MacLafferty Convicted – Sentenced For Failure to File Tax Returns! Evidence of What’s to Come for Wesley Snipes?

February 3, 2008

Robert M. MacLafferty, age 46, of Portland, Tennessee was sentenced January 29th to serve 5 months in prison, followed by 3 years of supervised release. His sentence also included the requirement to pay restitution to the IRS of $37 plus thousand.

According to the US Attorney’s news release:

MacLafferty pled guilty on October 12, 2007, to five counts of income tax evasion. During his plea hearing, MacLafferty admitted that he earned income which required him to file federal income tax returns for years 1996 through 2003, however, he failed to file such a return in each of those years. MacLafferty also admitted that he had adjusted gross income totaling $227,993 from 2000 to 2003. During this period of time, MacLafferty provided false documents to his employer claiming he was not a citizen of the United States and therefore not liable to pay federal income taxes. MacLafferty also admitted that after the Internal Revenue Service filed a federal tax lien against his residence in Sumner County, he quitclaimed his interest in this property and another property to his wife.

Similarities? Let’s see – Snipes claimed that he was not a citizen of the US and not liable to pay federal income taxes. Likewise, Snipes filed to file tax returns for a number of years during which he had approximately $37 million in earnings.


Possible Outcome! Snipes, due to “star power” avoids prison and makes right with the IRS and federal government. Or, Snipes gets a “hand slap” prison sentence like MacLafferty and is told to pay up for his misdeeds.

Since it will take time to see what the outcome is…want to weigh in with your thoughts.

Prison (light sentence) or freedom – which will the judge order?

Business ethics speaker, Chuck Gallagher, off for now…

Wesley Snipes and the 861 Tax Avoidance Argument – White Collar Crime Speaker Chuck Gallagher Comments!

February 3, 2008

Just this morning I received this comment to one of my blogs:

“Don’t quit your day job and become an attorney because it looks like you really don’t know much about law.”

While I am not an attorney – never have been – the comment caused me to pause. I have been a CPA – Tax Partner in a CPA firm – and so I know a bit about tax law. However, I have focused on Wesley Snipes choices and the consequences that could have and did follow that I haven’t taken time to focus on his position, his prosecution and the outcome. So in the comments that follow I’ll try to break it down into manageable bits for those who want to know the thoughts behind Wesley’s actions.

First, let me say – so there is no miscommunication – I am not a CPA today. I lost my license years ago for making wrong choices. In fact, I was convicted for tax fraud and spent time in federal prison. Hence, not only was I trained formally (including a Masters with emphasis in tax), but I received a Ph.D. (s0 to speak) from the school of hard knocks – learning first hand the effect of choices and the consequences that can follow. So – I speak from training and experience.


The Background: Wesley Snipes, for all I know, has been a law abiding citizen filing and paying his taxes like most normal folks for years. He has been successful and most would assume that he will continue to be – earning money from his services as an actor.

Somewhere back in the late ’90’s Snipes (unfortunately for him) came across two folks – Eddie Ray Kahn and Douglas Rosile – both of whom were promoters of an obscure position that a section of the tax code – Section 861 – somehow provided the ability for a US Citizen to avoid paying taxes on income earned within the US. Kahn has been described as a Veteran Tax Protester.

In August 2004 the following experts were part of a news release related to the tax protest activities of Eddie Ray Kahn and Douglas Rosile:

Eileen J. O’Connor, Assistant Attorney General for the Justice Department’s Tax Division, announced today that a federal court in Ocala, Florida has ordered four people and their businesses to stop preparing, selling, or marketing fraudulent tax schemes. The permanent injunction applies to Eddie and Kathleen (“Kookie”) Kahn of Sorrento, Florida; David Stephen Lokietz of Mt. Dora, Florida; Bryan Malatesta, a certified public accountant in Cleburne, Texas; and Eddie Kahn’s Mt. Dora, Florida businesses-American Rights Litigators (ARL), Guiding Light of God Ministries (GLGM), and Eddie Kahn and Associates.

“People who sell tax scams are cheating their customers as well as law abiding taxpayers,” said Assistant Attorney General O’Connor. “The IRS and Justice Department are working vigorously to protect the public and the U.S. Treasury from tax scams.”

The United States District Court for the Middle District of Florida entered the permanent injunction on August 12 after these defendants failed to respond to the Justice Department’s complaint. The court found that the defendants sold counterfeit checks, set up sham corporations (known as “corporations sole”) to help customers hide income and assets, and helped customers obstruct IRS investigations and collections by filing frivolous complaints against IRS employees. The order bars the defendants from selling these or any other fraudulent tax schemes and from representing customers before the IRS. The injunction also requires the defendants to send their customers a copy of the injunction and to refund to their customers all membership fees and other payments received for selling fraudulent tax schemes and services since 1996.

The court separately ordered that Eddie Kahn and Bryan Malatesta, who previously had been found in civil contempt of court for failing to obey the court’s preliminary injunction, be incarcerated until they turn over documents, including their customer list, to the Justice Department. To that end, the court directed the Clerk of the Court to issue bench warrants for the arrest and detention of Kahn and Malatesta until each complies with the previously entered injunction.

Now, let me first state – just because the government took this position does not mean that they were wrong. However, there is a clear difference between professionals (Tax Attorneys and CPA’s) who understand the law, the complexities of the law and the application of the law for tax avoidance purposes and those who can’t seem to find the legal boundary. The government’s position is that those named above have gone too far and crossed the legal line from tax avoidance into tax fraud.

Eddie Ray Kahn reminds me of Jim Jones – except that Kahn’s followers drink the “koolaid” of avoiding paying taxes or participating in the system. The “koolaid” in this case won’t kill them, but the consequences can be legally and financially devastating.

The 861 Argument: Tax avoidance promoters, like Eddie Ray Kahn, promote that tsections 861 through 865 of the Code permits an individual to take the position that either the individual or the individual’s U.S. based income is not subject to federal income tax. The arguments rely on sections 861 through 865 of the Code and the regulations (in particular, Treasury Regulation § 1.861-8) to argue that taxes are only imposed on income derived from certain foreign-based activities.

Kahn and others rely on this as a foundation for their positions that one does not have to pay taxes on US earned income. Likewise, there are other similar arguments that the IRS is not properly sanctioned and that there is no constitutional authority to tax citizens, etc. (the list goes on and on). Most of the folks sucked in by Kahn have elected not to pay taxes and not to file – claiming that there is not authority to compel such activity.

Snipes Actions: First, Snipes is just a well known figure who is a pawn at play here. Kahn sucked him in and in order to get Kahn (which the government did) they used the notoriety of Snipes to draw attention the the consequences than can follow choices like what Snipes made.

Snipes (now well documented) did the following:

  • After being indicted in 2006, actor Wesley Snipes sent a document to the Internal Revenue Service declaring he was a “nonresident alien” of the United States, refuting his Social Security number and warning that continued prosecution could lead to professional consequences for federal employees. Now honestly how dumb was that? It was clear that Snipes had, by this time, been drinking a lot of Kahn’s “koolaid.”
  • IRS Frivolous Return Program senior technical advisor Shauna Henline read excerpts of the document at his trial of the 600-page declaration signed by Snipes and sent Dec. 4, 2006, Snipes said he had “no ill intent or malice” and didn’t want to evade any lawful requirement to pay taxes. But he went on to say the government had “no lawful authority to impose any kind of criminal sanctions.” Snipes claimed (and that’s what saved his butt) that he just wanted the IRS to prove to him that he did have to file and pay taxes. Kahn, and others, promoted that one should not file or pay until the IRS satisfied their questions. They used that as a defense. In other words, don’t file or pay, rather push their issues or agenda with the IRS assuming that they would not get an answer and hence avoid the requirement to pay.
  • Snipes declared he had no taxable U.S. income, making the IRS Form 1040 “absolutely the wrong form for me to file.” He also claimed taxes withheld were “stolen funds.” Here’s where the 861 argument comes into play. Their position is that income earned in the US is not taxable therefore, since his income from acting was earned in the US – he obviously didn’t need to file a tax return.

Governments Position: As one can imagine, the IRS takes a different position. Treasury Regulations (some 29 pages) have been issued that define the meaning of Section 861. Click on the link if you want to mire up in the details. An excerpt defining income is shown below:

(a) Categories of Income.— Part I (section 861 and following), Subchapter N, Chapter 1 of the
Code, and the regulations thereunder determine the sources of income for purposes of the income
tax. These sections explicitly allocate certain important sources of income to the United States or to
areas outside the United States, as the case may be; and, with respect to the remaining income
(particularly that derived partly from sources within and partly from sources without the United
States), authorize the Secretary or his delegate to determine the income derived from sources within
the United States, either by rules of separate allocation or by processes or formulas of general
apportionment. The statute provides for the following three categories of income:

(1) Within the United States. The gross income from sources within the United States,
consisting of the items of gross income specified in section 861(a) plus the items of gross income
allocated or apportioned to such sources in accordance with section 863(a). See §§ 1.861-2 to
1.861-7, inclusive, and § 1.863-1. The taxable income from sources within the United States, in the
case of such income, shall be determined by deducting therefrom, in accordance with sections
861(b) and 863(a), the expenses, losses, and other deductions properly apportioned or allocated
thereto and a ratable part of any other expenses, losses, or deductions which cannot definitely be
allocated to some item or class of gross income. See §§ 1.861-8 and 1.863-1.

Likewise, not only has the government issued Treasury Regulations but Revenue Ruling 2004-30 was issued on March 22, 2004 related to frivolous tax returns and attempting to avoid taxes under section 861. The introduction of the Ruling states:

This ruling emphasizes to taxpayers, and to promoters and return preparers who assist taxpayers with tax schemes, that there is no authority in sections 861 through 865 of the Code that permits an individual to take the position that either the individual or the individual’s U.S. based income is not subject to federal income tax. The ruling also describes many of the possible civil and criminal penalties that apply to people who make frivolous section 861 arguments to evade tax.

Notice: If there is a Treasury Regulation that defines income and a Revenue Ruling that says don’t use this as a position to avoid taxes – one might assume that you would want COMPETENT tax advice – not advice from the likes of Eddie Ray Kahn and his “koolaid” crowd.

Conclusion: I have taken a keen interest in this trial, as I spent time in prison with others who were there for just the same reasons that Snipes took – taxes aren’t legal, income in the US isn’t subject to tax, etc. After prison, they decided that their minds were once again clear and they became law abiding citizens – avoiding the wrath of the IRS.

In Snipes case he had three things going for him: (1) he actually, to the jury, came across as a victim of Kahn’s ill advice – asking for information (albeit in a bizarre way), and acting not as a conspirator but just a misguided tax payer; (2) the race card was played early so it put the “all white jury” on notice that justice should be served. Had Snipes been convicted on all charges – it would have had racial overtones hence coloring the verdict (no pun is intended); and (3) Snipes had the benefit of star power. Notice that rarely do “stars” get the same treatment that plain folks seem to experience.

What’s next? The acquittal on the felony charge doesn’t relieve Snipes from his responsibility to pay taxes. The Internal Revenue Service can still sue him in civil court for back taxes for the years in which he didn’t file returns, from 1999 through at least 2004. The government says Snipes earned almost $38 million during that time.

Snipes is prepared to pay the taxes he owes for the years he didn’t file, Bernhoft, his attorney said.

“Mr. Snipes has always been committed to doing the right thing, and after this trial is over, he’ll make whatever amends are required. But this is a man of integrity.”

Prison for Snipes? Some how I doubt it – although I would be that the IRS would love to see some time served for Snipes convictions – even if it’s a short time like Martha Stewart. The message then would be clear.

The judge ordered a pre-sentencing investigation, which could take up to 75 days, but set no date for sentencing. He also reduced Snipes’ bond from $1 million to $250,000. Pending the sentencing hearing, Kahn will remain in custody, and Rosile will remain free on bond, the judge said.

Both Kahn and Rosile were convicted of tax fraud and will, no doubt, spend many years in federal prison.

The IRS will continue to aggressively pursue tax protesters, O’Neill said.

“We’re going to continue to go after those people, and I think you will see more indictments of tax protesters,” he said. “The IRS will go after all of those taxes.”


As a professional speaker talking about business ethics and white collar crime ( it is clear that this case will be talked about for years to come. One thing is for sure – a clear message was sent and when the smoke clears, I would bet that Snipes once again comes to his senses and files and pays his taxes. Hopefully, he won’t continue his protest – cause after this experience, he can’t claim that he just didn’t know.


Wesley Snipes – Guilty and Innocent – Department of Justice Comments!

February 2, 2008


These are comments from a Department of Justice news release:

A jury today found Wesley Trent Snipes guilty on three misdemeanor charges for failing to file income tax returns. Snipes was acquitted on felony charges of conspiracy to defraud the Internal Revenue Service (IRS) and presenting a fraudulent claim for payment to the IRS. He was also acquitted on three other charges of failing to file income tax returns. Eddie Ray Kahn, of Sorrento, Florida, and Douglas P. Rosile, of Venice, Florida, were found guilty of conspiracy to defraud the Internal Revenue Service (IRS) and presenting a fraudulent claim for payment to the IRS.

A sentencing date has not been set. The conspiracy and false claim charges each carry a maximum sentence of five years’ imprisonment. Snipes faces up to one year imprisonment on each charge of failing to file income tax returns.

Kahn was the founder and leader of American Rights Litigators (ARL), a tax protestor organization based in Lake County, Florida. Rosile prepared returns for ARL clients, such as Snipes.

U.S. Attorney Robert E. O’Neill stated, “Filing tax returns is not optional. It is a legal requirement. Mr. Snipes now faces up the three years in federal prison for his willful failure to comply with the law.”

“The jury’s conviction of Wesley Snipes today represents the latest in a long string of criminal convictions by the Justice Department and the IRS against tax protestors,” said Nathan J. Hochman, Assistant Attorney General of the Justice Department’s Tax Division, “Those who unlawfully dodge their tax obligations should know that they face long prison terms and stiff financial penalties.”

“Our criminal justice system has once again determined that there are no legal grounds for failure to file or pay federal taxes. There is no secret formula that eliminates a persons’ tax obligations — the law is very clear: people must pay their taxes. Today’s conviction again reminds all honest taxpayers that arguments from those who promote tax schemes are simply wrong and do not stand up to the scrutiny of the law,” said acting Internal Revenue Service Commissioner Linda Stiff.

Clearly the IRS would have liked more, but the main culprits have been convicted and a clear message has been sent. According to Snipes attorney, Snipe will now comply. Likewise, the IRS has said it will seek civil penalties and pursue Snipes till all that is due is paid.

And yet one more time the government establishes the long standing requirement (regardless of certain tax protesters opinions) that there are two things in life that are true – death and taxes.

Business Ethics Speaker – Chuck Gallagher – signing off…

Wesley Snipes – Learns Tax Lesson Agrees To Make Amends!

February 1, 2008

Guilty of three misdemeanor charges of failing to file tax returns was all that Snipes got from the jury of 12. Felony tax fraud and conspiracy – NOT GUILTY.


With this phase of his legal battle behind him Bernhoft stated that “Mr. Snipes has always been committed to doing the right thing and after this trial is over, he’ll make whatever amends are required.” Likewise, the IRS made it clear that they intended to pursue taxes on the roughly $38 million of income he earned during the time Snipes refused to file tax returns.

According to a report from CNN:

Snipes could have faced up to five years in prison on both the conspiracy and fraud charges. He was found guilty of only half — three out of six — of the failure to file charges. He faces a maximum one-year sentence on each but can be expected to be sentenced to less.

“Our position has been all along that Mr. Snipes committed no fraud,” said Robert Bernhoft, Snipes’ attorney, after the verdict was read Friday afternoon. “He had no bad intent, and that’s what the jury accepted.”

Eddie Ray Kahn and Douglas Rosile didn’t fare so well as both were found guilty on fraud and conspiracy charges.

Lessoff, of the IRS, said Kahn’s group is believed to have as many as 4,000 members. “This was a very high-profile case with us and we’re satisfied with the result because it clearly shows you cannot get away with not paying taxes,” Lessoff said. “If you are part of this organization, if you’re one of them, you need to get in touch with us and make right with us.”

Prediction: Zero doubt that Kahn and Rosile will face time in federal prison. Snipes on the other hand – well that’s going to be interesting. I could see the judge sentencing him to some prison time although my gut says – he’ll walk. Candidly, I would not have predicted that at the end of last week, but one never knows what a jury will do.

The White Collar Crime Blog says, “The minor convictions for Snipes and major ones for his co-defendants sends the message that one cannot claim ignorance if they follow a promoter of a tax scheme. But more importantly, those who promote such conduct can be charged and convicted of crimes such as conspiracy.

The numerous acquittals in the Snipes case should be making the government wonder whether it was worth the time, cost, and effort to proceed criminally against him, and whether civil penalties may have been more appropriate.”

Was It Worth It? You bet, at least as far as the IRS is concerned. Privately, I am sure they wish they had gotten a conspiracy conviction for Snipes. Nothing like a high profile individual in jail – makes the voluntary compliance system easier to manage. What they did get was the promoter in prison. That sends a clear message. Regardless of your personal beliefs, know that the IRS will pursue folks who don’t file and don’t pay.

Snipes will file now and pay (including hefty penalties and interest). I suspect that he will be on time with his 2007 return. It would certainly be in his best interest – BEFORE SENTENCING – to put his tax house in order. Failure to do so would send a clear prison sentencing message to the judge.

Every choice has a consequence. As a business ethics speaker ( I understand that there are a minority of citizens who feel there is justification in not paying or filing taxes. I’ve heard the arguments and I’ve seen the results. You either end up in jail or end up with a huge tax bill or both! I’ve (not proud to say) been an inmate in federal prison and seen folks who were there for one reason and only one reason – tax fraud. While Snipes got off easy by convincing the jury that “he didn’t understand” the reality is – he now understands and will file and pay. WINNER: IRS!

Comments are welcome!

Release Us From Our Bond – Wesley Snipes Might Run!

February 1, 2008

While the jury is still out, American Bankers Insurance Company of Florida said it could no longer guarantee Snipes’ appearance in court if he is convicted. “[D]efendant Snipes’ waiver of defenses indicates more than a lack of resolve. It can easily be inferred that the defendant has no faith in the judicial system and is an unwilling participant,” Surety Agent Aaron Aaba wrote.


“It is apparent that he may not vigorously pursue an appeal, if he is not interested in presenting a defense at trial. Therefore, any appeal is likely for purpose of delay in order to allow the defendant to flee,” Aaba’s motion continued. “It is also likely that Snipes simply does not consider himself to be subject to the jurisdiction of the court, or any United States governmental body.”

Snipes, Eddie Ray Kahn and Douglas Rosile are each charged with one count of conspiracy to defraud and one count of aiding and abetting the making of a false and fraudulent claim as part of an alleged tax fraud scheme. Snipes also is charged with six counts of willfully failing to file federal income tax returns.

Now, I’m no lawyer, but I do have a unique perspective as I’ve been in federal prison for tax evasion and know quite a few people who were there for the same thing that Snipes has done – no pay or file tax returns because somehow they felt they shouldn’t have to. I still never cease to be amazed at the responses I receive claiming that taxation on earned income is somehow not statutory. Anyway, back to Wesley…

Apparently the company had asked Snipes’ legal team to increase collateral for the bond, and that the actor’s lawyers had refused.

Hum…why would he pay more money if he won’t pay his taxes. Maybe Wesley is above the law – he’s a universal citizen and no governments rules apply to him? Well…maybe? Anyway, Senior U.S. District Judge William Terrell Hodges rejected the motion because it was not signed by a Florida lawyer or by the surety agent with power of attorney who signed the original bond.

Now wouldn’t you think that if you put a motion before a judge you’d dot the “i’s” and cross the “t’s”?

I suspect a verdict today…but as many odd twists as this trial has taken – who knows?

Your comments?

Wesley Snipes – And the Jury’s Still Out! But What Does Conspiracy Mean?

January 31, 2008

January 30th has passed and the jury still has reached no verdict in the Wesley Snipes case. What does that mean? Probably it means they are doing their job!

Senior U.S. District Judge William Terrell Hodges announced that jurors had a question. He displayed a copy of jury instructions marked with yellow highlighter and red marks, and told the lawyers present that the jury had a question about the meaning of the term “conspiracy.”


Snipes, Douglas Rosile and Eddie Ray Kahn are each charged with one count of conspiracy to defraud and one count of aiding and abetting the making of a false and fraudulent claim as part of an alleged tax fraud scheme. Snipes also is charged with six counts of willfully failing to file federal income tax returns between 1999 and 2004.

Because none of the defendants were in the courtroom Wednesday afternoon, Hodges told the attorneys he would study the matter overnight and address with them the question of what to tell the jury Thursday morning.

The following was written in the White Collar Crime Prof Blog:

There are many levels to this trial. On the surface we see the courtroom battle with many years without tax returns, but also a question as to why he may not have filed them. Was it a conspiracy or was there a legitimate question? We also see a case in closing arguments while outside the courthouse an election is occuring. And finally we see an all-white jury coming from an all-white venire deciding the guilt or innocence of Snipes.

Commentary: I don’t see, in this country, whether you like the law or now, how one can be confused as to whether you are to file tax returns and pay taxes on income received. For years Snipes wasn’t confused. He earned money and paid taxes – just like any good citizen of this country. Then he met Kahn. Now I fear he’ll experience the Wrath of Kahn…by going to prison. (Could be wrong – doubt it)

What changed? Did Snipes somehow gain amnesia about this past earnings and taxes paid? Did he feel somehow that the laws had changed and he was no longer required? Or, did he fall prey to the likes of Kahn and his army of tax evaders (oops…I mean tax patriots)?

My bet is by week end we will see a guilty verdict on one or more levels.

Your comments?

Wesley Snipes – Patriot or Plain Idiot?

January 29, 2008

How many times did I hear in federal prison, people convicted of tax fraud claiming that they were just patriots imprisoned by a government gone amok. Fact was – they were in prison for their misguided belief. Considering that today the closing arguments were being made in the Wesley Snipes tax fraud case, we will likely see either a conviction (my prediction) or the miracle of the century – Snipes acquittal.


Federal prosecutor M. Scotland Morris portrays Wesley Snipes as a common criminal with worked with idiots like Eddie Ray Kahn to defraud the government of their duties as a citizen to file and pay their taxes. While Robert Barnes, Snipes attorney, portrays Snipes as a patriotic American who was legitimately seeking information about his tax liability. (If the jury buys that one – well, there’s some outstanding property in the Everglades for sale.)

According to Rick Cundiff with the Star-Banner:

Prosecutor Morris went first, telling jurors Snipes conspired with Kahn and Rosile to file a fraudulent refund claim for $7.3 million in taxes on his 1997 return, and sought to illegally deny his ongoing tax liability for 1999 through 2004.

“Nobody likes paying taxes. Nobody,” Morris said. “But paying taxes is the privilege we pay to live in a civilized society … That’s what this case is about – three men who believe they are above the law. They’re not above the law. Tell them that.”

Barnes invoked the Founding Fathers and said the Internal Revenue Service deprived Snipes of his civil rights by not responding to his letters seeking information.

“It may have been protest,” he said of filings by Snipes and by Kahn on Snipes’ behalf. “Protest is not criminal. It may have been disagreement. Disagreement is not criminal. It may have been frivolous. Frivolous is not fraud.”

Barnes urged jurors to acquit Snipes in the name of American freedoms.

In the name of American freedoms? What American freedom is it that allows us to avoid filing tax returns? What American freedom is it that allows us to avoid paying income taxes on the money we earn? What is Barnes talking about?

“The liberty to ask questions … the liberty to challenge your government. The liberty to engage your government. These liberties are American liberties,” Barnes said. “The Liberty Bell may be cracked in Philadelphia, but it can still be heard in Ocala.”

The last time I checked, challenging your government was perfectly legal as long as it was done through the legal legislative or judicial process. Here Snipes is taking the judicial road to challenge something he will lose and ultimately end up paying the price with his freedom. Sorry, but that to me is the mark of a plain idiot.

Every choice has a consequence. Snipes (unless I’m dramatically wrong) will pay the price of his choices with his freedom and while he spends time in federal prison, perhaps will come the knowing that he was duped by the likes of Kahn. But, maybe not, maybe they’ll share a cell together so they can experience the joy of knowing they took a stand for the civil liberties of us all.

For now, I’m going to do my tax return.