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F. Lee BaileyFamed defense attorney F. Lee Bailey owes an unknown amount of delinquent tax and penalties under a tax court decision entered this month. The court found him negligent in his underpayments for tax years 1993 through 1995 and 1997 through 2000. However, Bailey, who represented himself, won a substantial victory when the court rejected the claim by the Internal Revenue Service that millions of dollars in stock he held in trust for a client were income.

After its April 2 decision, the court had not yet calculated the amount Bailey owed when it ruled on his challenges to the nearly $5 million in unpaid tax and penalties sought by the IRS for 1993 through 2001. The court held that $3 million in proceeds from loans against the stock were not income, but also ruled that $425,956 in proceeds he misappropriated by transferring them to a money market account were income. At issue were both 1040 and 1120S returns for the years in question. The court also supported the IRS in finding Bailey failed to report hundreds of thousands of dollars in income and similarly took deductions to which he was not entitled.That included the double deduction of $215,612 in office expenses for 1995.

Bailey harmed his own effort with a lack of record keeping. The decision showed that he tracked millions of dollars of income in Quicken, failed to obtain a written agreement with the United States Department of Justice recording what he was allowed to do with the millions of dollars of stock he held in trust, co-mingled funds and threw out records that might have proved an airplane remanufacturing venture was a for-profit effort, not a hobby. The stock effort ended with Bailey unpaid for hundreds of thousands of dollars of work, jailed for contempt of court and disbarred for his handling of the securities.

In a 143-page memorandum decision, the court noted Bailey's lack of recordkeeping made the examination of his returns "a forensic and almost archaeological challenge." The opinion said that in attempting to keep others from seizing funds by depositing them into multiple accounts, Bailey "introduced confusion into his own recordkeeping and accounting."

A substantial part of the taxes sought by the IRS stemmed from his 1994 representation of Claude Duboc, accused of importing massive amount marijuana into the United States. In cooperating with the government's seizure of Duboc's assets, Bailey, in "a vague and unusual agreement" with the federal government performed services to facilitate forfeitures. Duboc transferred 602,000 shares of Biochem Pharma stock to Bailey for use in maintaining and transferring Duboc's assets and to cover Bailey's fees and expenses.

The government let Bailey manage the shares since selling it all at once would have flooded the market. The attorney borrowed against the shares and co-mingled the proceeds with his own Credit Suisse bank account. The initial value of the Biochem stock was $6 million. But after he sold 200,000 shares, the remaining 400,000 quadrupled in value to $13.6 million by 1994. Bailey assumed he was entitled to the appreciated value via his unwritten agreement, but lost in court and went to jail for contempt after initially refusing to give the securities to the federal government.

His results for the contested taxes for his business ventures were also mixed. In 1993, Bailey, a veteran pilot, formed Roamer Aircraft Division from the merger of two entities he owned. At first, Roamer rented aircraft to the public and then rented a yacht to the public through a related company, Palm Beach Roamer. But in 1993 Bailey decided to remanufacturer aircraft instead of yachts after Congress repealed a luxury tax on yachts. The court found the primary use of his yacht was personal and that its expenses dramatically exceeded income. The government took control of the yacht in 1996 as a condition of his release from jail.

His aircraft business involved substantial reworking of two Twin Comanches, a discontinued line. But despite the successful effort to retrofit planes and obtain a supplemental certificate from the Federal Aviation Administration for their remanufactured use, that business hit the wall when Bailey was imprisoned.

However, the IRS claimed the aircraft effort was not a for-profit venture and Bailey failed to submit any records to support his claim. Bailey had kept the records for both the yacht and aircraft businesses at the Palm Beach County Park Airport in Lantana, Fla., but discarded those in 2002 after he stopped renting a hangar. Bailey told a visiting IRS agent to copy the records before he discarded them and claimed in court that the agent failed to do so and should have.

The court found the aircraft venture was for-profit, with Bailey's obtaining the FAA certificate, along with hiring professional advisers, a key factor in his success on this point. But the court held taxpayers are required to keep their own records.

Bob Scott
Bob Scott has provided information to the tax and accounting community since 1991, first as technology editor of Accounting Today, and from 1997 through 2009 as editor of its sister publication, Accounting Technology. He is known throughout the industry for his depth of knowledge and for his high journalistic standards.  Scott has made frequent appearances as a speaker, moderator and panelist and events serving tax and accounting professionals. He  has a strong background in computer journalism as an editor with two former trade publications, Computer+Software News and MIS Week and spent several years with weekly and daily newspapers in Morris County New Jersey prior to that.  A graduate of Indiana University with a degree in journalism, Bob is a native of Madison, Ind
Last modified on Sunday, 02 June 2013
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