My thanks to Joe Kristan for highlighting an interesting and amusing (to me) Tax Court case today: Baisden v. Commissioner. Mr. Baisden is a CPA, and he had a unique way of preparing tax returns:
In an effort to explain his bookkeeping and accounting methods, petitioner explained that since approximately 1998 [Mr. Baisden] had developed for his use and for the use of his clients a novel and insightful tax strategy that may be described generally as follows:
(1) Booked sole proprietorship income would be totally or almost totally offset by the payment by the sole proprietorship of “royalties” to the owner of the business;
(2) the so-called royalties would not be paid directly to the owner but rather would consist of payments by the sole proprietorship of the owner’s personal and family expenses;
(3) the “royalty” payments would be treated as fully deductible by the sole proprietorship, and they would reduce the booked net income of the sole proprietorship
to zero; and(4) the owner would report “royalties” paid with regard to personal and family expenses as “other income” not subject to employment taxes. The primary savings were apparently intended to be derived from petitioner’s tax strategy through the conversion of sole proprietorship business income subject to self-employment taxes into royalties not subject to self-employment taxes.
I strongly suggest that you never attempt to use the above strategy unless you’d like to find yourself facing fraud penalties.
Mr. Baisden also tried to delay his audit by filing a “spurious complaint” with the Taxpayer’s Advocate Office. And I’m only just touching the surface of this case….
On the good side, the Tax Court case was about the IRS assessing fraud penalties and, as you’d suspect, the IRS was upheld. On the better side Mr. Baisden remains under a preliminary injunction to not provide tax advice.
Tags: BozoTaxPreparer