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Fun With Taxes

Thinking About Taxes

"I like to pay taxes. They are the price we pay for civilized society." —Supreme Court Justice Oliver Wendell Holmes

"Death: To stop paying taxes suddenly." —Anonymous

"Do 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

"On my 1040 it says 'Check this box if you are blind.' I wanted to put a check mark about three inches away." —Tom Lehrer

"I'm 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

"Dear 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

"Old MacDonald had an agricultural real estate tax abatement."-Anon.

"Saul 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

"I had 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

Hard Numbers

$80 billion — gap between what the IRS says Americans owe and what gets paid

$8 billion — amount IRS plans to spend to upgrade its computer system, which dates from the Kennedy administration

$1 billion — value of federal contracts given to American companies that have incorporated in Bermuda to avoid paying U.S. taxes

390,000 — number of refund checks returned to IRS as undeliverable

53-percentage of Americans who pay someone else to do their taxes

7 — width, in inches, of U.S. Tax Code

2.8 million — number of words in code

774,746 — number of words in Bible

195-taxpayers who paid more than they owed in 2001 to reduce federal debt

11 — percentage of Americans who check the little "presidential campaign contribution" boxes on returns

Creative Deductions

Breast Implants: A 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 auditors.

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 entrepreneurs 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.

More Loophole Lunacy

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.

Lifestyles 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 companies.

Myth: You don't have to pay taxes if you buy online

Although 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.

A Day at Tax Court

Commerce Clearinghouse is a Chicago-based firm that provides legal updates to tax pros. Their reporters shared favorite cases:

A 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 businesses 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 her $2400.

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 business.

Pay No Taxes! (except if you get caught)
Tax Evasion Gone Wrong

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 company.
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 to yourself.
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 ratified.
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 review."

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 mule.

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 $51 million.