parents
will have a tax deduction in the amount of $2,040 * * *

The actual net return to parents and children,
will depend upon the tax brackets of the parents * * *
In an undated form letter that accompanied initiating

documents received by petitioner Terry D. Owens, Kersting wrote:
Enclosed please find the promissory note (issued
to our Acceptance Corporation) by which you will
engender the funds needed to create the educional [sic]
fund for your children. Please sign white copy of note
and endorse the attached check. Return both to us.

* * *

Upon receipt of your executed promissory note and
check we will issue to your children Thrift
Certificates as per enclosed sample copy. Your
children will earn as of the date of the Thrift
Certificate 12% interest on the face amount of the
Certificate. For every $17,000.00 of Thrift
Certificates your children will earn $2,040.00 per
year. * * *
When a parent decided to discontinue participation in the

CAT-FIT Plan, he sent the investment certificate back to Kersting
to be redeemed.

The redemption check sent to the child was

endorsed, returned, and then used to pay off the primary loan.

- 66 F.

Flow of Funds

1.

Generally

The "waltz" was what Kersting called the procedure he used
to guide checks through the bank checking accounts of several

corporations and investors on the same date.

All of the Kersting

corporations involved in a given waltz had checking accounts at

the same local bank in Hawaii,·either Hawaii National Bank or
Liberty Bank.

These waltzes were not always perfect in terms of

same-day timing and identical amounts flowing between accounts,
but both types of discrepancies were relatively few and
insignificant.

The Kersting corporations conducted banking transactions at
Hawaii National Bank during the 1970s.

Kersting himself made

deposits to the accounts of the various Kersting corporations and
to the accounts of various investors who had opened accounts at
the bank.

He often provided a schematic drawing to a bank

employee and explained that the funds were moving from one party
to the next in a circular fashion.

Because there were usually

negligible balances in the accounts affected by the circular

transactions, the bank processed checks as a simultaneous
transaction, in effect depositing and paying checks at the same

time so that payment of a check from an account was covered by a
deposit to that account of a like amount.

Eventually, Hawaii National Bank became concerned about the
nature of these transactions, specifically the possibility of

- 67 check-kiting,

and informed Kersting that all accounts would be

closed, which occurred in March of 1979.

There had been no

possibility of check-kiting up to this time because all of the
affected accounts were within Hawaii National Bank.

Nonetheless,

Kersting was involving more and more accounts, and the Hawaii
National Bank administrators, who began to track drawing-on-sameday-deposit reports, decided that the transactions should cease.
Several Kersting corporations had checking accounts at
Liberty Bank even before closing of the accounts at Hawaii

National Bank.

At least from 1978 through 1983, either Kersting

or women who worked in his offices would go to the Kahala Mall
branch of Liberty Bank to conduct banking transactions.

Several

checks would usually be deposited, most or all of which were

drawn on Liberty Bank.

The total deposited amount was sometimes

large enough to make the deposit volume for the branch on that
day seem unusually high.

Checks associated with Kersting's investment programs
usually cleared the bank, Hawaii National Bank or Liberty Bank,
at least several weeks after their dates, and sometimes the date
difference was over a year.

In addition, Kersting generally

waltzed funds associated with primary loans separately from those

Check-kiting is a fraudulent scheme in which the wrongdoer
profits from a continual interchange of worthless checks between
accounts at two or more banks, taking advantage of both the
several-day check collection process and the willingness of the
banks to pay a check even though the account balance consists
only of a deposited check not yet collected. See generally H.
Bailey, Brady on Bank Checks, par. 18.11, pp. 18-22 to 18-25 (6th
ed. 1987).

- 68 funds associated with leverage loans, at least for the Stock
Subscription Plan.

These factors sometimes affected the work of

the bookkeepers, who relied on bank statements and canceled
checks.

For example, as already noted, Fargo Acceptance in its

initial income tax return for the period ending June 30, 1977,
reported interest income of $91,200, but indicated no capital
stock on the Schedule L balance sheet.

Kersting had waltzed

leverage loan funds for a Fargo Acceptance Stock Subscription
Plan on June 15, 1977, which included interest on subscription

agreements of $91,200.

He did not waltz the primary loan funds

with which the investors purchased the Fargo Acceptance stóck
until July 29, 1977.

Kersting's intercorporate fund transfers as part of a waltz
were at least sometimes documented as loans or deposits (by means

of notes or other evidences of indebtedness) or as stock
purchases.
2.

Stock Purchase Plan

The holding companies that participated in the Stock

Purchase Plan, Charter Financial and Investors Financial,
periodically transferred the funds received from new shareholders

to Federated Finance.
On February 8, 1980, Liberty Ba2k recorded 20 checks issued
by Charter Financial in amounts of either $14,400 or $21,600.

Among the deposits recorded on the slme date were two for

$151,200 each.

The account balance vas the same at both the

beginning and end of the day, $1,399.36.

For Candace Acceptance

- 69 on the same date, Liberty Bank recorded three deposits totaling

$302,400 (among other smaller deposits), with each of the three
evenly divisible by $7,200.

Among the issued checks recorded on

the same date were two for $151,200 each.

The ending account

balance for the day differed by less than $50 from the beginning
balance.
On May 22, 1980, Liberty Bank recorded 37 checks issued by
Charter Financial in amounts of $7,200, $14,400, and $21,600.

Among the deposits recorded on the same date was one for
$597,600.

The account balance was the same at both the beginning

and end of the day, $780.53.

For Candace Acceptance on the same

date, Liberty Bank recorded four deposits evenly divisible by
$7,200 (among others not so divisible), and these four totaled
$597,600.

Among the issued checks recorded on the same date was

one for $597,600.

The ending account balance for the day, which

was less than $900, differed by less than $30 from the beginning
balance.
3.

Stock Subscription Plan

For the Stock Subscription Plan, the waltz of primary loan
funds typically occurred several months after the date on the

initiating documents.

After several investors had endorsed and

returned to Kersting the two-party loan proceeds checks from
their primary loans, the bank processed the following check

transactions (paying a check from the drawer's account and
depositing it to the payee's account) on the same date:

(1) The

loan proceeds checks were paid from the account of the primary

- 70 lender and deposited as a group to :he account of the second
Payee named on the checks, which was the acceptance corporation
selling its stock; (2) this acceptance corporation issued a
check, equal to the amount deposited to its account, to Federated
Finance; and (3) Federated Finance, if the primary lender was
other than Federated Finance, issued a check in the same amount

to the primary lender.

Although the amount flowing from point to

point in a waltz of this type often exceeded $500, 000, it was not

uncommon for the account balances of the primary lender and the
acceptance corporation, immediately before· and after the waltz,
to equal a small fraction of the circulating amount.
The waltz of leverage loan funds for the Stock Subscription

Plan also typically occurred several months after the date on the
initiating documents.

This waltz incorporated the investor's

checking account at the same bank into the loop.
As part of the leverage loan t

nsaction, the investor

returned one check to Kersting and s nt two of his own.

More

specifically, he endorsed and return d the leverage loan proceeds
check and-also sent two signed check

drawn on his account (for

primary loan interest and subscripti n interest) that taken
together equaled the amount of the proceeds check.

After several

investors had returned this three-check package, the bank
processed the following check transactions on the same date:

(1 )

The loan proceeds checks were paid from the account of the
leverage lender and deposited separately to the account of each
investor; (2) the check for subscription interest was paid from

- 71 the account of each investor, and these checks were deposited as
a group to the account of the acceptance corporation selling its
stock; (3) the check for primary loan interest was paid from the
account of each investor, and these checks were deposited as a
group to the account of the primary lender; (4) the stock-issuing
acceptance corporation and the primary lender issued checks, each

equal to the amount deposited to its account, to Charter
Financial or Federated Finance; and (5) Charter Financial or
Federated Finance issued a check, equal to the amount deposited
to its account, to the leverage lender.
The amounts flowing into and out of the accounts of the

stock-issuing acceptance corporation and the primary lender
usually exceeded $100,000.

The amounts flowing into and out of

the accounts of the leverage lender and Charter Financial usually
exceeded $200,000.

It was not uncommon, however, for each of

these account balances, immediately before and after the waltz,
to equal less than $1,000.

4.

Leasing Corporation Plan

The leasing corporations that sold their stock under the
Leasing Corporation Plan, like the holding companies in the Stock
Purchase Plan, periodically transferred the funds received from

new shareholders to Federated Finance.

-- 72 On July 22, 1981, Liberty Bank recorded deposits of $28,800

and $82,000 in the general account c4f Anseth Leasing.3'

The

$28,800 consisted of checks from fot.r individuals, three for
$6,600 each and one for $9,000.

The $82,000 consisted of checks

from the same individuals, three for $19,000 and one for $25,000.
As recorded on the same date, Ansett Leasing issued checks from

this account that included one for $28,800 and another for
$82,000.

Also on July 22, 1981, Liberty Bank recorded deposits of
$14,520 and $41,000 in the general tccount of Escon Leasing.

The

$14,520 consisted of checks from twc4 individuals, one for $6,600
and one for $7,920.

The $41,000 cor.sisted of checks from the

same individuals, one for $19,000 ar.d one for $22,000.

As

recorded on the same date, Escon Letsing issued checks from this
account that included one for $14,520 and another for $41,000.
On April 27, 1978, Liberty Bank recorded the following
activity in the Escon Leasing genertl account:

10 checks issued

in the amount of $9,990, 5 of $6,48(, 3 of $5,400, 2 each of
$10,800, $8,640, $7,560, and $3,240, and 1 each of $8,100,
$2,970, and $1,620, for a total of $221,670, and deposits of

$143,730, $78,000, and $2,000.

The recorded special account

activity for the same date was a sir.gle deposit of $221,670 and
58 issued checks:

10 each of $6,57C and $3,420, 7 of $2,160, 5

3'
The activity in the general accounts of the leasing
corporations often included deposits and checks in addition to
those we mention specifically.

- 73 each of $4,320 and $3,600, 3 each of $1,800 and $1,080, 2 each of
$7,200, $5,760, $5,040, $2,880, and $2,520, and 1 each of $5,400,
$2,700, $1,530, $1,440, and $540.

The ending special account

balance for the day was the same as the beginning balance, $100.

On November 8, 1978, Liberty Bank recorded the following
activity in the Escon Leasing general account:

5 checks issued

in the amount of $9,990 and 1 each of $8,640, $6,480, and $3,240,

for a total of $68,310, and deposits of $45,090 and $23,000.

The

recorded special account activity for the same date was a single

deposit of $68,310 and 16 issued checks:

5 each of $6,570 and

$3,420, 2 of $2,160, and 1 each of $5,760, $4,320, $2,880, and
$1,080.

The ending special account balance for the day was the

same as the beginning balance, $88.77.
On August 6, 1979, Liberty Bank recorded the following

activity in the Anseth Leasing general account:

4 checks issued

in the amount of $10,020 and 2 of $9,748.80, for a total of
$59,577.60, and a deposit of $39,417.60.

The recorded special

account activity for the same date was a single deposit of
$59,577.60 and 12 issued checks:

4 each of $6,600 and $3,420,

and 2 each of $6,508.80 and $3,240.

The ending special account

balance for the day was the same as the beginning balance,
$78.90.

On August 16, 1979, Liberty Bank recorded the following
activity in the Anseth Leasing general account:

15 checks issued

in the amount of $10,020, 6 of $9,748.80, 3 of $6,499.20, and 1
each of $5,416 and $4,062, for a total of $237,768.40, and

- 74 deposits of $156,948.40 and $81,000.

The recorded special

account activity for the same date was a single deposit of
$237,768.40 and 52 issued checks:

15 each of $6,600 and $3,420,

6 each of $6,508.80 and $3,240, 3 each of $4,339.20 and $2,160,
2 of $1,800, and 1 each of $3,616 and $2,262.

The ending special

account balance for the day was the same as the beginning
balance, $78.90.
5.

CAT-FIT Plan

During 1979 and 1980, Liberty Hank recorded the following

amounts in the accounts of Atlas Guarantee and Windsor

Acceptance:"
Date
8/30/79
9/24/79
10/30/79
11/29/79
1/25/80
2/22/80
3/ 7/80
3/18/80
4/18/80
7/24/80
8/ 8/80
8/13/80
8/21/80
11/19/80

Atlas Guarantee
Checks Issued

Windsor Acceptance
Deposits

$500,000;
85,000
408,000
391,000
102,000
17,000;
17,000
17,000
339,000;
459,000
17,000;
306,000
17,000;
306,000

$500,000; $510,000
85,000
408,000
391,000
102,000
34,000
17,000
17,000
339,000; 374,000
459,000
34,000
306,000
34,000
306,000

$510,000

17,000
374,000
17,000
17,000

On all of these dates, the deposits to the Atlas Guarantee
account exactly offset Atlas Guarantee checks, and the checks
paid from the Windsor Acceptance account (most of which were

*
The listed dates are not all of those with recorded activity
during 1979 and 1980. For a given date, the listed amounts do
not necessarily represent the only activity in the accounts.

¥

- 75 either $17,000 or a multiple thereof) exactly offset Windsor

Acceptance deposits.

Thus, the beginning and ending account

balances for the day were equal.

The Atlas Guarantee beginning

and ending account balances never exceeded $100 on these dates,
and the Windsor Acceptance account balances, with the exception
of January 25, 1980, did not exceed $5,000.
The waltz of leverage loan funds for the CAT-FIT Plan, like

the Stock Subscription Plan waltzes, typically occurred several
months after the date on the initiating documents.

Like the

waltz of Stock Subscription Plan leverage loan funds, this waltz

incorporated the parent's checking account into the loop.

As part of the leverage loan version of the CAT-FIT Plan,
the parent endorsed and returned the leverage loan proceeds check
and also sent a signed check drawn on his account (for primary

loan interest) that equaled the amount of the proceeds check.
After several parents had sent both of these checks to Kersting,
the bank processed the following check transactions on the same

date:

(1) The loan proceeds checks were paid from the account of

the leverage lender and deposited separately to the account of
each parent; (2) the parent's check for primary loan interest was

paid from the account of each parent, and these checks were
deposited as a group to the account of the primary lender,

Windsor Acceptance; (3) Windsor Acceptance issued a check, equal
to the amount deposited to its account, to Federated Finance; and

(4) Federated Finance issued a check, equal to the amount
deposited to its account, to the leverage lender.

- 76 The amounts flowing into and ot.t of the accounts of Windsor
Acceptance and the leverage lender tsually exceeded $50,000 for
this type of waltz.

It was not unccmmon, however, for each of

their account balances, immediately before and after the waltz,
to equal less than $500.
G.

Termination of Stock Programs

Before someone began a stock investment program,. Kersting
assured him that he could surrender the purchased stock at any

time in full payment of the corresponding primary loan.

For

those relatively few who insisted on written documentation of
this policy, which did not include any of petitioners, Kersting
obliged them.

In effect, he agreed with the investor to

repurchase the shares at the price for which they were issued.

As a mechanical matter, the investor gen.erally returned an
endorsed stock certificate in exchange for a check, which he.

endorsed and returned to pay off th

outstanding primary loan.

Although Kersting sometimes provided written assurances of
the termination policy after an investor began participating, the
letters in such instances merely confirmed the understanding

reached before participation began.

As an example of a letter

confirming an earlier understanding, Kersting wrote to a new
participant on July 28, 1977:
We received today your exeputed note #420 of which
I will be enclosing a copy for identification.
This is to confirm that yo have a continuing
option to offset any obligation arising from execution
of this note by surrender of th Fargo Acceptance Corp.

t

- 77 -

stock certificate which was issued to you (Certificate
#39, 30,000 shares of stock).
Similarly, on August 18, 1977, Kersting wrote to someone else:
This is to confirm our verbal understanding that
you will have a perpetual option to offset any
obligation arising from execution of your note in the
amount of $30,000.00 (copy attached for identification)
.by surrender of the stock certificate issued to you by
Fargo Acceptance Corp. of which a copy is enclosed with
this letter.
Kersting sometimes represented that surrendered stock would

satisfy all outstanding debt, which would include outstanding
leverage loans.

On January 18, 1978, he wrote to a prospective

investor on behalf of Forbes Acceptance, Fargo Acceptance,

Federated Finance, Federal Finance & Mortgage, Mahalo Acceptance,
and Atlas Funding:

"This is to confirm our verbal assurance that

you will be permitted to offset any of the promissory notes which
you might execute at one time or another to any of our lending
companies by surrender of the stock certificates which will be
issued to you in that connection."
In some correspondence, Kersting disclosed why he was

reluctant to provide written assurance to all participants as a
matter of course.

A letter he wrote to a prospect on July 21,

1977, explained:

there is, of course, no problem to reassure you of the
self-sustaining and self-liquidating aspects of the
transaction. We would, in fact, issue a letter to
every participant in the deal outlining that
understanding if it would not weaken YOUR position with
the IRS. IRS wants to see you "at risk" and not on a
non-recourse basis. The fact is, if they would
determine that you are on a non-recourse basis you
would likely lose your deduction.

- 78 His February 1978 letter to Willis McComas similarly stated:

As to the obligation under the promissory notes
and subscription agreements there is no ongoing
obligation as far as we are coÅcerned. We will always
repurchase the stock issued at a price sufficient to
allow a borrower to discharge all of his debt. That,
unfortunately, can not be stated before the Revenue
Service. The Tax Reform Act of 1976 has essentially
eliminated non-risk or non-recóurse notes. Your
deductions would be materially |weakened if we would
admit to an offset arrangment [sic] as to notes and
stock certificates. I wish I could be more explicit in

writing.
In a letter serving as a credit reference to a third party
on December 10, 1980, Kersting described a specific client's
t 540ypical
investments:

"His liabilities at * * * [ the time of the

stock purchases ] and from there on would be equal to the assets
acquired.

His debt can be cancelled at any time of his choice by

the sale of the assets in his possession.

We maintain a stable

and assured market for these securitiies."

The letter also

included this summation:

"The results of this sort of investment

planning have been considerable tax retrievals * * * at a nominal
cost and negligible risk. "
Kersting did not always provide.. an original of a termination

assurance letter directly to the concerned prospect or
participant.

In some instances, with the approval of the

concerned party, he gave the original to a mutual acquaintance
such as Michael Provan or Robert Campbell for safekeeping.

In

one instance, Kersting sent the oridinal to a mutual acquaintance
and attached a letter that read:

IRS.

"Be sure this never gets to the

It would be most damaging to all of us."

- 79 Although Kersting sometimes described the stock surrender
part of the transaction to a prospect as a stock redemption by

the corporate issuer, he also sometimes characterized it as a
direct sale to another buyer with Kersting acting in the role of
a broker.

Regardless of how Kersting characterized the

transaction, the prospect understood that his surrender of stock
would relieve him of liability on at least the principal balance
of the primary loan.

Kersting also assured all participants that if they

conformed to the investment programs as set up and operated, they
would not be liable for the principal amounts of their leverage

loans.

A participant in the Stock Purchase Plan or the Stock

Subscription Plan understood from the beginning that annual
distributions from the corporation would satisfy his principal

balance obligation on the outstanding leverage loan.

Kersting

personnel processed terminations of these programs as of the end
of the calendar year so that December distribution checks could
be applied to pay off the last leverage loan.

A participant in

the Leasing Corporation Plan was assured that an outstanding
leverage loan would be refinanced annually with a new leverage
loan.

At termination, the annual distribution check from the

leasing corporation satisfied the investor's obligation on the

principal balance of the then outstanding leverage loan.

- 80 H.

Collection Activities

Kersting wrote a letter dated Saptember 25, 1980, to over 30
clients, which read in part:
We have sent you several r3minders, most of them
friendly, now to encourage you :o discharge the debt to
which you are a party for some :ime. As it appears
that our reminders had no beari:1g on you, we * * *
alert you now to the prospect t:lat your tax deductions
which we have generated for you might evaporate.
It is

not reasonable to expect us to deliver and not be
compensated for it in return.
Please be advised that we will reverse on our
records your tax deductions for which we have not been
paid and as referenced above if we do not receive
payment in full by not later than October 10, 1980.

* * *
The programs involved were the Stock Subscription Plan, the

Leasing Corporation Plan, and the CAT-FIT Plan.

Of the various

amounts sought from these people, none was over $4,000 and

several coincided with the annual in:erest on a leverage loan for
a typical Stock Subscription Plan or Leasing Corporation Plan.
The Kersting corporations sometimes engaged attorneys,
including Kersting's son-in-law, Rogear Moseley (Moseley), to
pursue missed payments from those who participated in the
investment programs during the years at issue.

Some investors

stopped making payments to Kersting after hearing of the IRS
search and seizure activities on January 22, 1981.
activities were more vigorous after

Collection

982 than before, and

Kersting first engaged Moseley after 1983.

At the time of trial,

Moseley had been used for fewer than 10 debtors, wi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3Adac2e40be50ad948. Public record. Not legal advice.