The Prosecution Rests

Posted on January 27, 2008 by Russ

The trial of Wesley Snipes and his tax advisors continued in Ocala, Florida last week. The prosecution rested its case on Friday; the defenese will begin presenting its evidence on Monday. The last government witness, IRS agent Steward Stich, testified that Mr. Snipes earned over $37,897,053 from 1999 through 2004 but didn’t pay a penny in taxes.

Earlier, testimony showed that Mr. Snipes sent a 600 page letter to the IRS. Why? Joe Kristan takes up this part of the story:

If you were indicted on federal tax charges that could put you in prison for years, would you:

a). Pour yourself a stiff drink.
b). Flee the country
c). Call a good lawyer and devote your time to preparing your defense
d). Write a 600-page letter to the IRS telling them not to mess with you.

Wesley Snipes chose option “d,” according to testimony in his tax evasion trial as reported at Ocala.com:

After being indicted in 2006, actor Wesley Snipes sent a document to the Internal Revenue Service declaring he was a “nonresident alien” of the United States, refuting his Social Security number and warning that continued prosecution could lead to professional consequences for federal employees.

Among other things, the letter claimed the IRS deceives people to “terrorize, enslave, rape or pillage” taxpayers.

Don’t be silly. Terrorize and pillage, sure. Enslave and rape? I haven’t seen that out of the IRS.

The IRS does many things, but a picture of a bunch of accountants laying siege on a Dark Ages town is just hard to believe.

The defense did get one ruling to go there way on Friday. Accountant Kenneth Starr was ordered by Judge William Terrell Hodges to provide the information requested of him by the defense or be held in contempt of court. Mr. Starr has ten days to comply.

As to what to expect from the defense, I have no idea. Defense attorney Robert Barnes said there’s a chance that Mr. Snipes might testify. There’s speculation that testimony will focus on Snipes’ advisors providing bad advice (i.e. telling people they didn’t have to pay taxes). The problem with that is that if you get bad advice you don’t have to take it. Snipes was told by others to pay his taxes; I doubt that line will work. Additionally, we may see celebrity testimony (though Judge Hodges hasn’t yet ruled whether that testimony will be allowed).

Meanwhile, Robert Bernhoft, one of Snipes’ attorneys said, “It’s the weakest conspiracy case I’ve ever seen in my life, that’s all I can say. Were looking forward to defense, were looking forward to closings and we’re looking forward to vindication.” And the trial likely will conclude next week as the defense now only expects to put on evidence for two to three days.

It should be an interesting week in Ocala.

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Weekend Fraud

Posted on January 27, 2008 by Russ

The end of the week didn’t bring an end to tax fraud. There’s a lot to report as the fraudsters have been especially active.

First, let’s look at two former public servants. From outside of Atlanta comes the indictment of former state Representative Charles “Chuck” Scheid (R-Woodside) on charges of not filing a state tax return in 2005 and evading taxes in 2003. This isn’t the first time Mr. Scheid has had tax troubles; he had a tax lien of over $18,000 assessed against him in 2006. Reporters attempting to speak to Mr. Scheid discovered that his phone has been disconnected.

Let’s go to Shreveport, Louisiana where former Louisiana state Senator Charles Jones (D-Monroe) has been indicted by a federal grand jury on two counts of filing a false tax return and one count of tax evasion. Mr. Jones is accused of substantially understating his gross income in 2003 and of filing a false amended tax return for 1999. The indictment alleges that Mr. Jones took monies due him for legal fees and converted them to cashier’s checks which he used to buy property. It’s a great scheme if you can get away with it….

Next, we head to Salt Lake City where three individuals pleaded guilty to tax fraud. The three were part of a scheme that successfully (for awhile) kept $20 million out of the Treasury. Graham Taylor, an attorney from Tiburon, California, and two CPAs, Stephen Peterson, of Coalville, Utah, and Reed Barker, of Littleton, Colorado all pleaded guilty to tax fraud. Also under indictment are six other individuals; their trial is set to begin on Monday in Salt Lake City. The scheme involved a tax shelter called “The Hybrid,” and used Cayman Island nominees. The scheme alsoutilized offshore companies, foreign bank accounts, and fraudulent transactions. The six remaining defendants are looking at very lengthy terms at ClubFed if found guilty.

Finally, on a somewhat lighter note, Robert Sass of Tampa, Florida will spend a year and a day at ClubFed for his conviction on tax evasion. Mr. Sass owned a lingerie modeling business called Sophisticats, Inc. Mr. Sass’ business appeared, though, to be more prostitution and less modeling; he charged “room fees” in cash for his models. Somehow those fees didn’t make it on to his tax returns. Oops; illegal income is taxable. The judge noted that Mr. Sass’ relatively light sentence is due to his declining health (Mr. Sass is 70).

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EFTPS Passwords Must be Updated

Posted on January 27, 2008 by Russ

If you use the federal EFTPS system to pay your federal taxes you must update your password. EFTPS now requires passwords to be eight to twelve characters long, containing at least one uppercase letter, one lowercase letter, and one number or special character. You can change your password at the “My Profile Internet Password Management page.”

Hat Tip: Roth Tax Updates

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Propositions 94, 95, 96, and 97

Posted on January 27, 2008 by Russ

It’s time to look at the last four propositions on the February 5, 2008 California ballot. Propositions 94 – 97 would allow four tribes to dramatically expand their Indian casinos in California (each proposition is for one of the four compacts involved). The casino expansion would be just for additional slot machines.

California Indian casinos have what is known as “Class 2” gaming. These slot machines (including video poker) all have a predetermined outcome once you pull the lever. And they operate on a “pull tab” basis. If there are 100 possible outcomes, once outcome #2 (say) is pulled, that outcome cannot come up again until all the other outcomes have occurred. The house advantage in these games is huge; as we saw in a Tax Court case decided this past week, it’s practically impossible to be a long-term winner on these slot machines. So these additional slot machines will act as a tax on the dumb gambler.

These compacts also have quite a history. They were sent to the Department of the Interior for their approval, but some bureaucrat forgot to review the compacts. So they were automatically approved.

Meanwhile, two tribes that don’t want the expansion, unions which want to unionize the workers, and anti-gambling forces got the measures on the ballot. Note that a “yes” vote on each proposition is a vote for the additional slot machines. So the measures are supported by some Democrats, some Republicans, and some tribes and opposed by some Democrats, some Republicans, and some tribes.

There is a certainty about these measures, though. No matter who wins the next stop for these propositions is court.

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A Pathological Gambler’s Deductions

Posted on January 24, 2008 by Russ

Today the Tax Court looked at the case of a “pathological gambler.” This isn’t a problem gambler. As the Court noted,

“A pathological gambling disorder is a type of impulse control disorder and mental illness, not an “addiction”. This disorder is accepted by the scientific community and is in a category with kleptomania (the impulse to steal stemming from emotional disturbance rather than economic need) and trichotillomania (pulling hair). Dr. Pike concluded that Mr. Gagliardi suffered “from the almost delusional belief that if he gambled long enough, he’d win everything back or break even.””

The IRS claimed that this pathological gambler didn’t have any back-up to claim his gambling losses from 1999-2001. The taxpayer disagreed. Which side did the Court believe?

The preferred method of keeping a record of gambling wins and losses is through a gambling log. The gambler in question, Mr. Gagliardi, didn’t do that. He had won the lottery in the early 1990s and began, in the late 1990s, to use the proceeds to gamble on slot machines at local Indian casinos. He didn’t keep a log; however, he did keep all of his W-2Gs (issued when he won a jackpot of $1200 or more) and his ATM receipts. Mr. Gagliardi testified during the trial Mr. Gagliardi opined that he “could wallpaper my
bathrooms with just the ATM receipts for millions of dollars.” His ex-girlfriend also testified to his gambling.

But this wasn’t good enough for the IRS. They didn’t believe Mr. Gagliardi, and believed that the only method to substantiate losses was through a gambling log. The Court noted that this isn’t the case.

“At trial respondent’s counsel had great difficulty explaining exactly what a “gambling log” is and what petitioner should have recorded in a gambling log. Respondent’s counsel stated that it was not realistic for someone to keep track of every bet and that the revenue procedure does not require taxpayers to keep track of every bet (i.e., the revenue procedure does not require a taxpayer to list how much he/she bet for each slot machine “pull”). Respondent’s counsel contended that to keep a log for slot machine play, per the revenue procedure, a taxpayer must know how much was wagered and how much was lost and record it contemporaneously. But see id.

“We also note that the revenue procedure provides that “Verifiable documentation for gambling transactions includes but is not limited to” Forms W-2G, wagering tickets, canceled checks, credit records, and bank withdrawals–all of which are present here. Id. sec. 3, 1977-2 C.B. at 538. Additionally, the revenue procedure provides a method, keeping a gambling log, that the IRS will consider as acceptable evidence for substantiation of wagering winnings and losses. Id. It does not contain the exclusive method for substantiating gambling losses. Id. sec. 1, 1977-2 C.B. at 538 (“The purpose of this revenue procedure is to provide guidelines to taxpayers concerning the treatment of wagering gains and losses for Federal income tax purposes and the related responsibility for maintaining adequate records in support of winnings and losses.”).”

Mr. Gagliardi also had two expert witnesses who testified on his behalf. Dr. Suzanne Pike (noted above) testified that Mr. Gagliardi was a pathological gambler, and as the Court noted, “Dr. Pike stated that a pathological gambler, such as Mr. Gagliardi, who walks away from a casino with money will, with an extremely high probability, go back to a casino the next day with the money.” In fact, the outlook for Mr. Gagliardi is bleak if he continues gambling. The Court stated in a footnote,

“We note that Dr. Pike testified that, unlike recreational and problem gamblers, pathological gamblers take the “gambler’s fallacy” to a delusional level–they believe if they gamble long enough, they will win back all their losses and even more. Dr. Pike also opined that, unless treated for his illness, Mr. Gagliardi will gamble until he dies or loses all his money.”

Also testifying for Mr. Gagliardi was Mark Nicely, a casino gaming expert who currently works at International Game Technology, a leading manufacturer of slot machines. Mr. Nicely testified that at the Class 2 machines that Mr. Gagliardi gambled, his chance of breaking even was worse than one in one trillion. At the casinos Mr. Gagliardi gambled the ‘payback’ on slot machines is probably worse than 90 percent (likely either 83% or 70%).

The IRS had no counter to the testimony which showed fairly conclusively that Mr. Gagliardi gambled and lost. His gambling losses were upheld.

There are two other important points to this case. First, Mr. Gagliardi had to go to Tax Court, hire two attorneys, have expert testimony, and then he won his case. Had he kept a gambling log it’s likely he wouldn’t have needed to go through the effort. And second, the IRS has a lot of problems dealing with gamblers. Most of the personnel within the IRS doesn’t have experience with gambling, and even an IRS attorney had trouble explaining an IRS-suggested procedure on gambling (a gambling log).

Case: Gagliardi v. Commissioner, T.C. Memo 2008-10

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Dotting the I’s

Posted on January 23, 2008 by Russ

The last two days of the Wesley Snipes trial on tax evasion and conspiracy charges has been full of paper. The government has been entering into evidence numerous documents that they claim show proof that Mr. Snipes has evaded taxes.

Today, Ocala.com reports that IRS Agent Cameron Lalli testified, identifying various documents. It’s not exciting, but the government is building a paper trail so that the jury can see exactly what happened. Dotting the i’s and crossing the t’s is necessary for convictions.

Meanwhile, it appears that the trial may last a couple more weeks. Defense attorney Robert Barnes “…proposed introducing several exhibits that went as high as [number] 308.” That’s a lot of exhibits. The prosecution has objected to all of those exhibits; Judge William Terrell Hodges appears to so far have allowed one of the 308 to be introduced. The defense will have to wait for Judge Hodge’s ruling on the other 307 exhibits.

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Odds On Snipes

Posted on January 22, 2008 by Russ

An online betting site has posted odds on whether Wesley Snipes will find his way to ClubFed or not. According to Gambling911.com, BetCris.com has posted these odds on Mr. Snipes:

Will Wesley Snipes be convicted of tax fraud?
Yes 1/10
No 3/1

Wesley Snipes’ tax fraud sentence will be…
Convicted 1 – 5 years: 1/3
Convicted 5 – 10 years: 7/4
Convicted 10 – 16 years: 10/1
Not Convicted: 5/1

The best comment is from BetCris’ spokesman, Esteban Siles, who told Gambling911, “I don’t understand why people refuse to pay their taxes. If it didn’t work for Al Capone or Tony Montana, then why would tax evasion work for anyone else?”

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IRS: Audits, Customer Satisfaction Up

Posted on January 22, 2008 by Russ

The IRS released the statistics on the most recent tax season last week. The good: customer satisfaction with the IRS toll-free telephone line (for answering tax questions) has risen to 94%. Do note that there is still a significant chance of the IRS giving you the wrong answer to your question but at least you’ll be happy.

The bad: audits are up. These statistics are from the 2006 fiscal year:

– If your income was more than $1 million, your chance of being audited was 9.25%, up from 6.3%. That’s an increase of 84%;

– If your income was between $200,000 and $1 million, your chance of being audited was 2.87%, up from 2.57%. That’s an increase of 29%;

– If your income was between $100,000 and $200,000, your chance of being audited was 1.77%, up from 1.67%. That’s an increase of 14%; and

– If your income was under $100,000, your chance of being audited was 0.93%, up from 0.89%. That’s an increase of 5%.

[Note that the percentage increases are based on the total number of audits (which I’m not reproducing here), not the change in the percentage of individuals being audited.]

No matter, your chance of being audited has increased. The IRS (and Congress) have figured out there’s money to be made in audits, so don’t expect this trend to change any time soon.

Other Coverage: TaxProfBlog, Roth Tax Updates, and Don’t Mess with Taxes.

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A Bozo Diversion

Posted on January 21, 2008 by Russ

One of my links is to the Bozo Criminal of the Day. During tax season I need all the humor I can get. Today’s Bozo Criminal entry is one that I passed on, and involves two Miami gang members who challenged the cops on YouTube to arrest them. They did.

Here’s a link to the video, and here’s the news story I got it from.

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Snipes Trial: Week One Recap

Posted on January 20, 2008 by Russ

If you believe Robert Barnes, one of the attorneys for Wesley Snipes, the first week of Snipes’ trial went well. Mr. Barnes told the Ocala Star-Banner, “I think what they [jurors] saw was that Mr. Snipes openly, honestly engaged the IRS for years … and never received any meaningful response.” That’s one way of looking at the first week of the trial.

To this observer who is, though, looking at the trial from 3000 miles away, it doesn’t look like Mr. Snipes had a good week. First, Mr. Snipes went to trial in a locale which he has previously described as “racist,” Ocala, Florida. An attorney that Mr. Snipes supposedly dismissed showed up as one of his attorneys, too. Second, the prosecution has presented evidence showing that Mr. Snipes’ previous accountant, Kenneth Starr, told him that the idea that he didn’t have to pay income tax on his millions of dollars of income was laughable.

I don’t think things improved on Friday. According to Ocala.com, an ex-employee of Mr. Snipes’ film production company, Carmen Baker, had some collaborating evidence of Snipes’ behavior. Ms. Baker told the Court after hearing co-defendant Eddie Ray Kahn’s theory that Americans don’t have to pay taxes, “I was told by Mr. Snipes, Was I not paying attention? Did I not understand what I was just shown? I didn’t believe it. I thought it was bogus from the beginning.”

Ms. Baker made the wise decision (in my view) to consult another accountant. Mr. Snipes, though, had other ideas about the wisdom of that decision. Ms. Baker told the Court, “I got called into the office, and I was told that I was being a difficult employee and told that I should not have called an accountant. [Mr. Snipes] said, ‘If you’re not going to play along with the game plan, then you need to find employment elsewhere.'”

Mr. Snipes didn’t want her talking to the government even under subpoena. “He said if you do contact them you will have to pay the consequences,” Ms. Baker told the Court. Although Ms. Baker was under a non-disclosure/confidentiality agreement, a subpoena overrides such an agreement.

There was more evidence presented on Friday. Mr. Kahn’s company prepared ‘bills of exchange,’ and the government introduced several such bills sent to the IRS by Mr. Snipes. Though Mr. Snipes’ attorneys asked for a mistrial after several witnesses described such documents because this was evidence (in Mr. Snipes’ attorneys view) solely applicable against Mr. Snipes’ co-defendants, the mistrial was granted. Given that Mr. Snipes sent such documents to the IRS they appear to be yet another link in the chain.

At this point the only thing we know about the defense is that they plan on calling character witnesses such as Barbara Walters and Muhammad Ali. I think they’re going to need a lot more than that for Mr. Snipes to avoid spending significant time at ClubFed. The trial will resume on Tuesday in Ocala.

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