CIA DIRECTOR DISPUTES IRS CLAIM TO $100,000 IN BACK TAXES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00965R000100270045-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 3
• Document Creation Date: December 22, 2016
• Document Release Date: December 28, 2011
• Sequence Number: 45
• Publication Date: May 13, 1984
• Content Type: OPEN SOURCE

S Declassified in Part - Sanitized Copy Approved for Release 2011/12/28: CIA-RDP90-
IRTICLB EAR1R.1 R LE -'AGE^,a WASHINGTON POST RLE OO HII
13 May 1984
CIA Director Disputes IRS Claim to
X100,000 in Back Taxes
By Charles R. Babcock
Washington Post Staff Writer
CIA Director William J. Casey is disput-
ing an Internal Revenue Service claim that
he owes at least $100,000 in back taxes, plus
interest, for deductions he took on two 1970s
partnership ventures.
The precise amount in dispute cannot be
determined from public records. However,
some of Casey's partners are challenging the
IRS in the U.S. Tax Court, and records in
those cases list his investment and share of
the write-offs.
In an interview last week, Casey did not
dispute calculations made from the court
records, but he refused to disclose the spe-
cific figures.
"My tax returns are confidential docu-
ments and I'm not going to talk about
them," he said. He also said, in reference to
the joint returns he and his wife Sophia file:
"If we have to pay more taxes, we will."
In one case, the records show that Casey
invested $95 for a 1 percent share in Pen-
Verter Partners, a group formed in late 1976
to develop a pen that transfers data directly
to a computer from hand-printed writing.
From 1977 to 1980 Casey took tax deduc-
tions of about $60,000, a write-off 600 times
his initial cash investment, according to the
records. The IRS has disallowed the deduc-
tions.
The IRS also has disallowed from
$115,000 to $150,000 in deductions that
Casey and his wife took over the same period
for her investment in a waste-recycling ven-
ture in Rhode Island. In each case, the Ca-
seys were limited partners who made invest-
ments, but had no role in the operation of
the ventures. .
In another case, the IRS claims that a $5
million price tag Casey set on patent rights
for an automobile engine "unreasonably ex-
ceeded" the fair market value. Casey owns a
30 percent interest in the engine patent, ac-
cording to records, and paid $10,400 for his
share a few months before he negotiated the
$5 million sale price in 1976. Casey was not a
member of the partnership that claimed
IRS-disputed deductions in this case. He
would benefit only if the partners-who ac-
quired the patent rights through notes-paid
off the $5 mjllion to Casey and two other
patent owners.
All the activities being cnauengea oy the Records in Tax court snow the ixa ms-
IRS took place before Casey assumed his allowed $6 million that the PenVerter part-
sensitive role as head of the CIA. The IRS ners declared as losses between 1977 and
has made no charge of wrongdoing by Casey
or the other partners in the ventures, and
the matters are in civil Tax Court.
The IRS last year recovered 35 percent of
the taxes being contested in Tax Court.
There are now nearly 20,000 tax-shelter
cases in Tax Court and more than 350,000
undergoing IRS audit, according to IRS
spokesmen.
Casey, 71, is a millionaire former tax law-
yer and publisher of tax manuals and books,
including the 1952 "Tax Sheltered Invest-
ments," who has made a practice of investing
in high-risk ventures. A dispute with the
IRS, .which might lead to payment of be-
tween $100,000 and $200,000 in back taxes
and interest, is not unusual for a wealthy
man who has a reputation for many decades
of aggressive, and at times adventurous, in-
vesting.
Casey's personal investments have been
an issue ever since he was nominated by
President Richard M. Nixon to be chairman
of the Securities and Exchange Commission
in 1971. At that time he told the Senate
Banking Committee that he had made 17
venture-capital investments in small corpo-
rations and had been sued for his activities
in three of them.
If he limited his holdings to larger corpo-
rations he might have avoided litigation and
made more money, he said. "But I would not
have had the interest, satisfaction or expe-
1980. During that period Casey was entitled
to 1 percent of PenVerter's profits and
losses, the records show.
PenVerter, the automobile-engine partner-
ship and the waste-recycling venture were
organized by Carl G. Paffendorf, a longtime
friend and business associate of Casey. They
are among several Paffendorf-related part-
nerships whose deductions have been disal-
lowed by the IRS in recent years.
Paffendorf is president of COAP Systems
Inc., which he and Casey co-founded 20
years ago, according to documents on file at
the SEC. Casey also has been a stockholder
in the company, and bought one of its sub-
sidiaries in 1979 for $250,000. Paffendorf,
who has been described as a Casey protege,
did not return calls for comment.
All three cases in Tax Court involve the
sale of patent or licensing rights at prices
that the IRS has challenged because the in-
vestors put up little cash and signed large
"non-recourse" notes for loans. Investors are
not personally liable for such loans if the
venture fails. The partnerships also wrote off
millions of dollars in research and develop-
ment fees they owed to Hi-Tech Research
Inc., a subsidiary of COAP Systems. SEC
records show that COAP Systems has not
collected any of the interest or principal
-owed it by the partnerships.
PenVerter
rience that comes from investment and ac- Soon after Paffendorf formed the Pen-
tive participation in new enterprises con-
cerned with development and change in our Verter partnership in November, 1976,
society." Casey replaced him as the "original limited
He declared, "It is this activity, as much partner" with an investment of $95. The
as anything else, that has given me an un- same month, the PenVerter partnership ob-
derstanding of the way the capitalist system tained "rights to certain confidential infor-
operates in America...." mation and technology" relating to comput-
After Casey left the government in 1975, ers from COAP Systems for $4 million. Of
limited partnerships for research and devel- that, $100,000 was paid in cash; the remain-
opment were becoming popular investment ing $3.9 million was in non-recourse notes.
vehicles for venture capitalists. Court records show that PenVerter then
The Senate Select Committee on Intelli- paid another $1.4 million-all but $50,000 of
gence knew of Casey's PenVerter write-offs it in non-recourse notes-to a group of en-
in 1981 when it investigated his finances. gineers from the Massachusetts Institute of
But the IRS had not completed the audit Technology to develop a laboratory model of
that led to disallowing the deductions. the computer pen device. In their work, the
Declassified in Part - Sanitized Copy Approved for Release 2011/12/28: CIA-RDP90-00965R000100270045-6
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/28: CIA-RDP90-00965R000100270045-6
2,
engineers were to use the "information and
technology" that the partners had bought
from COAP Systems. The three engineers
involved said in recent interviews that they
did not receive anything from PenVerter
that they would describe as "technology."
"Carl Paffendorf came up with the idea of
having accountants write on tablets that got
right into a computer," Barry Blesser, one of
the engineers, recalled.
"He conceived the idea. He had
sketches .... He owned the concept. He
hired us to implement it .... There was
nothing substantial I would call technology."
PenVerter also hired Hi-Tech Research,
the COAP Systems subsidiary, for $1.5 mil-
lion-including $1 million in non-recourse
notes-to develop a production model of the
device in 1977. The MIT engineers said they
were not aware of what Hi-Tech did for the
money.
In early 1980, the PenVerter partners sold
their interest to a new company called Pen-
cept, which was backed by J.H. Whitney and
Co., a New York investment banking firm.
Don Ackerman, a Whitney partner and di-
rector of Pencept, said the new company has
invested several million dollars in the tech-
nology, which is being marketed under the
name Penpad. He said he told the Senate
intelligence committee in 1981 that he
thought the $4 million value placed on the
PenVerter technology was "suspect."
Recycling Venture
The waste-recycling venture, Recycle and
Energy Associates/Little Compton (Realco),
was set up in 1974 by Paffendorf and an
associate. Its purpose was to "acquire, lease,
and/or operate" a system for disposal and
recycling of solid waste in Little Compton,
R.I. In early 1975 it had five limited part-
ners, including Sophia Casey. By 1978 her
investment totaled $40,000 in cash and an-
other $40,000 in notes-20 percent of the
group's capital.
The Tax Court case covers nearly
$800,000 the partnership claimed as losses
between 1977 and 1980. The limited part-
ners were entitled to split 95 percent of the
write-off, according to partnership papers.
Thus the Caseys apparently deducted be-
tween $115,000 and $150,000 on their joint
returns over that four-year period.
The recycling facility is not currently be-
ing used. Jane Cabot, president of the Little
Compton town council at the time, said, "It
didn't pass state pollution tests and it
sounded like a jet engine when it was run-
ning. We got a lot of complaints."
Engine Partnership
In the Tri-Rotor Motor Co. partnership
case, in which Casey has no personal invest-
ment, the IRS disallowed all $5.5 million in
losses claimed by the partnership from 1977
to 1980. The tax agency also is questioning
the group's payment of $5 million for the
rights to the engine patent owned by Casey
and two brothers, George J. and Helias
Doundoulakis.
In papers filed in Tax Court, the IRS said
that only $50,000 of the $5 million purchase
price was cash. The remaining $4.95 million
was in the form of "non-recourse" notes.
"Both the alleged purchase price of the
patent and the principal amount of the al-
leged non-recourse note unreasonably ex-
ceeded the fair market value of the patents
at the time of the purchase," IRS 'lawyers
said in papers filed Feb. 23. They added:
"The acquisition of the patents and the
claimed research and experimental expend-
itures were not activities entered into for
profit. On the contrary, the transactions en-
tered into by Tri-Rotor and the activities
undertaken by it were solely or primarily to
reduce the income taxes of the partners."
Jerome Kamerman, an attorney for a Tri-
Rotor partner fighting the IRS challenge to
the deductions, said at a Tax Court hearing
last month that he understood that Casey
"set the price on the patent in question and
he bargained very hard on that price and he
thought it was valuable."
Casey said he is willing to testify.
Technical reviews of the engine in 1977,
1980 and 1982 commented on its unique and
intriguing design, but also noted the part-
ners' troubles in getting it to perform as
hoped. Inventor George Doundoulakis, in a
report he circulated earlier this year, said
that it wasn't until April, 1983, that his en-
gine "began starting at every try and contin-
ued to run with good consistency."
Doundoulakis said in a recent interview
that he could not demonstrate the engine
because it was taken apart after testing.
"We are confident our engine will become
the engine of the future," he said. Asked
about the IRS challenge, he said: "`The IRS
says everything is overvalued. That's their
job .... They'll say it's worth nothing. We'll
say it's worth a billion dollars. We'll let the
judge decide."
Special correspondents John Kennedy
and Anndee Hochman contributed to this
report.
Declassified in Part - Sanitized Copy Approved for Release 2011/12/28: CIA-RDP90-00965R000100270045-6
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/28: CIA-RDP90-00965R000100270045-6
Venture capitalist Casey likes `participation in enterprises concerned with development and change:'
Declassified in Part - Sanitized Copy Approved for Release 2011/12/28: CIA-RDP90-00965R000100270045-6