Meet Five Celebrities Who Have Had Worse Tax Days Than Yours

by Greenberg Glusker Fields Claman & Machtinger LLP
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In celebration of Tax Day today, we here at Law Law Land offer tribute to our favorite celebrity/IRS run-ins.  Now, lest you think this is just another list airing dirty celebrity tax laundry, think again.  This is a classy publication, as you well know, so if you’re looking for dirt on which celebrities owe what, look elsewhere. . . like here, or here, or here.  Instead, on this national day of tax collection, Law Law Land is pleased recognize five (or more) of our favorite celebrity tax stories of all time… so far.

Honorable Mention:  Timothy Geithner

In our Honorable Mention category of “Really, Are You Kidding Me?,” we recognize former Treasury Secretary (i.e., head of the U.S. Treasury, the folks you make that tax check out to) Timothy Geithner, who underpaid his personal federal income taxes from 2001 to 2004 by failing to report and pay social security and self-employment tax on income received from the International Monetary Fund.  Mr. Former Secretary subsequently amended his returns since he “should have been more careful.”  We imagine he regretted his “unintentional” decision not to report that income when appearing before the Senate Finance Committee during his confirmation hearings to control the United States’ piggy bank.

Honorable Mention:  Nick Diaz

In our Honorable Mention category of “How Dumb Can You Be?,” the award goes to MMA fighter Nick Diaz, who recently announced during a post-match press conference that he has “never paid taxes in his life” and “is probably going to jail.”  Well, if Nick had only read about some of the other people on this list, then he definitely would have seen that coming!

#5:  Richard Hatch

Like the Real-Life Version of that Always-Naked Neighbor on Although the name “Richard Hatch” might not mean much to you, you may better remember Hatch as “Consistently, Inexplicably Naked Man” on Season 1 of Survivor, where his penchant for letting it all hang out was somehow rewarded with the show’s first-ever $1 million grand prize.  Well, Dickie may be able to eat rats and bugs with the best of them, but a federal judge voted him off the island and straight to prison for failure to report and pay tax on $1.4 million of income (including the $1 million Survivor payout, hard-earned through relentless backstabbing, conniving, and pantslessness.  While his tour of duty on Borneo island may have only lasted 39 days, Hatch’s fully clothed prison stint lasted a total of 51 months (including time for perjuring himself during his tax trial).  Well, at least he learned his lesson.  At least, that’s what the infomercial says.

Following Hatch’s sentencing, the Department of Justice press release announced, “Our nation’s federal tax system is not a reality show to be outwitted, it is a reality, period.”  Take note, Kardashians!

#4:  Wesley Snipes

America's Most Wanted Tax-Evading Vampire-SlayerJust this month, Wesley Snipes bid adieu to the federal prison in McKean County, PA he has called home for the last 3 years, courtesy of his tax woes with Uncle Sam.  Convicted of tax evasion for willfully failing to file income tax returns (take notice, Nick Diaz), during his sentencing, prosecutors proclaimed that he had earned $38 million since 1999 but had filed no tax returns nor paid taxes through October 2006.  Snipes’ defense:  arguing he was not actually required to pay taxes based on a misguided interpretation of the tax code that has been uniformly rejected by all courts and resulted in at least 8 people being sentenced to prison.  (Well, ninth time’s the charm, eh?  Or not.)

In true Blade vampire hero fashion, Snipes ultimately took a bite out of his advisors and blamed his predicament on bad professional advice.  For what it’s worth, the “but it’s my tax advisor’s fault” defense (i.e. reliance on professional advice) is no longer a valid defense for most tax controversies with the IRS — or, it’s safe to assume, for any controversies where the “advice” was “of course you don’t have to file or pay taxes ever at all!”  And, while your manager may be willing to pick up your dry cleaning or walk your dog, I doubt he’s willing to go to jail for you.

Wesley Snipes appealed his case all the way to the Supreme Court, but they decided not to entertain his antics.

#3:  Joe Francis

Guys Gone Wild...for Tax Penalties!Coming under the category of why not to mix business with pleasure, the man responsible for bringing us Girls Gone Wild found himself exposed (and not in the Mardi Gras, party beads kind of way) when he was turned into the IRS by his former tax return preparer, Michael Barrett, under the IRS’s “Whistleblower” program, by which the IRS actually pays people to rat out their tax-cheating friends, families, estranged business partners, corporate rivals, and other loved ones.

Francis was charged by the IRS with claiming more than $20 million in false business expenses on his companies’ corporate income tax returns, omitting interest income on brokerage accounts, and using offshore bank accounts to conceal other income.  According to media reports, the case fell apart when Barrett, the government’s key witnesses, was himself accused of embezzling funds by overbilling Francis’ company hundreds of thousands in fees and expenses for work never performed, while at the same time hoping for an IRS payday by turning Francis in.  (But hey, who could be a more qualified judge of financial crimes than someone with a little experience in the field himself?)

Claiming “victory” against the IRS (here, defined as “much less defeat”), Francis ultimately pleaded guilty to two  counts of submitting false tax returns omitting $562,000 of interest income relating to the brokerage accounts (and, oddly, one count of bribery for paying a prison guard over $5,000 for contraband food).

#2:  Al Capone and Heidi Fleiss

Why to Pay Taxes on Your Illicit Booze Money

 

Al Capone and Heidi Fleiss.  Two American heroes (to some, at least).  Purveyors of many fine, sought-after services.  But it wasn’t Capone’s notorious bootlegging or Fleiss’s infamous “little black book” that landed these twentieth century titans of industry in jail:  it was tax evasion.

Capone was never actually indicted for any “major” criminal activity, despite the fact that he was the most notorious rum-runner of his day, and was (allegedly) responsible for an event with the word Massacre in the title.  No, the agency that finally brought down Capone wasn’t the FBI or the ATF:  it was the IRS, which forced Capone behind bars on federal tax evasion charges.  After a federal judge refused to honor a 2 ½-year plea bargain that Capone initially struck with prosecutors, he was convicted of owing $215,000, plus interest (which, in today’s dollars, amounts to more than $3.2 million) in back taxes, and was sentenced to 11 years in prison.  After serving 7 ½ years (some of which, famously, at Why to Pay Taxes on Your Illicit Sex MoneyAlcatraz), and having paid all his back taxes and fines imposed by the Court, Capone was released from prison.

Similarly, the well-known title of “Hollywood Madame” wasn’t enough to land the pimp-turned-parrot ringleader, Heidi Fleiss, behind bars.  Rather, it was the taxes she failed to pay on (and the money laundering committed with) her earnings in the pleasure business that landed Fleiss a 37-month jail sentence in 1997.  (A 3-year prison sentence for a 1993 conviction for pandering was overturned on appeal based on improper juror conduct.)

Following her federal prison stay, Heidi tried to get back to business doing what she does best — albeit legitimately this time (where’s the fun in that?) — and attempted to open a brothel in Nevada, but eventually abandoned that plan.  Ever the entrepreneur, though, Fleiss still managed to make lemonade out of prison-time lemons, penning a successful memoir, Pandering.  So take heart!  You too can have her splayed… sorry, we mean displayed… on your coffee table.  Let’s hope she paid tax on her book profits.

#1:  Willie Nelson

The Perfect Stocking Stuffer for the IRS Agent in Your LifeThere could never be any doubt that Law Law Land’s Award for Overall Achievement in Tax Problems would go to a musical icon and American legend who collected the greatest hits of his career to date under the title, The IRS Tapes:  Who’ll Buy My Memories?

It turns out the answer to that question is:  enough people to generate $3.6 million in sales, all of which was turned over to the IRS to satisfy a portion of Nelson’s approximately $16 million debt to the IRS.

Unlike many of our other award winners, Nelson’s spar with the IRS was not for failure to file or failure to pay, or failure to use common sense, but primarily for claiming invalid deductions related to tax shelters the IRS subsequently discredited and disallowed — resulting in a judgment for $6 million in back taxes, plus approximately $10 million in interest and penalties.  After just about all his worldly possessions were sold, Willie recorded the compilation album that is just “him and his guitar,” about the only thing he had left.

Nelson eventually sued his tax preparers, Price Waterhouse, charging that they failed to adequately investigate the tax shelters that led to this uniquely tax-related moment in musical history.  The company denied responsibility, but agreed to an undisclosed settlement with Nelson — though not before arguing that he was better off even with their “bad advice” because he settled with the IRS for $3.5 million less than he would have owed had he not claimed the shelters in the first place.  (Then again, Nelson qualified for a special discount because he was bankrupt.)

But Nelson kept his chin up through the legal battles and property sales, saying “The things that did sell were just things.  So actually, I haven’t lost anything.”

Except, you know, all the things they sold to pay the debt.

So What Have We Learned?

It should come as little surprise that celebrities don’t like paying taxes any more than the rest of us.  But what lessons can we draw from our famous friends?

1.         Pay your taxes, especially if you earned your money strutting your stuff on the beach on national television (again, Kardashians, take note).

2.         If you are going to claim you are above the fray and don’t have to pay taxes like the rest of us, at least pick a rationale that hasn’t been debunked by every court which has heard the argument and landed 8 people in prison before you.

3.         While getting girls to loosen up on camera might make you millions, playing fast and loose with the IRS will land you in hot water (and not the hot tub in the back of a limousine filled with girls kind).

4.         If you’re earning money from conducting illicit criminal activity, the crime of not paying tax on that income is sure to get you; and

5.         When your career achievement is recording a soundtrack for the IRS, it’s time to call it a day.

Have a favorite celebrity/IRS showdown from this list, or one we didn’t cover?  Let us know in the comments section.  After you file your tax returns.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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