RERI-ng Its Ugly Head - Part Two

Let’s continue our story of Stephen Ross, the billionaire owner of the Miami Dolphins and of his indirect contribution of an (unusual) partnership interest to the University of Michigan.

What made the partnership interest unusual was that it represented a future ownership interest in a partnership owning real estate. The real estate was quite valuable because of a sweet lease. When that ship came in, the future interest was going to be worth crazy money.

That ship was a “successor member interest” or “SMI.”

We talked about the first case, which went before the Tax Court in 2014 and involved legal motions. The case then proceeded, with a final decision in July, 2017.

COMMENT: Yes, it can take that long to get a complex case through Tax Court. Go after Apple, for example, and your kid will likely be finishing high school before that tax case is finally resolved.

The SMI was purchased for $2.95 million.

Then donated to the University of Michigan for approximately $33 million.

COMMENT: This is better than FaceBook stock.

After two years, the University of Michigan sold the SMI (to someone related to the person who started this whole story) for around $2 million.

OBSERVATION: Nah, FaceBook stock would have been better.

Now RERI was in Court and explaining how something that was and will be worth either $2 or $3 million is generating a tax deduction of $33 million.

And it has to do with the SMI being “part of” of something but not “all of” something.  SMI is the “future” part in “all of” a partnership owning valuable leased real estate in California.

The concept is that someone has to value the “all of” something. Once that is done, one can use IRS tables to value the “part of” something. Granted, there are hoops and hurdles to get into those tables, but that is little obstacle to a shrewd tax attorney.

Ross found a shrewd tax attorney.

Virtually all the heavy lifting is done when valuing the “all of” part. One then dumps that number into the IRS tables, selects a number of years and an interest rate and – voila! The entrée round, my fellow tax gastronomes, featuring a $33 million tasty secret ingredient.

The pressure is on the first number: the “all of.”

This will require a valuation.

There are experts who do these things, of course.

Their valuation report will go with your tax return.  No surprise. We should be thankful they do not also have to do a slide presentation at the IRS. 

And there will be a (yet another) tax form to highlight the donation. That is Form 8283, and – in general – you can anticipate seeing this form when you donate more than $5,000 in property.

There are questions to be answered on Form 8283. We have spoken about noncash donations in the past, and how this area has become a tax minefield. Certain things have to be done a certain way, and there is little room for inattention. Sometimes the results are cruel.

Form 8283 wants, for example:

·      A description of the property

·      If a partial interest, whether there is a restriction on the property

·      Date acquired

·      How acquired

·      Appraised fair market value

·      Cost

I suspect the Court was already a bit leery with a $3 million property generating a $33 million donation.

And the Court noticed something …

The Form 8283 left out the cost.

Yep, the $3 million.

Remember: there is little room for inattention with this form.

Question is: does the number mean anything in this instance?

Rest assured that RERI was bailing water like a madman, arguing that it “substantially complied” with the reporting requirements. It relied heavily on the Bond decision, where the Court stated that the reporting requirements were:

“… directory and not mandatory”

The counterpunch to Bond was Smith:

“ the standard for determining substantial compliance under which we ‘consider whether … provided sufficient information to permit … to evaluate the reported contributions, as intended by Congress.’”

To boil this down to normal-speak: could RERI’s omission have influenced a reasonable person (read: IRS) to question or not question the deduction. After all, the very purpose of Form 8283 was to provide the IRS enough information to sniff-out stuff like this.

Here is the Court:

“The significant disparity between the claimed fair market value and the price RERI paid to acquire the SMI just 17 months before it assigned the SMI to the University, had it been disclosed, would have alerted respondent to a potential overvaluation of the SMI”

Oh oh.

“Because RERI failed to provide sufficient information on its Form 8283 to permit respondent to evaluate its purported contribution, …we cannot excuse on substantial compliance grounds RERI’s omission from the form of its basis in the SMI.”

All that tax planning, all the meetings and paperwork and yada-yada was for naught, because someone did not fill-out the tax form correctly and completely.

I wonder if the malpractice lawsuit has already started.

The Court did not have to climb onto a high-wire and juggle dizzying code sections or tax doctrines to deny RERI’s donation deduction. It could just gaze upon that Form 8283 and point-out that it was incomplete, and that its incompleteness prejudiced the interests of the government. It was an easy way out.

And that is precisely what the Court did.

Is There Any Point To Middle Class Entitlements?

I was reading a Bloomberg article last week titled “Those Pointless Upper-Middle-Class Entitlements.” It is - to be fair - an opinion piece, so let’s take it with a grain of salt.

The article begins:

Let’s talk about upper-middle-class entitlements, the subsidies that flow almost entirely to those in the upper fifth or even tenth of the income distribution. You know, the home mortgage interest deduction and the tax subsidies for 401(k)s, IRAs and other retirement plans.

Then we have a spiffy graph: 

I am confused with what is considered a “tax break.”

The true “tax break” here is the earned income credit. We know that this began as encouragement to transition one from nonworking to working status, and we also know that it is the font of massive tax fraud every year. The government just sends you a check, kind of like the tooth fairy. An entire tax-storefront industry has existed for decades just to churn-out EIC returns. Too often, their owners and practitioners are not as … uhh, scrupulous … as we would want.

And this is a surprise how? Give away free money to every red-headed Zoroastrian Pacific Islander and wait to be surprised by how many red-headed Zoroastrian Pacific Islanders line up at your door. Even those who are not red-headed, Zoroastrian or Pacific Islander in any way. 

Here is more:

Of course, we wouldn’t want to take away all of those tax expenditures, would we? The earned income tax credit and the Social Security exclusion, for example, are targeted at people with pretty low incomes.

Doesn’t one need to have income before receiving an INCOME TAX expenditure?

Then we have these bright shiny categories:

·       Defined contribution retirement plans

·       Defined benefit retirement plans

·       Traditional IRAs

·       Roth IRAs

Interesting. One would think that saving for retirement would be a social good, if only to lessen the stress on social security.

We read:

Wealthy people who would save for retirement in any case respond to subsidies by shifting assets into tax-sheltered accounts; the less wealthy don’t respond much at all.

It makes some sense, but don’t you feel like you are being conned? Step right up, folks; make enough money to save for retirement and you do not need a tax break to save for retirement.

When did we all become wealthy? Did someone send out letters to inform us?

Did you know that the majority of income tax breaks are claimed by people with the majority of the income?  

Think about that one for a second, folks.

This following is a pet peeve of mine:

·       Deferral of active income of controlled foreign corporations

We have discussed this issue before. Years ago, when the U.S. was predominant, it decided that U.S. corporations would pay tax on all their earnings, whether earned in the U.S. or not.

There is a problem with that: the U.S. is almost a solo act in taxing companies on their worldwide income. Almost everyone else taxes only the profit earned in their country (the nerd term is “territoriality”).

Let’s be frank: if you were the CEO of an international company, what would you do in response to this tax policy?

You would move the company – at least the headquarters - out of the U.S., that’s what you would do. And companies have been moving: that is what "inversions" are.

So, the U.S. had no choice but to carve-out exceptions, which is how we get to “deferral of active income of controlled foreign corporations.” This is not a tax break. It is a fundamental flaw in U.S. international taxation and the reason Congress is currently considering a territorial system.

By the way, how did these tax breaks come to be, Dudley?

Why do these subsidies continue nonetheless? Mainly, it seems, because they’ve been granted to a sizable, influential population who, it is feared, will fight any effort to take them away. 

Politicians giving away money. Gasp.

But mainly it’s the millions of upper-middle-class Americans who, like me and my family, are beneficiaries of tax subsidies for home mortgages, retirement accounts and/or college savings.

To state another way: It is unfair that people with more money can do more things with money than people with less money.

Profound.

What offends about this bella siracha is:

You train for a career.

You set an alarm clock daily, dress, fight traffic and do your job.

You get paid money.

You take some of this money and save for nefarious causes such as your kids’ college and your eventual retirement.

Yet you keeping your own money is the equivalent of receiving a welfare check euphemistically described as an “earned income credit.”

No, no it is not.

And the false equivalence is offensive.

I get the issue. I really do. The theory begins with all income being taxable. When it is not, or when a deduction is allowed against income, there is – arguably - a “tax break.” The criticism I have is equating one-keeping-one’s-money (for example, a 401(k)) with flat-out welfare (the earned income credit). Another example would be equating a deeply-flawed statutory tax scheme (multinational corporations) with the state income tax deduction (where approximately 30% of this tax break goes to two states: California and New York). 

And somebody please tell me what “wealthy” means anymore. It has become one of the most abused words in the English language.

Bloomberg

RERI-ng Its Ugly Head - Part One

Here is the Court:

The action involves RERI Holdings I, LLC (RERI). On its 2003 income tax return RERI reported a charitable contribution of property worth $33,019,000. Respondent determined that RERI overstated the value of the contribution by $29,119,000.”

That is considerably more than a rounding error.

The story involves California real estate, a billionaire and a university perhaps a bit too eager to receive a donation.

The story is confusing, so let’s use a dateline as a guide.

February 6, 2002 

Hawthorne bought California real estate for $42,350,000. Technically, that real estate is in an LLC named RS Hawthorne LLC (Hawthorne), which in turn is owned by RS Hawthorne Holdings LLC (Holdings).

Holdings in turn is owned by Red Sea Tech I (Red Sea). 

February 7, 2002 

Red Sea created two types of ownership:

First, ownership for a period of time (technically a “term of years,” abbreviated TOYS).

Second, a future and successor interest that would not even come into existence until 2021. Let’s call this a “successor” member interest, or SMI. 

QUESTION: Why a delayed ownership interest? There was a great lease on the California real estate, and 2021 had significance under that lease.

March 4, 2002     

RERI was formed.

March 25, 2002

RERI bought the SMI for $2,950,000.

August 27, 2003

RERI donated the SMI to the University of Michigan.

A key player here is Stephen Ross, a billionaire and the principal investor in RERI. He had pledged to donate $5 million to the University of Michigan. 

Ross had RERI donate the SMI. 

The University agreed to hold the SMI for two years, at least, before selling.

Do you see what they have done? Start with a valuable piece of leased real estate, stick it in an LLC owned by another LLC owned by another … ad nauseum, then create an LLC ownership stake that does not even exist (if it will ever exist) until 2021.

What did RERI donate to the University of Michigan?

You got it: the thing that doesn’t exist for 18 years.

I find this hard to swallow.

“Successor” LLC interests are sasquatches. You can spend a career and never see one. The concept of “successor” makes sense in a trust context (where they are called “remaindermen”), but not in a LLC context. This is a Mary Shelly fabrication by the attorneys.

So why do it?

Technically, the SMI will someday own real estate, and that real estate is not worth zero.

RERI hired a valuation expert who determined it was worth almost $33 million. This expert argued that the lease on the property – and its reliable series of payments – allowed him to use certain IRS actuarial tables in arriving at fair market value (the approximately $33 million).

Wait. It gets better.

The two years pass. The University sells the property … to an entity INDIRECTLY OWNED by Mr. Ross for $1,940,000.

This entity was named HRK Real Estate Holdings, LLC (HRK).

More.

HRK had already prearranged to sell the SMI to someone else for $3 million.

Still more.

That someone donated the same SMI and claimed yet another deduction of $29,930,000.

REALITY CHECK: This thing sells twice for a total of approximately $5 million but generates tax deductions of approximately $63 million.

Yet more.

Who did the valuation on that second donation? Yep, the same guy who did RERI’s valuation.

The IRS disallowed RERI’s donation to zero, zip, zilch, nada. The IRS was clear: this thing is a sham.

And there begins the litigation.

How something can simultaneously be worth $33 million and $2 million?

This is all about those IRS tables.

Generally speaking, the contribution of property is at fair market value, usually described as the price arrived at between independent buyers and sellers, neither under compulsion to sell or buy and both informed of all relevant facts.

Except …

For annuities, life estates, remainders, reversions, terms of years and similar partial interests in property. They are not full interests so they then have to be carved-out and adjusted to present value using IRS-provided tables.

OBSERVATION: Right there, folks, is why the attorneys created this Frankenstein. They needed to “separate” the interests so they could get to the tables.

RERI argued that it could value that real estate 18 years out and use the tables. Since the tables are concerned only with interest rates and years, the hard lifting is done before one gets to them.

Not so fast, said the IRS.

That real estate is in an LLC, so it is the LLC that has to be valued.  There are numerous cases where the value of an asset and the value of an ownership interest in the entity owning said asset can be different – sometimes substantially so. You cannot use the tables because you started with the wrong asset.

But the LLC is nothing but real estate, so we are back where we started, countered RERI.

Not quite, said the IRS. The SMI doesn’t even exist for 18 years. What if the term owner mortgages the property, or sells it, or mismanages it? That SMI could be near worthless by the time some profligate or incompetent is done with the underlying lease.

Nonsense, said RERI. There are contracts in place to prohibit this.

How pray tell is this “prohibited?” asked the IRS.

Someone has to compensate the SMI for damages, explained RERI.

“Compensate” how? persisted the IRS.

The term owner would forfeit ownership and the SMI would become an immediate owner, clarified RERI.

So you are making the owner of a wrecked car “whole” by giving him/her the wrecked car as recompense, analogized the IRS. Can the SMI at least sue for any unrecovered losses?

Uhhhh … no, not really, answered RERI. But it doesn’t matter: the odds of this happening are so remote as to not warrant consideration.

And so it drones on. The case goes into the weeds.

Who won: the government or the billionaire?

It was decided in a later case. We will talk about it in a second post.

Lawless In Seattle

Did you hear that Seattle has a new income tax?

Sort of. Eventually. But maybe not.

The tax rate is 2.25 percent and will tag you if you are (1) single and earn more than $250,000 per year or (2) married and earn more than $500,000.

This is big-bucks land, and we normally would not dwell on this except…

Washington state has no income tax.

Let us get this right: Seattle wants to have an income tax in a state that has no income tax. Washington state considered an income tax back in the 1930s, but the courts found it unconstitutional.

You or I would live within the Seattle city limits … why?

Surely there are nice suburbs we could call home. Heck, Bill Gates and Jeff Bezos do not live in Seattle; they live in the suburbs.

There appear to be legal issues with this tax.

The state constitution, for example, requires taxes to be uniform within a class of property. The pro-tax side questions whether income is “property.”

The anti-tax side provides the Power Inc v Huntley case (1951), wherein the Washington Supreme Court stated:

It is no longer subject to question in this court that income is property.”

Must be something cryptic about the wording.

Then there is a law that bans Washington cities from taxing net income.

The pro-tax side argues that they are not taxing “net” income. No sir, they are taxing “adjusted” or “modified” or “found-under-the-cushions” income instead.

The anti-tax side says: seriously?

Then you have the third issue that Washington cities must have state authority to enact taxes.

The pro-tax side says it can do this under their Licenses and Permits authority.

RCW 35A.82.020

Licenses and permits—Excises for regulation.

A code city may exercise the authority authorized by general law for any class of city to license and revoke the same for cause, to regulate, make inspections and to impose excises for regulation or revenue in regard to all places and kinds of business, production, commerce, entertainment, exhibition, and upon all occupations, trades and professions and any other lawful activity: PROVIDED, That no license or permit to engage in any such activity or place shall be granted to any who shall not first comply with the general laws of the state.

No such license shall be granted to continue for longer than a period of one year from the date thereof and no license or excise shall be required where the same shall have been preempted by the state, nor where exempted by the state, including, but not limited to, the provisions of RCW 36.71.090 and chapter 73.04 RCW relating to veterans.

I am not making this up, folks.

Here is the mayor:

This legislation will face a legal challenge.”

And green is a color.

But let me tell you something: we welcome that legal challenge. We welcome that fight.”

Then why pick a fight, Floyd?

… lowering the property tax burden …, addressing the homelessness crisis; providing affordable housing, education and transit; … creating green jobs … meeting carbon reduction goals.”

Got it: verbigeration, the new college major. It will get you to that $15 minimum wage. At least until those jobs go away because they are too expensive.

Speaking of expense: who is bankrolling this issue while it is decided in court? Has the city banked so much money that a guaranteed legal battle is worth it?

If we need to pack the courts, will you be there with me?” thundered a councilperson.

Pack the courts? Should we bring bats too?  

The pro-tax side wants to be sued, hoping that a judge will legislate from the bench.

Needless to say, the anti-tax side is resisting, with calls for “civil disobedience.”

With exhortations not to file returns.

The state chair of the Republican party is encouraging

“… non-compliance, non-violent and non-paying”

Sounds almost Gandhi-esque.

It appears that neither side has any intention to observe – heck, even acknowledge – any pretense of law.

I am at a loss to see how this is good for anybody.

Is Paying Cards A Sport?

What is a sport?

You and I have probably encountered that shiny-sparkly when discussing NASCAR.

But can it have a tax angle?

Oh, grasshopper. Even circles take on angles when you tax them.

Let’s travel to the UK. Their 2011 Charities Act defined sports as “activities which promote health involving physical or mental health or exertion.”

Introduce Sport England. They distribute National Lottery funding to encourage people to be more physically active. Seems a desirable cause.

It helps to be a sport if you want to tap-into that pot of Lottery gold.

Enter the English Bridge Union.

They want in.

The EBU has battling HMRC (that is, the British version of the IRS), arguing that entry fees to bridge tournaments should be exempt from VAT (“value added tax,” a sort of super sales tax). HRMC in turn looks to Sport England when developing its regulations. The EBU argued that the “physical or mental health or exertion” wording in the 2011 Act does not require physical activity.

But that is not Sport England’s position. They argue that the goal of sports is to increase physical activity and decrease inactivity.  That is not to argue that activities such as bridge do not help with mental acuity and the relief of social isolation; it just means that it is not a sport.

The EBU brought a refund suit against HMRC for VAT paid between 2008 and 2011. The amount is not insignificant: for 2012/13 alone it was over $800,000. The case went before the High Court of Justice of England and Wales.

The Court ruled that Sport England was within its rights to emphasize physical activities over mental and that Sport England could deny bridge status as a sport. Extrapolating, HMRC does not have to refund VAT paid on bridge tournament fees.

But the Court simultaneously added that it had not been asked to answer the “broad, somewhat philosophical question” as to whether bridge was actually a sport.

Seems both sides have a drum to beat following this decision.

By the way, the British courts have a different way than American courts. The lawsuit cost the EBU approximately $150,000. But they lost. They have also been ordered to pay approximately $75,000 to Sport England as reimbursement of their legal expenses.

COMMENT: I like this idea.

The EBU went to the Court of Appeal in London, where they lost earlier this year. They then appealed to the EU courts.

Here is Advocate General Maciej Szpunar of The European Court of Justice determining that bridge is a sport because it requires

… a certain effort to overcome a challenge or an obstacle” and “trains a certain physical or mental skill.”

The Advocate General’s decision will in turn be reviewed by the full Court en banc.

Soon an EU court will review a British tax decision. My understanding is that the British would not have to observe an adverse EU decision, but such a decision should nonetheless carry considerable persuasion.

And the Brits argue what constitutes a sport … because they have decided to tax something unless it is a sport. Well heck, all one has to do is remove “sport,” replace with another word, and we can continue this angels-on-a-head-of-a-pin nonsense until the end of time.

I do sympathize with the EBU. The HRMC, for example, recognizes both darts and snooker as sports, whereas you and I would recognize them as activities played in a bar. Several European countries – Austria, France, Denmark and others – already recognize bridge as a sport. To be fair, there are other countries – Ireland and Sweden, for example – that do not.

Did you know that the International Olympic Committee classified bridge as a sport back in 1998?  

But still…

I have difficulty with the concept of a “mental sport.”

By that definition tax practice – that is, what I do professionally – is a sport. 

Trust me, this is no sport.

Hockey Team Meals And Fairy Dust

Let’s say that you own a professional hockey team.

What is your biggest expense?

Your players, I would think.

You train them, coach them, house them, feed them, transport them.

Wait … did we say “feed them?”

Uh, yes. Here is an easy example: the team has an out-of-town game. I presume you are going to feed them while they are away from home and hearth.

We have walked into one of the tax Code’s nonsensicals.

Yes, I know: which one?

Are their on-the-road meals deductible?

Yes, but you may remember that only 50% of the meals and entertainment costs is deductible. The company has to eat the other 50%.

Why? Because of three-martini lunches and all that.

Fat cats. Write-offs. Loopholes. The Hallmark Channel.

Let’s say there is an uber-expensive – and secret - lunch in Georgetown between a media mouth and some cobbling bureaucrat. Why should you and I have to subsidize that behavior with a tax deduction?

But that is not your situation. You are feeding your players. Maybe you feed them because you want them present by a certain time, or you want your dietician to monitor their intake, or you want to minimize interruptions were they to go out for meals. Perhaps it gives everyone an opportunity to review game plans and prepare for media interviews.

But the tax Code lumps you in with those Georgetown pseudologists.

The Boston Bruins decided to push this issue. They deducted the full cost of their meals, not just 50%.

COMMENT: For the tax nerds, the issue before the Court was the “away” meals. The IRS was not concerned with “home” meals, for reasons we will not address here.

Two of their tax years – 2009 and 2010 – went to Court.

I had considered this is an uphill climb.

Code Section 274(n) waives the 50% axe.

(n)  Only 50 percent of meal and entertainment expenses allowed as deduction.

(1)  In general.

The amount allowable as a deduction under this chapter for-

(A)  any expense for food or beverages, and

(B)  any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity,

shall not exceed 50 percent of the amount of such expense or item which would (but for this paragraph) be allowable as a deduction under this chapter.

But are there exceptions?

Yep.

For example, “de minimis” fringe benefits are not taxable to the employee.

Well, that is great for coffee and sodas at the office, but it seems that we are stretching the word too ….

Wait, a “employer-operated eating facility” can qualify as a de minimis fringe benefit.

Well, that is hay of a different barn. What does it take to be such a facility?

Here are two of several requirements:

(1) The facility has to cover its own direct costs on an annual basis.

(2)  The facility must be located on or near the employer’s business premises.

Hah, you say. There is no way that the Bruins can meet test one, as there is no “revenue” here. The whole thing is a “cost.”  

Would you believe me that there is a way – an obscure, head-scratching way – to string the tax Code together to spontaneously spark the required “revenue?”

There is and the Bruins made it. I will spare you the details.

On to test two.

Let’s say they are in Pittsburgh playing the Penguins.

Google tells me there is approximately 575 miles between Boston and Pittsburgh.

Seems a stretch that the Bruins are “on or near” their training facilities in Brighton, Massachusetts.

But have the Bruins rent-out a banquet room in a Pittsburgh hotel. Can one sprinkle fairy dust and argue that the rental transmogrifies the banquet room into Bruins “business premises” – at least for a while?

The Court really seemed to be in a favorable mood towards the Bruins. They emphasized the “function” of the banquet room rather than its actual location in space and time. Perhaps the banquet room identified as Bostonian.

We conclude that away city hotels were part of the Bruins’ business premises for the years in issue. In arriving at this conclusion we consider the traveling hockey employees’ performance of significant business duties at away city hotels along with the unique nature of the Bruins’ business (i.e., professional hockey).”

Having met that test, the Pittsburgh hotel in essence became “business premises” of the Bruins.

Bam! The Bruins have business premises in Pittsburgh.

The Court next considered whether the eating-facility-on-Bruins-business-premises-in-Pittsburgh qualified as a “de minimis” fringe benefit.

Well heck, I think the Court telegraphed its hand when it decided that a Pittsburgh hotel was “on or near” Brighton, Massachusetts.

To wrap this up, someone on the Court is a huge hockey fan and the Bruins got their 100% deduction.

I suspect that this type of meal expense is not what Congress was after with its Section 274(n) chop. It is nonsensical that the Code disallows a 50% deduction for employee meals when their job requires travel. This more resembles the histrionics of class envy than any rational tax argument.

However – and let’s be fair – that is what the tax Code says. 

Or said, more accurately.

All it takes is a court willing to sprinkle fairy dust.

Issuing 1099s In Anger

Several years ago, I received an angry call from another CPA.

He had lost a couple of key partners, to which he responded with an almost Game-of-Thrones vindictiveness. He had been charged with issuing false Form 1099s to his former partners.

They dragged him into Court for this and other reasons.

I had looked into the 1099 matter. It is not every day a CPA is charged with issuing false tax forms.

Why would somebody do this: issue false 1099s?

Because chum in the water.

Let’s talk about the Petrunak case.

Petrunak was a pyrotechnician.

This guy made fireworks. He owned a company called Abyss Special FX, Inc. (Abyss), and he could do both indoor and outdoor fireworks displays.

This also meant that he was under regulation by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).

A couple of ATF agents conducted a mandatory inspection and found a number of violations. Petrunak challenged their findings and had his day in administrative court. I do not know what the details were, but the judge revoked Petrunak’s fireworks license.

So much for Abyss and his paycheck.

Petrunak reckoned he lost a lot of money – both as real-money losses and as money he would have made except for the ATF agents.

He had time to think about it. He thought about it for five years.

He had Abyss send each of them a Form 1099-MISC for $250,000.

Half a million. He figured that was about what they had cost him.

Abyss deducted that half million. As Abyss was an S corporation, there was a big loss passed-through to Petrunak to use on his individual return.

Needless to say, both ATF agents omitted that 1099 from his/her individual tax return.

One agent however got pulled for audit.

The IRS wanted taxes of over $100 grand. She spent a lot of time contesting and unraveling that mess.

Exactly what Petrunak wanted. Forms 1099 are chum in the water to the IRS.

Problem is, the IRS pursued Petrunak after the ATF agent’s audit. He admitted to filing those 1099s, but he was right in doing so and those two had lied – to a judge, unbelievable! – and an IRS person told him that he might be able to issue 1099s for his business costs. He estimated his costs to be half a million.

The IRS charged him with three counts of making false and fraudulent IRS forms.

He fought back, going to the Seventh Circuit Court of Appeals.

How did it turn out?

Petrunak is going to prison for 24 months.

His accounting was fantastical, but I get his anger.

Circling back, the accountant who called me was angry because I did not agree with him.

To be kind, let’s say his side of story was … creative.

But then, have a CPA play in a field with accounts receivable, deferred compensation, cash transfers, buyout agreements and whatnot and a talented – and motivated - practitioner can get creative.

He did.

Problem was: he picked a fight with tax CPAs. Two of them.

Bad call. 

It cost him a few bucks.