Accountants, Spencer Reed Settle Lawsuit

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The lawsuit filed by Spencer Reed Group Inc. accusing accounting firm Grant Thornton LLP of miscalculating the company's corporate taxes and the personal tax return of the late founder by several thousand dollars has been settled.

Jackson County Circuit Court filings do not indicate a settlement amount although the March 26 stipulation for dismissal with prejudice requires Grant Thornton to pay court costs. The malpractice suit, filed by co-plaintiffs Spencer Reed and founder Dick Plodzien's estate in October 2003, had been scheduled to go to jury trial April 4, 2005.

The lawsuit alleged Grant Thornton accountants overstated a loss on Plodzien's 1997 personal tax return by $1.66 million resulting in penalties, taxes and other expenses of an unspecified amount exceeding $25,000. According to court documents, the miscalculation stemmed from Spencer Reed's decision to change its tax status from a C corporation to an S corporation. According to the lawsuit, Grant Thornton did audit and tax work for Spencer Reed during the transition and failed to report capital gains on any assets carried over to the S corporation.

Also included in the lawsuit was an opinion letter dated October 28, 2002, from Ernst & Young LLP estimating that Grant Thornton overlooked $497,185 in taxable built-in gains. That meant Spencer Reed owed $174,015 in back taxes, not including penalties and interest.

Tax experts said that converting from a C corporation to an S corporation can be beneficial to companies wishing to avoid double taxation in the event of a dividend distribution or the sale of the company.

The difficulty of the S corporation conversion depends on the complexity of the business being converted, David Perky, a partner at TPP Certified Public Accountants LLC told the Business Journal of Kansas City.

“It's something you have to approach carefully because (with) some businesses you may have some hidden tax ramifications that you might not have known you had,” Perky said.

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