Twin Cities developer and hotelier Jeffrey Wirth was sentenced on Wednesday to 4 1/2 years in federal prison and ordered to pay $6.45 million in restitution for what prosecutors characterized as one of the largest tax-fraud conspiracies ever in Minnesota.

Wirth, 53, of Plymouth, took the news with aplomb. Outside of court, the once high-flying hotel and water park developer smiled broadly as he hugged and shook hands with more than a dozen family members and friends who attended the sentencing.

Wirth had faced up to 20 years in prison in the scheme before his attorney, Christopher Madel, negotiated a plea bargain.

Madel said Wirth would appeal the amount of restitution ordered for the tax years of 2003-05. He contends Wirth was entitled to offsets from losses incurred in other years that would wipe out Wirth's entire tax bill.

U.S. District Judge Ann Montgomery rejected those arguments for losses prior to 2003 and said Wirth was free to take up the case in tax court for 2007 and later years.

Montgomery gave credit to Wirth for generous contributions to charities over the years, as well as the generosity he's shown to family members, employees and young entrepreneurs. But she rejected Madel's argument for a sentence below the 51 to 60 months recommended by sentencing guidelines.

"This is not a case of a single tax year or a slip-up," Montgomery said. "This went on for quite a period of time."

Montgomery echoed Assistant U.S. Attorney William Otteson, who said that tax fraud is not a victimless crime and that Wirth deserved a stiff sentence to send a message to other tax cheats.

"This country depends on the honor system for the collection of its taxes," Montgomery said. "The fact that you could put on a tax return that you made $12,000 a year ... when you were giving money away to family and charities is fairly incomprehensible to me."

Wirth apologized to his family, friends and employees. He made no apology to the taxpayers.

Wirth, owner of Wirth Cos. in Brooklyn Center and about 30 other business entities, is best known as the developer of the Grand Lodge Hotel Waterpark in Bloomington and the Grand Rios Hotel and Water Park in Brooklyn Park. He also spent about $54 million turning the old Minneapolis Athletic Club into the luxury Grand Hotel Minneapolis.

Yet from 2003 through 2006, Wirth and his now ex-wife, Holly Damiani, paid just $7,567 in federal income taxes, according to Nona Bosshart, a revenue agent who testified at a hearing last Friday about the government's investigation.

Bosshart explained that the IRS didn't go back further because the law won't allow it and that it didn't review subsequent years because the criminal case was opened at the end of 2006.

Besides Wirth, Damiani -- who was the Wirth Cos.' former CFO -- and outside accountant Michael Murray have pleaded guilty in the case. Prosecutors said Wirth and Damiani helped themselves to company funds and defrauded the government by failing to pay enough taxes.

Cars, spas, 'Isle of Windemere'

An IRS analysis shows $446,943 in personal credit card expenses were paid with company funds, including $397,036 spent on travel and $6,360 on entertainment. Wirth and his family tapped the business accounts for $630,120 in cash withdrawals, Bosshart said.

About $185,000 in company money flowed into the Wirth family's checking accounts and was spent on athletic club dues, meals, spa treatments and boating equipment.

Millions of company dollars also went into an 18,000-square-foot custom home and 15-car garage they built on an island in St. Albans Bay on Lake Minnetonka, Bosshart said. They dubbed it the "Isle of Windemere." Bosshart said the company ledger shows $4.5 million going into the home, and the IRS traced another $2.3 million of company funds to it that were not recorded.

The company revenue that flowed to Wirth and Damiani -- about $9.7 million from 2003 to 2006 -- should have been reported as distributions, she said. By failing to report the cash flows properly, they could avoid paying capital gains.

Rodney Oakes, a retired IRS agent, disputed Bosshart's analysis. "I did not come up with any tax owing. Zero," he testified.

But Montgomery said she accepted Bosshart's testimony as reliable. She found that Wirth, as a certified public account and successful entrepreneur, employed special skills to carry out his crime. She said she would let Wirth turn himself in later so he could attend his son's piano recital in New York. "I realize I'm taking a risk on that," she said. "Mr. Madel, I'm sure, will tell you that the most stupid thing you could do in this situation is to run."

Dan Browning • 612-673-4493