Peter Hoffman took the stand Wednesday in his criminal tax trial, offering an impassioned explanation of his careful compensation planning and how it went awry.

The former Carolco CEO reiterated that the payments worth $600,000 that he received from Carolco Pictures Inc. — which the government claims was taxable income — were always intended as loans, and were in fact repaid.

Though the government contended he never reported the income or paid taxes on it, Hoffman revealed Wednesday he had in fact paid the tax — the day before this trial began in U.S. District Court in Los Angeles.

Hinting at a wide-ranging cross-examination to come today, Assistant U.S. Attorney Monica Bachner near the end of questioning Wednesday asked if Hoffman had devised the tax structure for Carolco that allowed the company to avoid U.S. taxes.

The question drew a vigorous denial from Hoffman. “There’s so many things wrong with that question, I don’t know where to start,” said Hoffman.

Earlier, on direct examination by his attorney Tom Pollack, Hoffman explained that he set up a deferred compensation plan shortly after he arrived at Carolco in 1986 because it was a common tax deferral device used by highly compensated execs.

He chose to be paid $300,000 and defer the remainder of his $750,000 salary, basing the current income on the amount he had made as a partner at his law firm, Gipson, Hoffman & Pancione. He said that he also discussed occasional loans with Carolco principals Mario Kassar and Andy Vajna, so he would have “flexibility” for a variety of purposes.

Hoffman said he volunteered not to borrow more than was in the account because he knew he would have to repay any loans and he wanted to be sure he always had enough money to pay back loans.

There was no promissory note, he stated, because “we were friends, we trusted each other”; instead, he set up a loan account, which Hoffman said was perfectly legal. “There was never a dispute with Carolco about whether I would pay back the loans,” he testified. “They knew I’d pay it back and I did.”

When asked if he thought it was legal for him to borrow money even though he had a deferred compensation account, Hoffman said that it was “absolutely fine and legal and it never occurred to him that it was a problem or that it would be attacked civilly,” let alone criminally.

‘Another galaxy’

At several points throughout his testimony, Hoffman that it “was like from another galaxy” that the IRS would consider these payments income. “The law says that intent is the major issue and there was no question that I intended to pay the money back and did pay it back,” he said.

Explaining his decision to cash out the deferred compensation account, Hoffman testified that 1989 was a horrible year, during which Vajna left the company and Hoffman was fighting with Kassar.

The defendant testified that around this time his wife, producer Susan Hoffman, became concerned about the amount of money in the deferred compensation account because it was under Carolco’s control. Hoffman testified, “My wife said, ‘I love Mario, but I don’t trust him. I want my money.’ “

In 1990, Hoffman was paid the amount that remained in the account, less the total of his loans and other payments that the company has made on his behalf.

However, as has been brought out repeatedly during this case, his W-2 for 1990 only showed the net amount for tax purposes, even though it should have showed the gross amount. Consequently, Hoffman did not report these payments on his 1990 tax return or pay taxes on the amount.

The defense has always attributed this to an error by Carolco’s accounting department. Hoffman testified Wednesday, “We’re all here because of the 1990 mistake.”

He stated that he had nothing to do with the preparation of the W-2 and didn’t learn that it was incorrect until 1996 during the course of the criminal investigation.

Dropping somewhat of a bombshell, Hoffman revealed that on Sept. 8 — the day before this trial began — he paid taxes on $800,00 in income, the major portion of the amount he had borrowed over the years.

Explaining the delay, Hoffman said, “I was angry and upset” about the criminal investigation and the fact that he was being punished for Carolco’s bookkeeping error.

If it weren’t for the mistake, he would have paid the taxes in 1991, he testified. Because he feared that the government would try to draw a negative inference from the fact that he was now paying the taxes, he waited until Sept. 8, the exact day the government would be time-barred from also prosecuting him on his 1990 return to pay the money. (The indictment involves only payments in 1989; claims involving earlier payments were time-barred. At the time Hoffman was indicted last year, the government could have also brought charges related to the 1990 tax return but elected not to.)

The government made a $100 million tax assessment against Vajna and Kassar based on earnings by the Carolco partners’ offshore companies that were set up in tax-haven countries such as the Netherlands Antilles. The government is still pursuing its two-year-old criminal investigation against the two, and Wednesday’s questioning, like Tuesday’s, gave indications that the government considers Hoffman’s role in setting up the tax structures to be crucial.

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