Thursday, February 25, 2010

Day 36 - Trading Catatonia with the IRS

          I had lots of discomfort and lots of blood in my urine today. Thank God for the spanking new bottle of hydrocodone. Kelly Ripa was looking spectacular this morning, but not so good that I didn’t get up and go take a nap in the middle of the show. It takes a little medication for me to get interested in Kelly, but just a little too much and I’m right off her again. There’s a delicate balance involved.
In my wooly youth there was an underground comic I used to enjoy about a bunch of inveterate stoners called “The Fabulous Furry Freak Brothers.” At some point they developed a kind of life maxim that was repeated frequently in the comic and eventually became a cult mantra for the times: “Dope gets you through times of no money better than money gets you through times of no dope.” Leaving aside the relative truth or fallacy of that particular statement, there is often a relationship between dissimilar objects like dope and money or hydrocodone and Kelly Ripa or drudgery and leisure that needs to be maintained within a narrow range of ratios in order to work at an acceptable level of satisfaction. Now that I’m out of work and having to take medication to moderate my various pains, I’m finding a lot of my ratios are getting out of whack. Hopefully something will happen soon to reestablish some semblance of order and balance.
I owe the IRS a million three?? I guess it could be worse.
I lost ten times that much in my trading account in the last 20 minutes.

          My reveries today went back to Henry and all the abuse and injustice associated with working for him. In spite of his affronts to good manners and decency he was always interesting, especially when considered next to the anal bozos I have worked for since. Henry was a megalomaniacal sociopath, but he was always direct and unapologetic about it. For this reason he was almost entirely predictable. For instance when he stiffed my wife on the $30,000 real estate commission I knew he was going to do it and warned my wife to get a written contract before she set out to sell his house.
“He promised,” she said, and so he did. In the end though, when he betrayed her trust, broke his promise, and cheated her out of her livelihood, it was just ‘bidness.’ It was entirely within the norm of Henry behavior not only to stiff her on the commission, but to be surprised and a little hurt when she got angry about it.
          When Henry said he loved me the day I almost killed him, I have no doubt that he believed it. Henry had no idea what love is, but, to the extent that he was capable of experiencing emotions and affixing labels to them, however bizarre to the rest of us mortals, what he felt for me and my wife was genuine affection. Now that we are not associated with him on a daily basis, he will not ever think of us again unless there is some immediate benefit available to him in the reaching out. When such a situation presents itself to him however, we will be the first people he thinks of. That’s about as much as one can hope for from Henry.
           Henry used to delight in telling people I was the only person on the planet that he trusted enough to grant power of attorney over all his affairs. That he had not actually done so did not trouble him very much, or me either for that matter. He had given me power of attorney over his income tax issues, and probably that was close enough to ‘all his affairs’ for Henry as tax matters occupied a large percentage of his psychic energy. Henry was one of those people who would rather lose a thousand dollars of real money to real crooks than give up a hundred dollars to the IRS. Fortunately for him I was able to pull his fat out of the fire several times when it came to his taxes.
Henry never really appreciated what I actually did for him, but he did appreciate what he thought I did for him, which was keep him from having to pay any taxes. I didn’t really have much to do with that happy state of affairs. The real reason Henry didn’t have to pay any taxes was that he never made any money. He was an appallingly bad businessman—completely clueless in the intricacies of managing his assets to generate profits and positive cash flow. He was however a master of leverage, and what he managed to do was build a huge and precariously balanced house of cards on credit. He was always one deal away from disaster, and he took us all to live with him on the bloody edge of the precipice.
          What I actually did for Henry was not nearly so exciting, but was, at times at least, immensely satisfying. One such occasion had to do with an IRS audit. No one likes to get audited—especially Henry. He was so completely and naturally larcenous at heart that he couldn’t imagine getting through an audit unscathed. In addition to that, he did not trust the IRS or any of the agents in its employ to deal fairly with him—not since he had admitted to a female agent (long before I met him) that he was knocking down cash, and she had the brass to bring him up on charges.
          The real irony in that particular incident was that Henry had admitted to the impropriety, not out of contrition or even because he thought that he was about to be found out, but rather because he believed that the female agent would be so impressed with his resourcefulness and temerity that she would consent to sleep with him. He did it to get laid, but instead he got screwed. That at least was Henry’s take on it. I would love to talk to the agent and hear what she has to say about it. I imagine that it is, for her, a tale that grows larger and sweeter with each telling.
          So when Henry got the notice that he was going to be audited again he rushed down to my office, threw the envelope on my desk, and told me to handle it. Henry did not want to confront or be confronted by anyone from IRS. He just wanted me to make the whole thing go away.
          The auditor turned out to be another woman. I’d dealt with a number of auditors in various capacities at that point in my career. I thought that I was batting a thousand with them. That is most of the audits I’d been involved in had resulted in a ‘no change’ finding, meaning no additional tax due, and those that had not, amounted to not more that a few dollars each—essentially the same result. My opinion of the process and of the agents involved was this: an audit is meant to be fair, and the auditors who conduct them are just regular people trying to do a difficult and tedious job in which they are usually regarded with fear and loathing. Always I had treated the agents and auditors with whom I dealt with consideration and respect. They had done the same with me.
          This new auditor however seemed to be cut from different cloth. She was as unattractive and disagreeable a person as I had ever had to deal with. She was not just unfriendly. She was imperious. She was beyond the reach of such charm as I had managed to develop to that point in my life. She would not be led. She would not be cajoled. She would not be persuaded by reason, logic, or even by beautiful reports. She was a plodder, so I let her plod.
          It took forever. She examined every aspect of our business for the previous three years. She looked at payroll records, bank records, financial statements, invoices, receipts, notices and minutes of the board of directors. If it was on a piece of paper she looked at it. She said not one word about any of it—not to me at any rate. I assumed that she had found nothing to discuss. I knew that our returns were true and complete and supported by the underlying books and records. I knew we were clean as a whistle because it was my job to make sure that we were. That was the only way I was going to keep Henry out of jail, and keeping him out of jail, if you will remember, had been his sole mandate to me.
          Still the agent plodded on, and I began to suspect that she was hiding out with us. She either didn’t want to go back to the office or she didn’t want to start the audit they had scheduled next for her, so she was going to drag our audit out until they reassigned her next job. I couldn’t imagine why else she was taking so long to conduct what should have been a routine examination.
          It took six weeks to get my answer. After an absence of several days the auditor called to tell me she had finished a draft of the final audit report, and wanted to review it with me. We made an appointment for the following day. She showed up in her usual grumpy mood and started off our meeting by telling me that her final additional assessment of tax was going to be $1.3 million. I pretended not to be alarmed, which was actually pretty easy because all of my synapses and all of my vital organs had shut down the second she mentioned $1.3 million. It is an easy matter not to register surprise when you are catatonic.
          She gave me a copy of her report. My immediate plan was to hide in a closet until after closing time, and then to get into my car and drive to Argentina. I didn’t know if the U.S. had an extradition treaty with Argentina or not. It was not a fully developed plan. I looked at the paper she had handed me. It was an IRS form, a fill in the blanks form with spaces for the essential findings, the applicable code sections, the amount of the related assessment, and so forth. I needed to get Henry to sign it to finalize the outcome. The entries on the form were made by hand in a tightly crabbed block print so tiny I needed a magnifying glass to read most of it. I looked at the assessment. $1.3 million is a huge number—maybe not to the investment bankers and Wall Street traders who are largely responsible for our current financial crisis, but then, to Henry and me at any rate, it was an astronomical sum. Henry was going to have a stroke.
I looked at the reason for the assessment. The auditor had asserted that Henry had taken deductions for losses in excess of his basis. I stopped and read that part again. I knew that was wrong. I sat down and waited for my vital organs to reboot. It took several minutes.
          I had set Henry’s company up as what is known as an S Corporation. An S Corporation is a special kind of corporation that is taxed as if it were a partnership. That means that instead of the corporation paying any income tax, the corporation’s income and losses are passed through to the stockholders and reported on their individual tax returns. Henry’s corporation had only spun losses, so Henry, the sole stockholder, had deducted the company’s loss each year from his other income to arrive at the adjusted gross income on his Form 1040. When I say that Henry deducted the losses, I mean of course that I did it for him when I prepared his annual returns.
Now there is a limit to the amount of losses that a stockholder in an S Corporation may take, and that limit is the amount of money the stockholder has actually invested in the company. This is called his basis. The basis is adjusted upwards for any profits passed through to the stockholder and downwards for any distributions of cash or property taken out of the company by the stockholder. The loss deductions taken by the stockholder in total may not exceed the stockholder’s adjusted basis. This sounds complicated but it is actually very simple. It is also something that I took a great deal of care to calculate correctly each year. I knew that the auditor was wrong.
          I went down to the office she was using, and asked to see her calculation of the adjusted basis. As soon as she showed it to me I knew what she had done. She had started with the adjusted basis at the end of the period under audit—a number from which the distributions Henry had taken had already been deducted. Then she deducted the total of all the distributions that Henry had taken. She had in effect reduced his basis twice by his distributions. Her math was wrong. I tried to put on a considered and avuncular air. This is hard to do when your ego is turning cartwheels as if you had just checkmated Bobby Fischer or stripped a basketball from LeBron James. Still, as gently as possible under the circumstances, I pointed out the error in calculation to the auditor.
She didn’t register any surprise or alarm. I suspect that this was because all her vital organs had just shut down. I knew just how she felt. She’d walked in there with a $1.3 million assessment under her belt. She thought she was going to be a big hero back at the office. She thought that she was taking down a big player who’d already copped to a felony evasion charge. Her career was made one minute, and then, thanks to me, in the next minute—not so much.
She sat looking at the offending calculation for about 30 seconds, after which she uttered a single word: “Oh.” Then she packed all her work papers and schedules into her valise and left. I got a ‘no change’ notice the following week. Henry thought that was just as it should be, and he was right.

No comments:

Post a Comment

Comments are always welcome. Tell me what you like and what you don't. Information, encouragement, criticism--I don't care. A day where I don't learn something new is a day lost to me.