Court Decisions

Creator of Girls Gone Wild Indicted for Tax Evasion
<IRS eNews, April 17, 2007> — A federal grand jury in Reno, Nev., returned an indictment charging Joseph R. Francis with tax evasion. The indictment alleges that Francis, whose companies Mantra Films Inc. and Sands Media Inc. produce and sell the Girls Gone Wild videotapes and DVDs, deducted more than $20 million in false business expenses on the companies’ 2002 and 2003 corporate income tax returns.
According to the indictment, Francis used offshore bank accounts and entities purportedly owned by others to conceal income he earned during 2002 and 2003.
The indictment also alleges that Francis transferred more than $15 million from an offshore bank account to a brokerage account in Irvine, Calif., held in the name of Rothwell Limited, a Cayman Islands corporation, that Francis controlled.


JUSTICE DEPARTMENT SUES ROBERT L. SCHULZ AND “WE THE PEOPLE” TO STOP ALLEGED TAX SCAM
<IRS eNews, April 10, 2007> — The United States announced that it has sued to block Robert L. Schulz, of Queensbury, N.Y., from selling an alleged tax fraud scheme said to have cost the U.S. Treasury more than $21 million, the Justice Department announced today. Also named in the suit are two corporations, We the People Foundation for Constitutional Education Inc., and We the People Congress Inc.
The government’s complaint alleges that Schulz has used the two We the People entities to market a nationwide tax fraud scheme, called the Tax Termination Package, to employers and employees. According to the complaint, the Tax Termination Package includes We the People forms, which the defendants falsely tell customers can be used to replace forms the IRS requires employers and employees must use in connection with federal tax withholding from wages.
Schulz and the We the People entities falsely state that use of the replacement forms will allow customers to legally stop tax withholding. According to the complaint, the defendants base the scheme on frivolous arguments about federal tax laws that federal courts have repeatedly rejected.



IRS Can Ask for PayPal Account Info
<IDG News Service, April 11, 2006> — The U.S. Internal Revenue Service can ask PayPal for information on some of its customers as part of an ongoing investigation into suspected tax evasion, a federal court ruled on April 11, 2006.
The online payment prover, a division of EBay, has received a summons from IRS, according to PayPal spokeswoman Amanda Pires. The summons was approved by the U.S. District Court for the Northern District of California.
Pires would not say whether PayPal would hand over customer information. "A key part of our response will be the fact that PayPal takes the privacy of our customers very seriously," she said. PayPal isn't compelled to comply with the summons unless it becomes a court order.
PayPal believes the agency is seeking information on U.S. taxpayers who claimed they lived in foreign localities and set up PayPal accounts linked to foreign credit card or bank accounts in those places.



Oklahoma Court Acts to Stop Tax-Scam Promoter
<IRS eNews, Oct. 2, 2003> — The U.S. District Court for the Northern District of Oklahoma permanently barred Charles Chung from preparing tax returns for abusive trust schemes or "engaging in any other conduct that substantially interferes with the proper administration and enforcement of federal tax laws." The court had previously entered a preliminary injunction against Chung on July 29, 2003.
The news release and copies of documents filed in this case can be found on the Justice Department's website at
http://www.usdoj.gov/tax/chungprelinjPR.htm and
http://www.usdoj.gov/tax/03_tax_172.htm.




Transferring Property to Avoid an IRS Tax Collection Backfires
<Dow Jones Newswires, Aug.22, 2001> — David and Elizabeth Reed, of St. George, Utah, claimed they weren't subject to federal taxing authorities. As such, they failed to file income-tax returns for 1990 and 1992 and filed what the IRS calls a frivolous return for 1991. The IRS assessment for taxes and interest totaled $250,000. When the IRS issued notices of delinquency, the Reeds deeded the house to Mr. Reed's parents.
After the IRS made several delinquency inquiries, the elder Reeds foreclosed on the property and sold it, using much of the proceeds to pay down the balance on a home-equity loan on their own house. The U.S. District Court for the District of Utah Central Division in a recent decision ruled that the younger Reeds made the transfer in anticipation of their tax liability, effectively giving them an ownership stake in the parent's house. The court ordered that the elder Reeds' property be sold to pay the tax liens against the younger Reeds.




A Michigan Man Gets an Unusual Sentence
<Dow Jones Newswires, Nov.15, 2000> — Lyle Edward Hotchkiss, a former dentist, was convicted earlier this year of tax evasion and failing to file a return for 1993. At sentencing, U.S. District Judge Robert Holmes Bell cited "sham trusts" and tax-protester arguments that pay is not taxable. Judge Bell also expressed concern about a Grand Rapids Press article in March quoting Mr. Hotchkiss predicting vindication, saying "our victory will bring enlightenment and benefit to us all."
The judge sentenced him to 27 months in prison and 200 hours of community service. The judge also ordered him to buy a full-page ad in the Grand Rapids Press giving a "complete and candid admission" of wrongdoing. "I'm going to require that your picture be there," the judge said, "and I'm going to require that you explain that you have been sentenced to 27 months in prison for not paying taxes and that you were wrong and that other people should pay their taxes."
Donald Martin, Mr. Hotchkiss's lawyer, says his client "is in the porcess of complying" with the order.



Winning a Court Award Can Be Surprisingly Taxing
<Dow Jones Newswires, Aug.2, 2000> — Suppose you sue your employer for age discrimination, and a judge orders the company to pay $1 million. You agreed in advance to give one-third to your lawyer. How much of your award is subject to taxes? Curiously, the answer may depend on where you live and which federal court hears your case.
Some federal appeals courts have decided the entire award is taxable. But others have ruled differently, creating a confusing jumble that the Supreme Court may have to untangle. This issue has been upsetting plaintiffs for years. Winners often cannot claim most or all legal costs as an itemized deduction because of the alternative minimum tax and other limitations.



Sex and Taxes
<Dow Jones Newswires, July 12, 2000> — A man deducted cash payments to Nevada prostitutes as research for a book he was writing. The Tax Court said no, calling the deductions "so personal in nature as to preclude their deductibility." A federal appeals court recently affirmed the Tax Court's decision.



A Couple Surrenders to the Marriage Penalty but Not Without Protest
<Dow Jones Newswires, July 5, 2000> — Because of tax-law oddities, millions of two-income married couples are forced to pay more in taxes each year than if they had remained single. In some cases, this marriage penalty can be thousands of dollars, Vince Arers, a corporate tax executive in Indiana, and his fiance, Lisa say.
"With the perverse instinct of a true tax professional, every year for the last six years I have calculated what Lisa and I saved in taxes by not moving beyound engagement into marriage," Mr. Akers wrote recently to Tax Notes, a weekly publication. "In 1999 alone, we saved $18,000!" But after a six-year engagement, he and Lisa will be "closing down our personal little tax shelter and saying our marriage vows" on Sept. 2.



Confusion Mounts about Deductibility of Many Types of Business Expenses
<Dow Jones Newswires, June 21, 2000> — At issue is whether businesses may deduct certain types of expenses in the year they are incurred, or whether those costs have to be "capitalized" and spread out over many years. This question has grown increasingly kntty since the Supreme Court's 1992 Indopco decision. In that case, the court said that costs incurred in arranging a friendly corporate takeover had to be capitalized since they were designed to genrate significant long-term benefits.
Since then, the IRS has challenged a wide variety of deductions, ranging from bank-loan origination costs to mutual-fund start-up expenses. Confusing court decisions and lack of Treasury guidance have left corporate tax directors and lawyers increasingly bewildered.



Parsing a Parsonage Allowance in Legal Terms Splits Tax Court Judges
<Dow Jones Newswires, June 14, 2000> — A minister isn't taxed on the rental value of a home furnished as part of compensation or on rental allowances used to rent or porvide a home. But Richard D. Warren, a Trabuco Canyon, California, pastor, presented a novel case. His thriving church labeled nearly all his compensation of $263,491 over three years as allowances for the home he owned. In the same years, he also had additional income totaling $622,806 from a religious-book and recorded-tape business.
The IRS read the law to mean that a tax-free allowance for a home that's owned must not exceed the home's fair-market rental value, some $58,000 a year here around in California. It claimed taxes and penalties. But the pastor's prayer to the court convinced Judge John Colvin and 13 colleagues that nothing in the law's wording could be thus construed. Judge Arthur Nims and tow other judges dissented from the majority's blessing and agreed with the IRS, saying "This case is an archetypical example of the potential for abuse of an allowance."