"Most of What Follows Is True"

Robert Redford has thrilled movie audiences for decades. He's breathed life into iconic roles like the outlaw Sundance from Butch Cassidy and the Sundance Kid. He's won two Oscars, and even been awarded French Knighthood in the Legion D'Honneur. (It's been a long time since French knights have struck fear in anyone's heart, but it can't hurt when it comes to charming les cinephiles in Paris.)

But Redford is far more than just a pretty face on a screen. In 1978, he founded the Sundance Film Festival near his hometown in Utah, establishing himself as the "godfather of indie film." In 1996, he launched the Sundance Channel, dedicated to airing independent feature films, world cinema, documentaries, and similar programming. And in 2005, he sold part of his equity in that venture — which brings us to today's story.

Redford didn't hold his interest in the channel in his own name. (That would have been be too easy.) Instead, he owned 100% of a New York-based limited liability company called Sundance T.V. That entity owned 85% of an "S corporation" named Sundance Television, Ltd.. And that entity, in turn, owned Redford's interest in yet another entity, called Sundance Channel LLC, which owned the actual channel. (It's just like those little Russian "nesting dolls," except instead of dolls we're talking business entities.)

Now, all of those entities are "pass-throughs," which means that instead of paying tax themselves, they pass their gains and losses directly through to their owners. So, when Redford sold 20% of his interest in the TV channel, his gain passed through Sundance Television, Ltd., to Sundance T.V., to Redford himself. Redford paid his tax on his federal 1040 and his Utah state return, and called it a day.

But Redford missed one thing. That final entity, Sundance T.V., was organized in New York, not Utah. And the New York Department of Taxation and Finance can be just as dogged as the posse that tracked Butch and Sundance through the Wyoming mountains. So just imagine Redford's surprise when New York sent him a bill last May — eight years after the sale — stinging him for $845,066 in unpaid tax plus another $727,404 in interest!

So now Redford and New York are headed to court. Redford is asking the Court to declare that New York's own constitution prohibits the Empire State from taxing him on his gain. That constitution provides that assets in New York that aren't used to carry on an active business are "deemed to be located at the domicile of the owner for purposes of taxation." Redford concedes that, yes, the LLC was established in New York. But he argues that he didn't use his ownership interest in any of the "nesting doll" entities to carry on a trade or business in New York. Nor did he have "any property, payroll or receipts located in or deemed attributable to the conduct of a trade or business" in New York.

Ironically, New York has already said that Redford doesn't owe them any state tax for selling therest of his interest in Sundance to Showtime in 2008. So you'd think he ought to be able to avoid the 2005 bill, too. But anything can happen in court, and we'll just have to wait and see if Redford can shoot his way out this time.

Getting a surprise tax bill isn't any more fun than a surprise visit from the Pinkertons. But you don't need to run to Bolivia to avoid it. You just need a plan. It's easier than robbing a train, and a whole lot safer, too! So call us when the tax man gets close. And remember, we're here for the rest of your Hole in the Wall Gang, too!