There are no tax miracles.
Sure, lots of folks say there are, if you just hire them, or buy their book. There are always clients for those who promise a painless end to tax woes, and there’s always an audience that wants to hear that their old tax pros are just incompetents or wimps who are afraid to take on The Man.
A case decided by the Eighth Circuit Court of Appeals holds a lesson for these folks. The Eighth Circuit upheld an injunction against a host of tax plans promoted by former Coopers & Lybrand and Grant Thornton attorney A. Blair Stover. These included:
- A setup using a “parallel” C corporation with a November year end to suck all of the income out of an S corporation as “management fees” in December, providing an 11-month deferral of the tax on the income.
- A similar deal where the substance-free management company was owned by an ESOP, thus sheltering the income until it was withdrawn by the owner.
- Still another deal where the “management” C corporation was owned by a Roth IRA.
While these may have seemed attractive at the time, they worked out badly for the clients. From the Appeals Court opinion:
The IRS conducted a lengthy and costly investigation into Stover’s schemes. The district court found that agent Rhonda Kimball spent over three thousand hours (more than one year’s normal work) unraveling transactions for just two of Stover’s clients. It also found that even the most conservative estimate of the tax loss to the government caused by Stover’s schemes was $100 million, and potentially as high as $800 million. Agent Janice Mallon testified that a “reasonable estimation” of the government’s tax loss was $300 million. Apart from those costs, most of Stover’s clients had to pay other professionals to “undo” the structures Stover promoted, organized, and sold. Many had to pay penalties to the government.
Until things blew up, these taxpayers probably sneered at their wimpy old tax advisors, who weren’t willing to be really creative like Mr. Stover. In the end they had to pay extra to the IRS and to those milquetoast tax people who color inside the lines. One of these cases showed up in the Tax Court just last month. It’s something to keep in mind when you see one of those “pennies on the dollar” TV ads.
Cite: Stover, Case No. 08-6018-CV-SJ-ODS, CA-8, 8/16/2011
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