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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

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.

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

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.

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, 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.