Detroit stripper named Chesty Morgan took the IRS to court after
it refused to allow a $2088 deduction for her implants. The judge
ruled in her favor, comparing the implants to special work clothes.
Beer: A tax court allowed a gas station owner in Oklahoma,
to deduct the cost of the beer he put in a soda machine for customers
to grab as they filled up.
Bribes: William Zack bribed a Ford employee to get contracts
from the automaker. When the scheme collapsed, the IRS demanded
taxes for unreported income of $310,000. Zack claimed that not
all of the money had been income because he had merely been a
"conduit" for the bribes taken from his company coffers
and given to the Ford employee. An appeals court allowed him
to exclude $90,286.
Concert Tickets: An attorney tried to deduct $60,000 for
front-row concert tickets he bought from scalpers. He claimed
that by getting front-row seats for clients, he gained exposure
to rock groupies, roadies and musicians who might someday hire
him as an attorney It's not clear what happened to the attorney,
but he ended up as a case study in a training manual for IRS
Hookers: A former Treasury Department budget analyst deducted
the cost of visiting brothels and hiring hookers as business
expenses because he said he was researching a novel. A tax judge
disallowed the hookers.
Lunch: Two Minnesota state troopers argued in tax court
that they should be allowed to deduct the cost of lunch. A judge
allowed it, but only because the officers had to eat lunch at
a specific time and a specific restaurant. The ruling led to
a widespread belief among cops that they can deduct $7.50 per
day for lunch.
Payphones: Last year the IRS began cracking down on a
scam in which entreprenurs start a "business" by purchasing
a pay phone that has volume controls, then claim a Disabled Access
Credit of up to $5000.
Vacations: Many lawyers and doctors attend "continuing
education" seminars held at golf resorts. The IRS says these
seminars must improve professional skills and last a reasonable
amount of time. To organizers, that means four hours a day over
five days. The kicker the seminars are all on videotape,
so attendees can watch one each morning before tee time.
Two Iowa farmers tried to avoid Social Security taxes by
paying themselves in hogs, which they then sold. They claimed
the "hog bonus" was designed to motivate employees,
although they were the only employees who got them.
During the late 1990s Wal-Mart took out secret life-insurance
policies on 350,000 employees policies that paid benefits
to Wal-Mart if the employee died and that allowed the company
to deduct premiums as business expenses.
O.J. Simpson's Brentwood neighbors took a $751,000 "casualty
loss," arguing that the accused killer's notoriety lowered
their property values. A court upheld the IRS's demand for $292,000
in back taxes.
Convicted spy Aldrich Ames argued that he shouldn't have
to pay income taxes on $1 million he received from the KGB from
1989 to 1992, because the Soviets had actually set aside the
money for him in 1985 and the IRS wasn't disputing his return
from that year. The court told him to give it up.
of the Rich and Famous
In 1986 Arkansas governor Bill Clinton deducted $2 for a
pair of used underwear he gave to Goodwill.
As president, Richard Nixon underpaid his taxes by $445,000,
based largely on a huge deduction he took for donating his papers.
In response the IRS limited the value of "self-created"
documents to the cost of the ink and paper.
In 2002 action star Wesley Snipes asked the IRS for a $7.3
million refund based on a tortured reading of the code that he
and other tax kooks claim exempts Americans who work for American
History of Taxes
1776 One of the
most notorious evaders of British taxes, John Hancock, signs
the Constitution in flowing "fuck you" script.
1788 The newly ratified Constitution forbids Congress
from imposing an income tax.
1794 Alexander Hamilton persuades Congress to impose
a 25 percent tax on whiskey "as a measure of social discipline."
Farmers on the Pennsylvania frontier revolt.
1798 Congress imposes a property tax on houses,
land and slaves.
1862 The newly formed Bureau of Internal Revenue
collects taxes to finance the Civil War.
1894 Congress creates an income tax that applies
only to the wealthiest 2 percent of Americans. The Supreme Court
rules the tax unconstitutional.
1913 The 16th Amendment authorizes Congress to
collect income taxes. Congress sets a base rate of 1 percent
but again exempts 98 percent of Americans.
1920s Republicans push to lower the top rate from
73 percent to 25 percent.
1934 The Treasury Department goes after its former
chief, Andrew Mellon, for evasion. As secretary Mellon had asked
the Bureau of Internal Revenue for a memo "setting forth
the various ways in which an individual may legally avoid tax."
He then used five of the 10 methods on his return.
1942 "In this time of war, no American citizen
ought to have a net income, after he has paid his taxes, of more
than $25,000," FDR declares. Congress taxes the middle class
for the first time, with rates starting at 13 percent.
1981 With much hoopla, Congress slashes the top
rate from 70 percent to 28 percent, the largest cut in U.S. history.
The next year, Congress passes the largest peacetime tax increase
in U.S. history.
1986 The IRS begins requiring Social Security numbers
for each dependent. The following year, 7 million "children"
You don't have to pay taxes if you buy online
many online stores boast that they don't charge sales tax, this
actually means only that they don't collect sales tax. In states
that have a sales tax, residents are required to pay a "use
tax" on any goods they purchase from online merchants (including
Ebay), shopping channels, 800 numbers or catalogs located out
of state. If you buy something in a state that has a lower tax,
you're required to submit the difference. It may be the most
ignored tax in the world.
at Tax Court
Commerce Clearinghouse is a Chicago-based firm that provides
legal updates to tax pros. Their reporters shared favorite cases:
Pittsburgh furniture store owner hired someone to torch the place,
collected a $500,000 payout and then deducted the $10,000 he
paid the arsonists as a "consulting fee."
A former stockbroker owned several business but claimed his
"ministry" lost so much money that he grossed only
$1000 annually. When the IRS investigated, it found that the
man deducted everything he spent, including food and $1,000 per
month he gave his mother for keeping his stuff at her house.
A couple, both CPAs at Big Five accounting firms, claimed
they spent 50 to 80 hours per week selling Amway but still lost
$190,000 per year. The court ordered them to pay $26,000.
A woman who ran a bookkeeping service claimed $59,323 in
deductions. When the IRS asked for documentation, she replied:
"It's just a lot of paperwork. I didn't bring the details."
A man deducted the cost of his $70,000 home, which he had
lost in a foreclosure, for "judicial theft of real estate."
When a judge challenged him, the man corrected himself, saying
it had actually been a "due process theft."
A tax attorney told a judge that her clients believed the
law was "nothing more than the opinion of individuals published
in fancy books" and that there was "nothing magical
about the pieces of paper called summons." The judge fined
A court ruled that a San Francisco police officer who patrolled
with a ventriloquist's dummy couldn't deduct the $11,465 he spent
to get the issue on the ballot when supervisors told him to leave
his puppet at home.
A court overturned an IRS fine on a technicality against
a couple who had filed a six-page, handwritten return. The IRS
refused to accept the return but then fined the couple for filing
an inaccurate return.
The IRS took issue when a Chicago mob boss deducted his legal
fees as a business expense. The agency argued that because the
boss had not succeeded in siphoning off profits from an Indian
casino (which led to the charges), he had only expected to have
a business. A tax court ruled that being a mobster was the man's
*except if you
Argument: Section 861 of the
U.S. Tax Code states that all Americans must pay taxes, but the
regulations that led to it exempt everyone who works for an American
Why it doesn't work: This argument is the cornerstone
of countless "tax honesty" packages that claim you
don't have to pay taxes if you're willing to spend $1000
or more for the details. Last year prosecutors charged one typical
cheat, Richard Simkanin, owner of Arrow Custom Plastics in Euless,
Texas, with 12 counts of failing to pay $175,000 in taxes and
15 counts of filing fraudulent claims for refunds totaling $234,515.
Simkanin says that, because he is a Christian, any official who
moves against him will be consumed by fire (it hasn't happened
yet). In 2002 a tax court fined a taxpayer $15,000 for making
a Section 861 argument and his lawyer $10,500 for presenting
it. That same year actor Wesley Snipes asked for a refund of
$7.3 million, citing Section 861. He had claimed $18.8 million
in income on his 1997 return but signed a new 1040 saying he
had actually owed nothing.
Argument: If you're ordained
as a minister, you can deduct your income as a charitable donation
Why it doesn't work: This is a familiar scam. In one case,
in 1984, then-U.S. attorney Rudy Guiliani indicted nine leaders
of the Life Science Church, which had raised $10 million selling
ordinations. During the investigation Guiliani learned that at
least 1000 New York City employees, including hundreds of cops
and firefighters, had found religion.
Argument: You don't have to
file a return if you make money from illegal activities, because
it would violate your right against self-incrimination.
Why it doesn't work: If you're a prostitute or hitman,
you can write "Fifth Amendment" in the places where
you would otherwise list the source of your wages and your occupation,
but not the amounts. This keeps the cops from knowing too much
but doesn't stop you from being audited.
Argument: According to the
tax code, only residents of "federal" areas-Washington,
D.C., Puerto Rico, Guam and other territories, Indian reservations
and military bases-must pay income tax.
Why it doesn't work: "This nonsense appears to arise
from a tortured reading of the definition for United States,
with the cranks going to dictionaries to try to prove that includes
means only," explains attorney Bernard Sussman. The includes-only
argument also has been used to argue that only federal employees,
politicians and corporate officers have to pay taxes.
Argument: The Sixteenth Amendment,
which allows Congress to collect income taxes, wasn't properly
Why it doesn't work: This argument is advanced in The
Law That Never Was, a two-volume series sold online for $100
by Bill Benson of South Holland, Illinois. Benson says he visited
every state capital and discovered that only four states had
ratified the amendment proposed by Congress. The other 33 resolutions
had errors of capitalization, spelling or other typos. His smoking
gun is a 1913 memo in which the solicitor for the Department
of State acknowledges the errors. But a federal court ruled in
1989 that the memo actually settles the matter: "It advised
the secretary that he was authorized to declare the amendment
adopted," which he did, and "his decision is now beyond
Argument: Black taxpayers
can claim a deduction as a reparation for slavery.
Why this doesn't work: Nothing in the massive U.S. Tax
Code allows for this. Even so, in 2000 and 2001 the IRS received
100,000 returns (including 12 from agency employees) claiming
$2.7 billion in reparation refunds. The IRS mistakenly sent out
$30 million before realizing what was going on. In 1993 an Essence
columnist urged readers to claim a deduction of $43,209, which
the writer calculated as the current value of 40 acres and a
Argument: Congress revoked
the income tax in 1954, so it's voluntary.
Why this doesn't work: This argument is pushed by Irwin
Schiff, twice-convicted tax cheat and author of The Federal Mafia:
How the Government Illegally Imposes and Unlawfully Collects
Income Taxes. Schiff argues the 16th Amendment was intended only
to tax corporate profits, and that the Revenue Act of 1954 omitted
the requirement that taxes be "levied, collected or paid."
At a hearing last year, a judge indulged Schiff with an hour
to outline his legal hodgepodge, then dismissed it as nonsense.
The IRS says it has received at least 5,100 zero-income returns
from taxpayers who cite Schiff, costing the rest of us an estimated
gap between what the IRS says Americans owe and what gets
amount IRS plans to spend to upgrade its computer system,
which dates from the Kennedy administration
value of federal contracts given to American companies
that have incorporated in Bermuda to avoid paying U.S. taxes
number of refund checks returned to IRS as undeliverable
of Americans who pay someone else to do their taxes
width, in inches, of U.S. Tax Code
number of words in code
number of words in Bible
who paid more than they owed in 2001 to reduce federal debt
percentage of Americans who check the little "presidential
campaign contribution" boxes on returns
"I like to pay taxes. They are the price we pay for civilized
society." Supreme Court Justice Oliver Wendell Holmes
To stop paying taxes suddenly." Anonymous
senators introduce tax bills because the tax system is a mess?
Or is the tax system a mess because senators introduce tax bills?"
Martin Sullivan, Tax Notes
my 1040 it says 'Check this box if you are blind.' I wanted to
put a check mark about three inches away." Tom Lehrer
sick and tired of politicians beating up on the IRS. We have
the best and fairest tax-collection system in the world."
Charles B. Rangel
Mr. President, Internal Revenue regulations will turn us into
a nation of bookkeepers. The life of every citizen is becoming
a business. This, it seems to me, is one of the worst interpretations
of the meaning of human life history has ever seen. Man's life
not a business." Saul Bellow, Herzog
MacDonald had an agricultural real estate tax abatement."-Anon.
promised that the man who slayed Goliath will receive riches,
the king's daughter and exemption from all taxes. Riches is a
relative term, and we all know that most women were virtually
chattel in the Bible, so it had to be the tax exemption that
drove David to risk his life." Conrad Rosenberg
a guy who wanted to know if he could deduct the cost of his dog
food. His reasoning was that his dog was security for his house,
therefore the dog food was a security expense." CPA
Frank Howard, to Bankrate.com
Chip Rowe. A shorter version of this article appeared in Playboy,
Playboy. Reproduced by permission.
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