John Paulson

John Paulson was one of the few winners during the 2008 financial crisis. A couple of years prior, he saw the housing bubble coming and started buying derivatives that would profit when mortgages began to default. And when they finally did, he earned an astounding $15 billion for his fund and $4 billion for himself personally.

Of course, a big payday also comes with a commensurately large tax bill, but Paulson took advantage of a provision that at the time allowed him to defer taxes on that gain until 2018. But the time has come, and this past April he paid a total of $1.5 billion in federal income taxes, which is probably one of the largest personal tax bills in history.

As you can imagine, the logistics of paying a sum that large can be challenging: On top of choosing which assets to liquidate, the actual transfer of possession to the Treasury can also be tricky. He could simply wire the money, but then he would forgo interest on the time it takes the government to process his payment.

On the surface, that may seem like a silly concern. But consider this—even assuming a modest interest rate (1%) over a short process period (3 days), Paulson could accrue over $80,000 in interest. He may be a billionaire, but eighty grand is still eighty grand. And if there is a way to pay a bill while simultaneously earning that much money, you do it.

The other almost laughable concern is physically having enough space on the check to write the amount due—after all, that’s a lot of zeros. And apparently, the IRS won’t accept checks greater than $100 million. So it looks like Paulson may be writing several checks for $99,999,999.

He’s paying his fair share, but leave it to a tax hero to get a ten-year deferment and somehow make money off paying the IRS.

Josh Norris
Joseph Nunan

Over sixty years later, he’s just an ironic blip in American history, but in 1952, it was big news that former IRS Commissioner Joseph Nunan was convicted of tax evasion. That’s right—the country’s primary tax law enforcer was a tax cheat.

Over several years in the 1940s, he hid over $90,000 of income, $1,800 of which he won from a bet that Harry Truman would win the 1948 presidential election. He destroyed evidence and dodged investigators, but ultimately, the government prevailed in its case against Nunan. As a result, he spent five years in jail and paid $15,000 in fines.

But a deeper dive past the irony reveals something even more sinister. Apparently, much of the hidden income came from fees paid by tax litigants for phone calls on their behalf to the IRS. As former commissioner, Nunan still had pull within the Service to make tax problems go away. So he was convicted of tax evasion, but he was guilty of far more than that.

Josh Norris
Willie Nelson

He’s been making records for over 60 years and has cross-generational appeal like no other musician in history. But second to music, Willie Nelson is infamous for both his recreational use of marijuana and his tax troubles with the IRS. So what exactly happened to earn him that reputation?

In 1984, Nelson first came under investigation as the result of his investment in a tax shelter, which was recommended to him by a very large accounting firm. The result of that investigation was a tax bill for close to $17 million, but his lawyers negotiated it down to $6 million (the difference was primarily interest and penalties).

Unfortunately, Nelson didn’t have $6 million either. So in 1990, federal agents raided his home and took virtually everything he owned (except his guitar, Trigger), but it still wasn’t enough to cover his tax liability. So the IRS struck an unprecedented deal with the musician for his release of a compilation album with a profit-sharing agreement between Nelson and the US Treasury.

The album, entitled “The IRS Tapes: Who’ll Buy My Memories?”, was not quite as successful as everyone had hoped. But between those record sales and settlement money from his lawsuit against the accounting firm that originally recommended the tax shelter, Nelson finally cleared his debt with the IRS.

Josh Norris
George Steinbrenner

It’s not so much what he did but what Congress didn’t do. The estate tax went away in 2010, even though Congress brought it back to life in 2011 and never meant for it to lapse in the first place. I know that estate taxes are a hot button issue, but politics aside, there is something to be said for consistency because it’s hard to make rational decisions when the rules to the game keep changing.

But sometimes those changes end up working out in your favor—such is the case with George Steinbrenner, who was the owner of the New York Yankees and worth an estimated $1.1 billion when he died July 13, 2010. So based on estate tax rates that took effect January 1, 2011, his family saved around $600 million in taxes. In other words, he picked a good year to die.

Josh Norris
Michael Milken

In financial history, he’s known as the “Junk Bond King.” He revolutionized the market for high-yield bonds during the 1980s, but he later ended up serving two years in prison and paying $600 million in fines after he was indicted for racketeering and securities fraud. He got greedy, broke the rules, and paid for it. Sorta.

But he is still a very wealthy man, and apparently, he is a generous philanthropist. Although, a recent investigation by the Wall Street Journal raises questions about the opportunistic timing of his philanthropic gifts, so you have to wonder—is he getting greedy and breaking the rules again?

Donating stock to a charitable organization is a great move if you have appreciated securities and a cause that you want to support. There is no tax on the gain, and you receive a deduction equal to the fair market value of the stock on the date of the gift. So what tax game could you possibly play? Well, if you just happen to give away the stock before a dramatic fall in value, you come out way ahead.

That’s exactly what Milken did in 2013 when he donated $27 million of K12 Inc. stock to charity, which then lost 38% of its value less than a month later. Coincidence? Sure, maybe. But he did the same thing back in 2003 when he donated $17 million of another company, which lost 25% of its value a little over a month later.

But Milken is not alone. In fact, the Wall Street Journal recently investigated 14,000 donations to private foundations (public charities do not have to identify their donors) and found that stock donations before a loss of 25% or more are three times as likely as donations before a gain of the same amount. Statistically, it is very doubtful that those results are random.

At the end of the day, it’s still a charitable contribution. But you have to wonder if he’s reverted to his old ways of breaking rules to come out ahead.

Josh Norris