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LARCENY IN LADUE?

February 14, 2008

Ladue, Missouri, is a wealthy suburb of St. Louis, comparable to Lake Forest in Chicago. If a complaint filed this week by the Justice Department is any indication, some of that wealth comes from using bogus S corporations to deduct personal expenses.

The complaint seeks to bar Frank Zerjav, Sr. and his son, Frank "Tiger" Zerjav, Jr., from engaging in tax practice. The Justice Department alleges that the Zerjavs use a simple tax plainning method that could be summarized as follows:

1. Set up an S corporation.
2. Put all of your personal possessions in the S corporation.
3. Deduct them.

From the complaint:

21. At so-called tax planning seminars defendants advise customers how to improperly reduce their reported federal tax liabilities. 22. Defendants charge customers a fee of approximately $2,500 for the tax planning seminars. Defendants call the seminars the “Tax Advisory Coaching Program.” 23. During the Tax Advisory Coaching Program defendants advise customers to set up S corporations for the purpose of paying the customers’ non-deductible personal expenses and then claiming those expenses as tax-deductible business expenses. 24. According to defendants’ promotional materials, the Tax Advisory Coaching Program “shows owners how to structure and operate with the right entity and apply techniques, tactics and ideas that help make life less taxing. Proven strategies and methods can be implemented that reduce or even eliminate taxes.” 25. Defendants give customers’ “homework” as part of the Tax Advisory Coaching Program. The homework consists of instructing the customers to read the book Inc. & Grow Rich!, and to determine: 1) the square footage of each room in the customer’s home; and 2) the value of any artwork, collectibles, exercise equipment, tools and other personal property owned by the customer.

Inc. & Grow Rich? "Incorporate & Grow Rich!" is available at Amazon.com; 29 used and new from $17.00! In case you'd like your own permanent injunction.

26. Defendants then use this information to create bogus transactions for customers involving the newly formed corporation. Defendants use the homework information to determine the amount of phony reimbursements the newly formed corporation should make to the customer. For example, one Missouri customer provided homework responses to the defendants indicating that the value of his personal assets was $25,995 including a “precious moments” art collection ($10,000); humidor ($100); DVD player ($400), VHS player ($200), and a curio ($800). On February 27, 2005, the Advisory Group wrote the customer a letter confirming the value of his personal assets at $25,995. Defendants then improperly deducted these items on the customer’s 2004 1120 S federal tax return using Depreciation and Amortization Form 4562.

The complaint also alleges that an NHL hockey player was one of the Zerjav's clients, and that he claimed improper deductions. Presumably not the Precious Moments collection.

Mr. Zerjav seems to have a bit of a backstory. He contributed over $18,000 to Republican candidates in 2004 and 2006. A fat lot of good it's done him. His membership in the American Institute of Certified Public Accountants was terminated effective July 1, 2000 as a "disciplinary action," though the AICPA website doesn't provide the details. A "name search" for CPAs at the Missouri Professional Licensing website comes up with only one Frank Zerjav.

The Moral? Just putting something in a corporation doesn't make it deductible.

Links:

Justice Department Press Release
Complaint

UPDATE: I have closed this post to comments and removed one of them. Obviously opinions are pretty heated about the Zerjavs. I don't believe any of the comments were libelous, but I don't care to push that line, either.

We allow comments as a service to the readers. We love comments. Our love doesn't extend to profanity or personal attacks on other commenters. Vigorous discussion yes, flame wars, no. The line between discussion and flaming is arbitrary, but we'll call them as we see them. Of course, anything that seems libelous or defamatory will go; if you see a comment that you think crosses the line, send me an email (jkristan -at - rothcpa.com) and I will deal with it.

UPDATE 2: I removed the rest of the comments. Better safe than sorry.

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