The criminal trial of Wesley Snipes and two other men will focus on a little known movement based on Section 861 of the Internal Revenue Code. This group argues that citizens are only required to pay taxed on earnings made outside but not inside the country. Snipes could be looking at real jail time for his involvement with the group even after he signed a affidavit of incompetence in 2000 that he does not understand his basic tax obligations.

The government has alleged that Snipes was fully aware that the 861 argument was a scam. He is accused of not filing any returns at all from 1999 to 2004 in addition to two false returns. If convicted, he could face up to five years in prison if the eight counts run concurrently — as they usually do. He will stand trial with Ray Kahn of Sorrento, Fla., and Douglas P. Rosile, of Venice, Fla.Kahn and Rosile allegedly filed to income returns for Snipes and claimed refunds totaling almost $12 million.

At the center of the alleged criminal enterprise is Kahn who was the founder and leader of American Rights Litigators (ARL) and its successor, Guiding Light of God Ministries (GLGM).The government has long watched both organizations, which allegedly consulted with taxpayers in advancing fraudulent tax claims and schemes. The 861 argument has been described as a “cult belief” by experts, click here It is a widely cited and false claim.

One of the leading peddlers of this theory has been Larken Rose, who wrote a popular analysis of the provision. Larken described how regulations can be read to mean that if you do do foreign commerce or work in the Northern Mariana Islands, your income is not subject to taxation.Such tax schemes have always found a ready audience. Indeed, as I discussed in a prior column, the black community has been victimized by a reparations-based tax scheme.

For Snipes, this could not be more serious. The government will use this case to deter others from being drawn into the 861 crowd. Targeting a celebrity is a great way to getting that message out to taxpayers. Moreover, given the amount of money and the failure to file returns (one of the easiest crimes to prosecute), the government is likely to hammer Snipes in court or in a plea agreement.

For the full story, click here. The government has long posted the following message on this scheme on its website, which can be found here. It notes:

Sections 861 through 865 do not limit gross income subject to United Statestaxation to foreign-source income. In Notice 2001-40, 2001-1 C.B. 1355, the Serviceadvised taxpayers that it considers the Section 861 position to be a frivolous position.Courts repeatedly have rejected this and similar arguments as frivolous, and havepenalized taxpayers who make these types of arguments. See, e.g., Takaba v.Commissioner, 119 T.C. 285 (2002) (concluding that “[t]he 861 argument is frivolous”and sanctioning both the taxpayer and his attorney for making such frivolousarguments); Madge v. Commissioner, T.C. Memo. 2000-370 (concluding that the argument that only foreign income is taxable is frivolous).