Law prof: Tax debt for OJ lawyer meets time threshold for discharge

By Jamie Kelly | Jul 13, 2016

PORTLAND, Maine – One of the superstar lawyers who was a member of O.J. Simpson’s “dream team” has filed bankruptcy to discharge millions of dollars in taxes owed and may fall into the category of people allowed to do so, at least in terms of how long the debt has existed, according to a law professor.

F. Lee Bailey filed for bankruptcy late last month to discharge more than $5 million in taxes the Internal Revenue Service says he owed from a complicated case in the 1990s that ended up getting him disbarred. Because he’s owed the taxes for so long, they might be dischargeable in bankruptcy, Jeffrey Kahn, a law professor who teaches tax law at Florida State University’s School of Law, said.

“There is a conception that most tax debt isn't dischargeable, and I think most debt isn't dischargeable,” Kahn told the Florida Record. “But it's not true that all federal income tax debts are nondischargeable in bankruptcy. They've got specific rules about when it can be dischargeable. Looking quickly at the fact, but he meets some of the requirements. They've got to be fairly older – I think the requirement is three years. It has to be over 240 days since the IRS tried to collect the taxes. The general rule is that you have the chance to discharge them if it's older than three years, you filed a return and you didn't try to cheat. So if you filed a fraudulent return, you're not going to be able to discharge those. In terms of the times, though, it looks like he met (the requirements).”

The debt stems from a 1994 case where Bailey represented a man convicted of drug smuggling and money laundering. Bailey ended up holding shares of stock in a pharmaceutical company in a Swiss bank account in his own name at the request of the government. The government and IRS later accused him of mishandling the money, a charge Bailey has fought ever since.

Those accusations led to his disbarment in Florida and Massachusetts in 2001, and, eventually, to a finding by the IRS that he owed $1.9 million. With penalties and interest, that has risen to $5.2 million.

Kahn said that even if Bailey does get the debt discharged, he might still end up having to pay the government.

“If the IRS filed a tax lien against him, and I'd be shocked if they didn't, you can't discharge the lien,” Kahn said. “So even if you get the debt discharged, the lien stays. Now, he may not have any assets, so it may be that lien is useless because there may be nothing to attach to. But if he has assets that they've put a lien on, even if he gets rid of the debt, when he sells those assets, he'll have to satisfy the lien. That won't go away with bankruptcy.”

Bailey said in an interview with the Portland Press Herald that the IRS has refused to settle with him because he’s a celebrity, and Kahn said that, following a case involving boxer Joe Louis, the IRS has been reluctant to deal with celebrities out of fear of seeming to give them special treatment or of giving other people reason to argue that they can pay less on taxes owed.

But, Kahn said, this case might be a way for Bailey to show the government he simply doesn’t have the money. In his filings, Bailey listed few assets, the largest of which was a condominium with a mortgage.

“He may be saying to the IRS, 'Here's my assets. You can see, you're not getting the money out of me, so let's come to a settlement,'” Kahn said “This may be the signal to start a compromise here. Even if it's not legally dischargeable, this may be the start of a settlement.”

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