Joseph J. House had worked as an IRS agent for five years and prepared tax returns for more than twenty-eight. He met clients in his Lockport, Ill., basement home office.

His son Tim collected Walt Disney characters. House, also intrigued with the collection, enjoyed sharing his affinity with others. After Tim went to college, his collection was displayed in House's basement.

The former agent's evasion scheme involved improper deductions, mixing corporate money with his own and moving funds among his three inactive corporations to confuse future auditors. One corporation (JJH) reported income and expenses from the accounting business and deducted his personal expenses. He reported the balance of his income on his own return. As part of the plan, his wife didn't file a return; he filed as married filing separately.

The IRS had no problem unraveling the circuitous structure House had built. After it increased his and JJH's taxes and added penalties totaling $97,104, he appealed to the tax Court.

Consistant with his love for the Magic Kingdom, House filed his Tax Court petition on a diskette with Mickey Mouse's picture. The judge said the Goofy deductions are as "fantastic as the Disney characters themselves." JJH had paid Tim for leasing Mickey, Donald and Goofy. He added that House devised a "deceitful plan to divert and disguise" his deductions. He commingled business and personal expenses and treated JJH's checking account as his own and then boasted at trial: "My home, my style of living is paid for by JJH." He argued that living expenses when paid by an employer are deductible and not income to the employee. The judge said, the former agent's argument is meritless and "he knows it."

Using a corporation to disguise the deduction of personal expenses and not maintaining records separating business from personal expenses indicates fraud. The judge said it's surprising that House admitted trying to hide assets from the IRS and bragged that he formed one corporation just to do this. He said House's experience as an agent gives him insight into audit techniques. As a subterfuge, the accountant had included, in JJH's gross income, transfers from the other corporations to appear to over report gross income. This didn't increase taxable income, however, because House manipulated the expense numbers to offset it.

In case he got caught, House planned to transfer assets to his wife to keep the IRS from seizing them. To avoid tax liability, she had not filed jointly with him. This scheme accomplished nothing; the IRS had authority to get the assets back from her.

The judge agreed with the IRS as to taxes and penalties.

The judge added that House's fraudulent scheme was not just a family affair: he recommended it to others. He set up 163 corporations for other taxpayers and proudly stated, "it was good advice then and I stand by it now." In at least one case where the IRS challenged a corporation's deduction of personal expenses, he advised his client not to challenge the agency. He explained to his client: "Hey, we got away with it for ten years, it's time."

The judge's retort to House, "it's time."

The Moral: : M-I-C- "See you in tax court" K-E-Y- "Why? because you schnookered the IRS." M-O-U-S-E

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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Released 5-29-2000