[BOBT12]

Here is an interesting article:

San Francisco Chronicle
October 22, 2006

Snipes hit by no-tax scammers

By Kathleen Pender

Occasionally, when I write columns about taxes, I'll get calls from irate people claiming I've made a huge mistake. Don't I know, they'll say, that some provision of the Constitution or Internal Revenue Code states that you don't have to pay federal income taxes? Most of these callers sound like crackpots, but a few of them, I must admit, sound convincing.

So when I heard that actor Wesley Snipes had fallen for one of these bogus arguments, I had a small drop of sympathy. Very small. Snipes allegedly ignored the advice of his longtime tax advisers who told him to pay taxes and heard what he wanted to hear.

The star of the "Blade" trilogy was charged last week with filing false refund claims for 1996 and 1997 and failing to file returns for tax years 1999 through 2004. He could face fines and up to 16 years in prison.

According to a federal grand jury indictment, Snipes filed amended returns in 2000 and 2001 for tax years 1996 and 1997 seeking a total of $11.4 million in refunds based on the "861 argument."

This is one of many schemes popular in the so-called tax patriot subculture. It claims that section 861 of the tax code imposes tax only on foreign-earned income.

Section 861 "is aimed at trying to distinguish for a foreign taxpayer what is U.S. income and what is not," says Mark Luscombe, principal tax analyst with CCH.

Section 861 of the tax code clearly states that gross income, the starting point for taxes, includes "all income from whatever source derived. ..."

"If you're a U.S. taxpayer, you're taxed on all your income unless you can find an exclusion," Luscombe says. "They're trying to bring in 861 as guidance for U.S. taxpayers. It's just not applicable."

Various courts have ruled that 861 does not exempt U.S. income from taxes. Nevertheless, some use the 861 argument to weasel out of taxes. Snipes also used it to stop withholding income taxes from his employees' paychecks, according to the suit.

Snipes allegedly was advised in these misadventures by Eddie Ray Kahn and Douglas Rosile, who are also named in the indictment.

Kahn was the founder of American Rights Litigators and its successor, Guiding Light of God Ministries. The Department of Justice alleges that these were for-profit businesses that sold "fraudulent tax schemes."

According to the suit, Rosile was a CPA who continued to file tax returns on behalf of clients after losing his licenses in Ohio and Florida. For each fraudulent tax return, Kahn's company charged a fee, half of which allegedly went to Rosile. Kahn also collected 20 percent of any refund generated by such a return and paid half of that to Rosile.

In June 2000, Snipes allegedly had a phone conversation with one of his long-term tax advisers, who told him that there was "no merit to the 861 argument" and that he should file tax returns, the indictment says.

In October 2000, Snipes "executed an 'Affidavit of Incompetence' in which he allegedly claimed he did not understand the tax laws and did not know if they applied to him.

In 2000 and 2002, Snipes allegedly sent the U.S. Treasury two "bills of exchange" for a total of $13 million, along with IRS payment vouchers, the indictment said.

The charges were filed in Florida, where all three defendants live. Snipes was not apprehended. News reports say he is filming a movie in Namibia.

Fred Daly, a tax attorney and author of Nolo's "Stand Up to the IRS," has seen people promoting these types of tax-avoidance schemes since the 1960s.

They often claim, among other things, that taxes are unconstitutional because the 16th Amendment, which allowed Congress to levy taxes, was never ratified by all the states or doesn't define income. (For a long list of tax protest arguments, with rebuttals, go to evans-legal.com/dan/tpfaq.html.)

Some tax protesters are "true believers" who are convinced the government has no right to levy taxes, Daly says. Other promoters are just trying to make a buck.

"I've seen people pay as much as $10,000 to sit in a seminar; they come away with a workbook that will show you how to untax yourself," he says.

"What always amazes me is that the type of people who fall for this are otherwise fairly well-educated, sophisticated people -- airline pilots, engineers, dentists," Daly says. "These people should know better, but if you want to believe something strongly enough and it's in your best interest to do so, you can suspend your powers of reason."

Daly adds that some people might believe they don't have to pay taxes because "there's a myth that rich people don't pay taxes. They have all these CPAs, tax attorneys, advisers, that somehow or another can get them removed from the tax system."

Luscombe says some people might be duped because "tax laws are not always drafted as well or clear as they should be. But the courts are willing to provide interpretations. That ultimately causes these people to lose" their tax-avoidance cases.

Daly says Snipes is an "ideal candidate" for prosecutors. "If they go after a local banker who's cheating, that makes the local paper. If they go after Leona Helmsley or Willie Nelson, they get national publicity. They can scare all the rest of us into compliance."

Indeed. News of the Snipes indictment made it all the way to the Geelong Advertiser in the Australian state of Victoria.

Unlike Willie Nelson, who settled civil charges by paying part of what he owed, Snipes is facing criminal charges. Daly says there is a good chance that Snipes, if convicted, will go to jail.

"They would not have gone this far without making a determination that they are going to put him in jail," says Daly. "For criminal tax cases, the amount of time they put in is more than they do for a murder case. And their conviction rate is extremely high."

Neither Snipes nor the other defendants could be reached for comment.

Many legal experts fear that a recent court decision could give tax protesters new ammunition.

In August, the District of Columbia Circuit Court of Appeals found that the taxation of emotional distress awards by the federal government is unconstitutional.

Section 104 of the tax code exempts awards in personal injury cases from income taxes. Congress amended that section to make it clear that the exemption applied only to awards for physical injuries.

The case involved Marrita Murphy, who blew the whistle on her former employer for environmental hazards. She sued the employer for emotional distress and loss of reputation, and won. She paid taxes on the award, but later sued the IRS to recover them.

A lower court ruled that the award was taxable because it was not for physical injury. But a three-judge appeals panel found that the statute taxing emotional distress awards is unconstitutional.

"That was a radical decision," says Bob Scharin, senior tax analyst from Thomson Tax & Accounting. The IRS has asked the appeals court to reconsider the case and will likely take it to the Supreme Court if necessary, he says.

Luscombe agrees that "it's pretty rare for any provision of the tax code to be declared unconstitutional." If the decision stands, "tax protesters may take that and say if Section 104 is unconstitutional, maybe the whole thing is unconstitutional."