Attorney-at-Law

THE QUEST FOR PERFECTION

In Uncategorized on 12/09/2015 at 18:02

Terry M. Schank is a perfectionist, he says. So much so, he says, that he does the work of three or four individuals, because he can’t get good help nowadays. Terry’s story, and that of his C Corp, living trust and LLC, conjoined with wife Paula, as told by Judge Laro, may be found in Terry M. Schank and Paula J. Schank, 2015 T. C. Memo. 235, filed 12/9/15.

Terry ran the family roofing company, had a living trust that owned the land where the C Corp provided materials to build a house and barn for Terry and Paula, and the LLC owned the land where the C Corp’s building stood.

It’s indeed an ill wind that blows no one some good. A hailstorm in the year at issue gave Terry and his C Corp a ton of work. And a lot of money.

So Terry wrote off his personal credit card bills against the C Corp and treated the materials that went into his house as cost of goods sold. He also had the C Corp buy him a jazzy sports car, ostensibly to drive to various job sites, although he had zero records of same. And he tried a prepaid rent dodge between C Corp and LLC. And there was sufficient cash on hand by way of E&P to set up the constructive dividend, rather than compensation. Although if Terry can show qualified dividend, he gets the benefit of the lower rate at the Rule 155 hoe-down.

You can see where this is going.

After wiping out Terry’s little games, Judge Laro comes to the chops.

Judge Laro: “Mr. Schank, a self-described perfectionist, entrusted bookkeeping for [C Corp] to a high school graduate with no formal accounting training. The … bookkeeper entered personal expenses as attributable to cost of goods sold with the tacit approval of her direct supervisor and the company CEO, Mr. Schank. These facts show that petitioners did not make a reasonable attempt to comply with the provisions of the Code or to exercise ordinary and reasonable care in the preparation of their tax returns. Accordingly, we conclude that respondent met his burden of production under section 7491(c) and that petitioners were negligent with respect to any underpayment of tax for the periods in issue.” 2015 T. C. Memo. 235, at pp. 31-32.

Terry used a CPA for the C Corp, but his and Paula’s personal return was done by “an enrolled IRS agent and a co-owner of a local H&R Block franchise,” 2015 T. C. Memo. 235, at p. 14.

Neither one agreed to audit Terry’s numbers or look behind what Terry and his bookkeeper told them. They just wrote down whatever Terry and the bookkeeper told them.

Now Judge Laro: come on! “An enrolled IRS agent”? No way! One can be an IRS Agent (Revenue Agent, maybe) or one can be an Enrolled Agent. One cannot be both. The only IRS employees who can qualify for EA status must be former IRS employees.

Re-read 31CFR§10.4. Then apologize to us EAs. We work for our clients, not IRS.

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