The attorney for Rep. Mickey Gates, R-District 22, said Thursday that the Garland County legislator didn't file income tax returns as a result of instructions he received from the state revenue office following an audit.
Jeff Rosenzweig said Gates did what the Department of Finance and Administration told him prior to being charged with six felony counts of failing to pay or file a tax return. Charging documents filed in July 2018 said agency officials told an Arkansas State Police investigator in April last year that Gates had not filed a state income tax return from 2003 to 2017.
Gates pleaded not guilty in October 2018. Benton County Circuit Judge Brad Karren, whom the state Supreme Court appointed to hear the case, set a July 29 trial date Thursday.
"The defense in this case is good faith," Rosenzweig said following a motion hearing Thursday at the Garland County Court House. "It's that he did what DFA told him to do. There were some issues dealing with calculations years before this event was still being hashed out. As a consequence, he did what they told him to do and handled it in the way he understood they told him to do it."
The supplemental motion for discovery Rosenzweig filed in December is seeking internal DFA correspondence he said will corroborate the good faith defense, showing Gates' failure to file returns was done at the instruction of the state.
"We do not have the inter-office memorandum, which will be prior statements of the witnesses who will be testifying," Rosenzweig said.
Karren ordered Thursday that discovery be concluded prior to a June 10 pretrial hearing.
The audit extended to Gates' promotional products company, an S corporation that passes profits and losses directly to its shareholders, which, in Gates' business, are him and his wife. Rosenzweig said DFA was determining how a loss the business claimed affected Gates' tax liability when Special Prosecutor Jack McQuary filed charges in July.
McQuary was asked for comment Thursday but said through an Office of the Prosecutor Coordinator spokesperson that he's prohibited from commenting on an ongoing criminal matter.
Gates has told The Sentinel-Record the theft of computer files by former employees led to a $1 million loss in revenue after the stolen information was used to solicit business for a competitor. He won judgments against his former employees and distributor after filing suit in federal court, according to court records. Gates said he spent $300,000 on attorneys and expert witnesses.
"What happened was that he had a significant business loss, and there's questions of how you treat that, how you deduct that," Rosenzweig said. "They were in the process of trying to figure that out."
He said Gates has been paying $1,500 a month as part of a tax settlement he and DFA agreed to. The affidavit in support of his arrest last year said as of June he owed $259,841 in taxes, penalties and interest for the 2012-17 tax years.
No tax returns for Gates were found when DFA searched its system in response to a subpoena McQuary issued, according to the affidavit, which said records in DFA's system date back to 2003. The state's Tax Procedure Act sets a six-year statute of limitations on prosecuting tax offenses.
"This is not a case of someone saying, 'I'm not paying anything. I'm just hiding, not filing,'" Rosenzweig said, explaining that he has substantial documentation showing Gates had been working with DFA to address his tax issues. "He has been paying taxes all along. It wasn't a case of him not doing stuff."
He said the supplemental discovery will help determine the extent of Gates' tax liability. Debts listed in the 2017 statement of financial interest Gates filed last January with the secretary of state's office included $40,000 in taxes owed to the state.
Garland County property records show the state has active liens against Gates for $54,325 in unpaid 2007 income taxes and $159,882 in unpaid 2014 income taxes. Gates told the newspaper in 2016 that the former lien stems from faded receipts he submitted in support of business-related expenses he deducted from his taxable income. He said the faded ink made the receipts illegible and unable to proof the expenses were business related.
"That's what we're trying to determine," Rosenzweig, referring to the tax liability, said. "That's why we need some of the other discovery. How did they come to that? We don't have that calculation."
Karren said owing to publicity the case has received and Gates' prominence in the community, he plans to summon six panels of 25 people for jury selection.
Gates was elected in November to a third term representing west Garland and north Saline counties in the state House, defeating Democratic candidate Kevin Rogers by an almost two-to-one margin despite his arrest four months earlier.Local on 01/04/2019