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Loophole Lotto

Next time you write a check to the IRS, you may wonder whether you really have to.

Death and taxes may be the only sure things, but don't tell that to Dick Simkanin or Al Thompson. Both have decided to do away with the hassle of income tax. Why? They say it's to keep from breaking the law.

After years of scrutinizing tax regulations, Simkanin, 56, and Thompson, 54, came to a few conclusions, the most notable being a controversial reading of the Internal Revenue Code's section 861 as saying that only foreign-owned businesses are liable to pay federal income tax. Eventually, both entrepreneurs made a decision: no paying the IRS and no withholding from employees' paychecks.

"If I were to sign another one of those tax forms, knowing what I know now, it would be a felony," says Simkanin, who owns a $3 million Bedford, Texas, company, Arrow Custom Plastics, that got out of the tax game in January 2000.

Simkanin and Thompson aren't alone. At least 18 other U.S.-owned businesses have publicly acknowledged using the so-called "861 position" to justify nonpayment of income tax and are mentioned by name on Arrow's Web site.

One of those companies is Thompson's. The IRS has seen neither payment nor evidence of withholdings from Shasta Lake, California-based Cencal Aviation Products since July 2000. But like Simkanin, Thompson insists he's not a scofflaw. "I pay all lawful taxes," he says. "I'm a real middle-class type of guy, not a political extremist. I just want the tax laws applied the way they are written."

To the IRS, however, these companies are simply tax evaders, and the agency says it's actively investigating these cases. "We don't want to see taxpayers caught in a bind because [their] employers fail to properly withhold taxes," Commissioner Charles O. Rossotti said in a recent statement.

Indeed, such radical actions force employees into an unenviable position: They either agree with their employer that the company is acting lawfully, or disagree and pay Uncle Sam on their own time, at their own expense. Some employees have opted to jump ship rather than make the decision. To date, Simkanin has lost two of his 48 employees; Thompson, two of 28.

Neither employer was surprised. "You can understand people's fear," admits Thompson. "It's like telling them the earth isn't flat."

But employee loss or no, both entrepreneurs intend to maintain their tax-free stance. "We're trying to get people to read the law and understand," Thompson says, "then force our politicians to do the right thing."

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This article was originally published in the July 2001 print edition of Entrepreneur with the headline: Loophole Lotto.

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