F. Lee Bailey Tax Attorney – More Fun Than Anietra Hamper’s Underwear

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Some cases seem destined to excite the imagination of the tax blogosphere.  TV news anchor Anietra Hamper was a good example.  She went to Tax Court because she thought she should be able to deduct the clothing she bought to wear on air.  She was defeated by the rule that clothing suitable for ordinary wear is not deductible and the Women’s Wardrobe Guideline she was subject to indicated that she should be wearing clothing suitable for working in an office.  TV anchors are supposed to dress like CPAs – Who knew ?

What caught the mature attention of tax bloggers was that included in the detailed list of purportedly deductible items of apparel were things that only the anchors on the Naked News ever display.  I joined in the fun rather late in the game with a post titled Neither Mentionable Nor Deductible and rated her argument number 1 amoung the 10 lamest taxpayer arguments of 2011.  That particular story burst out of the tax blogosphere into the mainstream.

The great F. Lee Bailey trying his hand at tax litigation did make quite an impression among tax bloggers, as I expected it would.  This time, thanks to the astuteness of my esteemed editor  Janet Novack and my willingness to burn the midnight oil on the 143 page decision, I was first.  Others were not far behind.  Since the case had so many angles, we collectively may seem a bit like the blind men and the elephant.

Paul L. Caron at TaxProf blog emphasized the penalty aspect quoting from the decision:

Joe Kristan at the Tax Update Blog in F. Lee Bailey, tax litigator emphasized the yacht disallowance quoting:

Tony Nitti at Double Taxation in F. Lee Bailey Makes a Guest Appearance In Tax Court, As Both Attorney and Petitioner compared Bailey’s career to that of Lionel Hutz of the Simpsons.

Caleb Newquist at Going Concern reminisced about Bailey’s defense of Patty Hearst whose recruitment into the Symbionese Liberation Army was attributed to Stockholm Syndrome.  He picked up on Joe Kristan’s story about the yacht.

Lew Taishoff in A Victim of His Own Success comments on the extraordinary deal that Bailey had made with the US Attorney, that was the source of the bulk of the IRS notice of deficiency.

I was surprised at the DOJ lawyers, who entrusted Mr. Bailey with $5.9 million worth of publicly-traded stock belonging to his incarcerated client, and allowed Mr. Bailey to deal with the stock in an account he controlled in a Swiss bank, with no requirement to account periodically (only at the end), pay at stated intervals, and with no written agreement embodying this extraordinary deal.

Mr. Bailey obviously believed himself to be everything his reputation said he was. A Tax Court trial should be a stroll on the boardwalk for him. It wasn’t.

Mr. Taishoff’s had a comment on my piece:

As I noted in my piece I knew that I would not be able to do the decision full justice.  I did indicate, though, that Bailey actually won the largest issue and that a tax litigator might have not been able to help all that much with the rest of the mess, which Bailey had created by trying to be his own accountant.  I’ve been reflecting on Bailey’s argument that the IRS was persecuting him.  I think  there actually may be something to it even though as it turns out he deserved a little persecution.  Trying to tax him on the 5.6 million in stock that he accepted in a trustee type role and ultimately was briefly jailed for not paying back quickly enough was a gross overreach by the Service.  That transaction though was likely why they looked at the rest of his stuff, which was a mess.

Bailey was audited for 9 years (1993 to 2001) apparently in a fairly meticulous manner.  He had several ventures going on.  He used Quicken, which is a single entry system that clients loved because it is so easy and accountants hated.  It was soon succeeded in most businesses by Quickbooks, which gives the benefits of double entry to people who cannot understand it.  Double entry apparently is not something the great F. Lee Bailey thought he needed. I shudder at the thought of having to prepare his return.

The case could be divided into three major components. There were the issues surrounding Bailey’s handling of client funds, where the Service was definitely overreaching.  Then there was the question of whether the two side businesses were entered into for profit.  That was split with Bailey winning on the aviation remanufacturing and losing on the yacht.  Then there was the accounting mess.  That part of the case compares quite well with those of attorneys Thomas Hale and Dean Pace who went into Tax Court to engage in a war of words when what they need was some schedules supported by receipts which ticked and tied to the returns.  Don’t bring a knife to a gun fight.  That was the part of the case that Bailey lost almost totally.  Anybody with sloppy records and loose accounting whose business affairs have more than a few moving parts will have significant adjustments, going both ways, if they have 9 years worth of returns audited.

An example of the type of thing, that the agent found was a deduction of $215,612 expenses for Mr. Bailey’s West Palm Beach Office that were claimed on his Schedule C. Mr. Bailey was a 50% partner with another attorney in the West Palm office and reported a small loss from the partnership.  Those same expenses had been claimed by that partnership.  That’s the type of mistake that gets made when the records come to the tax return preparer in the proverbial brown paper bag.  Mr. Bailey had a grocery cart full of brown paper bags.  What is a sign of IRS animus is their going through nine years worth.  I don’t recall ever seeing a case like this covering that many years.

The other thing that is interesting, to me anyway, is why this story has not broken out of the tax blogosphere.  It could well be that it is because Mr. Bailey’s fame is largely pre-internet.  His last hurrah in the public eye was at the OJ trial when he discredited Detective Mark Fuhrman, who lied about how frequently he used the “N word”.  Bailey was only part of the team there and it was one instance where he was working for a client at least as famous as he was.  You probably have to be over 40 to remember the Symbionese Liberation Army and Patty Hearst.  His rise to prominence from the Sam Sheppard acquittal was in 1966. When I mentioned that I was surprised that the story hadn’t generated more interest, I was told that most twitter users might not recognize his name and it was too bad that the story wasn’t about Justin Bieber, whoever he is.

You can follow me on twitter @peterreillycpa.