Frank McNulty would never forget the day in 1973 when he read the names of the holders of the winning tickets for that year’s Irish Sweepstakes. He was one of the big winners, the holder of a ticket that was good for several hundred thousand dollars.
However, he was discomforted by the thought of what would happen next April 15, the deadline for the annual reckoning with the IRS. He was going to have to file a Form 1040 that listed the winnings as income.
Soon, though, Frank perked up, for he’d figured out a way to sidestep that disagreeable chore – just forget about filing. When tax time rolled around, he implemented his tax-saving strategy. Frank didn’t submit a 1040 and paid no tax on his winnings.
As someone who made no bones about what he thought of the IRS, Frank didn’t hesitate to tell several completely trustworthy friends of his intention not to file, so as to avoid having any of the winnings wind up with the feds. Those statements came back to haunt him when they were repeated on the witness stand at his trial on charges that he had evaded income taxes.
There was other evidence that helped the government make its case against him. On three separate occasions, Frank went so far as to ask the IRS to calculate just how much would be due in taxes on his winnings. Obliging IRS staffers advised him of the amount of taxes.
Then there was the matter of his efforts to better familiarize himself with the workings of the Internal Revenue Code. In response to another of his inquiries, the feds explained that, contrary to what Frank understandably preferred to believe, he’d remain liable for the taxes even if the money was left in Ireland.
More on the trial in a moment. First, a bit of background. What counts is whether a gambler is subject to the reach of the IRS, not where he chooses to deposit his winnings. That snag arises because Uncle Sam taxes his citizens on a worldwide basis; it makes no difference at all that the funds in question never find their way into the United States.
The government’s case was bolstered by testimony establishing that Frank had journeyed to Ireland to personally pick up the money. The next step in his itinerary, before returning to the United States, was a stop in the Channel Islands, where he put nearly all of the winnings in a bank.
Why, asked the government rhetorically, did Frank choose to do his banking outside of the United States? The government-provided answer: He was aware that the Channel Islands have strict laws that bar the disclosure of bank deposits.
To the surprise of no one but Frank, the trial judge found him guilty of tax evasion. He was similarly unsuccessful when he appealed his conviction. Said the appeals court: “McNulty set for himself and successfully navigated a firm course leading to the shoals and rocks of a guilty verdict.”
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 160 and counting).
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