Every once in a while a Tax Court decision breaks out of the tax ghetto. This month it is a Wesley Snipes case. I started on it, but when I saw how well Kelly Erb covered it I figured that my post would end up being “what she said” and I don’t like to post without offering a different angle. I think I have found one.
Wesley Snipes attends the LA Premiere of “The Equalizer 2” at the TCL Chinese Theatre, Tuesday, July 17, 2018, in Los Angeles. (Photo by Richard Shotwell/Invision/AP)Richard Shotwell/Invision/AP
A lot of the reports on the decision imply that it is game over, as if Wesley Snipes is now going to just mail in a check. I don’t think so. It may well be a long journey before the IRS gets any of the over $23 million in income tax that he owes for the years 2001 through 2006. The $23 million plus, it appears, is conceded to be the correct tax. Once you enter the world of collections, though, the correct tax can be merely of academic interest. Reilly’s Tenth Law of Tax Planning – Once the tax is more than you can pay it might not matter how much more.
The undisputed assessed tax is like the sticker price on a car or perhaps, more aptly, full tuition at a brand name college with a generous financial aid program . That is what Wesley Snipes was arguing about with the IRS. How much could he afford? Reasonable collection potential (RCP). Why did he not take the seemingly generous offer that IRS made? And what further recourse does he have? Those are the questions I find interesting.
Collections 101
Once it is clear what their correct tax is, most people just pay it. The two reasons they might do that are that they are good citizens and they think the consequences of not paying are severe. The first reason is right on and I agree with it. The second reason, maybe not so much.
If you don’t pay, what happens is that you start getting annoying mail from the IRS. You need to pay attention to the mail. You might get a call from a collection company, but if it is not a scam, that is good news because it means that your file is now in the hands of somebody who can’t actually do anything. Because there is a clock ticking. And it is ticking in your favor. After ten years the statute of limitations on collections passes and you are olly, olly oxen free. There are ways that the clocks get stopped, but we’ll get to that.
You may get a letter from the IRS that threatens to do one of the two things, they can do to you, without an indictment and a trial (That can take your liberty). They can put liens on your property, which can make your life miserable and louse up your credit rating. More ominously, they can levy – actually take your stuff – usually bank account balances, but also other stuff.
At the point at which that sort of real collection action is threatened, you get a notice that tells you that you can get a “Collection Due Process” hearing (CDP) by filing Form 12153. While the hearing process is under way the IRS cannot take further action to collect. That’s the good news. The bad news is that the ten year clock stops ticking.
If you don’t like what the IRS has to say about your RCP, you can appeal to Tax Court. The Tax Court review is somewhat limited. It just considers whether the IRS officers involved abused their discretion.
Wesley Snipes
Wesley Snipes refused to file and pay income tax based on something called the 861 argument. It is a bad enough argument that it got him criminally prosecuted along with Eddie Ray Kahn and Douglas P. Rosile, who, each in his own way, promoted the scheme. Mr. Snipes was convicted of some charges and acquitted of others earning a three year sentence.
It is on completion of the sentence, that the more current drama starts. Mr. Snipes was released on April 2, 2013. Then spring became the summer and on August 27, 2013 the IRS filed a Notice of Federal Tax Lien (NFTL). It was likely anticipated, as Form 12153 was filed on September 4 – just over a week later. (You have thirty days, but it is best not to cut it close). Mr. Snipes made an Offer in Compromise (OIC) of $842,061 on the basis of doubt as to collectibility. That’s less than four cents on the dollar.
The settlement officer started looking into Snipes properties, some of which he claimed to have lost or transferred, although documentation on that was weak. The SO arrived at $17,482,152 as RCP. Snipes held firm at $842,061. SO issued a noticed of determination rejecting the OIC on October 6, 2015. The Snipes Tax Court petition was filed on October 5, 2015 – cutting it close this time. A year later Judge Kerrigan kicked the case back to appeals. Mr. Snipes claimed that his financial adviser, W. Johnson had diverted funds and, in effect, asked the IRS to chase Mr. Johnson (It’s called transferee liability). Documentation on that was also viewed as being weak. Nonetheless, SO offered to cut the RCP by close to half – down to $9,581,027. Mr. Snipes did not budge from $842,061.
Finally, Judge Kerrigan ruled on November 1, 2018.
Petitioner has failed to establish that the settlement officer did not properly determine that the requirements of any applicable law or administrative procedure had been met. We find that the settlement officer properly based her determination on the required factors. Accordingly, we conclude that the settlement officer did not abuse her discretion in determining that acceptance of petitioner’s OIC was not in the best interest of the United States.
And that is what all the coverage was about, as if the matter ends there, but let’s consider whether what Wesley Snipes is doing makes any sense.
Was This A Good Idea?
I spoke to a couple of practitioners who have substantial experience in collection work. Kathryn Morgan is an Enrolled Agent and a United States Tax Court Practitioner who runs Puzzled by Taxes LLC. Frank Wolpe is an attorney and Professor Emeritus in Law, Taxation and Financial Planning at Bentley University. The both think that Wesley Snipes is being ill advised. Ms. Morgan wrote me:
Based on the info I have read, including the court case and other articles, I can see him (or his reps who he needs to fire!!) trying to go through this circus all over again. They really don’t want to do that because if frivolous penalties start getting added and then they could eventually start with more evasion charges depending on how it goes, he could end up in even more trouble then he is in right now. Does he really think that in a high profile case like this that the IRS hasn’t dotted every i and crossed every t?
Professor Wolpe, when I spoke with him, went on at some length on how he would handle the case, which is basically doing some serious negotiation with the IRS and working out a payment plan. He also believes that Snipes is ill-advised.
Not surprisingly, I had no luck in reaching out to the attorneys representing Mr. Snipes in Tax Court. I think Ms. Morgan and Professor Wolpe may be too quick in criticizing them. It is possible that Wesley Snipes is not following their advice and that they are following their clients directions in a kind of scorched earth strategy, which brings us to what comes next.
Snipes Next Bite At The Collection Apple
There was no mention of a levy in the litigation. Sometimes the IRS will issue both the NTFL and a levy and the allowed CDP hearings will be combined. There is no indication that this happened. The decision only discusses a NFTL. So, assuming Wesley Snipes is not just writing a check, the next step is to levy. Actually take his stuff. Tell people that owe Wesley Snipes money that they should pay the IRS instead – or else.
Only they have to send Mr. Snipes a warning that they are going to levy and with that he gets the right to file Form 12153 again and have another CDP hearing. If he does not like the outcome of that hearing, he can appeal the result to Tax Court again.
So if Wesley Snipes decides to be stubborn about it, there will be another long process. Maybe not another five years, but I have to think at least two. What could the motivation for that kind of stubbornness be?
Still A Believer?
I have not been able to find any statements by Wesley Snipes himself on his tax situation. We see him here getting involved with a new cryptocurrency called NYNJAcoin. Is it possible that he still believes that he does not actually owe any income tax? That the 861 argument is actually sound and will be vindicated.
We do know what his co-defendants maintain. Eddie Kahn, who is still doing time insists that he is a political prisoner and is seeking a pardon from President Trump. His cause has been adopted by Rudy Davis, who also looks out for Ed and Elaine Brown who were featured here several years ago.
Then there is the other co-defendant, Douglas P. Rosile Sr. Mr. Rosile finished his term and has written a book – Dirtbags, Liars And Power Freaks – A critical look at the IRS, DOJ and politicians. I can’t promise you that the four bucks for a Kindle copy is a good value, although it was for me. Seventeen bucks for the paperback is probably above and beyond. Mr. Rosile is still a believer.
Mr. Rosile opens with statements about the IRS being an illegal organization. The book is sort of a mish-mash of observations about existing systems, their abuses and how they might be improved along with personal anecdotes. It is pretty random. What made me not regret the four dollars was Chapter 7 – My Case. That is where we get some high points of the trial, which was also the Wesley Snipes criminal trial.
It’s my position that the only “conspiracy” that ever existed was one of trying to get to the truth and the IRS attempting to suppress it. But when the government is wrong they ATTACK, not respect due process. EVERY return being challenged by the government had a statement attached asking for due process ……
Referring to the 861 refund claims that he prepared, Mr. Rosile wrote:
While the IRS may not have liked the issues raised or agreed with them, that doesn’t destroy a person’s right to make them. There was no U.S. Supreme Court decision on the matter. The IRS could have simply rejected ANY claim in question and LET DUE PROCESS PLAY OUT. Unfortunately that could have opened the door to Mr. Snipes’ filing a civil action in U.S. District Court (which then makes it a very public issue) rather than handling it in the phony “Tax Court”. Mr. Snipes could have demanded a jury trial and presented his case. (Which the government would never have allowed. They don’t believe in the 6th Amendment either.) He had the resources to do so. There is no doubt in my mind he would have lost that case on some convoluted decision. But the issues raised would come before the public, IRS witnesses would have been cross-examined and any decision that wasn’t on point, legally sound and backed up by case law would have smelled funny in the eyes of the public and exposed the system for what it is – corrupt.
On the payment that Mr. Snipes made, he wrote;
The dumbest thing he did was give the IRS $5,000,000. The worst case scenario had him going to prison for 3 years without giving them a penny. He took bad advice, wasted money on a new legal team, spent $5 million and still got a 3 year sentence …..
Not only did he waste $5 million he should have reported to prison and would have been out two years sooner and saved all the money he spent on filing an appeal that had a 95% chance of being rejected.
So substantial prison time did not convince either of the Wesley Snipes co-defendants that they were wrong. Did it convince Wesley Snipes? If there is hope that the 861 argument will still be vindicated, then using any legal means possible to delay making payment makes sense. A wiser head who might cite the mounting interest charges should remember Reilly’s Tenth Law of Tax Planning – Once the tax is more than you can pay it might not matter how much more.
The one thing that it is very important he avoid is any shenanigans involving hiding assets. That could result in more criminal charges.
Pop Culture References
Many of the other writers covering this matter seem to be much more familiar with Wesley Snipes movies than I am. I see 47 films are in the Snipes filmography. The only one I ever watched was White Men Can’t Jump, because, you know, I make the case for the premise in the title even better than Woody Harrelson does. It actually brings back painful memories. Not only could I not jump. I could not dribble or shoot either. I was over six feet tall when I started high school and I was constantly being counselled to take up basketball which could lead to a scholarship to college. Not so many chess scholarships back in the day and besides I wasn’t very good at that either
I’d tell you about the scholarship, I did get, but that would be bragging.