added 9-8-98

Initial Work

I met John Disterdick at a women's business conference in early 1979. He took my card and later contacted me to represent his companies before the IRS, mainly involving a payroll tax problem. This work resulted in my being retained to do a write-up accounting and tax return preparation work for his companies. At the time, his companies were doing financial planning for individuals. They would do an analysis of a client's finances, including investments, retirement planning, and estate planning. The client would get a book complete with recommendations.

In 1980 As Mr. Disterdick's companies were growing, I recommended that he start doing his accounting internally. I recommended Charles Brink to advise him on computers and to do any specialized programming he might need.

In 1980, Disterdick hired an in house CPA (Lance Shermoen) to do his internal accounting.

As Disterdick's companies grew, he decided to expand his business by offering his client's investments, as they felt lost with a book of recommendations and no way to implement them.

Disterdick researched various investments prior to offering them to his clients. I would be asked to do an analysis for an investor as to the tax effects the investment would have on their personal situation. All work I did was as an independent CPA, and billed by my firm to T&FP. In this manner, I got to know several investors and was asked to take them on as tax clients.

Newcomb Government Securities Program

In 1978, Tax and Financial Programming Inc. (T&FP) owned by John Disterdick, started to sell a tax shelter in government securities. This shelter was a straddle in which a long security was purchased with a closely matched short T-Bill. The short security would be closed in the first year generating an ordinary loss (as a T-Bill was an ordinary item). Then suitable long positions would be placed in the second year to convert the ordinary gain into long-term capital gain. The Government securities dealer used was Newcomb Government Securities (NGS). T&FP raised about one million dollars in 1978.

In 1979 T&FP raised about three million dollars for the same dealer.

In 1980 T&FP raised about ten million dollars for the same dealer. To receive the maxim sales commission (about 20%) T&FP hired an alleged government securities trader named Joe Karroll.

T-Bill Program

In 1981, T&FP decided to open their own government securities dealer called International Government Securities (IGS) headed by Joseph Karroll. Karroll was instructed to find a secondary government securities dealer to trade with IGS. Karroll located, with the help of Leonard Weller, a company called Sentinel Government Securities who, according to Karroll, would not trade directly with IGS. Karroll, unknown to T&FP, formed an intermediary called Sandia Financial Instruments.

In 1981, T&FP decided to put all the investors into general partnerships made up from six to twenty-five investors without the promoter T&FP as a partner. In 1981, T&FP took in about twenty million dollars. T&FP closed all individual trading accounts with NGS and had another six million dollars transferred to IGS and set up new partnerships. NGS had lost almost all the funds in some accounts, which required another two million dollars to be paid by investors to IGS.

In 1981 Sandra Kardos, CPA prepared about 75% of the Partnership Tax Returns.

1982, T&FP continued selling partnerships for the first part of the year and then sold individual accounts for the balance of the year. Unknown to the investors, they changed the secondary Government dealer to MGI. They took in about ten million dollars that year.

In total, T&FP et al (John Disterdick) collected about $51,000,000 and returned only about $8,000,000, defrauding investors out of $43,000,000.

At the beginning of 1983, the investors were advised by a letter from T&FP and their attorney Robert Martin that the IRS was looking at the transactions from 1978 to 1981 and that the IRS believed the transactions were totally fraudulent.

In 1983, the IRS started to question the deductions taken by the partners of the Tax and Financial Programming (T&FP) partnerships, which invested in Treasury Bill straddles. Prior to this time, the IRS was auditing a prior program of T&FP’s which traded with a government securities dealer called Newcomb Government Securities (NGS).

By the time the IRS got to the T&FP 1981 and 1982 programs in 1983, a lot of the audit procedures were bypassed and taxpayers were issued 30-day and then 90-day letters. These taxpayers were not afforded the opportunity of individual audits. Since my firm represented several investors in the T&FP program, we attempted to meet with the IRS to try to resolve some of the issues, but to no avail.

We contacted Disterdick to try to get some documentation on the trades they had made for the partnerships but he refused, since his attorney Bob Martin had filed suit (IGS vs Sandia) against the government securities dealer where they purchased the securities, and they were part of the litigation.

We started by filing some 30-day letters, but soon came to recognize that IRS was not going to settle. Since the taxpayers and we thought the trades were real, and we had researched thoroughly the tax aspects of how the program ran and found nothing contrary to existing law, we didn’t want to pay erroneous taxes, interest and penalties.

The 1983 Partnership Returns

In early 1984, T&FP advised the investors that they would no longer file tax returns for the partnerships including the 1983 return. This is significant because of the IRS penalty for failure to file a partnership return is $50 a partner per month for up to six months. This would amount to $540,000 per year in penalties assessed against the partners. As T&FP was not a partner they would not be liable for the penalty.

We wrote a letter  agreeing to file the needed returns and protect the partners from the $540,000 penalty. I believe I asked the partnerships for $200 a partnership to file the returns. By filing these 5 years of returns, we saved the partnerships $2,160,000 in penalties. Disterdick then refused to cut the checks from some of the partnership to pay my firm.

T&FP announced that while they had collected $500,000 from the investors/Partners as a defense fund to protect the investors, they were saving that fund and refused to use it to prepare tax returns.

In 1984, the IRS started issuing statutory notices (90-day letters) which require the taxpayers either to pay the proposed liability and penalties in full or challenge the assessment in U.S. Tax Court. The statutory notice typically had penalties which were nearly equal in amount to the tax claimed due.

T&FP's attorney, Robert Martin, who had the $500,000 defense fund, then wrote letters to each investor advising them that he would defend their case in U.S. Tax Court for a fee of $5,000 plus 5% of the proposed liability and penalties. He said he would save the defense fund fee to pay for the test case that went to trial.

He failed to disclose that he was simultaneously representing the promoter (T&FP) in the IGS case and before the IRS.

When we started to see how expensive this could get for the taxpayers, we contacted Disterdick, the owner of T&FP about getting some support from the $500,000 defense fund he had set up. He refused to let any of the investors or our firm have any access to this defense fund, as he had given the fund to his own attorney. His attorney, Bob Martin, then wrote to all the investors offering to represent them for a fee of several thousand dollars plus a percentage of the taxes and penalties involved.

T&FP and Martin refused to allow any of the collected fund of $500,000 to be used to defend the Aardvark Partners. Both refused to provide any data on the actual trading. This refusal required the Aardvark suit both as a discovery tool and as a funding tool for the IRS defense.

Several non-client investors were also contacting my firm at this time for help, since they knew I used to be T&FP’s accountant and had prepared some of the partnership returns. Charles Brink, of my firm, who had also previously worked for T&FP and was familiar with the program, and I decided, after meeting with the IRS, that the investors were not going to be helped by Disterdick or his attorney.

Since we would have to defend so many of our clients regarding this program, Chuck suggested that it wouldn't be much more work to defend the whole group. Boy was he wrong!

The exorbitant fees Bob Martin was attempting to charge along with a percentage of the liabilities and the obvious conflict of interest as he was representing Disterdick (T&FP) at the same time made it clear the defense fund was not going to be used for the investors (Exhibit Q).

It was another case of the investors getting damaged by the promoter then offered to be saved by the promoter’s attorney, then getting damaged by the promoter’s attorney. When statute of limitations is about to expire, the investor is told the attorney can’t help them because the attorney would have to go after the promoter, and he had a conflict of interest since he represented the promoter, the investors would have no time to get additional council, and then with the IRS after them and no one to defend them, they would get damaged by the IRS.

The Defense Group

We decided to try to put together a defense group of some sort to assist these investors, against IRS. Some "investors" had lost their life savings in this "investment". Charles Brink took charge of contacting the investors since we did about 75% of the partnership returns for 1981 and we had the name files for the other partnerships we had not completed, we had everyone’s name and address. (Bill Snyder, a CPA on T&FP’s payroll filed the balance of the 1981 returns.)

1981 and 1982 Tax Court Cases

As the 90-day letters started coming in, and for our convenience, the IRS transferred the group handling the shelter from Laguna Niguel, CA. to Louisville, KY. We contacted a CPA-tax attorney Walter Weiss to file petitions in Tax Court. We tried to do as much of the work as possible to keep fees low. Since many of the 90-day letters were similar, we set up several computer generated versions of the Tax Court Petitions on my computers (done by Charles) which Walter and I formulated and which could be customized to the individual investor. We decided to put Walter on a monthly retainer for his fees. We would discuss the 90-day letters, draft the Tax Court Petition for Walter’s review, and after changes, he would sign and file them in Tax Court. I recall periods where all we did were Tax Court Petitions (up to 15 or 20 a day).

As Martin's fees were excessive and he had a clear conflict of interest, we joined forces with tax attorney Walter Weiss, who had no previous connection with this program, and together offered to assist the investors in filing petitions with U.S. Tax Court for a fee of $700, without any percentage of the proposed liability.

Many investors complained they could not afford the full cost charged by Robert Martin (Average of $7,000 per case).

The fee was quickly reduced to average $300 over all petitions filed as compared to the average fee the promoter's attorney, and holder of the defense funds, Robert Martin, was charging of $7,000.

We then, with Walter Weiss, started filing Tax Court cases at a furious pace. We filed 610 petitions, in some cases with the petition covering up to 5 years.

Our fee was quickly reduced to $260 as simply a fee to get the case filed and before the court. We advised the Partners that the balance of cost of preparing, prosecuting, and defending the case would be paid from recovery of funds in the Aardvark suit.

Sandra Kardos CPA paid the filing fee for the Tax Court ($60.00) and the postage (about $10.00). For the 610 tax Court filings that was $42,700 of expense

The 1983 Statutory Notices

On the 1983 tax year the IRS tried to triple charge the Partners. In 1987, IRS decided to notice the 1983 year and argue the taxpayers had a relief of debt for that year. For that year, they used the amount for relief of debt on the negative partnership capital. Not just what the partners had deducted but including the huge amount of investment interest that was on the K-1 but not taken by the partners on their returns, at my suggestion. This amount was claimed by the promoter making the liability for the partnerships at close to one billion dollars.

The IRS argued that while the deductions were illegal, the relief of debt was legal, therefore the taxpayers owed the billion dollars along with a 50% penalty and various other penalties. As these were Tax Equity and Fiscal Responsibility Act (TEFRA) controlled Final Partnership Administrative Adjustment’s (FPAA), we filed just 5 petitions for all the partnerships.

By removing the claimed relief of debit of the Partnerships (the TEFRA Action) in 1983, which claimed additional gain of $895,000,000 at the same 64% marginal rate saved $572,800,000.

IRS claimed all taxpayers were negligent calling for a 5% of tax and a 50% additional penalty on interest due for each year. In all cases, they claimed the section 6661 penalty of 20% of tax due. In many other cases they also claimed the over valuation penalty along with late filing penalties by claiming the extensions were invalid.

By convincing IRS to remove all penalties we saved the 5% of tax and 50% of interest Negligence penalty, the 20% of Tax section 6661 Penalty and various other penalties which saved the Partners in both the improper tax and correct tax due (about $250,000,000). This is a saving on section 6661 penalty of $146,560,000, on the 5% of tax penalty of $36,640,000 and on the 50% interest penalty of $833,000,000.

The Filing of Aardvark

In mid 1985 the IRS agent in charge Randy Tachiki, pointed out to us that the promoter, Tax and Financial Programming and Sandia were claiming that the trades were false and that the investors were co-conspirators in these fraudulent trades. IRS fully intended to ask for every possible penalty against the investors and refused to allow any deduction for the $43 million dollars actually lost.

I took a position that this was false and that the all the trading was done in good faith and that the Partners believed the trades were real. Tachiki asked, well if you think you were defrauded, why haven't you sued the promoter?

To  pay for the cost of the IRS litigation and to determine if the trading was real, as the promoter refused to give us any information about the trades, we decided to sue the promoter. We knew T&FP had errors and omissions insurance coverage, so we asked each partner for 2% of their investment to get the litigation started. Charles Brink asked for and got a power of attorney from the investors and was elected as Tax Matters Partner for all of the partnerships so that we could get copies of IRS notices and deal with IRS. I had already received a Power of Attorney from the majority of partners to handle tax matters.

Even before we had raised the funds from the investors, Charles started contacting attorneys we knew to interview them or referrals to handle the litigation. I did the necessary research and we advanced a retainer, as we were running out of time to file a suit.

This prompted me to send a letter to every investor asking them to join in a common litigation against the promoter. As the actual investors with T&FP were partnerships, the plaintiffs had to be these same partnerships. The partnership agreement required that all decisions be made by a majority vote of the partners.

Each partner was asked to:

A - Contribute a fee equal to 2% of his original investment,

B - Sign a power of attorney authorizing Charles Brink be his attorney in fact (Exhibit B and O) for the partnership, to defend the IRS case for the partnership, and to bring suit against T&FP to either prove the trading was real or for damages, and

C - Understand we did not expect to recover any money to be paid to the partner and at best we might get enough from T&FP to pay the cost of the IRS litigation.

Charles took charge of the lawsuit, and I handled the problems with the IRS. At that time, I had a staff of 2 full time employees and one or two part time employees, besides Charles and myself. As we got into this there were long periods of time when three or four of us were on the phone constantly with investors or IRS. We had extra staff to help with file organization, copying, collating, and mailing data to investors. We had to get more file cabinets and even put files in storage, as there were so many files (the partnership’s tax file, bank file, and accounting data file, as well as a file for each investor we were working with.

We never thought that there would be enough money left over to return to the investors and told them so from the start.

A follow-up letter was sent later to partners who did not join immediately

We held meetings at ten hotels in which about 70% of the partners attended in which we discussed these issues. To reduce the cost of the Aardvark case, and to properly represent the true injured parties, only the partnerships were named as plaintiffs and an agreement was made with Wyman that I would expend the money and effort keeping the partners appraised of the litigation through Sandra Kardos, CPA.

The majority of each partnership signed the power of attorneys but only about $141,000 was raised from the partners to deal with IRS and pay for filing the Aardvark suit. I filed the Aardvark suit as attorney-in-fact for each partnership named as plaintiffs in the case using the power of attorney. Sandra Kardos and I personally advanced money to Wyman, to file before the funds were raised from the partners.

The suit was filed in January of 1986 as a declaratory relief suit, asking the promoter (T&FP) to prove the trading was real and if they couldn't prove they were real, asking for fraud and RICO damages. A declaratory relief suit was filed because had we just demanded recession of the trades or fraud, we could not continue our tax court litigation cases because we would have no belief to base the Tax Court cases on.

Settling the IRS Cases for the Aardvark Partners

The task of dealing with IRS was overwhelming. Since we were such a small firm, trying to keep track of how much time was spent on each investor would have been prohibitive. Unlike attorneys, accountants usually bill by project. In very large firms, time records are kept, but not necessarily to bill by, but to determine the profitability of a job when completed. Since almost everyone was constantly on the phone explaining very complex tax issues, it was impossible for us to keep track by individual client. In many cases, we deal with the investor, his spouse, his accountant, and his attorney. There were 1400 investors and their spouses and accountants to explain the problems to. We answered all questions both to those who became part of Aardvark and to the others who did not.

Several investors have divorced, doubling the number of people we have to deal with. Several investors have died, also complicating our task. We also had no assurance that any funding would be available to pay us, therefore the added cost of extensive time records would only increase the cost of the IRS defense out of our own pocket.

Due to the change in laws regarding the deductibility of interest, we had as many investors as we could pay in the amounts we estimated were due. Therefore, in 1986, we spent the whole Christmas season calculating what taxes and interest were due, and we had taxpayers lined up in and outside our offices with checks to the IRS and FTB on New Year’s Eve. We took them to the Van Nuys sectional of the US Post Office and had  them postmarked by midnight so the interest could be deducted. We estimate that we took over $5,000,000 in checks to the post office in payment of tax and interest due on the T&FP shelter that night. Working through the whole holidays season were Charles Brink, Jeff Lentz, some office staff and myself. This continued on at each year-end as the interest deduction was phased out over five years.

For example, my current assistant, Jeff Lentz, has been with us 7 years, and like his predecessors, he has spent virtually all of his time on T&FP related matters. Jeff has worked an average of 50 hours a week, with an average of 90% of his time spent on the T&FP program.

This would be 2,340 hours per year which would, at the same $60 per hour rate charged by Rucker for their computer operator (GAS) in 1989, be the equivalent of $140,400 per year by itself and over his seven years of employment would be $982,800 alone, if we charged the same rate as attorneys charge.

Our telephone bills and postage bills soared as the IRS as well as numerous investors were scattered across the country. We did so much copying in the last 10 years we have gone through 3 or 4 copy machines. Supplies seemed to be devoured and overhead soared. As there were more and more deadlines, almost all our efforts were concentrated on the T&FP clients, forcing us to put our regular tax clients on extensions. Many did not like this idea and we lost a majority of our clients due to the T&FP project.

As more and more cases accumulated in Tax Court, they were eventually referred to appeals for settlement. Once we reached a settlement, we had to wait for IRS to process that settlement for each investor. This settlement allowed the taxpayer to deduct their initial investment in the year made and remove all income and expenses from other years.

Various agents interpreted this to mean remove the deductions and leave the income in, thereby taxing the individual twice. In cases where an earlier year was closed, to be fair, we agreed IRS should leave the subsequent years as is, thereby not giving the investor a double advantage. All penalties were dropped. The code provides that if someone is involved in a fraudulent tax shelter, they are assessed interest at 120% of the regular rate. It does not differentiate between one who is the defrauder, or one who is defrauded, as these investors were. Therefore, the higher interest rate would not be waived and the partners paid it.

Since everyone had more than one year involved, and generally, a different agent assigned to each year, the IRS tried to refund overpayments to the taxpayers and charge them interest for deficiencies in other years. This is against IRS regulations and a long battle ensued trying to get IRS to take the over-payment at the date of payment from a later year and credit it back to the earlier year.

The result under the IRS method would have been that the taxpayer gets paid interest which is taxable (and at a 2% lower rate than IRS is charging on deficiencies) and charged interest on the earlier year up to the current date (not deductible) even if the payment was made five years ago! We tried to get all our clients to notify us when they receive a refund from IRS or FTB and let us determine whether it is correct or needs to be returned.

To complete the audits and settlements the IRS scattered the cases across the country to agents unfamiliar with the case. It seems that each agent only had authority to work on only one year at a time, as he interpreted the settlement agreement, adding items that have no relationship to the case. This involves a constant stream of correspondence and in many cases additional research to resolve the problems created by these people unfamiliar with what is going on.

After the federal tax is settled, we move on to the state, whom we have tried to put on hold until the federal is settled. We had the investors pay in what we calculated to be due, but still have to officially settle the cases. In several cases, even years after final settlement documents are signed, the IRS or FTB tries to assess the liability again or just attached a lien or levy against the taxpayer. This takes a lot of time and effort to settle. We have to deal with outraged taxpayers as well as agents who sometimes listen and try to help, or agents who think they are God.

Accountants have no privilege as attorneys do, however, that does not mean that an individual’s records are public either. Disterdick's attorneys Don Fields and Marc Kent, in an attempt to stop us from prosecuting Aardvark, filed a complaint against me for refusing to give them the partnership records. Both were Disterdick’s attorneys and Disterdick had all of the records they were requesting. They filed a complaint in 1987 with the state Board of Accountancy and the matter went to a full board hearing. I was exonerated, as they had no right to any of the records.

Even with the minimal fees we charged, some investors refused to pay us any fee for the work we did. The money we received sounds like a lot, but when you consider that we have spent at least 18 years working on this project and factor in all the costs including payroll, equipment and general overhead, we lost money, as well as clients. I have no doubt that we could have made more money with less stress without this project. We continued to do the work because we made a commitment to the investors and, as corny as it sounds, it was the right thing to do.

The money ran out in 1992, but the work did not.

We are still working on Aardvark Partnership tax cases