Tax Court is Not Very Taxing for the Wealthy
This is a story about four upper income taxpayers. The Internal Revenue Service says they owe the government a total of $2.8 million in additional Federal income taxes and penalties.
© 1974, The Philadelphia Inquirer
This is a story about four upper income taxpayers. The Internal Revenue Service says they owe the government a total of $2.8 million in additional Federal income taxes and penalties.
They include Xaviera DeVries, better known as Xaviera Hollander, the former New York madam and prostitute who wrote "The Happy Hooker"; Stanley M. Baron, a Philadelphia stock promoter; Delbert W. Coleman, a Chicago businessman, and Sidney R. Korshak, a Los Angeles and Chicago attorney, whose clients and friends have included Hollywood movie starts and Las Vegas gambling casinos.
Unlike the vast majority of low and middle income Americans – who automatically pay whatever additional tax the IRS claims they owe after an audit – these four taxpayers have appealed assessments by the IRS in U.S. Tax Court.
If everything goes as it traditionally has, they – like most all others who go to tax court – will be required to pay about one-third of the amount the IRS now says they owe.
The figure represents just one more inequity in a growing catalog of inequities covering all phases of the nations' Federal income tax system – from audit to settlement to collection.
As The Inquirer disclosed earlier this week, the IRS administers the nation's tax laws with a most uneven hand, extracting a maximum amount of tax money from low and middle income wage earners, settling for a good deal less than maximum from upper income taxpayers.
Now consider just a few statistics of the U.S. Tax Court – a court which is independent of IRS and other tax enforcement agencies – which probably receives less public scrutiny than any other court in the country:
While the tax court operates independent of the IRS, those cases that are settled before going to trial are resolved as a result of negotiations between the IRS and the taxpayer.
The vast majority of cases in which the IRS assesses additional taxes and penalties – better than 90 percent – are resolved without any appeal by the taxpayer whatsoever.
That means those taxpayers – and they are largely low and middle income wage earners – pay whatever the IRS says they owe without question.
Sometimes the amount of the additional tax is too small to contest. More often than not, the taxpayer feels intimidated. Few taxpayers are familiar with their rights of appeal. Even fewer are familiar with their right to take the IRS to court.
Who is it, then, who appeals IRS assessments in the tax court? What are the issues involved?
The following are the stories of four taxpayers – all their cases are still pending – who owe, by IRS calculations, from $93,545 to $1,846, 209.
The first of these is Xaviera DeVries, the former Manhattan bordello operator who, by her own account, set out in the summer of 1970 to "become not just a madam – but the biggest in New York."
In her book by the same name (21 printings, 6 million copies sold), the Happy Hooker recounted the details of her New York business – her business cards identified her as an "interior designer" – and described her clientele:
"Bankers are among my very best customers. There is only one other profession that outranks bankers as dedicated clients, and that is the stockbroker…I would estimate 50 percent of my business is directly tied to the market trends."
Business was so brisk after she became a madam, Miss DeVries recalled, that "within a month or two of my opening there was almost too much business to handle in a one-bedroom apartment.
"Some nights were so packed that there would be two couples using the king-size bed at the same time, another couple in the living room using the queen-size Castro convertible, and yet another pair in the collapsible camp bed set up in the corner."
As for financial rewards of her work, or as she calls it, the business of pleasure, Miss DeVries wrote: "It is true that my business – as my stockbroker would put it – does generate a large cash flow.
"The top madams in town can make $4,000 a week during a good week in January, February and March, but the rest of the year it's more likely to be $2,000 a week. And expenses are large year round." On her 1970 income tax returns, though, the IRS said Miss DeVries reported a taxable income of just $19,445, when she should have reported $149,676. Said the IRS:
"It is determined that you realized gross receipts of $120,577 from your profession as a madam in the operation of a house of prostitution. In as much as you reported $20,722 under the guise of a design consultant, the difference of $99,855 is added to income."
The IRS said Miss DeVries also failed to report $25,200 in rental income, saying that she "charged three persons a rental of $700 per month in each of the 12 months of 1970."
The tax agents also assessed Miss DeVries another $5,176 for disallowed deductions and income she failed to report. In all, the IRS said she owed an additional $89,090.78 in taxes for 1970, plus a negligence penalty of $4,454.54 for a total tax bill of $93,545.32.
In challenging the IRS claim, contending that she did not owe any more money, Miss DeVries said, she did not become a madam until Dec. 17, 1970, and that she spent the first three months of 1970 in Puerto Rico.
According to her petition filed in Tax Court:
"She was a prostitute in New York operating on a four-day-a-week basis. Larry Dreyfuss, the petitioner's boy friend, lived with her on weekends of Friday, Saturday and Sunday. Therefore…it is physically impossible for her to have had cash receipts for the year 1970 in excess of $120,000."
Stanley M. Baron is a Philadelphia stock promoter and management consultant who, with his wife, has been involved in a variety of stock dealings in a small businesses with names like Fantastic Fudge Inc. and Radiant Energy Inc. and the American Institute of Science and Technology.
Baron and his wife have been the target of an assortment of civil lawsuits filed in both state and Federal courts in at least three different states and the District of Columbia, all in connection with their business activities.
50% Fraud Penalty
They have been charged in the civil lawsuits with such practices as using non-transferable stock as collateral for bank loans. Mrs. Baron was the principal stockholder in a technical school that was padlocked by the IRS for nonpayment of taxes.
A self-styled "benefactor of local charities" and a lieutenant colonel in the Army Reserves, Baron, according to court papers, has carried on his business affairs through his wife as a straw party.
For her part, Mrs. Baron maintains that she is "an experienced business-woman who makes her own business decisions."
An IRS deficiency notice – a technical term for the letter a taxpayer receives stating he owes back taxes – dated May 5, 1973, informed Baron and his wife that they owed $210,107.81 in additional taxes and penalties for the year 1969.
That figure included a 50 percent fraud penalty, the IRS letter stated, because "it is determined that all or part of the underpayment of tax required to be shown on the return…is due to fraud."
The IRS letter said the Barons, who live in a $60,000-plus home at 49 Wistar Rd., Villanova, reported a taxable income in 1969 of $8,282.26, when in fact they should have declared a taxable income of $225,428.90.
According to the tax agents, Mrs. Baron failed to report income of $89,964.80 and short term capital gains of $4,397.50 in two stock transactions.
Other problems, IRS said, included Baron's failure to report as income $95,064.32 in indebtedness that was cancelled by a company he once ran and a $25,000 bank loan that the bank wrote off as uncollectible. IRS also said there was a computation error made by the Barons of $1,624.
Denying IRS Claims
In their petition filed in tax court contesting the IRS tax claim, the Barons said of Mrs. Baron's alleged unreported income of $89,964.80:
"The amounts received are subject to arrangements between the parties that completely refute the claims made by the IRS. (One company) received advanced previously in excess of amounts returned to Baron."
As for the unpaid bank loan, the Barons said:
"Stanley Baron was never informed of any forgiveness of indebtedness and furthermore both during 1969 and thereafter has been in communication with the bank, reaffirming this indebtedness and restating plans and expectations of repaying said loan."
IRS answered the Barons' petition by charging that the couple, "with intent to evade and defeat tax, failed to keep adequate books and records with respect to their income producing activities for the taxable year 1969."
The agency added that the Barons "fraudulently, and with intent to evade tax, omitted from their joint individual income tax returns filed for the taxable year 1969 taxable income of $217,146.64."
Sidney R. Korshak is a prominent and influential Chicago and Los Angeles attorney who numbers among his friends and acquaintances people like Jill St. John, Henry Kissinger, Dinah Shore and Mervyn LeRoy, the film director.
Over the years, Korshak's work generally has involved duties unrelated to a courtroom law practice, although he did represent Dinah Shore when she was divorced from actor George Montgomery.
It was Korshak, for example, who represented the owners of Las Vegas gambling casinos when they successfully fought off attempts by several unions to organize casino workers a few years ago.
It was Korshak who arranged for the sale of the Stardust Hotel and Casino in Las Vegas, bringing together the owners and the Parvin-Dohrman Company, the buyer. For his services, Korshak received a $500,000 finder's fee.
He also has served as a labor relations specialist for companies like Max Factor and Schenley Industries and race tracks to Chicago and on the West Coast.
He is described this way by his tax lawyer:
"Sidney R. Korshak is an attorney whose thriving and successful practice carries him from one coast to the other.
"Although the major portion of his practice during the years 1968, 1969 and 1970 was conducted in Chicago, he also had offices in West Los Angeles and New York, where he conferred with and entertained many of his affluent clients."
In a letter dated March 23, 1972, the IRS advised Korshak and his wife that they owed an additional $618,351 in taxes and penalties for the years 1968 to 1970. The figure included a fraud penalty of $187,658.
The IRS said that during the three-year period, Korshak reported a taxable income of $2,110,030 when he should have reported a taxable income of $2,621,911.
The tax agents disallowed a series of deductions that Korshak had claimed on his tax returns, including:
Business expenses of $47,493 for the use of his 12-room Los Angeles house, and $81,178 for his New York office, which was a suite in the Carlyle Hotel.
The agency also stated that Korshak had underreported the profits from his business by $280,875 and had failed to report capital gains of $134,762.
In their petition filed in tax court, the Korshaks – who live in the posh Drake Hotel on East Lake Short Drive in Chicago, overlooking Lake Michigan – are contesting the entire IRS claim for additional taxes and penalties.
The couple said, "Each income tax return in issue was prepared by a highly qualified and respected certified public accounting firm, and each return reflects the petitioners' correct taxable income and deductions for that year."
Delbert W. Coleman is a millionaire Chicago businessman and attorney and former chief executive officer of the Seeburg Corp.
Early in 1969, after leaving Seeburg, Coleman headed a group of investors who purchased a controlling interest in the Parvin-Dohrman Co., which owned Las Vegas gambling casinos and hotels.
Later in the year, the Securities and Exchange Commission filed a lawsuit charging Coleman and other investors with a variety of securities law violations.
They were accused of manipulating the price of Parvin-Dohrman stock and allowing certain persons to buy stock below the market price.
Coleman's group included actress Jill St. John; a Chicago and Los Angeles attorney, Sidney R. Korshak; and Korshak's brother, Marshall, a long-time Chicago politician. Which they gained control of the company, stock was selling at about $35 a share. A few months later, the trading price had passed $140.
At the same time the SEC brought its legal action, the late House Speaker John W. McCormack suspended one of his top administrative assistants, Martin Sweig, after Sweig was accused of approaching the SEC on behalf of Parvin-Dohrman.
Gossip Column Item
Sweig's intervention had been arranged by the late Nathan Voloshen, a Washington attorney and long-time friend of House Speaker McCormack. Coleman paid $50,000 to Voloshen for his services. The payment was arranged through Sidney R. Korshak.
Both Voloshen and Sweig were convicted in Federal court on other charges relating to influence-peddling out of House Speaker McCormack's office.
Over the years, Coleman's name has turned up regularly in Chicago gossip and society columns, most recently in the March 8, 1974, Chicago Daily News which observed:
"The most dazzling girl in City Hall memory was wed there Thursday, in revenue director Marshall Korshak's office. She's Karen Graham, a top New York model and cover girl. Karen married Del Coleman, Chicago businessman who wooed her back from TV's Davis Frost."
In a deficiency notice dated April 2, 1971, the IRS advised Coleman that he owed an additional $1,846,209.75 in taxes for the year 1967.
The IRS said Coleman reported a taxable income of $12,761.90 on his 1967 tax return, when he should have reported a taxable income of $3,708,573.86.
The tax agents said that Coleman had omitted from his return two items:
In his petition filed in tax court, Coleman is contesting the IRS tax claim, stating that the agency incorrectly interpreted a business transaction that involved the sale of 239,134 shares of stock he owned in the Pacific Coast Company.
Millions Promised Later
Coleman said the stock was sold to Enness Realty Corporation – another Coleman company – in exchange for $2,829.25 and a promissory note for $7.5 million, payable on or before Jan. 31, 1974.
Those, then are capsule summaries of four taxpayers whose cases now are before the U.S. Tax Court.
Whatever the merits of their individual cases – and it may be that IRS has made mistakes in all four cases and none of the taxpayers owes any additional taxes – the fact is that upper income taxpayers generally ** quite well in tax court.
But let's take a closer look at just one of those taxpayers, Stanley M. Baron, the Philadelphia stock promoter and management consultant. For he has been through the tax court once before.
The Barons have been associated, at one time or another, with about a dozen small companies, including International Resources Inc., Hickory Chef Inc., Educational Computer Corp., the American Institute of Science and Technology, EDP Technology, Steel Crest Homes Inc., Fantastic Fudge Inc., Radiant Energy Inc. and Photo Motion Corp.
Over the last several years, court records show that either Baron or his wife has been involved in a series of fascinating financial transactions related to these companies.
When the City Bank of Philadelphia went out of business in 1970, the bank was holding thousands of shares of essentially worthless stock as collateral for loans. The stock, which carried restrictions meaning that it could not be traded, was in the name of Doris B. Baron.
A typical transaction involved a $60,000 loan to a Leon Appleman, secured by 10,000 shares of Photo Motion Corp. stock in Mrs. Baron's name – stock that could not be sold. In all, City Bank lost about $360,000 in bad loans secured by stock bearing Mrs. Baron's name.
Mrs. Baron is one of 12 defendants in a $5 million civil lawsuit brought in Federal court in New York in connection with the sale of stock in Fantastic Fudge Inc.
The legal action was filed by an investment group which charged Mrs. Baron and others with participating in a scheme to manipulate the market price of the stock.
In another civil lawsuit filed in Federal court in Washington, D.C., Baron is accused of persuading an associate to invest $30,000 in a company called Radiant Energy Inc., a company which supposedly had patent rights to a novel food process for infusing hickory flavor into beef.
No Stock, No Money
The buyer said he gave $30,000 to Baron, but Baron refused to give him the stock and refused to return his money.
Mrs. Baron was secretary-treasurer and principal stockholder in the American Institute of Science and Technology, a Philadelphia trade school that went into bankruptcy proceedings in 1970. Among the score of creditors were students who had paid their fees in advance.
There was also a plan to sell stock in a venture calling for the exploration and mining of mercury in northern California.
In July 1969, a company called International Resources Inc. filed a registration statement with the Securities and Exchange Commission seeking to sell $3.2 million in stock to the public.
Mrs. Doris B. Baron was listed as treasurer-director of the year-old company and as owner of 26 percent (763,760 shares) of the company's stock.
According to the registration statement, the company planned to mine and explore for mercury in at least three counties, but its most important property was the 107-year-old Abbott Quicksilver Mine which had been producing mercury, off and on, since 1862.
Before SEC Approval
The Abbott Mine had not been worked since about 1961, the registration statement said, but International Resources was rehabilitating it and already had started construction of a plant to process the ore.
In addition, International Resources had gained title to other nearby mines – the Juniper Mine, the Petray Mine, the Eagle Rock Mine and the Esperanza Mine – as well as other land where mercury deposits might be found.
The proceeds from the stock sale were to be used to pay off the company's obligations and raise money for exploration and development.
Before the SEC acted on the proposed securities sale, promotes of International Resources already were selling stock in the company in the Bethlehem, Pa., area.
In an effort to circumvent Federal securities laws that prohibit the sale of stock to the public before SEC approval, the stock promoters devised a special sales plan.
The plan was described in a lawsuit against Mrs. Baron and other International Resources officers filed by two Bethlehem men who bought stock in the company:
"The scheme or device was to sell for cash, stock of International Resources Inc., but instead of delivering stock, the buyer received an escrow agreement wherein the defendants continued to be the registered owner of the stock and the plaintiff received a statement of escrow…"
2 Brothers File Suit
The stock sales took place in 1968 and 1969 and several hundred thousand dollars worth of the securities were sold to about 100 Bethlehem area residents.
Among the buyers were two brothers, Emmanuel D. and Nicholas D. Theodoredis.
From Dec. 19, 1968, to the May 16, 1969, the two brothers said they bought 46,250 shares of International Resources stock for $229,000 from various agents of a securities dealer in Bethlehem.
The brothers charged, in their lawsuit filed in U.S. District Court in Philadelphia, that the stock sale was illegal and they had been misled about the mercury mining company's future. The lawsuit charged:
"The defendants falsely represented to the public and to the plaintiffs that Bethlehem Steel Co. and U.S. Steel Co. were interested in the mercury operation in California; that the Bethlehem Steel Co. engineers had visited the site and were negotiating to acquire the same."
The Theodoredis brothers also said that officials of International Resources told interested stock buyers that:
"Within 90 days after the Securities and Exchange Commission approved the pending registration statement of International Resources Inc., a merger would occur between International Resources Inc. and Bethlehem Steel Co. and U.S. Steel Co. and that all persons having purchased investment stock would acquire stock from one of the aforesaid corporations."
To get them to buy the stock, the Theodoredis brothers said the defendants "falsely represented that the pending registration statement to the public would offer the stock at $7.50 per share while plaintiffs and others were allowed to purchase prior to the prospectus stock at from $4 to $5 per share."
Action Is Still Pending
Like other lawsuits filed against the Barons in Philadelphia, New York, Washington and Miami, the legal action brought by the Theodoredis brothers is still pending.
Also pending is one IRS lien for unpaid income taxes amounting to $24,321.26.
Back in 1968, the IRS sent a deficiency notice to the Barons, saying they owed $19,859.81 in additional taxes for the year 1965.
The couple filed a petition in tax court contesting the assessment and for two years the Barons and the IRS negotiated. Finally, on Oct. 16, 1970, the couple signed a stipulation agreeing to pay the full amount assessed by the IRS, plus interest.
And therein lies another IRS statistical secret.
The agency will not say whether the Barons ever paid the back taxes that they agreed to pay.
Indeed, neither the IRS nor the tax court will say what percentage of back taxes the court directs taxpayers to pay goes uncollected.
So while over the last five years, taxpayers in court cases were required to pay only 35 percent of the taxes the IRS originally said they owed, no one will say how much of that 35 percent is actually ever paid.
May Still Owe IRS
In the Barons' case, though, there is some indication their tax bill is still outstanding.
For on Aug. 18, 1972, the IRS filed a tax lien notice against the Barons for $24,321.26 in the Delaware County Courthouse in Media.
That lien covers unpaid taxes for 1965, the same year covered in the Barons' tax court case in which they agreed to pay $19,859.81, plus interest.