Numbersman Admits to Deception

 By: Donald J. Schaffer, CPA/ABV, CVA

When I went to apply for the job that Doc Holcomb advertised in the Memphis Press Scimitar, the drug store’s shiny, almost new 1954 Allstate 250 motorcycle was sitting outside.  He was looking for a kid to work behind the soda fountain and also deliver prescriptions for Holcomb’s drug store, a venerable institution on the corner of Main and Jackson.  I’m now, 55 years later, willing to come clean.  I committed fraud in getting that job. 

You have to admit that it would be tempting for a 14 year old to bend the truth a bit to get a chance to get a beautiful ride like that bike.  It was new, which beat the heck out of the old Cushman I had rebuilt and blown up.  It was certainly sexier and more powerful than Billy Hicks’ new Whizzer motorbike that he had let me ride, even after I dumped it in a gravel parking lot.  It wasn’t a big heavy bike like the Harley 74 that Mack Mallory, the 250 pound son of our housekeeper Luvenia, challenged me to ride.   He got a good laugh watching me try to kick start it, which I couldn’t do with my 100 pound body.  But heck, that Allstate, made by Puch, was the most beautiful thing I had ever seen. All shiny black with chrome tank sides, it had a “twingle” 250cc two stroke engine that put out some serious horsepower.  Besides, since I was the only Jewish boy in Memphis whose mother was not too overprotective.  She actually let me ride those dangerous motorized two wheelers, and work on them in her garage.  Thanks Mom, before I got that job I had to spend a lot of money on candy, and the results were not nearly as good.

But I digress.  When Doc asked me if I knew how to make a malted milk shake, I lied.  Then when he said that the job would pay 50 cents per hours, I did not tell him that I was willing to pay him and work behind the soda fountain just for a chance to ride that bike a couple of times an afternoon.  And it is said that an act of omission is as bad as one of commission.  Doc never asked me the most important question, and I kept my mouth shut.  The question he forgot to ask was, “Do you have a driver’s license?”  Man, did I love that job.  Imagine someone actually paying you to ride his bike, and I didn’t even look like Danica Patrick. 

Not everything went well on that gig, however.  I was riding past Baptist Hospital one afternoon when a pedestrian started across Madison Street without waiting for the light at the pedestrian crossing to turn green.  In Memphis NOBODY jaywalks, so the two cars in front of me paniced and locked up their brakes.  Well, I tried to get between the cars but they were too close together and I was just a little too close behind them for those six inch drum brakes to stop me before I put one fist through the tail light of each car.  The good news was, I was riding past Baptist Hospital.  I just got back on the bike, which had survived without a scratch, turned into the drive and went right to the emergency room to get some plastic picked out of my hands.  I can still see the damned scars.

All good things come to an end.  After about 6 months of afternoons and weekends happily zipping around town and impressing the girls, Doc asked the fatal question.  I don’t know how he found out I was still a half year short of being old enough to drive, but I suspect that I was ratted out by some bastard who wanted to ride my bike.

How did all of these fond memories come tumbling out of my aged brain?  I was talking with Bradbury at the Allstate booth at the bike show this winter and they had a pristine 1965 version of my bike right there in the booth.  We didn’t have a real camera, but Mike was kind enough to capture my image on his phone standing next to my first love.  Ain’t it pretty?   Think they will sell me that bike?

When Don’s not indulging his obsession for motorcycles, you can find him at CJBS applying a similar passion for business evaluation.  Contact Don at by e-mail at numbersman@CJBS.com.

Don Schaffer heads the Business Valuation practice at CJBS, LLC. He was awarded a Certificate of Educational Achievement in Business Valuation in 1994 by the Illinois CPA Society, earned his CVA credential from NACVA in 1995, and was one of the first seven CPA’s in Illinois to be Accredited in Business Valuation by the AICPA.

AICPA’s Proposal for Pass-Through Entity Tax Deadlines: A Tier or Two Away From Practicality

By: Donald J. Schaffer, CPA/ABV, CVA

In recent years taxpayers and their accountants have been pushed later and later in their tax filings due to the delinquent receipt of Forms K-1 from their investments in partnerships.  In may cases the forms are received only days before filing deadlines, resulting in delinquent returns or costly amendments. The Government made a first step last year by moving the final extended deadline for Partnership returns up from October 15, to September 15.

The American Institute of CPA's has published a draft of their proposal to suggest that Trust and S-Corporation extended return deadlines be set at September 30 and that C-Corporation return extended deadlines be moved back to October 15, the same date that extended Individual returns are due.  We generally support these proposals as a way to help spread the pile up of last minute returns.  The re-shuffled deadlines do not, however, help solve the problem of multi-tiered entities such as partnerships that own partnerships. 

The AICPA’s proposal to change extended due dates to September 15 for Form 1065, September 30 for Forms 1120S and 1041, and October 15 for Forms 1120 and 1040, would be helpful.  The proposal does not, however, help with the major cause of late K-1’s and the resulting work compression among accounting professionals; tiered entities not under common control.

The problem can be resolved at the regulatory level with a framework that severs the K-1 delivery date from the tax form delivery date, and assigns responsibility for timely delivery. The following structure would help relieve work compression for unrelated entities up to 3 tiers deep, and makes provision for penalty avoidance in deeper ownership tiers.

Regulations can have a positive impact if they make it clear to pass-through entity managers that they will have a higher burden with respect to deadlines for filing if they accept other pass-through entities as owners.  Similarly, an investor entity must anticipate in advance the late receipt of underlying entity K-1’s, and either decide not to invest in tiered entities, make arrangements for costly last minute service and potential penalties, or exert enough influence on the underlying entity to be sure that it will furnish timely Forms K-1.  The proposed deadline scheme will put the burden of compliance on both the underlying entity and the investor entity.

Consider this due date proposal that would apply to any pass-through entity that accepts another pass-through entity as a partner/member/beneficiary, etc.  This proposal would require such an entity to submit Forms K-1 on the latest of the following dates –

1. 15 days prior to the entity’s extended due date, if the entity does not own an interest in any other pass-through entity.
2.  7 days prior to the entity’s extended due date, if the entity does own an interest in any other pass-through entity.
3. 15 days prior to the earliest extended due date of any owner.

Penalties would be assessed only if an “up-stream” entity uses late receipt of Form K-1 in a request to avoid penalty on its own untimely Forms K-1.

Examples:
Let’s look at two situations which assume AICPA’s proposed due dates are in force:

Situation — A partnership has Trusts and other partnerships, as well as individuals as partners. The partnership has no investments in underlying partnerships.
Result — The tax deadline for the production of Forms K-1 is 9/1, which is 15 days prior to the extended due date for its own return and that of any owners that are partnerships.
If the entity had only Trusts and S-Corporations as owners, K-1s would not be due until 9/15, which is the entity’s own extended due date and also 15 days before the Trust/S deadline of 9/30.

Situation — A partnership has Trusts and other partnerships, as well as individuals as partners. The partnership has an investment in underlying partnerships.
Result — The tax deadline for the production of Forms K-1 is 9/8, which is 7 days prior to the extended due date for its own return.
If the entity had only Trusts and S-Corporations as owners, K-1’s would not be due until 9/15, the returns’ extended due date and 15 days before the Trust/S deadline of 9/30.

And Here’s an FAQ…
A frequently asked question is, “My partnership (Tier 2), has another partnership as an owner (Tier 1).  Tier 2 owns an interest in another partnership (Tier 3) that itself owns an interest in a partnership (Tier 4). Tier 4 delivers a timely Form K-1 on September 1 to Tier 3, which delivers its timely Form K-1 on 9/8 to Tier 2.  Since Tier 2's last day to deliver Form K-1 to Tier 1 is also 9/8, how could Tier 2 avoid a delinquency?”

The answer is that, absent same day production of Forms K-1, Tier 2 cannot avoid a delinquency and is subject to penalty.  The only way to avoid penalty is to obtain agreement from Tier 1 that a later delivery will not cause its own Forms K-1 to be late.  It is the responsibility of a pass-through entity to investigate prior to investing in another pass-through entity to determine that Forms K-1 will be delivered sufficiently ahead of deadlines to allow it to produce its own Forms K-1 on a timely basis.

These thoughts obviously do not consider all of the problems and details to be overcome in a regulatory system.  But the implementation of this type of structure would at least provide a fighting chance for a two or three tier arrangement to produce timely K-1s and the means for a four or more tier arrangement to avoid penalties by cooperation between entities and investors. Mailing and transit times would seem to make the proposal difficult to manage and enforce, but this is an electronic age.  Perhaps there should there be a requirement for electronic delivery of K-1s to provide instant delivery and time stamps.

I’d like to hear any suggestions readers might have for improvements of these ideas.  Feel free to either comment here or e-mail me at numbersman@CJBS.com.

Don Schaffer heads the Business Valuation practice at CJBS, LLC. He was awarded a Certificate of Educational Achievement in Business Valuation in 1994 by the Illinois CPA Society, earned his CVA credential from NACVA in 1995, and was one of the first seven CPA’s in Illinois to be Accredited in Business Valuation by the AICPA.

Extending the COBRA Premium Subsidy...

by Michael W. Blitstein, CPA 

The American Recovery and Reinvestment Act of 2009 (ARRA) provided a temporary subsidy for the cost of COBRA continuation health coverage. On December 21, 2009, President Obama signed legislation extending the COBRA premium subsidy. The new law addresses the uncertainties employers were facing regarding the subsidy.  The following facts concerning the extension should be of interest to all employers and is excerpted from the GCG Financial, Inc. Legislative Brief: 

Eligibility Period – Extended through February 28, 2010

Before the subsidy extension, an individual had to be eligible for COBRA before December 31, 2009, in order to receive the premium subsidy. This was true even if the individual was involuntarily terminated from employment before December 31, 2009. The extension provides that individuals who become eligible for COBRA because of an involuntary termination occurring during the period from September 1, 2008, through February 28, 2010, will be eligible for the subsidy if they elect COBRA.

Length of Subsidy – Extended to 15 months

Initially, the COBRA premium subsidy was available to assistance eligible individuals (AEIs) for a maximum of nine months.  The new legislation extends the premium subsidy period by six months to a total of 15 months. However, employees and employers should keep in mind that the COBRA premium subsidy does not affect the length of COBRA coverage itself.

Retroactive Payments – How to Handle Employees Caught in the Middle

The new law contains provisions regarding AEIs whose 9-month subsidy period expired before the extension was passed. These AEIs may have let their COBRA coverage lapse because it was too costly without the subsidy. Others may have kept the coverage and started paying the full amount of the premium. These AEIs will be able to benefit from the subsidy extension retroactively. Special notices to these individuals are required, as explained below.

AEIs who failed to pay their COBRA premiums once their initial subsidy period expired can retroactively pay the premiums to maintain COBRA at subsidized rates for the additional six months. The premiums must be paid no later than February 19, 2010, or 30 days after the AEI receives notice of the extension, whichever is later.

If an AEI paid the full amount of the COBRA premiums after the 9-month subsidy period ended, but is now eligible for additional assistance, the employer must either reimburse the individual for the excess premium amount paid or provide a credit that reduces later premium payments.

Notice Requirements 
The legislation includes additional notice requirements for group health plans. In general, plan administrators must provide notice of the subsidy extension to individuals who are AEIs at any time on or after October 31, 2009. The notice must be provided by February 19, 2010. Also, election notices sent to individuals who experience a qualifying event on or after October 31, 2009, must include information regarding the subsidy extension.

The new law also requires notices to the following individuals: (a) those who are eligible to make retroactive premium payments because they let their COBRA coverage expire once their subsidy period ended, and (b) those who are entitled to receive reimbursement or credit because they are eligible for additional assistance but paid the full amount of the premium for coverage. The plan administrator must notify these individuals of the subsidy extension within the first 60 days of the individual’s transition period.  The transition period includes any period of coverage beginning before December 21, 2009, that will now be covered by the subsidy due to the extension. 

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Sometimes it's better to receive...

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

Why should your law firm or bank hire me and the CJBS team as your court-appointed receiver?

Unlike some receivers who merely seek to profit from the quick liquidation of an operating entity, I strive to realize the business' true net worth.  I objectively analyze the business and develop a plan to maximize both the repayment to creditor's funds and the debtor's investment.

Being a receiver is like walking into a burning house with two parties waiting anxiously outside; the secured creditors, who need to verify their collateral is safe and will be repaid, and the debtor, who hopes to survive both personally and as a business.  I shine a light on the accounting books and records to see if they stand up to scrutiny.  I look into dark rooms and feel around corners to determine if management is cooperative and honest.  And I must get the answers fast before the entire structure goes up in smoke, destroying any remaining value.

As a certified forensic accountant leading the CJBS team of experienced financial specialists, we verify accounts receivables, take charge of the cash, and develop cash flow and profitability analyses.  With years of experience working as a receiver, assignee and financial adviser to many companies in various industries, I am able to quickly determine the viability of a business and, if possible, the requirements the company will need to regain profitability.

Above all, I bring honesty, integrity and independence to what can be a stressful and difficult process.  If I believe that the debtor cannot survive or is not truthful I will recommend that the creditors pull the plug.  If I believe that a sale will provide greater return than a liquidation, I will let that assessment be known.  And, if I believe the debtor is honest and the business has an opportunity for sustained profitability, I will report that to the creditors, recommending that the business be given more time as a means to the best possible outcome for all concerned.

It is also important to mention that the fees of a court mandated receiver firm can sometimes be too much of a burden for a business receivership to absorb.  Based in Northbrook, Illinois, the professional fees at CJBS are generally significantly less than those at the downtown Chicago firms or the specialized turnaround companies that often profit more from the liquidation than the survival of the debtor.

I work to assure that your client or customer will get the fairest possible chance at surviving a difficult financial situation.  Perhaps the best testimonial to our fair and honest approach to our role as receiver is that many companies we have helped turn around from financial trouble have since regained profitability and are currently accounting clients at CJBS.

CJBS, LLC is a Chicago based firm that handles business receivership and liquidation issues on a national basis. E-mail me at larry@cjbs.com, if I may be of assistance.

The Telephone Rings: The Anatomy of a Forensic Accounting Investigation

by Larry Goldsmith, C.P.A., J.D., C.F.F.A

It was a dark and stormy afternoon when suddenly I heard the familiar sound of the telephone ringing. No doubt another person seeking forensic assistance where a ‘perceived’ violation of trust has occurred. Notice the emphasis on ‘perceived’; after years of answering these calls I’ve learned that just because there is suspicion does not mean there is cause for action.

This time, the caller was a woman with a cool but quiet voice. From her quivering tone I knew there was trouble, but when you’re a Forensic Accountant, you get used to trouble. You even get to like it. The caller said she suspects a family member of stealing from mom and dad's estate. Mistrust and suspicion among family members is unfortunately common in my business. Sometimes it's about a family member stealing monies held in trust, or taking financial advantage of an elderly relative. The caller usually has no proof. No evidence of a crime being committed. Just an unshakeable belief that something bad is taking place.

Typically, the caller is unaware of their options and is seeking guidance. They are usually upset and often angry, seeking restitution. In their emotional state, these callers are also generally unmindful of the consequences of pursuing an unfounded suspicion. If the caller’s assumption is wrong, they stand to lose more than money – they may lose a lifelong relationship with a family member of a family friend. Or worse, they may be sued for defamation of character.

Contacting a Forensic Accountant at this stage was definitely the right thing for the caller to do. Lawyers and police will not get involved without evidence of wrongdoing. But Forensic Accountants are trained to investigate financial matters and provide documentation that shows that something untoward may actually have happened, or be happening. Remember – a CPA is not necessarily a Forensic Accountant. Just as you wouldn’t trust a pediatrician to perform brain surgery, you shouldn’t assume that your family accountant knows the specialized methods and tests used by Forensic Accountants to resolve often complex issues involving potential financial malfeasance.

The Forensic Accountant's first job is to listen to the caller with an objective ear. Determine if the caller has legal standing to pursue a claim, if the matter is financially worth pursuing, and if the caller’s assertions can be proved: for example, an estranged son may be jealous that his brother, who lives with and takes care of mom, is receiving greater financial benefits now and in the mother’s will. Or, a daughter visiting from out of town notices that the live-in nurse is now driving a Mercedes and seems to be wearing her mom's jewelry. Two situations, maybe only one of which may have a cause of action.

After determining whether the matter can or should be pursued and establishing that there are no conflicts of interest, the Forensic Accountants then develop a plan and a budget:

· The plan establishes the goals and step-by-step procedures of a forensic search, including a study of the relationships of the parties involved and an investigation of how the money flows.

· The budget gives the prospective client a realistic idea of the costs involved in pursuing an investigation.

Once the plan and budget are approved and the investigation begins, the Forensic Accounting team develops theories on how a financial defalcation may occur. The goal is to determine if a “smoking gun” can be found that provides an attorney with sufficient reason to file a lawsuit, or, in more extreme or urgent cases, allows the client to file a police report and pursue criminal remedies.

Even when a report has been filed, the police are powerless unless the State's Attorney is willing to pursue the matter. The police and the State's Attorney generally do not have the manpower nor the financial resources to pursue what they often consider to be no more than “family squabbles”. Only if television or newspaper media get involved and publicize a wrongdoing — as in the Brooke Astor case in New York — will the authorities initiate a criminal investigation.

A lawsuit, as opposed to a criminal charge brought by the state, is a civil court matter. In the event of a successfully concluded civil suit, the courts have the power to protect the remaining assets, appoint receivers to watch over the assets, and recover stolen assets. Court and attorneys may produce the best results in the long run, but they come with a price. And a civil case can drag out for years.

Whether the action is civil or criminal, the subpoena power of the Court can open up doors and provide a flood of documents that can greatly increase the probability of proving malfeasance or theft, if either has in fact occurred. But to get into court one needs evidence and a cause of action. The Forensic Accountant is often the only one who can find the evidence needed so that the attorney can file a strong and compelling cause of action.

I explained all of this to the woman on the phone. I gave her options. And finally, I warned her that confronting the suspected wrong doer can be very dangerous. Wrong doers have been known to commit violence to keep their acts undiscovered.

Just as I was about to ask her name and suggest she come to the office to talk further, I heard a man’s voice and what sounded like a struggle through the receiver. Then the line went dead. I hung up the phone and listened to the rain beat against the window. There are some things a Forensic Accountant can fix and some he can’t.

CJBS, LLC is a Chicago based firm that handles Forensic Accounting issues on a national basis. E-mail me at larry@cjbs.com, if I may be of assistance.

The IRS Provides Clarification for Ponzi Scheme Victims

By: Larry Goldsmith, J.D., C.P.A., C.F.F.A.

The recent revelations about the nefarious activities of Bernie Madoff have once again brought the phrase “Ponzi scheme” back into the news. Madoff was convicted of operating a Ponzi scheme that has been called the largest investor fraud ever committed by a single person, bilking thousands of investors of almost $65 billion, leaving many financially destroyed. The sole solace that these unfortunate investors have is that the IRS has now clarified the favorable tax treatment of Ponzi scheme losses.

A Ponzi scheme is a fraudulent investment operation that pays returns to investors from their own money or money paid by subsequent investors rather than from any actual profit earned. The Ponzi scheme usually offers returns that other investments cannot guarantee in order to entice new investors, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from new and existing investors in order to keep the scheme going.

The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the United States in 1903. Ponzi did not invent the scheme (Charles Dickens' 1857 novel Little Dorrit described such a scheme decades before Ponzi was born, for example), but his operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors' money to support payments to earlier investors and Ponzi's personal wealth.

The names Ponzi – and now Madoff – will forever be remembered by the countless number of victims who trusted and then were left financially destroyed. The Madoff case prompted the Internal Revenue into tightening up some previously vague language concerning the disposition of Ponzi scheme losses.

In general, losses from investments are treated as capital losses which are offset by capital gains plus $3,000 annually. Losses from a theft under IRC Section 135 are typically categorized as a "personal casualty and theft loss" and are treated as itemized deductions less ten percent of the taxpayer's adjusted income and one hundred dollars.

The Internal Revenue Service permits a Ponzi scheme victim to claim a net operating loss that can be carried back or forward to generate a refund of taxes previously paid. The deduction is claimed in the year the taxpayer discovered or became aware of the fraud. The taxpayer's basis for the losses includes previously reported income less distributions.

Charles Ponzi was released after three and a half years in prison. He was deported to his homeland, Italy, as he hadn't ever become an American citizen. His charismatic confidence had faded, and when he left the prison gates, he was met by an angry crowd. He told reporters before he left:

"I went looking for trouble, and I found it."

Bernie Madoff is now in jail after entering his guilty plea. He faces spending the rest of his life in prison, and up to $170 billion in restitution.

If you have any questions, please contact Larry Goldsmith, J.D., C.P.A., C.F.F.A.
larry@cjbs.com

Valuation Credential Certification – How many letters are in the alphabet?

By: Donald J. Schaffer, CPA/ABV, CVA

I apologize in advance for the numerous acronyms that follow. Unfortunately, they are the only shorthand available for some organizations with rather long names. But what do all these letters that you find strung together after the name of a supposed valuation expert mean?

There are many organizations that issue credentials for valuation specialists. The largest of these are the National Association of Certified Valuation Analysts (NACVA), the American Institute of Certified Public Accountants (AICPA), the American Society of Appraisers (ASA), and the Institute of Business Appraisers (IBA), each of which require a substantial commitment to education, testing and experience. There are dozens of other organizations that also issue credentials whose value cannot be readily determined. Some require nothing more than the payment of the requisite fee. With this veritable alphabet soup of credentials out there, how can you determine the qualifications of a valuation professional?

The National Association of Certified Valuation Analysts decided to risk its reputation by submitting itself for certification to the National Organization for Competency Assurance (NOCA). After a process of more than three and one half years that required extensive documentation of every facet of the certification program, NOCA has, through its National Commission for Certifying Agencies (NCCA) division, accredited NACVA’s two premier credentials, Certified Valuation Analyst (CVA) and Accredited Valuation Analyst (AVA).

The CVA credential, for which only CPA’s are eligible, and the AVA credential, for which other business school graduates may qualify, are issued only to candidates who have qualified by education, rigorous examination, and experience. Holders are required to maintain their skills through continuing education. NACVA offers an extensive menu of basic and advanced educational offerings, research, and library services to members.

When picking a valuation professional, carefully weigh not only the credentials, but the organization that issued the credentials. Then evaluate the experience of the professional in doing the type of project that you require. Then check references. Be sure you fully understand the quality and depth of the analysis to be performed when discussing pricing of the engagement. Poor quality valuation work, especially in tax, divorce, and business ownership matters that may lead to examination or litigation can have severe consequences.

Donald J. Schaffer, CPA/ABV, CVA heads the Business Valuation practice at CJBS, LLC. He began specializing in business valuations and first testified as an expert at trial in 1983. He was awarded a Certificate of Educational Achievement in Business Valuation in 1994 by the Illinois CPA Society, earned his CVA credential from NACVA in 1995, and was one of the first seven CPA’s in Illinois to be Accredited in Business Valuation by the AICPA

Contact Don at numbersman@CJBS.com.