Originally published on Forbes.com.
A careful reader of this blog might note a somewhat irreverent attitude toward the people who run public accounting firms. There are also occasional swipes at the legal profession, although I am generally quite humble about that referring to many cases as being lawyerly, which means there is stuff in them I don’t understand. Generally I only mock lawyers who end up in Tax Court, because they prepared their own returns.
The thing about people who run public accounting firms is related to my character flaws. I have authority issues going back at least to my encounters with Sister Jane Aloysius in the sixth grade, but my brother’s introduction of Irish rebel songs into the family’s meager collection of phonograph records may also be a factor. I also lacked the habits necessary to get to the very top of the regional accounting firm mountain. Among them are a taste for single malt scotch and a love of golf. I’d rather be doing tax research.
The case of Pitcher v Waldman recently decided in the Sixth Circuit makes me want to either laugh or cry. First comes the crying. The whole story represents a massive transfer of wealth from CPAs to attorneys . The laughter comes from watching the management of a CPA firm being publicly stupid. Usually they manage to keep it under wraps.
It happens that Joe Kristan covered the original decision quite well in a post title CPA Revenge Edition.
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 … When Waldman, Pitcher and Co. broke up, it wasn’t amicable. Lawrence Waldman felt ill-used by departing partners Kenneth Pitcher and Michael Enders
Mr. Waldman sent his departing partner bogus 1099s.
Waldman mischaracterized these 2009 transfers and payments in filings with the IRS in order to antagonize his former partners and diminish his own tax liability. Following the resolution of a state court action in 2012, Waldman filed similar false reports and mailed copies to Pitcher and Enders with notes reading “tax cheat thief” and “you are going to hell.”
Later he corrected the 1099s to 0, but made a corresponding boost in their income by amending their W-2s. That is really a silly way to be vindictive. Better you should slash their tires or toilet paper their houses.
Getting a bad 1099 is something of a PITA, but the simple way to deal with it is to put it on your return and back it out with a corresponding negative number. I don’t think I’ve ever seen anybody trigger an audit by doing that. There is something else you can do.
Code Section 7434 gives you a cause of action in federal court against someone who willfully files a fraudulent federal tax information form. If you win you get the greater of actual damages or five grand and maybe attorney fees. If you don’t get the attorney fees, you lose even if you win, unless you are yourself an attorney and have a lot of time on your hands.
Mr. Waldman’s ex-partners won in district court – kind of. They were awarded the minimum which totaled $15,000. That is understandable, since getting a bad 1099 or W-2 will probably not do you much damage if you know what you are doing and the victims were CPAs. No award for attorneys fees, though. And I bet the fees came to more than 15 grand making for something of a Pyrrhic victory. Apparently they were not satisfied with the amount of wealth that had been transferred to the legal profession by the accounting profession. So they appealed. Mr. Waldman appealed also.
Disatisfied with the district court’s resolution of their longstanding argument, the parties cross appealed. Waldman’s dozen specific issues on appeal collectively challenge the district court’s weighing of competing evidence and its conclusions regarding Waldman’s reporting obligations and his willfulness. Pitcher and Enders complain that the district court abused its discretion by declining to award attorneys’ fees.
It did not go well for Mr. Waldman.
The district court’s conclusion that Waldman “filed false information returns with the IRS in order to harass , not to meet a non-existent duty” is supported by the record. We therefore affirm the district court’s finding that Waldman violated § 7434 by willfully filing fraudulent information with the IRS.
It did not go well for his former partners either.
For their part, Pitcher and Enders contend that the district court abused its discretion by declining to award attorneys’ fees after finding Waldman liable. When deciding not to award attorneys’ fees, the district court described the litigation history between the parties as “unusually hostile” and cited “needlessly contentious discovery battles, repetitive briefing, and unfortunate personal attacks” in the litigation. Pitcher and Enders argue that the district court was not entitled to consider their contributions to the “bitter circumstances” of the litigation when exercising its discretion over attorneys’ fees. They offer no authority for this limitation on district court discretion, and we know of no reason the district court may not weigh all of the facts in making a determination on the fairness of an attorneys’ fee award. The statute that establishes the cause of action grants the courts discretion over the award of attorneys’ fees. The district court in this case exercised that discretion in light of “the unusual circumstances of this case.” Accordingly, the judgment of the district court is affirmed.
My blogging buddy Robert Flach the Wandering Tax Pro often puts out passionate appeals to let it be known that CPAs should not have a monopoly on tax preparation and advisory services. I am forced to agree with him, but I hope that he will forgive me for appealing to any of the attorneys involved in this particular case to use CPAs just to balance the scales a bit.