The artful dodger

A series of legal defeats going as far as the Privy Council has not dimmed John George Russell's appetite for a fight but, as JAN CORBETT reports, some of his clients have wearied of the anguish.

At 67, John George Russell would like to be enjoying a relaxed retirement, gazing through the rickety ranchsliders at the glistening waters of Kawakawa Bay, playing the church organ at the local Presbyterian church, maybe even reading Dickens. But he says Inland Revenue won't let him.

Instead it is keeping him busy with a raft of litigation including issuing 226 prosecutions "against me personally" in a move he calls "vindictive as hell."

In the meantime, as many as 3500 people, according to Taxation Review Authority Judge Paul Barber's estimate, could be " having their lives ruined by financial stress which seems likely to continue for years and years" because they, their spouses, parents or employers answered an advertisement offering a way to release the funds in their businesses and cut a deal with John George Russell.

He doesn't look like a man you would suspect of bringing misery to ordinary people's lives, nor like a man who has made millions of dollars out of his schemes.

The decor at Kawakawa Bay has not been changed since, at a guess, the 1960s. Patterned brown and orange carpet, gold dralon-covered couches pushed against the walls, crocheted cushion covers, a tiffany lamp, a gilt-framed copy of Constable's Haywain and an organ in the corner. The only nod to the times is a television set and stereo with CD player.

Fast cars, flash boats, fancy houses and slick suits have never interested him, he says. All he will say about his income is that he has spent close to $2 million on legal fees, defending his schemes through the courts.

"If you're involved in a vendetta, you have to pay the price," he says.

There was until last year a team of about 20 Inland Revenue investigators dedicated to JGR, as he is labelled in the numerous judgments against him.

Finding out about the Russell Team was somehow thrilling for its prey, who saw it as evidence of the department's obsessive and irrational pursuit of him.

He thinks it has now changed its name to the tax avoidance unit. "But I'm its only customer," he chuckles.

Inland Revenue might say Russell could easily retire if he would just accept he is wrong, and that the convoluted schemes he has hooked numerous small business people into are, indeed, the type of tax avoidance the IRD can undo.

But Russell, who in his long and controversial career has been variously described as a corporate undertaker, commercial hazard and enemy of the state - the last description delights him - is not ready to surrender.

Although he says he will stop short of "flagellating myself for the rest of my life if I can't put it right," he still has plenty of fight. "I can stand the heat," he says, proudly repeating Justice David Baragwanath's assessment of him: "Mr Russell gives as good as he gets."

He wants to be sure he could have done nothing more to see that the IRD's "vendetta" against him is ended and that the "injustices" meted out by the Taxation Review Authority, the High Court, the Court of Appeal and, most recently, the Privy Council, are overturned. Because Russell has no doubt he has played within the rules.

There are two possible starting points in any story about John George Russell.

One would be at his seven-bedroom home in Pakuranga in the 1980s. Here he ran his financial advice and insolvency business, and perfected his tax-avoidance schemes, although he would never call them that.

At his peak he employed 59 staff, mostly accountants, to keep the schemes running. Because all 59 could not fit in the house at the same time, they worked in shifts, starting at 4 am and finishing at 11 pm. He says it suited him to work this way, rather than renting office space.

Russell himself usually clocked up 100 hours of work each week, taking time out only to sleep, shower and to attend church twice on Sundays.

In those days he went to the local Methodist church, playing the organ at one service and singing in the choir at the other. Through these years he garnered considerable notoriety.

The business press began feeding on a regular diet of stories from the High Court, where Russell's early tax avoidance schemes were criticised, where he was declared unfit to be the liquidator for Skybus and was removed as the receiver for Glen Eden Motors in 1988 and disqualified from managing a company for five years - a ban he successfully appealed.

Undeterred, he kept amassing High Court judgments against his practices as a receiver. At one point his habit of naming companies rather than people as directors and company secretaries prompted a law change.

But at least one of the people later caught up in one of his schemes admitted to never reading the business press.

The other starting point comes a decade earlier when he was the brainchild and managing director of Securitibank, one of the country's first merchant banks. When it crashed just before Christmas 1976, it went into the history books as one of the largest commercial failures of the time.

During Securitibank's heyday, as then-finance minister Robert Muldoon was pulling on all the reins of a tightly regulated economy, John Russell was feted as a messiah on the state of the economy and financial management. His speeches to business associations and service clubs were as faithfully reported in the daily press as if they were addresses by the Reserve Bank governor himself.

Not that he dressed that way.

"He never wore pinstripe suits. He always wore a scruffy white shirt with a screwed-up tie and messy hair. He looked like a boffin, or a clerk who couldn't afford a new suit," remembers one of the young men who learned about merchant banking at Russell's knee but prefers not to be named in association with him.

Even so, he remembers his old boss as "very clever, and very astute."

Indeed Russell, despite his sometimes dishevelled appearance, was also charming and charismatic. He roused his young disciples into believing they were the smartest young men in the land, and it was their job to find ways through Muldoon's increasing menu of financial regulations.

"The Reserve Bank used to say to me, 'Mr Russell, you work out ways of avoiding regulations.' I said, 'No, I work out ways of complying with regulations and doing something new.' I say the same thing to the IRD, I've found a way to do something new."

Among his acolytes at Securitibank were none other than Michael Fay and David Richwhite, who later had their own problems with the interpretation of taxation rules. But suggest to Russell that Securitibank was a nursery school for masters of the murky art of tax minimisation and a dark shadow flashes across his otherwise sunny face, and he dismisses the notion.

And ask him if he followed the Winebox inquiry while his former proteges were embroiled in it and he will tell you he was too busy fighting his own war with the taxman to pay much attention.

Unlike the large corporations who were snared in the Winebox deals, Russell's schemes were designed for average self-employed people.

One who spoke to the Weekend Herald recalls a knock on the door from IRD men, three years after he signed up to a Russell scheme. That was followed by eight years of weekly tax and penalty demands from a department now famed for its ruthless pursuit of tax debtors. It took $80,000 in legal fees to extricate himself from the morass.

"I haven't got any ill-feelings towards him," he says. "He believed what he was doing was legal ... But the system is against him, so he was never going to win."

Return to the 1980s and the house in Pakuranga. Russell's business style was to take a debenture over struggling companies in return for financial assistance, and when they failed, he became the owner of companies with tax losses.

Under prescribed circumstances, a company that loses, say, $1000 one year and makes $2000 the following year can carry the loss over and declare that year's profit as $1000, on which tax is paid. Russell, sitting on companies with losses, saw if they made money the following year it was like cash in the bank.

He decided the easiest way of achieving that was if the tax-loss companies bought profitable ones. So he went in search of good little earners, advertising in newspapers, accountancy journals and working on his relationships with accountants "who knew what I was doing," and were happy to advise their clients to sign up.

There comes a time in the life of most small business owners when they want financial advice, perhaps a line of credit to expand, and to be sure they are not paying any more tax than they need. Russell seemed to be offering all that.

He induced these often unsophisticated self-employed into selling him their businesses by offering them an inflated price, with the guarantee they could stay on running the company.

Through a labyrinthine structure typical of Russell, his company would buy the shares in the business and at the same time borrow the purchase price from it. The profits were paid to Russell's company, which had tax losses, meaning it was tax-free income to his company. Russell's company then paid the money back, minus a consultancy fee. So what would otherwise have been taxable profit to the original owners was now a tax-free repayment of a loan.

At the end of it the original owners could buy the company back for a nominal amount and start the whole process again.

Russell says he bought about 25 companies this way, weaving them into the scheme he says it took him years to perfect. Judge Barber heard reference to as many as 1100 companies having the Russell template.

When the tax department saw what was going on, it didn't like it. It set out on what became known as Track A, assessing the Russell-owned companies for tax. But when it went to collect the money, it found only empty shells.

So it turned to Track B, and went after the people who had sold him their companies in the first place, hitting them with bills for unpaid tax, plus penalties - albeit lower penalties than accrue under the modern tax regime.

Which is how a decade of litigation began as the IRD issued assessments against individuals. From the Taxation Review Authority, to the High Court, the Court of Appeal and now the Privy Council, every judge who has looked at it agrees the schemes are highly artificial, designed for the purposes of tax avoidance and therefore the Commissioner of Inland Revenue is entitled to drive a bus through them.

But Russell is unmoved. Judges, in his view, are failed lawyers who are biased, ignoring evidence that contradicts their position.

"The standard of the judicial system is poor," he says in a resonant tone that would not be out of place in a pulpit. "It could be easily fixed if you had a judges' school to start with.

"If it was possible to appeal the Privy Council, I would."

But Mike Lennard, head of the IRD's litigation department, is hoping Russell will see that the Privy Council decision is the end of the road.

Over time a number of Russell clients have quietly settled with the IRD, but Lennard estimates the department is entitled to around $10.3 million in unpaid tax from these schemes and it is still pursuing this. And then there are the prosecutions against Russell himself, which Lennard won't discuss.

In the five years Lennard has been with the IRD, Russell has consumed a significant part of his time. The only thing he agrees with Russell on is that it has been trench warfare.

Of all the heavyweight tax litigation he has been involved in, he says the Russell cases have "gone less smoothly" than any of them, largely because of Russell's talent for delaying tactics.

"It has been a dreadful waste of time and money."

Although one of his five children is studying to become a lawyer, Russell also derides that profession for being overly greedy and under-prepared. He laughs out loud as he reads his John Grisham books, because they denigrate lawyers.

Which is why Russell often defends himself when he can, and closely shadows his own counsel - even to the Privy Council - when he cannot.

All of this has left him with a lot of good war stories. And this old campaigner certainly enjoys telling them with the same charm and charisma that brought him to national prominence all those years ago. He smiles at the rare, incidental but none-the-less victorious courtroom moments that "were just gorgeous."

Even the IRD's lawyers are referred to affectionately by their first names, and Justice Baragwanath is "Bags" in Russell's tales, said in a tone that betrays his respect for the judge.

Having lost none of his enormous capacity for work, he prides himself on reading all the documents, believing judges seldom do.

His doggedness sees him appealing even judgments where he has won, if he believes the judge has arrived at the right answer with the wrong reasoning. He has even involved himself in tax cases that have nothing to do with him.

After all, he realises, law is based on precedent and a decision that favours him one time could bite him the next.

"I confess I enjoy the game," says Russell. "It's very intellectual."

He is meeting the legal costs for the individual taxpayers he still considers his clients, but points out they all had independent advice from lawyers and accountants before entering his schemes.

Obviously that has not necessarily made it easier for them to sleep at night.

"It was very stressful at the time," says one who has since settled his tax debts because he couldn't stand it any more. "It just went on and on."