- Associated Press - Tuesday, August 2, 2016

KNOXVILLE, Tenn. (AP) - A longtime Tennessee state lawmaker parlayed his position of power to orchestrate a scheme to secretly reap more than $300,000 in untaxed earnings, federal prosecutors told jurors on the first day of Rep. Joe Armstrong’s trial on Tuesday.

But Armstrong’s attorney argued that the Knoxville Democrat did nothing illegal, and that he was the victim of a fraudulent accountant who became the government’s star witness in the case following a guilty plea.

The prosecution alleges that Armstrong bought the cigarette tax stamps before a state law tripling the levy - which the lawmaker advocated and voted for - went into effect, and later re-sold them for a big profit. That “bonanza” was not reported to the IRS and allowed Armstrong to fund an opulent lifestyle that included the purchase of a Mercedes, said Assistant U.S. Attorney Frank Dale.

“Show Mr. Armstrong that he’s not above the law,” Dale urged the jury.

Armstrong attorney Gregory Isaacs responded that the government’s case hinges on the testimony of Charles Stivers, the accountant who filed the lawmaker’s tax returns. Isaacs said Armstrong had paid Stivers the money to cover the taxes, but that the accountant had pocketed that amount instead of paying the IRS.

According to Stivers’ plea agreement, the return on the purchase of $250,000 worth of tax stamps was $750,000, and he agreed to a 15 percent cut for funneling the proceeds through his bank. That 15 percent cut would have covered Armstrong’s tax burden, Isaacs said.

“They’re going to try to get him convicted for listening to his longtime accountant,” Isaacs said. “Joe can’t believe him, but you can.”

Isaacs had unsuccessfully sought to keep the defendant’s role as a state lawmaker from the jury, arguing that it would require him to mount a defense to political corruption instead of the tax evasion case he is charged with.

But prosecutors argued that political considerations were a key motivation for Armstrong. “He couldn’t be seen to be getting money from Big Tobacco,” Dale said.

Isaacs stressed that it was not illegal to buy tax stamps before the tax rate went into effect, and that many wholesalers did just that.

“Joe did what a lot of Tennesseans did,” he said.

The indictment alleges that Armstrong devised the scheme beginning in 2006 to profit from the cigarette tax hike planned by then-Gov. Phil Bredesen, a fellow Democrat. According to the charges, Armstrong borrowed $250,000 to buy tax stamps at the old 20-cent rate, and then sold them at a profit after lawmakers raised the tax to 62 cents in June 2007.

Armstrong was by Bredesen’s side when he toured East Tennessee in 2007 to promote the 42-cent cigarette tax increase to help fund an increase in education funding. Armstrong said at the time the tax should have been raised by as much as $1 per pack.

Earlier on Tuesday, prosecutors succeed in excluding the lone African-American potential juror from the trial over what they called “race-neutral reasons.”

District Judge Thomas W. Phillips agreed with prosecutor Charles Atchley’s argument that the 68-year-old retired caregiver had been “disengaged” during jury selection and that she would have had difficulty following a complex tax case.

“I have to have good jurors on this case,” Atchley told the judge.

Isaacs had argued that his client, who is black, deserved to be tried by a jury of his peers and there was no legitimate reason to exclude the juror.

Armstrong became Knox County’s youngest commissioner in 1982, and was first elected to the state House in 1988. A former president of the National Black Caucus of State Legislators, he is tied with two other lawmakers as the longest-serving members in the lower chamber of the Tennessee General Assembly.

Prosecutors said they expect to wrap up their portion of the trial by Thursday, which is also when Tennessee holds its primary election. Armstrong faces no Democratic opponent, but his political future hinges on the outcome of the trial.

Republican lawmakers are circulating a petition to call a special session to oust Armstrong along with Republican state Rep. Jeremy Durham, who allegedly had improper sexual interactions with more than 20 women.


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