Wright, Friend Targets of IRS Criminal Probe

The Internal Revenue Service has launched a “very broad” criminal investigation into the financial affairs of House Speaker Jim Wright (D-Tex.) and his friend and former business partner, Texas developer George A. Mallick Jr., The Times learned Wednesday.

Special agents from the Dallas regional office, with support and coordination from IRS headquarters in Washington, are reviewing a wide range of transactions that produced hundreds of thousands of dollars in income for the two men in recent years, according to federal sources.

May Deepen Problems

The investigation is in a preliminary stage. However, coupled with an ongoing inquiry into Wright’s activities by the House Ethics Committee, scrutiny of his affairs by special agents of the IRS criminal investigative division could add significantly to his problems.

Barbara Hargrave, an IRS spokeswoman for the Dallas region, said she could not confirm or deny the existence of the investigation. However, other federal sources said the IRS has begun an inquiry that is “very broad” and embraces “a whole range of transactions.”

An investigation by the IRS criminal division is different from an audit or investigation by the agency’s civil division and potentially is far more serious. If a civil audit results in a finding of taxes being owed, back taxes, penalties and interest may be paid without threat of a prison sentence.

The criminal division’s agents, however, are assigned to seek evidence of willful tax evasion, not accidental errors on a tax return. If the IRS finds what it considers evidence of criminal wrongdoing, it refers its findings to the Justice Department for possible prosecution.

The criminal division--whose agents are considered the best-trained financial investigators in government--is known for its thoroughness, with some investigations taking as long as 18 months.

Both Wright and Mallick said Wednesday that they know nothing about an IRS investigation. Mark Johnson, Wright’s spokesman, added: “We are not concerned about it because we know of no tax issues involved in this case.”

Although details of the IRS investigation could not be learned, agents are said to be using a staff report by Richard J. Phelan, special counsel to the ethics panel, as a “road map” for their own inquiry.

The report issued last month examines oil and gas ventures undertaken by Mallightco--the joint investment company formed by Mallick, Wright and their wives--as well as a series of profitable securities transactions in the stock of such little-known energy firms as Delhi International Oil and Supron Energy. Mallightco reaped combined profits of $110,000 on Delhi Oil and Supron alone.

Beginning in 1980, the report said, Mallightco also “was used as a conduit for cash flowing from the Mallicks to the Wrights.”

From one oil-drilling venture last year, known as Sabine Lake, Wright netted a quick profit of more than $300,000, which allowed him to pay off debts from his $100,000 investment in a nursing home enterprise that had failed.

The Wrights received more than $100,000 from Mallick in the form of reduced-interest loans, free housing in Ft. Worth and the free use of a luxury automobile, according to the report.

The car, a Cadillac used by Wright’s wife over a six-year period, could pose a tax issue for the Speaker because IRS regulations say that the personal use of a company car is a fringe benefit that must be reported as income.

Johnson, Wright’s spokesman, said that the Cadillac was intended to be a loan and, therefore, was “a liability and not income” to the Wrights. Johnson said the car was purchased by the Speaker’s blind trust last February for $10,011--its value in 1983 when it was first provided, plus 7% interest since that date.

“There is no IRS issue,” Johnson told a reporter.

Phelan has rejected the Speaker’s explanation that the car was a loan, saying that it was never reflected on the company’s books and that the Wrights never made a payment on it. Phelan argued in his report that the 1989 purchase of the Cadillac by the Wrights’ blind trust was an attempt to cover up the gift of the car from Mallightco.

Although Betty Wright has said that the 1979 sedan she used came with her job for Mallightco, House investigators said that there was no evidence that she did a substantial amount of work for the company in the Washington area, where the car was kept.

In addition, she continued to use the car from 1985 through the early months of this year, although her employment with Mallightco ended in December, 1984. However, Mallightco took regular deductions for business expenses--a total of $10,895--to pay for insurance, registration, tires, battery and repairs for the Cadillac.

The trustee of Wright’s blind trust, Thomas A. Law, said the money Mallightco paid for car expenses was repaid by Wright last February by deducting it from a $120,000 note that the company gave him when it bought back his shares in the firm.

William C. Oldaker, Wright’s attorney, justified the use of the car after 1984 by saying that the Speaker’s wife remained a vice president and director of the company.

The car was not mentioned in the financial disclosure reports filed by the Speaker for the years in question.

Accountants said the fact that Mrs. Wright kept the car at her home seven days a week usually would be considered a strong indication that she drove it for personal purposes as well as business.

Sources said that the IRS is seeking to determine whether all income accruing to Mallick, Wright and the company was reflected accurately on federal tax returns and whether all business losses claimed were justifiable.

Staff writer William J. Eaton in Washington contributed to this story.