Mutually assured destruction. Accounting firm breakups can generate bad feelings. Bad feelings can generate bad ideas — like filing bogus 1099′s on your erstwhile colleagues. That went badly for an Ohioan in a U.S. District Court case reported in today’s Tax Notes ($link).
When Waldman, Pitcher and Co. broke up, it wasn’t amicable. Lawrence Waldman felt ill-used by departing partners Kenneth Pitcher and Michael Enders. Some background from the District Court judge:
This case arises from the acrimonious break-up of the successful accounting firm Waldman, Pitcher, and Co., P.S.C. The individual parties in the present case were formerly partners in that firm. The break-up has spawned numerous related lawsuits, various audits by the Internal Revenue Service (“IRS”), numerous complaints of improper conduct to various professional oversight groups, and protracted contentious litigation of the present case.
Mr. Waldman apparently attempted to enlist the IRS in his fight, using an assignment of uncollected receivables in the break-up agreement (footnotes and other references omitted):
In January 2010, Waldman & Co. issued 1099-MISC forms to Pitcher and Enders personally for tax year 2009, for non-employee compensation in the amount of $111,535.00 for Pitcher and $13,260.00 for Enders. It is undisputed that Waldman and his company had not collected any of the AR/WIP money reflected on those 1099 forms (doc. no. 134, ¶¶ 18-19). Waldman was admittedly angry at Pitcher and Enders and has repeatedly characterized their departure as effectively “stealing” two million dollars from him. As a prominent and experienced CPA, Waldman was familiar with the matching program of the IRS and knew that issuing these 1099s to Pitcher and Enders personally would likely result in IRS audits of their personal income tax returns. Waldman & Co. benefitted by taking a corresponding tax deduction for the reported amounts.
The unhappy 1099 recipients fought back:
In February and March of 2010, Pitcher and Enders complained to the IRS’s Office of Professional Responsibility (“OPR”) that Waldman had issued 1099s containing information that Waldman knew to be inaccurate. They asserted that Waldman had done this “to exact a revenge that he couldn’t otherwise exact during our negotiations.” They filed similar complaints with the Accountancy Board of Ohio and Ohio Society of CPAs . Those groups declined to take disciplinary action against Waldman.
In February 2011, Waldman & Co. issued “corrected” 2009 1099s to the plaintiffs, reflecting “zero” for their nonemployee compensation. At the same time, he issued “corrected” W-2s to Pitcher and Enders reflecting increased amounts in Box 1 . For Pitcher, an additional $199,290.00 of reported income was included, reflecting the $111,535.00 for the accounts receivable assigned to KPE, $27,755 for the amount paid to KPE by Waldman & Co., and $60,000.00 for attorney fees paid by Waldman & Co. to plaintiffs’ attorneys… For Enders, an additional $13,260.00 was included, consisting of $13,260.00 for the accounts receivable assigned to KPE. Waldman & Co. took a tax deduction for the increased amounts listed on the corrected W-2s, even though such returns indicated that no federal income taxes had been withheld.
I suppose if you are going to make up compensation on W-2s, you may as well be consistent and deduct the pretend expense.
Much litigation later, the District Court ruled for the departing accountants Pitcher and Enders:
Given his education, knowledge, and business experience as a CPA, [Mr. Waldman] could not have reasonably believed that these information returns were proper to file. He filed these information returns “willfully” in order to obtain tax benefits and harass the plaintiffs. Despite having “settled” a previous lawsuit over the plaintiffs’ departure from the firm, Waldman was dissatisfied and stubbornly believed the plaintiffs had “stolen” two million dollars from him by leaving his firm with clients. In taking on the role of whistleblower, he deliberately misused the IRS reporting system.
A lot of good it did them. They were each awarded $15,000 in damages, but not attorney fees:
In light of the unusually hostile litigation history between the parties, the Court observes that plaintiffs have certainly played a significant role in creating the bitter circumstances of this case. This case has also been marked by needlessly contentious discovery battles, repetitive briefing, and unfortunate personal attacks. In view of the animosity between the parties, the Court in its discretion declines to award attorneys’ fees to the plaintiffs. The Court is aware that, absent such an award, this may be a Pyrrhic victory for plaintiffs. Nonetheless, the Court is convinced that this is a just result under the unusual circumstances of this case.
It’s hard to believe that the plaintiffs came out ahead on this, especially when their time is taken into account.
The Moral: breaking up is hard to do, even for accountants.
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