CELEBRITY TAX CASES

Willie Nelson, Wesley Snipes and Nicholas Cage are a few celebrities who come to mind who have has tax issues with the IRS.  Here are some current cases involving celebrities.

Ronald Isley-Twist and Shout-“a serial tax avoider”

An IRS appeals officer did not abuse his discretion by rejecting an offer in compromise from Ronald Isley, the frontman of the Grammy-winning and Rock and Roll Hall of Fame-inducted group, the Isley Brothers, according to a November 6 Tax Court decision. (Ronald Isley v. Commissioner, 141 T.C. No. 11; No. 5616-11L (2013)

The appeals officer accepted the OIC at first, but after consultation with an Office of Chief Counsel attorney the OIC was rejected because it covered years of a tax evasion conviction against Isley and the Justice Department would have needed to approve the OIC under section 7122, and because Isley's failure to file and pay taxes owed also violated the terms of the OIC.

Isley's petition to the Tax Court argued that the attorney had become a de facto appeals officer through the consultation and that the attorney violated impartiality requirements because of the attorney's involvement in a bankruptcy proceeding against Isley. The Tax Court rejected those arguments.

The IRS made two bankruptcy claims against Isley in seeking to collect taxes owed for all but five years of a period stretching from 1971 to 1995, and seized from him a yacht, cars, and other property in 1997. Isley was later convicted of five counts of tax evasion and one count of willful failure to file, was sentenced in 2009 to three years and one month in prison, and was ordered to pay $3.1 million. The U.S. district judge who sentenced Isley described him as a "serial tax avoider." Isley was discharged from bankruptcy in 2001 but did not file returns for 1997 through 2001, and did not sign his 2002 return or pay his taxes for that year.

IRS Says Racecar Driver Montoya Can't Outrun $2.7 Million Tax Bill

The IRS says professional racecar driver Juan Pablo Montoya owes $2.7 million in taxes and penalties, according to a November 3 report from Forbes.

The IRS argues that Montoya earned $9.5 million in taxable income in 2007 and 2008, compared with $2.4 million he and his wife reported on their returns for those years. Montoya admits he earned $800,000 more than he reported, but he is disputing the IRS's calculations.

Montoya says in 2001 he contributed his likeness and other aspects of his "driver identification" to JPM Motorsport Inc. of the Bahamas, which was owned by a trust his manager-father created. Montoya was residing in Monaco and racing in Formula One at the time, but in 2006 he agreed to become a NASCAR driver in the U.S. for the 2007 season, and he was advised to domesticate his foreign assets, which he did by creating Monty Motorsport LLC in Delaware, according to Forbes. He arranged for JPM Motorsport to sell his driver identification to Monty Motorsport for a $15 million note, which then claimed a $1.4 million deduction in 2007 and a $1 million deduction in 2008 on its investment. The IRS says the deductions are a sham.

Montoya is the latest in a string of sports figures in hot water with the IRS over intellectual property and offshore issues, including fellow Indianapolis 500 winner Helio Castroneves, who was acquitted of tax charges in 2009.

The IRS also says Montoya's driver identity sale was an installment sale by a grantor trust that resulted in $2.5 million in income for Montoya, but Montoya's attorneys contend that the grantor trust rules do not apply because he was not yet a U.S. resident at the time of the sale. The IRS also disputes Montoya's residence-related claim of operating and capital losses following his formation of a C corporation in 2006 to buy a Lear jet worth $8.7 million, the liquidation of the corporation in 2007, and the transfer of the jet to a limited liability company, Forbes reports.

Former Eagles Wide Receiver Freddie Mitchell Says Concussions Were Behind Tax Fraud

A U.S. district court judge in Orlando, Fla., on October 29 sentenced former Philadelphia Eagles wide receiver Freddie Mitchell to 37 months in prison after Mitchell argued that concussions he suffered during his playing career may have contributed to his participation in a tax fraud scheme. Mitchell pleaded guilty in March to conspiracy to file a false claim.

Mitchell told the court he uses notepads spread around his home to remind him of things because of memory issues, and said he experiences headaches and difficulty sleeping. His girlfriend, Patricia Jarmoc, praised Mitchell as "a great guy" but said he has trouble conversing. Mitchell's attorney screened for the judge a documentary on NFL players and brain damage.

The IRS began investigating Mitchell and two co-conspirators, Richard Walls and Jamie Russ-Walls, when an attorney for a professional athlete -- identified as "A.G." in court records but named as NBA player Andrew "Drew" Gooden in a civil suit by Mitchell against Walls and Russ-Walls -- informed authorities that a false, nearly $2 million tax refund had been filed in Gooden's name. The claim specified that $1 million should go to Gooden, $638,000 to Russ-Walls, and $280,000 to Mitchell. Mitchell admitted in his plea agreement his role in the conspiracy had been to recruit other professional athletes to Walls and Russ-Walls's return preparation business. Gooden paid the business to prepare a return for him but when Mitchell did not provide him a copy of the return, Gooden filed his return himself and the IRS became aware of the discrepancy.

Nelly Proposed No Taxes During Government Shutdown

Last month's government shutdown had many victims, and one of them, hip-hop performer Nelly, was vocal about not getting his money's worth from Washington.

"I'm trying to campaign, since the government ain't working, we shouldn't have to pay taxes," Nelly told VH1 on October 8. "Paying taxes is supposed to pay for the government, which in turn is not working, so if they're not working, I shouldn't have to pay taxes," Nelly said.

"And me being in the upper echelon of the tax bracket, [I] feel that the money I could be saving over these next couple of days could be very vital to my survival," Nelly quipped.

In April 2006 ABC News reported that some CPAs believe Nelly's bejeweled teeth, described in his and Paul Wall's song "Grillz" as "lookin' somethin' like a disco ball," are potentially deductible as a business expense, although it is unknown whether Nelly has ever taken that advice.