Nicolas Cage challenges IRS and gets a lower tax bite

He fought the IRS and won, sort of. Now he only owes two-thirds of a million dollars, still enough to make most grown men cry. Actor Nicolas Cage is yet another celebrity caught in the glare of the IRS spotlight as the tax agency focuses on high income earners. Forbes.com reported last spring that Cage was notified by the IRS that he and his company, Saturn Productions of Los Angeles, might be in trouble. The issue? Improper deductions and underreported income.

The IRS stated that for tax years 2002 to 2004, Cage wrote off $3.3 million in business expenses that, in reality, were personal in nature -- travel, gifts, limos, and his Gulfstream 1159a turbojet. Plus the IRS showed that Cage earned $18.5 million for his role in National Treasure while the actor contended he was paid a mere $17 million.

For Cage, the investigation has turned into a sort of double whammy. First the IRS denied the deductions that Saturn Productions claimed, resulting in a new tax bill of $988,000. Then the tax agency told Cage the items that Saturn deducted represent salary and constructive dividends to him, that could trigger a new personal tax bill of $814,000 (which includes penalties). Added together, Cage was looking at a bill for additional taxes and penalties equaling more than $1.8 million.

Are Good Looks Tax Deductible for Actors?

Cage's business manager, Samuel J. Levin, told Forbes.com that the disputed expenses were just “customary in the entertainment industry,” and in part, necessary to ensure the actor's security. They also contend that some disputed amounts were counted twice by the IRS. Last spring, Cage filed documents in the U.S. Tax Court - under his birth name, Nicolas Coppola - contesting the validity of both tax bills and the penalties.

Chuck Sloan, a tax columnist (“tax expert to the stars”) and licensed preparer who has been advising members of the acting profession for 15 years, says that the problems celebrities like Cage who get into tax trouble have, are mostly the fault of bad advice from those who prepared the returns, most of whom he says, are CPAs.

In an e-mail message Sloan said, "It's amazing the amount we have seen written off for hair, make-up, and clothing, all too often amounting to $4,000 and more for just an average actor. One can imagine what a star of the caliber of Nicolas Cage may have been told he could write off." While he lays most of the blame on the accountants, Sloan does admit that it is ultimately the taxpayer who signs the return and is responsible for the tax.

As for the IRS position, they tend to not be overly sympathetic to actors, especially when they attempt to write off costs that are more related to their appearance and their image than actual work. To be deductible, the expenses have to be fundamental to the taxpayer's ability to earn a living, like instruments for musicians or workout equipment for athletes. For actors, stage costumes might be deductible, but the cost of hairstylists, personal trainers, manicurists, and bodyguards would not. "The inherently personal nature of the expense and the personal benefit far outweigh any potential business benefit," said the IRS in tax documents relating to this case.

While he still owes a hefty bill for additional taxes and penalties, one could argue that Cage's efforts to dispute the IRS claims, paid off handsomely. In early September he and his company agreed with the tax agency to a reduced tax liability of $666,000, plus unspecified interest. About 20 percent of that total is penalties for inaccuracies. Cage's business manager points to the significant downward adjustment as evidence that the actor was well within his rights to contest the issue.

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