Wesley Snipes $38 million -- will the "861" tax scam put him inprison?


D

Dave Johnson

NYT December 14, 2008

http://www.nytimes.com/2008/01/14/business/14tax.html?_r=1&ref=business&oref=slogin

From 1999 to 2004, the actor Wesley Snipes earned $38 million
appearing in more than half a dozen movies, including two sequels to
his popular vampire thriller "Blade."
Actor Wesley Snipes with his press assistant Judy Smith in December
2006. The 45-year-old action star is set to go on trial Monday, Jan.
14, 2008, on tax fraud and conspiracy charges.
The taxes he paid in the same period? Zero.

But unlike other celebrities who find themselves on the wrong side of
the Internal Revenue Service, Mr. Snipes has a flamboyant explanation:
he argues that he is not actually required to pay taxes.
Mr. Snipes, who is scheduled to go on trial Monday in Ocala, Fla., has
become an unlikely public face for the antitax movement, whose members
maintain that Americans are not obligated to pay income taxes and that
the government extracts taxes from its citizens illegally.
His trial has become the most prominent income tax prosecution since
the 1989 conviction of the billionaire New York hotelier, Leona
Helmsley, who went to prison for improperly billing personal expenses
to her business.
Tax deniers maintain that the law only appears to require payment of
taxes. All their theories have been rejected by the courts, including
the one invoked by Mr. Snipes, which is known as the 861 position,
after a section of the federal tax code.
Adherents say a regulation applying the 861 provision does not list
wages as taxable, though it does say that "compensation for services"
is taxable. The courts have uniformly rejected all such theories, and
eight people have been sentenced to prison after not paying taxes
based on the 861 argument.
Despite the court rulings, juries have acquitted some prominent tax
resisters in recent years, and failed prosecutions have encouraged
others to join. Even when the government has failed to obtain
convictions, it succeeded in collecting the taxes through civil
enforcement.
J. J. MacNab, a Maryland insurance analyst who tracks people who deny
they owe taxes and has testified before Congress about the movement,
said that an acquittal of Mr. Snipes would be a severe setback for the
I.R.S.
"He will get more press and attention than any other victory by the
tax deniers, and the growth in new members will be exponential," she
said.
Mr. Snipes, 45, is charged with two felonies: conspiracy to defraud
the government and filing a false claim for a $7 million refund (a
claim for the year 1997, before he stopped paying taxes). He is also
charged with failing to file tax returns for the six years starting in
1999. Prosecutors say they intend to show that Mr. Snipes moved tens
of millions of untaxed dollars offshore and gave the government three
worthless checks totaling $14 million to cover some taxes.
In court papers and interviews, Mr. Snipes says that he is not guilty
and that he acted on the advice of two tax professionals. They are
being tried alongside him and are promoters of the 861 position and
other tax theories.
One is Douglas Rosile, who was stripped of his accounting license in
1997. The other is Eddie Kahn, who has served prison time for tax
crimes. Both are under federal court order to stop promoting tax
evasion, including the 861 position.
The lawyer representing Mr. Snipes at trial is Robert Bernhoft of
Milwaukee, who has been barred by court order since 1999 from selling
a program under which he said people could legally stop paying income
taxes.
Mr. Snipes, who grew up in the Bronx, is best known for tough-guy
roles in movies like "Blade," "U.S. Marshals," and "The Passenger,"
but he also starred in films by Spike Lee ("Jungle Fever," "Mo' Better
Blues") and Ron Shelton ("White Men Can't Jump").
His involvement with the tax resistance movement may stem from his
association with the Nuwaubians, a quasi-religious sect of black
Americans who promote antigovernment theories and who set up a
headquarters in Georgia in the early 1990s.
In 2000, Mr. Snipes sought a federal permit for a military training
compound on land next to the Nuwaubian camp; the Bureau of Alcohol,
Tobacco and Firearms rejected the request.
"Snipes is already drawing whole new demographics to the movement,"
Ms. MacNab added. "Tax protesters used to be white, 50 or older, blue-
collar, rural and often connected to racist movements, but Snipes is
young, urban and famous."
She and others said the movement got a boost in 2005 when a jury
acquitted Joseph Banister, a former criminal investigator for the
I.R.S., who used his acquittal as proof that his views on the tax law
were correct. One problem with that case was that even though his co-
defendant, Al Thompson of Lake Shasta, Calif., was acquitted of
conspiracy in a separate trial, Mr. Thompson is serving six years in
prison for failing to withhold taxes from his employees and turn the
money over.
Federal prosecutors also failed to convict a Louisiana lawyer, Tom
Cryer, who, like Mr. Snipes, said he sincerely believed that he was
not required to pay taxes. Another resister, Robert Lawrence of
Peoria, Ill., had his case dropped in 2006 after arguing that tax
forms violate the federal Paperwork Reduction Act -- a strategy that
had been falling out of favor among tax opponents but has since gained
new adherents. Both men were still liable for the taxes after their
cases.
Prosecutors also failed to convict a FedEx pilot, Vernice Kuglin of
Memphis, who said she wrote the I.R.S. asking what law makes her
liable for taxes, but got no response. She later signed papers
conceding she owed more than $600,000 in taxes, and last week her
goods, including her 14-year-old vehicle, were auctioned in Memphis.
Ms. Kuglin said that despite the court filing, she continues to
believe that she does not owe taxes.
Tax specialists and lawyers say that the Snipes case hinges on whether
he can persuade jurors that he sincerely believed that he did not have
to pay taxes, while prosecutors will argue that he was just trying to
avoid them. The Supreme Court has ruled that people can make such an
argument, but two leading defense lawyers said that Mr. Snipes might
have a hard time using it as a defense.
Michael Louis Minns, a Houston lawyer who has defended and won
acquittals for tax protesters, said that the three bad checks that Mr.
Snipes sent the government to cover $14 million of taxes would seem to
destroy a defense based on that argument.
"You can win acquittal with a good-faith defense that you sincerely
believed you do not have to pay taxes," Mr. Minns said. "But not if
you make inconsistent claims."
William Cohan, a lawyer in Rancho Santa Fe, Calif., who also
represents tax opponents, said another hurdle is the refund claim form
signed by Mr. Snipes. The signature statement, or jurat, was altered
so that instead of saying it was signed under penalty of perjury, the
word "no" was inserted before "penalty."


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Courts have consistently held that IRC Section 861 does not excuse
U.S. citizens from filing tax returns and reporting income they earn
in the U.S. "The conviction of individuals who intentionally conceal
income and evade taxes is a vital element in maintaining public
confidence in our tax system," stated Nancy Jardini, Chief, IRS
Criminal Investigation.
Various tax scams ("861", gross income, etc.) rest upon quotations out
of context from the regulations. For example, tax protesters like to
quote the first sentence of Treas. Reg. ("Part I (section 861 and
following), subchapter N, chapter 1 of the Code, and the regulations
thereunder determine the sources of income for purposes of the income
tax.") but steadfastly ignore the second sentence of the same
paragraph ("These sections explicitly allocate certain important
sources of income to the United States or to areas outside the United
States, as the case may be....") because the second sentence makes it
clear that the purpose of the regulations is to determine the
geographical source of income, which is relevant only to nonresident
aliens, foreign corporations, and certain other taxpayers.
I.R.C. section 1(a) imposes an income tax upon the income of United
States citizens and resident aliens. "Gross income" is defined in
I.R.C. section 61 as "all income from whatever source derived," and
"taxable income" is defined in I.R.C. section 63 as being "gross
income minus" allowable deductions. Pursuant to section 1(a), Treas.
Reg. section 1.1-1(b) states that "all citizens of the United States
are liable to the income taxes imposed by the Code whether the income
is received from sources within or without the United States."
Finally, the Code requires that taxes shown to be due on the return be
paid with the
filing of the return.
I.R.C. section 6151(a). In United States v.
Drefke, the court, while discussing section 6151, stated that "when a
tax return is required to be filed, the person so required shall pay
such taxes to the internal revenue officer with whom the return is
filed at the fixed time and place. The sections of the Internal
Revenue Code imposed a duty on [the taxpayer] to file tax returns and
pay the . . . tax." 707 F.2d 978, 981 (8th Cir. 1983) (emphasis in
original).Section 61(a) of the Code states that "gross income" (the
beginning of the determination of "taxable income") means "all income
from whatever source derived .. .."
As explained above in connection with the same phrase ("from whatever
source derived") in the 16th Amendment, the word "whatever" is usually
defined as meaning "of any number or kind," or "of any kind at all."
If income is taxable from any kind of source, then there is no need to
identify the source before taxing the income. (What about income that
has no source? I will leave it to more imaginative minds than mine to
try to visualize an income that springs out of thin air, with no
source at all.)
In interpreting similar provisions of the Internal Revenue Code of
1929, the Supreme Court expressly disputed the idea that the "source"
of income was significant:
"Congress applied no limitations as to the source of taxable
receipts, nor restrictive labels as to their nature. And the Court has
given a liberal construction to this broad phraseology in recognition
of the intention of Congress to tax all gains except those
specifically exempted." Commissioner v. Glenshaw Glass Co., 348 U.S.
426, 429-30 (1955).
The regulations under the Internal Revenue Code also confirm that the
geographical source of the income of a citizen or resident of the
United States is usually not relevant:
"In general, all citizens of the United States, wherever resident,
and all resident alien individuals are liable to the income taxes
imposed by the Code whether the income is received from sources within
or without the United States." Treas. Reg. § 1.1-1(b).
 
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