'This is the central principle of our system of justice, a pillar of our civil liberties. Yet the Internal Revenue Service demands of American citizens that they supply proof of their innocence. Wrong, Mr Novac. Wrong." Full volume. "If you have proof of my guilt, I demand to see it. Now!" He kept his cool, refusing to be baited or drawn into a shouting match, which was what I wanted for the record. He was a pro. "Mr Sutter," he said, "like it or nol, in matters of civil tax delinquency, the burden of proof is on you." "All right," I said coolly, "then listen carefully. It was my intention, which I can demonstrate in tax court, to build a house. Interestingly, the new tax law allows twenty-four months lo build or buy a house in order to avoid a capital gains tax. So you see, Mr Novac, nothing is carved in stone, least of all the tax code, which is rewritten by little elves every night. So there you have my position in this case, Mr Novac. I have nothing further to say, but if you want to fill the remainder of the hour I have allotted lo you, you can sit there and read the United States Tax Code while I work."
Mr Novac got the message and stood. "Mr Sutter, by your own admission, and based on my research, you are liable for capital gains taxes, plus interest and penalties." Mr Novac look a piece of paper from his pocket, scanned it, and said, "By my calculations, if you cannot show receipts and cancelled cheques for capital improvement deductions, then the capital gain in the year you sold your house was $310,000. Taking into account the tax structure at that time, plus the interest and penalties – negligence penalties, failure-to-file penalties, and a civil fraud penalty – you owe the United States $314,513." Now I wished I was sitting. I took a deep but discreet breath. This was the moment Mr Novac had been waiting for – perhaps for months – and I was not going to give him anything to savour about it. I said, "And I still come up with zero."
He handed the paper to me, but I refused to take it, so he left it on my desk.
Mr Novac said, "Your intention to legally avoid the tax is irrelevant." "Wrong," I replied. "In a civil tax case, my intent is very relevant. Where did you go to school?" Mr Novac only smiled, which made me uneasy. I continued, "And don't expect me to agree to a negotiated settlement. My position is that I owe no taxes." I added, "And if you try to seize any of my assets, I will block you and sue you." This threat, unfortunately, was so hollow that Mr Novac openly smirked. The IRS has nearly total power to take things from you, and you have to go to court to get them back. I added, "I'm calling my congressman as well." Mr Novac seemed not impressed. He informed me, "Normally, Mr Sutter, I would accept your explanation for the error if you would accept my figures. But as you are an educated man, a tax attorney at that, then the IRS is taking the position that this was not an error or oversight, but a case of premeditated tax evasion. Fraud. I must advise you at this time that, in addition to the civil penalties, criminal charges are being contemplated."
I could smell that coming, and when a cop says "criminal charges," I don't care who you are, how much money you have, or how many law degrees are hanging on your wall, your heart does a thump. I actually know a few men with more power and money than I have who were sent away for a while, as they say. I know two who have come back and they are not the same men. I looked Mr Novac in the eye. "Grown men do not wear cotton suits."
For the first time, Mr Novac showed some emotion; he turned red, but not, I'm afraid, with embarrassment over his poor attire. No, he was really pissed off now. He got his colour under control and said, "Please prepare for a full audit of all your tax returns from 1979 to the present, including this year's return, which you have not yet filed. Have all your documentation and records available for an auditor, who will contact you this afternoon. If you do not voluntarily turn over these records, we will subpoena them."
My tax records were in Locust Valley, but I'd worry about that this afternoon.
Now I know what it feels like to be mugged. I walked to my door and opened it. "And no one in the Free World wears synthetic leather shoes, Mr Novac. You must be a spy."
"I am a vegetarian," he explained, "and will not wear leather." "Then for God's sake, man, have the decency to wear canvas tennis shoes or rubber galoshes, but not plastic. Good day."
He left without another word, and as I was closing the door behind him, a word popped into my mind and I called out, "Schmuck!" Louise almost dropped her dentures. I slammed the door shut.
Despite my cool, patrician exterior, I was somewhat disturbed over the prospect of coughing up about a third of a million dollars plus spending time in a federal prison. I poured a glass of ice water from a carafe, went to the window, and opened it, letting in some of the last breathable air that still exists at this altitude in Manhattan.
So, there it was; the Great Upper-Middle-Class Nightmare – a tax slip-up in six figures.
Now listen to me feel sorry for myself. I work my butt off, I raised two children, I contribute to society and to the nation, I pay my taxes… well, apparently not all of them, but most of them… and I served my country in time of war when others found ways to avoid their national duty. This is not fair. Now listen to me build up rage. The nation is overrun with drug dealers and Mafia dons who live like kings. Criminals own the streets, murderers walk free, billions are spent on welfare, but there's no money to build jails, congressmen and senators do things that would put me behind bars, and big corporations get away with tax scams of such magnitude that the government would rather compromise than fight. And they call me a criminal? What the hell is wrong here? I got myself under control and looked down into the street: Wall Street, the financial hub of the nation from which radiated the spokes of power and money that held up the rim of the world. And yet there was this perception out in the hinterlands that Wall Street was un-American, and the movers and shakers who inhabited it were parasites. Thus, Mr Novac entered Wall Street with a generally bad attitude, and I suppose I didn't do much to change his mind. Maybe I shouldn't have remarked on his plastic shoes. But how could I have possibly resisted? I mean, I learned something at Yale. I smiled. I was feeling a little better.
Now listen to me think rationally. The criminal charge would be difficult to prove, but not impossible. A jury of my peers, drawn from my friends at The Creek, would surely find me not guilty. But a federal jury, constituted in New York City, might not be so sympathetic. But even if I could avoid or beat the criminal charges and fines, I was probably on the hook for… I looked at the paper on my desk… $314,513, which was actually more than the entire so-called profit on the sale of the house. That is a lot of money, even for a successful Wall Street lawyer. Especially an honest one.
Also, Susan theoretically was on the hook for half of that. Though we file separate tax returns because of her complicated trust fund income, and because that is what our marriage contract stipulates we do, half the East Hampton house is hers, and she should have picked up half the supposed capital gain. But of course, even in this age of women's equality, Novac was talking jail to me, not Susan. Typical.
Anyway, thinking rationally, I knew I should call the Stanhopes' law firm and advise them of this problem. They'd probably go to the IRS and offer to help screw me in exchange for immunity for their little heiress client. You think marrying into a superrich family is all fun and profit? Try it. Anyway, the next thing I had to do was have one of the partners here handle my tax case – you can't be objective when it's your own money – and then I should think about actually retaining a criminal attorney for myself.