Snipes cleared of felony tax-fraud charges

Wesley Snipes escaped felony conviction on tax-fraud charges.

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(FORTUNE Small Business) -- In the highest-profile tax-protest trial in years, Wesley Snipes was acquitted late last week by a federal jury on felony charges of tax fraud and conspiracy.

However, Snipes is not quite scot-free: The jury found Snipes guilty of three out of six misdemeanor charges of failing to file tax returns, and he faces up to three years in prison as well as a likely court order to pay millions in owed back taxes.

Snipes faced trial in Ocala, Fla., on charges stemming from the IRS's allegation that he failed to pay income taxes on $38 million in income he made between 1999 and 2004. The 45-year-old actor was also accused of fraudulently filing for an $11 million refund on income taxes he paid in 1996 and 1997.

In Snipes' defense, attorneys Robert Bernhoft and Robert Barnes argued that their client was genuinely persuaded that he was not obligated to pay taxes by tax protestor Eddie Ray Kahn and former Florida CPA Douglas Rosile, both co-defendants in the case.

"I think that stretches the imagination, and that's what we argued in court," said U.S. Attorney Robert O'Neill, lead prosecutor on the case. "Nonetheless, the jury bought into that."

Snipes' attorneys did not return a call seeking comment.

While the jury did find Snipes guilty on misdemeanor charges, tax protestors who believe income taxes are illegal view the verdict as a triumph because Snipes escaped felony conviction.

"Right now, they're declaring victory, and that's frustrating," said JJ MacNab, an insurance analyst who is writing a book about the tax protestor movement. "It makes it easier for them to recruit new people into the movement, and that just means more people are facing financial ruin and potentially prison."

According to MacNab, a significant percentage of the anti-tax crowd is made up of small-business owners who are better able to stay below the radar of the Internal Revenue Service and skirt the law than employees and owners of larger companies.

Snipes, famous for his roles in White Men Can't Jump and the Blade trilogy, joins a handful of defendants who have been found not guilty of criminal tax-fraud accusations. A 1991 Supreme Court ruling set the precedent that a good-faith belief that one is not violating the complex IRS tax code is a legitimate defense against criminal culpability - even if the belief is an unreasonable one. However, defendants acquitted of criminal charges are usually still ordered to repay any owed taxes.

Tax protestors often rely on what's known as "the Section 861 position." This argument, repeatedly struck down by U.S. courts, interprets the tax code to say that American citizens are not required to pay taxes on income earned or derived in the U.S. Another aspect of this argument asserts that wages are not taxable because the code does not explicitly say that wages are considered "compensation for services."

In 2005, Fortune Small Business interviewed Joe Banister, an IRS criminal investigator-turned-tax protestor who was changed with conspiracy to defraud the government. Like Snipes, Banister was acquitted of criminal charges.

Michael Schlesinger, a tax attorney for Schlesinger & Sussman who was not involved in Banister's case, attributes the win mostly to luck.

"Juries do strange things," he said. "That's why sometimes these guys get off."

Snipes still faces the threat of prison. Though the three-year max he could be sentenced to is a significant reduction from the potential 16-year sentence that loomed over him at the start of the trial, both MacNab and O'Neill believe he will be sentenced to the full 36 months. The sentencing hearing is expected to be held in two to three months.

"The tax loss on this is several million dollars," MacNab said. "He's looking at spending some serious time in prison unless the judge is extremely lenient."

Snipes' co-defendants Kahn and Rosile did not escape criminal conviction: they were both found guilty of tax fraud and conspiracy. Each faces up to 10 years in prison.

O'Neill believes that this outcome may send a warning signal to tax evaders that will overshadow Snipes' acquittal.

"Eddie Kahn was the main tax protestor, and he undoubtedly will get a very long prison sentence," O'Neill said.