When the Money Doesn’t Matter
I was engaged by a guy that was a partner in a partnership in October. I charged him a retainer, meaning all the phone calls and emails were being paid for.
There were tons of calls and emails. Mostly were due to the fact that the partnership that he was involved in had to have a Reviewed Statement that was going to be done by a CPA.
I explained to the client that a Reviewed Statement was prepared under Generally Accepted Accounting Principles (GAAP), which wasn’t necessarily the accrual method of accounting for tax. I explained that any expense that the partnership was under contract to pay could be accrued out for three months after the end of the year, provided that it matched income. We had several hypothetical discussions about this topic.
I finally got the Reviewed Statement, and like any good accountant, went directly to the footnotes. In the footnotes it confirmed that income was generated past the year end. It also gave a calculation of the capital account. So, I took the financials and began accruing expenses.
This client wanted to be involved from beginning to end, which was a mistake on my part. He wanted to see every calculation, etc. I asked for the percentages of the partners for their capital account.
Now, I had the calculation from the CPA statement, but this guy gave me a different calculation. I used his calculation, and sent him a draft of the return. According to him, there were mistakes. Most “mistakes” were things like why we were rounding, why is this partner’s capital account negative, etc. It was all that way because that is what he told me.
He made an appointment with me every day and honestly it was like beating a dead horse. He went through his retainer and I charged it again. I would send him emails on a Saturday at 3 am, and a response would come right away. It got to the point where it felt like I was this guy’s employee.
This began to drag on to a point at which every client of mine wanted my time and I sent this guy the final return. Of course this guy was not happy with the capital accounts and I will tell you why.
After many conversations with this guy, it turns out that the other partner’s agreement was that they would receive $5 million in distributions and this guy would receive the guaranteed payments. The other partner’s capital account couldn’t be negative, because this guy would have to come out of pocket and pay the difference. Then he mentions that January 1, 2018 the other partner pulled out and gave me the new agreement.
I have been in practice for 24 years, I know when there is going to be a lawsuit and I didn’t want to be in the middle of it. The guy sent me the operating agreement for 2017 and the amended one for 2018.
Now, from experience, I have never seen a partnership work out as ultimately there is a fight over money. The operating agreement was put together by a tax attorney and honestly the way these people were going to be paid and the special allocations didn’t make any sense.
I asked to talk to the Tax Attorney and realized that the operating agreement is a legal contract. Normally, I can navigate it, but because I kept thinking of the lawsuit that I knew was coming, I wanted the person that wrote the contract to give me specifics. I told the client this, sent the attorney an email explaining what I needed and copied him on email to the attorney.
Now, I consider myself a Southerner. I was born in Indiana and when I was two I moved to Florida where I still reside. Southerners are fine until we are disrespected.
I called this client the next day and explained to him that he was asking me to interpret a legal document, and how that was an unauthorized practice of law. The guy says that he had been talking to several accountants, and it was obvious that I had no clue what was going on.
My response was “it is your right to fire me” and I hung up the phone. I had delivered the three tax returns with a bill of $25,000 that I knew I would never get paid.
The way I took this guy’s comment was that this “Yankee Slicker” thought I was some Slack-Jawed-Yokel. Any other accountant will happily take your money, but I know this is going to court and I have no interest. He called back and I didn’t take the call nor call him back.
The lesson here is that don’t ever let someone disrespect you because they are paying you, it’s not worth it. Secondly, your first instincts are usually right.
There was a lot of money involved in this partnership. As I said, I never saw a partnership work out and in court the capital account debacle would be blamed on me.
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Craig W. Smalley, MST, EA, has been in practice since 1994. He has been admitted to practice before the IRS as an enrolled agent and has a master's in taxation. He is well-versed in US tax law and US Tax Court cases. He specializes in taxation, entity structuring and restructuring, corporations, partnerships, and individual taxation, as well as...