Wesley Snipes tax protest case heads to court

(FORTUNE Small Business) -- Opening arguments began yesterday in Ocala, Fla., on a tax-fraud case that could land actor Wesley Snipes in jail for up to 16 years.

Snipes, along with two co-defendants who once served as his advisors, is in trouble with the IRS for allegedly failing to file income taxes between 1999 and 2004, during which he made $38 million from movie projects such as the popular vampire trilogy "Blade." Snipes also fraudulently filed for $11 million in refunds on income taxes paid in 1996 and 1997, according to prosecutors.

Snipes' counsel maintains that their client is not guilty and fell victim to poor advice provided by his two co-defendants, Eddie Ray Kahn and Douglas Rosile. Kahn, who has served jail time for tax crimes, and Rosile, who had his Florida accounting license revoked more than 10 years ago, told Snipes that he was not obligated to pay income taxes on wages made in the U.S., according to the indictment.

Proponents of this anti-tax theory, commonly referred to as the "861 position," believe that because this section of the federal tax code does not explicitly say that wages are taxable (the phrase "compensation for services" does not encompass wages, according to this line of reasoning), earners are not obligated to pay taxes on them.

Tax experts say that argument - appealing as it may be to some workers and business owners - has been firmly and repeatedly shot down in court.

"The fact of the matter is that compensation for services includes employment. That's Tax 101," said Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants. "There's just no merit to what he's claiming here."

U.S. courts have routinely denied the legitimacy of this position, but have occasionally acquitted tax protestors whose cases have been brought to court on criminal charges. Most famously, the U.S. Supreme Court in 1991 overturned the conviction of tax protestor John Cheek, ruling that a good-faith belief - even if its unreasonable - that one is not violating the complex IRS tax code is a legitimate defense against criminal culpability.

While cleared of criminal charges, most of these defendants were ultimately required to pay the IRS the money owed, as Cheek was.

Snipes, 45, is being represented by lead attorney Robert Bernhoft, who is no stranger to cases involving section 861 protests. In 2005, he represented Joe Banister, a former criminal investigator for the IRS who decided that the government's taxation system was unconstitutional and began conducting seminars and radio interviews on the hows and whys of organized tax resistance.

"If I were to stay silent about this issue, I would be one of the biggest hypocrites that ever walked the face of the earth," Banister told Fortune Small Business in a 2005 article about his case.

Banister was arrested in late 2004 and charged with conspiracy to defraud the U.S., but he was acquitted of all charges in June 2005. However, his co-defendant, Walter Allen Thompson, was convicted and sentenced to six years in jail for failing to withhold taxes from his employees and pay off debts to the IRS.

Will Snipes' argument hold up in court? Tax attorney Michael Schlesinger doesn't think so.

"The law is quite clear," said Schlesinger, of New York City firm Schlesinger & Sussman. "There's no little quirk in the code that says that suddenly wage earners don't have to pay their taxes. You may not go to jail for not filing your taxes, but typically you're going to wind up paying your taxes."

That's been the outcome for most of the defendants who have been acquitted in section 861 cases. Though Snipes claims to have been unaware that the filing procedures suggested to him by Kahn and Rosile were illegal, prosecutors claim that Snipes sent payments to the IRS to cover some taxes.

"I think he's a great actor," Schlesinger said. "I hope he can act in court."