Originally published on Forbes.com Oct 13th, 2014
Last week, in writing about a prominent artist who was targeted for hobby loss treatment, I bemoaned the fact that accountants are generally not as well educated as lawyers. Well, I’m happy to say that sometimes that can work in our favor as the recent decision of the United States District Court For The Northern District of Texas in the case of the United States v Sally Hand-Bostick and Elizabeth Spinelli show. Ms. Hand-Bostick and Ms. Spinelli thought that they had been introduced to a manifestation of the tax fairy living in clouds of stinky hot air. The tax fairy, as identified by Joe Kristan is the magical sprite that can make your taxes go away.
About The Defendants
According to the complaint filed by the government in the case, Sally Hand-Bostick operated National Express Tax located in Carrollton, Texas. She was also a representative of Drake Software, which gave her access to other tax practitioners who wanted to meet the tax fairy. (By the way Drake Software has a pretty good preparation software as confirmed by my covivant who used it for a couple of years for the multitude of free returns she feels obligated to prepare.) Elizabeth Spinelli is a CPA licensed in Texas in 1989 and still good to go for almost another year.
About This Particular Tax Fairy
Ms. Hand-Bostick and Ms. Spinelli were among a host of tax practitioners who got caught up in this scheme. The masterminds were Greg Guido and George Calvert. Gregory Guido is a former CPA now resident at the Federal Correctional Institute in Jesup, Georgia according to BOP’s inmate locator. George Calvert , also a former CPA, resides at the Federal Medical Center in Rochester, MN. Mr. Calvert is 81 years old and has a scheduled release date of January 30, 2018. Let’s all hope for his speedy recovery. The Department of Justice in its news release on the scheme explained it this way.
According to testimony and other evidence presented at trial, Calvert and Guido conspired with others to defraud the IRS via a fraudulent tax credit scheme. During the relevant time frame, the Internal Revenue Code permitted producers of certain fuels from non-conventional sources (FNS) to claim a tax credit if the fuels were sold to unrelated third parties. From 2003 through 2006, Calvert and Guido and their co-conspirators promoted a tax credit scheme involving the sale to individual taxpayers of fraudulent FNS tax credits.
Calvert and a co-conspirator identified landfills in various locations throughout the United States and Puerto Rico from which they purported to secure rights to the methane gas, if any, generated by such landfills. They created fraudulent assignments which purported to assign the rights to claim FNS tax credits from the owners or developers of these landfills to the conspirators’ companies, including Gas Recovery Partners-2GP (GRP). Calvert, Guido and a co-conspirator also generated bogus engineering reports containing baseless findings that the landfills qualified for FNS tax credits. Guido also created fraudulent and back-dated landfill gas purchase agreements to create the illusion that GRP had sold methane gas generated by the landfills to unrelated third parties.
Calvert and Guido promoted their tax credit scheme to a network of tax return preparers, and referenced their purported rights in landfills as well as the bogus engineering reports and landfill gas purchase agreements. They used the balance of the proceeds to pay other expenses and for their own personal enrichment.
Many states have tax credits that are freely transferable – film credits are common. I don’t know of any federal credits like that, although I may be missing something. So in order to get methane credits (Section 45K – Credit for producing fuel from a nonconventional source), you have to actually be involved in a business that produces methane. Now most of us produce methane as a byproduct of our digestive process, but generally not in commercially feasible quantities.
How To Become A Minion
If you are going to pull off a villainous scheme, which is what it turns out Guido and Calvert were up to, the ideal thing is to convince your minions that the scheme is entirely innocent. For that purpose, they used Louis Powell.
Ms. Hand-Bostick learned about the credits and how they might be transferred to taxpayers from Louis Powell at a meeting for the Texas Society of Enrolled Agents. He provided her with promotional materials. It all seemed legitimate.
As a tax professional, you know that personal tax research or trust in someone else’s research is the only tested method of significance. We at U.S. Energy Credits have done the research. Our team includes EAs, CPAs, former IRS revenue agents, attorneys, CFPs, and oil and gas industry experts. Personally, we have owned and operated a private tax office in Texas since 1974. Our office has been using FNS credits for ten years on individual tax returns. Specifically, since 1994, six IRS private letter rulings have been handed down which have continued to allow the assignment of Section 29 credits to third parties.
It was off to the races from there as Ms. Hand-Bostick used the credits herself, then for her clients and then promoted them to other preparers.
Two Problems
If you read through how the process used to transfer the credits, you might get the impression that it didn’t really work, since, among other things back-dated documents were involved, but that was the lesser of the two problems. The other problem, as noted above was that the credits themselves weren’t real.
The Issue In This Case
The government was seeking an injunction against Ms. Hand-Bostick and Ms. Spinelli. They would be enjoined from:
(a.) organizing, promoting, or selling any tax shelter, plan, or other arrangement, that advises or assists customers to attempt to violate the internal revenue laws or unlawfully evade the assessment or collection of their federal tax liabilities;
(b.) making or furnishing false statements, in connection with such organization, promoting, or selling, about the allowability of any deduction or credit, the excludability of any income, or the securing of any tax benefit by the reason of participating in any such tax shelter, plan or other arrangement;
(c.) making or furnishing gross valuation overstatements (within the meaning of IRC § 6700) in connection with such organization, promoting, or selling;
(d.) preparing or assisting in the preparation of federal tax returns relating to any abusive tax shelter, plan or arrangement;
(e.) engaging in any other activity subject to penalty under I.R.C. §§ 6694, 6695, 6700, 6701, or any other penalty provision in the Internal Revenue Code;
(f.) engaging in conduct designed or intended to, or having the effect of, obstructing or delaying any Internal Revenue Service investigation or audit; and
(g.) engaging in any other conduct that interferes with the proper administration and enforcement of the internal revenue laws.
The Ruling
The Court had some harsh words for Ms. Hand-Bostick and Ms. Spinelli
…..it was unreasonable and reckless for them, as tax return preparers, to recommend to their customers that they take FNS Credits when they admittedly did not understand the basis for their customers’ entitlement to take such credits. Further, all of the FNS Credit transactions by Defendants were based on backdated documents purportedly effective the year before they were actually made. Defendants’ knowing use of backdated documentation to claim the FNS Credits in preparing their customers’ tax returns should have been a red flag and alerted them that something was amiss regarding the allowability of the credits taken. Accordingly, even though they had no duty of inquiry under section 6700, the court concludes that Defendants, as tax return preparers, reasonably should have known that it was unreasonable and reckless for them to recommend FNS Credits to their customers and prepare tax returns for their customers in which FNS Credits were claimed.
Nonetheless, the ruling was that the injunction was not really necessary. The Court indicated that the defendants had pretty well learned their lesson.
Overall, the court found Defendants’ testimony and their assurances that they would not engage in similar conduct in the future to be sincere. The court believes that Defendants have learned their lesson and will be deterred by their knowledge of the severity of potential penalties they could face if they violate the internal revenue laws in the future. After having to endure the costly and lengthy legal proceedings in this case and the Government’s exhaustive investigation for more than seven years; experiencing public shame, humiliation, and disfavor with clients; being the target of an IRS investigation, and knowing that some participants in the scheme received criminal convictions, Defendants would be more than foolish to engage in the same or similar conduct again in the future.
And The Reason
Well that’s the embarrassing part. It’s more or less something like what can you expect from a couple of accountants.
The court disagrees that either Hand-Bostick or Spinelli, as tax preparers, should be held to the standard of a seasoned attorney with full knowledge of statutory and case authority, and the Government has not presented any evidence or authority that persuades the court that tax preparers are held to the same standard as attorneys or are required in every instance to seek the advice of a tax attorney. Moreover, given the timing of the claimed losses and Defendants’ testimony that they thought that the deductions were appropriate at the time, the court concludes that Defendants’ conduct in this regard is not sufficiently indicative that they will continue to participate in or promote fraudulent tax credits or tax shelter schemes. (Emphasis added)
I don’t know that the Tax Court would have expressed the same opinion, since they deal not infrequently with attorneys who prepare their own returns and represent themselves in Tax Court. Some of those make this stuff look tame.