Originally published on Forbes.com.
The F. Lee Bailey bankruptcy discussed in the Washington Post is not much of a surprise to me. F. Lee Bailey’s resumption of his pre-Sam Shephard practice of tax litigation, this time on his own behalf lit up the tax blogosphere over four years ago . It was one of the rare times that I was first as I pulled an all-nighter to post at 4:29 AM. I ended up being very disappointed that the story did not break out of the tax ghetto. I guess bankruptcy is different.
Was It The Verbal Contract?
In the Washington Post, Bailey is quoted responding to the question of whether he made any mistakes
Bailey said only one: He did not get the terms of his agreement with the Justice Department in the DuBoc case in writing, which he said, allowed them to put their own gloss on it.
Actually buried in the rather long TC Memo 2012-96 are the signs of another mistake. To appreciate it you need to understand that the Tax Court case had three major elements. The most significant one which Bailey won cutting his tab roughly in half was the IRS attempting to tax him on money that was effectively being held in trust. Then there was the hobby loss element. He split with the IRS on that (issue wise, perhaps not dollar wise). His airplane remanufacturing activity was recognized as a valid business but not his yacht chartering.
Poor Accounting
Where Bailey really got creamed was on substantiation and in his arguments to the Tax Court he seems to have missed that taxpayers have the burden of proving their deductions.
…..he did not offer receipts or other transactional documents to substantiate the items on his return; he simply relied on his secondary Quicken records.
For several of the years he lacked even those records; but on the eve of trial in 2009, Mr. Bailey was finally able to “unlock” password-protected copies of his Quicken data base from which he made printouts for all nine years. The data on the three available printouts made earlier (printed in October 1997 for tax year1996, in October 2000 for tax year 1999, and in October 2001 for tax year 2000) and the data on the 2009 printouts for those same three years are not identical and cannot be correlated with each other. …….. And in any event, the corrected data (if they are correct) on the later printouts (if they really are later) do not correspond to the tax returns . ………Rather than correlating the 2009 printouts with the returns, Mr. Bailey simply criticizes the Commissioner’s position for failing to take into account the 2009 printouts.
Bailey is quoted in the Washington Post as saying
I never had a big bank balance. I always assumed that the pile of gold, as soon as it got diminished, would be replenished, replaced by something else, and there were days when that was almost true. If you were a very top flight lawyer in criminal law you get some very substantial fees. That was true until the DuBoc debacle
From the Tax Court decision, I think that might be both true and untrue. The DuBoc debacle is probably why Bailey faced such a big audit covering the years 1993 through 2001. If Bailey had had good accounting done, there would not have been all that much to find, though. There were a host of problems with omitted income and unsubstantiated deductions that have more of the hallmarks of inattention rather than trying to get away with anything.
Bankruptcy Decision Should Be Interesting
The bankruptcy will be very interesting and we can all hope that there will be a formal decision. I wonder if he will get the Trip Hawkins treatment, where there is scrutiny of his lifestyle to determine if he was attempting to evade.
It is a shame that the great work he did in Tax Court ends up being for naught. He cut the tax by a lot, but it still ended up more than he can pay – an illustration of Reilly’s Tenth Law of Tax Planning – Once the tax is more than you can pay, it might not matter how much more.