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Reality of not paying taxes

Published: May 18, 2006 6:35 p.m. ET


First 'Survivor' winner sentenced to 51-month prison term


Tax columnist

LOS ANGELES (MarketWatch) -- On the "Survivor" season finale Sunday Aras Baskauskas won $1 million. Instead of congratulations from show host Jeff Probst, Baskauskas received this valuable piece of advice: "Pay your taxes."

Why would Probst spoil a perfectly good victory celebration by bringing up taxes? Ask Richard Hatch, the winner of the first "Survivor" reality show.

On Tuesday, Judge Ernest Torres of the United States District Court in Rhode Island sentenced Hatch to 51 months in prison for tax evasion. Hatch was convicted in January for not paying taxes on his earnings from "Survivor," a radio show, rental income and other income from 2000 and 2001. Hatch owes the IRS nearly $475,000 in taxes -- plus interest and penalties -- on about $1.4 million in income.

Hatch is unlikely to make the payment; he reportedly spent all the money before the IRS charged him in the tax case. Hatch has contended that either CBS, the network that aired the show, or Survivor Entertainment Group, the production company, are responsible for the taxes.

According to Thomas Connell, spokesman for the U.S. Attorney's office, the government is expecting Hatch's attorney, Michael Minns, to file an appeal. Minns' publicist Ron Mitchell confirms that there will be an appeal. The grounds for appeal remain a mystery; Minns could not be reached for comment.

Connell was asked if the defense used Internal Revenue Code section 3402, claiming that CBS and SEG were really Hatch's employers and should have properly deducted all the taxes on that basis. Connell replied that there had been explicit contracts signed spelling out that all the contestants were responsible for their own taxes -- that none of them were employees of CBS or SEG.

CBS issued Hatch a Form 1099-MISC, reporting the $1 million as other income in Box 3. The instructions for Box 3 call for entries to be made for, among other things, prizes and awards that are not for services performed, the fair market value of merchandise won on game shows and amounts paid to a winner of a sweepstakes not involving a wager.

If Hatch had received the $1 million remuneration as an employee of CBS net of taxes then he should have received a W-2 reporting gross wages greater than $1 million with entries reporting the taxes withheld, tax experts said.

Sometimes, a good tax professional can argue that someone who's been treated by an employer as a freelancer is really an employee. In fact, IRS has a special form for this -- Form SS-8, which requests a determination of employee status.

Neil Becourtney, a certified public accountant and tax partner at J.H. Cohn LLP in Roseland, N.J., says that strategy wouldn't have worked for Hatch either. An employee normally receives various fringe benefits from the employer -- paid sick days, holidays and vacation days, payment by the employer of group medical coverage, ability to participate in an employer retirement plan such as a 401(k) plan, etc. Hatch was never offered any such fringe benefits that might make him think he was a CBS employee.

"In what circumstances does a third party pay the taxes resulting from income received by a payee just for the heck of it?" asked Becourtney.

The same question can be asked in regard to the $321,000 payment from a Boston radio station that Hatch also failed to pay taxes on. "Why would Hatch keep expecting others to be paying his income tax?" Becourtney said.

Although Hatch reportedly borrowed the money for his initial legal fees, when Minns came on the scene there was no money left. So he defended the case pro bono. That eliminates the discussion of whether or not Hatch's substantial legal fees might be deductible.

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