HOT SPRINGS -- The attorney for state Rep. Mickey Gates says the Garland County Republican failed to file income tax returns because he relied on instructions that he received from the state after an audit.
Jeff Rosenzweig said Thursday that Gates did what the Department of Finance and Administration told him to do. Gates has been charged with six felony counts of failing to pay taxes or file a tax return.
Charging documents filed in July said agency officials told an Arkansas State Police investigator in April last year that Gates had not filed state income tax returns from 2003 through 2017.
Gates pleaded innocent in October 2018. Benton County Circuit Judge Brad Karren, whom the state Supreme Court appointed to hear the case, set a trial date Thursday for July 29.
"The defense in this case is good-faith," Rosenzweig said after a motion hearing. "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 that Rosenzweig filed in December seeks internal Finance and Administration Department correspondence that he said will corroborate the good-faith defense and show that 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 the gathering of evidence be concluded before 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 himself and his wife. The business claimed a loss, and Rosenzweig said the Finance and Administration Department was determining how that loss affected Gates' tax liability when special prosecutor Jack McQuary filed charges in July.
McQuary was asked for comment Thursday but said through a spokesman for the office of the prosecutor coordinator that he's prohibited from commenting on an ongoing criminal matter.
Gates has told The Sentinel-Record in Hot Springs that 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. Gates 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 that he and state finance officials agreed to. The affidavit in support of his arrest last year said that as of June he owed $259,841 in taxes, penalties and interest for tax years 2012 through 2017.
No tax returns for Gates were found when Finance and Administration Department officials searched the agency's system in response to a subpoena McQuary issued, according to the affidavit, which said records in the agency'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 that shows that Gates had been working with the finance department 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 that 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 that the state has liens against Gates for $54,325 in unpaid 2007 income taxes and $159,882 in unpaid 2014 income taxes. Gates said in 2016 that the lien in the 2007 case 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 prove the expenses were business-related.
Noting the publicity the case has received and Gates' prominence in the community, Karren said 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.
State Desk on 01/07/2019