Tax Court Rules Ex-CEO of Payday Lender Check 'n Go Owes U.S. Millions: Stock Option Transfer at Heart of IRS Challenge

Feds Win Round in $13.7 Million Tax Case

By James McNair
Bellwether Contributor
 CINCINNATI (TDB) -- A bitterly contested income tax case involving Allen Davis, the former CEO of Provident Bank and the Check ‘n Go payday loan chain, ended earlier this week with a federal court ruling that Davis owes $13.7 million to the government.  In a 20-page decision issued Monday, the U.S. Tax Court in Washington, D.C., rejected Davis’ argument that a 2002 stock option grant from Check ‘n Go’s parent company, Kenwood-based CNG Financial, stemmed from a divorce settlement and wasn’t compensation. Davis didn’t include the $37 million option grant in his 2004 income tax return. The court ruled he erred -- something many people do when dealing with federal tax returns.  “Because CNG granted the Allen option to secure Allen’s participation in the management of the company, the stock Allen received by exercising that option was transferred in connection with the performance of services,” the court wrote.

In other words, it was taxable compensation, which is what the Internal Revenue Service had claimed all along. Davis brought the suit in 2006. He went to state court to challenge CNG’s booking of the $37 million stock-option grant as compensation. That case was settled earlier this year with Davis agreeing to sell his minority stake in CNG back to the company for an undisclosed amount. And in its opinion Monday, the U.S. Tax Court held that the $37 million compensation to Davis was reasonable given Check ‘n Go’s growth under his leadership. The IRS had deemed it too high by industry standards.  Today, Check ‘n Go has more than 1,000 payday loan stores nationwide. It is controlled by Davis’ sons, Jared and David. Neither CNG nor Allen Davis’ lawyer, Ben Dusing of Baker Hostetler, had any comment on the tax case.