COLVIN + HALLETT BLOG

Celebrity Tax Woes Bookend October 2018: Mike “the Situation” Sorrentino and Wesley Snipes Take a Hit

by | Nov 13, 2018 | Criminal Tax Defense, Tax Advice

The month of October began and ended with two celebrity names receiving unfavorable news in their tax controversy matters. On October 5th, Michael “the Situation” Sorrentino, of “Jersey Shore” acclaim, and his brother received prison sentences in Newark, New Jersey federal court. To round the month out, on November 1st, Wesley Snipes lost his Tax Court battle in which he alleged the IRS abused its discretion in not accepting his offer-in-compromise.

The Situation plead guilty to one count of tax evasion, admitting that he made cash deposits into bank accounts in amounts less than $10,000 in order to underreport his income and avoid detection by the IRS. Under the Bank Secrecy Act of 1970 (BSA), financial institutions are required to file a currency transaction report (CTR) with the Financial Crimes Enforcement Network (FinCen) when a customer makes cash transactions in excess of $10,000 in one business day. Further, the BSA requires financial institutions to file the more onerous suspicious activity report (SAR) with FinCen if it appears that a customer is attempting to avoid BSA reporting. Under 31 USC § 5324, it is a federal crime to “structure” transactions to evade reporting requirements under the BSA, like The Situation did when he made cash deposits in amounts less than $10,000 for the purpose of not triggering reporting requirements on the transactions. While he was not charged with structuring crimes, it should be noted that this constituted a separate felony offense that the government could have pursued had the matter gone to trial.

The Situation’s brother, Marc, plead guilty to charges of aiding in the preparation of a false and fraudulent return. He admitted that during 2010, 2011, and 2012, he willfully provided false information to his accountants in preparation of his tax returns, resulting in the underreporting of his total and taxable income. The government seems to have viewed Marc Sorrentino as the more culpable of the brothers, allowing The Situation a significant adjustment under the sentencing guidelines in light of his “minor role” in the offense.

The Situation and his brother were sentenced to eight months and 24 months in prison, respectively. In addition to their prison sentences, each must serve periods of supervised release and pay criminal fines of several thousand dollars, and The Situation must pay $123,913 in restitution, i.e. the taxes that should have been paid.

Wesley Snipes found himself again in the tax controversy spotlight in the latest chapter of his seemingly never-ending saga. The dispute relates to the civil consequences of his 2008 conviction on three misdemeanor counts of failing to file federal income tax returns on income of more than $18 million for the years 1999–2001. While Snipes was acquitted with respect to his failure to file income tax returns for the 2002–2004 years, this did not mean he did not owe civil taxes on the more than $23 million he earned in those years. Snipes offered the IRS $842,061 in lieu of the $23.5 million he owes for the years 2001–2006 as an “offer-in-compromise” (OIC) citing “doubt as to collectability” (a proposal of somewhat less than 4 cents on the dollar). In an effort to compromise, the IRS counteroffered with a $9,581,027 figure (a settlement of 41 cents on the dollar), yet Snipes did not budge from his original offer. The IRS rejected Snipes’ OIC, and he landed in Tax Court asserting that the IRS had abused its discretion in not accepting his offer.

The most intriguing aspect of Snipes’ case was his allegation that the settlement officer inappropriately failed to conduct an expedited transferee investigation of his financial adviser, W. Johnson. During the CDP proceedings, Snipes alleged that Mr. Johnson diverted loan proceeds, other assets, and income away from him without his knowledge. Accordingly, Snipes requested that the settlement officer perform an expedited transferee investigation, and conditionally accepted his offer or place him in “currently not collectible” status until the transferee investigation concluded. The settlement officer’s manager informed Snipes that the CDP hearing could not be held open during the pendency of a transferee investigation, nor could the IRS conditionally accept an OIC.

Snipes was placed in a real administrative Catch-22: Either he could withdraw his CDP hearing request, allow a full transferee investigation, and abandon his judicial rights to contest whatever decision the IRS made on his OIC after the investigation concluded, or he could decline to withdraw his CDP hearing request and preserve his right to petition the Tax Court with an underdeveloped administrative record. Snipes decided to go with latter, and the underdeveloped administrative record proved fatal. During the administrative proceedings, Snipes provided affidavits of Mr. Johnson, apparently admitting his misconduct and misuse of Snipes’ assets and income, but provided no “definitive or otherwise bona fide documentation showing the dissipation or diversion of his assets or income.” Had the IRS undertaken a transferee investigation, such evidence may have been discovered. But, as Judge Kerrigan pointed out, Appeals is not designed nor is it authorized to undergo such an in-depth examination—such processes are reserved for the Field Division.

It might have been possible for Snipes to have mitigated his risk in pursuing his claim in the Tax Court had he pursued a different strategy prior to and during the CDP hearing. Particularly, he could have performed his own transferee investigation (perhaps by filing a lawsuit against Mr. Johnson and obtaining discovery), and presented his findings to the settlement officer, rather than hoping to persuade the IRS to undertake the investigation itself. Had Snipes been able to produce the “definitive or otherwise bona fide documentation” of Mr. Johnson’s misconduct that Judge Kerrigan was looking for, it would have been far more difficult for the IRS—and the Tax Court—to ignore.

The moral of these two celebrity stories: it doesn’t pay to play tax games. And in Snipes’ case: sometimes if you want something done right, you may have to do it yourself.

 

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