I continue
to be surprised when people use IRS forms as retaliation.
The form of
choice tends to be a 1099. The intent – of course – is to provoke an IRS audit.
There was an
incessant legal battle several years back at a Cincinnati CPA firm that
detonated. I happen to know the parties involved, and I was interested in the
use of 1099s as weapons of war. The senior partner in the imbroglio however was
not amused with my interest, seemed surprised that so much of the combat was
available to one who could search legal records, and told me where to take a
long walk. Quite the charmer.
I am reading
a case involving doctors in Illinois. There was an anesthesiologist (Nicholas
Angelopoulos - “Nick”) who went into business with an orthopedist (Hall). Hall owned a company (Keystone) which
employed Nick and two other doctors.
There was a
cost-sharing arrangement among the doctors, which is common enough but which
seemed to change without much explanation.
There was
question whether Nick and the other two doctors were ever owners of Keystone
(an S corporation). There were e-mails, draft shareholder agreements and
meeting agendas, and the doctors were charged for equipment purchased by the
practice. Dr Hall, however, maintained
that he was the only shareholder.
OK.
There was an
LLC called WACHN, comprised of our four doctors plus another and which
purchased medical condominiums. Each of the doctors kicked-in $110,000 and the
LLC borrowed the rest, although the doctors had to personally guarantee the
debt. Nick said that he never signed the operating agreement and that his
signature was forged by use of a signature stamp.
Odd.
Each of the four
doctors was required to contribute $100,000 towards a “cash reserve” in
Keystone’s bank account. Hall argued that it was necessary to avoid paying
checking fees, and that – eventually – there would be more money to distribute
to everyone. Nick thought that he was paying for his ownership in Keystone.
COMMENT: Folks, if your bank requires hundreds of thousands of dollars to avoid fees, you really need to consider another bank.
There were
questions about how the numbers were calculated and allocated among the doctors
in Keystone, but Hall assured the doctors that the practice manager (Hall’s
brother in law, by the way) had assured him everything was in order.
I feel
better.
In 2007 two
of the doctors left.
Later in
2007, Nick told Hall that he too was leaving.
In March,
2008 Hall gave Nick a hand-written sheet stating that Nick owed $151,769. Hall,
being a good sport, said that he would offset the $110,000 that Nick had put
into WACHN, but Nick had to transfer his interest to Hall. Hall would then – back
to that good sport thing – “forgive” the remaining $40,769. Hall did not
address removing Nick as a guarantor for WACHN’s debt, though.
Nick told
Hall where to go.
Keystone
issued Nick a 1099 for $159,577.
Hall said
that Nick still owed $100,000 toward the Keystone cash reserves and $28,000
towards the WACHN buy-in. There was also a $38,010 bonus that Hall was paying Nick
on the way out, being a good sport and all. Nick responded that he had paid
everything he was supposed to pay, and – by the way – what bonus?
Sure enough,
in 2011 the IRS swooped in on Nick.
Mission
accomplished.
Turns out the
$38,010 bonus was right. That however left a bogus $121,567 on the 1099.
Let’s fast
forward through the rest.
Nick sued Hall
and Keystone. There were several lawsuits, but we are concerned here with the tax-related
lawsuit.
The Court
decided that Keystone and Hall filed a fraudulent 1099 because of “spite
arising out of the larger disputes between the parties.” Code Section 7434
allows for damages in this circumstance, and the Court gets to decide.
The Court
awarded Nick damages of $178,954.
Our case
this time was Angelopoulos v Keystone
Orthopedic Specialists.
