Leona's Defense: Taxes Overpaid

HELMSLEY TRIAL

LEONA HELMSLEY once told a housekeeper, ``We don't pay taxes. Only the little people pay taxes.'' Now it is up to the ``little people'' to decide if Mrs. Helmsley, with a $5 billion hotel and real estate business, cheated the government on her taxes. The high-visibility case is expected to go to the jury today after six weeks of government testimony, 44 witnesses, and grocery carts full of documents.

Helmsley and two former employees, Frank Turco and Joseph Locari, are charged with tax evasion and conspiracy to commit extortion. The government alleges Helmsley evaded paying about $1 million in taxes by charging millions of dollars in personal expenses to her businesses.

Helmsley's lawyers concluded her defense with only 5 1/2 hours of testimony. Helmsley's main defense is that she and her husband Harry, who is excused from the case for health reasons, actually overpaid her taxes. In the tax years involved in the case (1983-1985), the Helmsleys paid $59 million in income taxes.

Earlier this week, accountants from Touche Ross testified that Helmsley's tax accountants, Eisner & Lubin, had used an incorrect method of depreciating property held by Helmsley partnerships. As a result, the Touche Ross accountants said the government actually owes Helmsley a refund.

Helmsley's other defense is that she has such a nasty personality that employees did not want to tell her about payoffs, fake invoices, and other illegalities taking place. ``The theory is that she would shoot the messenger who brought the bad news,'' says one lawyer.

In fact, in his summation arguments on Wednesday, Helmsley's lawyer argued that invoices were faked so employees could avoid dealing with Helmsley and pay contractors who were doing work on the Helmsley estate, Dunnellen Hall, located in Greenwich, Conn. ``There is no question Mrs. Helmsley was a very tough person to deal with. She is tough and temperamental,'' said her lawyer, Gerald Feffer.

The government, in its summation, maintained Helmsley is a world-class cheapskate. Federal prosecutor Cathy Seibel told the jury that since Helmsley was not above ``nickel and diming'' her employees, it was no surprise she would cheat the government. ``If there is one thing you have learned at this trial, it is just because you are rich does not mean you're not cheap,'' said Ms. Seibel.

A key issue in the case will be the amount of business conducted at the Connecticut estate. The Internal Revenue Service has very tough rules about record keeping if home expenses are deducted from income taxes. The Helmsleys kept no records and deducted 50 percent of their Dunnellen Hall expenses. Mr. Feffer explained to the jury that the reason records were not kept was again because of Helmsley's personality: She intensely disliked Mr. Locari, her co-defendant, who was supposed to keep the records. Because she disliked him, she kept him in the dark about what went on at the mansion.

The government has a lot at stake in getting convictions. ``They like being able to show that the law applies even to the wealthiest people,'' says Michael Moriarty, an editor of Tax Notes, a trade publication in Washington.

The government's message might be having some impact. Publisher Malcolm Forbes said on Wednesday he would not write off any of the $2 million he spent on his recent birthday party. Rep. Fortney Stark (D) of California had written a letter to the Internal Revenue Service saying he hoped the party was not deductible.

However, Jules Ritholz, a Manhattan lawyer who specializes in defending tax cases, says the case should not affect his business. ``Most people think that getting caught by the government only happens to other people,'' he says.