Did Giannoulias lie to the IRS, or did he just lie to voters and journalists?

Did Illinois Democrats’ Senate nominee, Alexi Giannoulias, stop working for his family’s Broadway Bank in 2006? If so, he has repeatedly lied about it to shake questions about some of its dodgiest lending practices.

Did he stop working for Broadway Bank in 2005? If so, he lied to the IRS and got a huge tax deduction that resulted in him paying no taxes this year.

Naturally, Republicans are loving this storyline. For a more detailed account of the questions Giannoulias faces, here is the meat of Illinois GOP chairman Pat Brady’s referral of Giannoulias to the Internal Revenue Service for investigation:

In 2009, Alexi Giannoulias claimed $2.7 million in business losses stemming from the failure of his family’s Broadway Bank, an S-corporation of which Giannoulias was a significant shareholder. Mr. Giannoulias used these losses to offset his Illinois Treasurer salary, resulting in zero income taxes owed.

According to the federal tax code and IRS regulations, business losses may only be treated as non-passive if the person claiming the loss “materially participated” in the operation of the business. Mr. Giannoulias does not appear to satisfy any of the IRS tests for determining material participation, which I have listed below.

1. The taxpayer works 500 hours or more during the year in the activity.
2. The taxpayer does substantially all the work in the activity.
3. The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer.
4. The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year.
5. The taxpayer materially participated in the activity in any 5 of the prior 10 years.
6. The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.
7. Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity.

Considering Mr. Giannoulias’ current position as Illinois State Treasurer, the only test he possibly could have passed for his 2009 taxes is test 5: “The taxpayer materially participated in the activity in any 5 of the prior 10 years.” However, as the Chicago Tribune detailed on September 29, 2010, Mr. Giannoulias began work at Broadway Bank in 2002 and has repeatedly stated that he ceased working at Broadway Bank in 2005. Below are selected statements from Mr. Giannoulias and his campaign regarding his departure date from Broadway Bank.

  • “It was because my father instilled in his sons the importance of helping others that I decided to leave the bank in 2005 to pursue public service.”
  • “Alexi left daily operations of the bank in September of 2005, months before this loan was made,” says Kathleen Strand of his campaign staff.
  • “The facts are clear: Broadway Bank made a sound loan and the loan was fully repaid. Alexi was no longer involved in the bank’s operations when the loan was made and, as the loan document makes clear, Mr. Rezko had no role in this transaction,” Giannoulias spokeswoman Kathleen Strand said.

Furthermore, in a December 4, 2009 interview with the Chicago Sun Times Editorial Board, when asked whether Broadway Bank could have extricated itself from loans it made to two convicted felons named Michael Giorango and Demitri Stavropoulos, Giannoulias stated “by the time that stuff came out I was…I had left the bank.”

The first media report of Broadway Bank’s loans to Giorango and Stavropoulos was published in the Chicago Tribune on March 15, 2006. Taking Mr. Giannoulias at his word and using March 15, 2006 as his departure date from Broadway Bank, Giannoulias would have had only 2.5 months at Broadway during which to log 500 hours. Considering Mr. Giannoulias’ busy Treasurer campaign schedule at the time, that seems unlikely.

(Note: The primary for Illinois Treasurer, between Giannoulias and Paul Mangieri, was held on March 21, 2006.)

Finally, Mr. Giannoulias himself has admitted that he does not know how many hours he actually worked at Broadway Bank in 2006. He states in the September 29, 2010 Chicago Tribune article that “I think the biggest difference is I wasn’t taking on new customers. I was just finishing up what I needed to do, so I don’t know how the hours worked out, but it wasn’t a full-time job.”

Based on the evidence that is publically available, it is questionable whether Mr. Giannoulias logged 500 hours at Broadway Bank in 2006, and thus he may be one year short of satisfying test 5.

Because Mr. Giannoulias does not appear to have satisfied any of the tests for determining material participation, his 2009 losses stemming from Broadway Bank should be considered passive, and thus cannot be used to offset Mr. Giannoulias’ Illinois Treasurer salary.

Beltway Confidentialelection 2010ilUS

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