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Storytime - Part 1 of 3 - Energy Trader SNAFUs ๐ข๏ธ
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My largest client at a previous firm was an incredible learning experience. The type of stuff you can only learn by being so close to big mistakes. The next few editions, I'm going to walk through the technical lessons I learned - which will help explain how we got them out of $40 million of interest and penalties, including a call with Chief Counsel (big dogs at the IRS) who convinced us not to file a PLR because it would set precedent they didn't want set. ๐บ Advertisement ๐บ
I've read hundreds of operating agreements in the last 17 years - and I'm convinced that the biggest error in partnership tax returns is that they don't match what was promised to LPs in the agreement they signed.
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To solve this problem, I've launched OATaxReview.com. Previously, I'd only review agreements and tax returns for prospects or clients - but now I'm offering that to anyone as a consulting arrangement (GPs, LPs, CPAs and advisors). Would love to hear from you. ๐ค
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Back to the show ๐
BackgroundI can't share the company name for confidentiality reasons, but it doesn't really matter - the story is good all the same. They were a commodities distributor backed by traders. They would take physical possession of commodities, transport it, and sell it to another distributor (not an end user) - and once the contracts to buy and sell were booked, they were hedged with positions on the futures market. Sometimes they would take possession in the pipeline ๐ช, sometimes they would take take possession on a 18-wheeler tanker ๐, but their big movements were on barges ๐ข - selling the commodity to other countries. How I Got InvolvedOur audit team - back when I was an audit guy - had experience in auditing privately-owned commodities "traders". The trading is in quotations because they always took physical possession and were not speculative (read: betting). The first firm I was at had a decent little book of these clients where we cut our teeth on the accounting for them. This got us in front of big commodity banks (BBH, Macquarie, BNP Paribas) and one of those banks referred us into this client - as they were a start-up and we were a cheap provider. I was the audit manager and then partner for 5 years or so before moving over to tax - but I still owned the relationship so I stayed on as the tax partner (though much of the complex work like their provision was done by other offices by the time we merged with a national firm). Problem #1"Roger, if this is really what we have to pay to the government going forward, we're closing the business." That was the call I got from the CFO - a super sharp guy who had come up in a large international trading desk with no college education. What he was looking at was $800,000 of excise tax that was withheld by one of the majors who was a counterparty on one of their trades. ๐คฏ That counterparty had a sharp tax team and they discovered my client was missing a special excise tax registration (Form 637) that their previous CPA had advised them was unnecessary. That was dead wrong. Without this "distributor" exemption, my client was stuck as being a default seller to "end users" and liable for the excise tax. This set off a scramble to (1) get that form filed effective immediately, (2) call up the old CPA and see what they were talking about (they were just wrong), and (3) start working on getting that $800,000 back. Solution - KindaThe client handled the 637 filing with a major law firm in town - something we insisted on, as we didn't want any liability that large on over our heads. And I had an excise tax ace up my sleeve that I was hopeful would help. A former Big 4 tax attorney occasionally referred us work, and we sent him referrals for his tax specialty du jour (credits, studies, etc) that we didn't do. One of the things he did at the Big 4 was excise tax reporting and advising - so I called him up and ran this by him. He was baffled. He was certain that getting this in front of the right person at the IRS would free up that amount. So I connected him with my client. This is where things went sideways - kinda. The ex-Big 4 attorney engaged on a contingent basis for 25% of the recovery - $200,000. His estimate is that it would take him months of calling in and submitting requests in writing with all kinds of support. It did not. ๐จ Within 2 weeks of signing the engagement letter he found someone in the excise tax team at the IRS to listen and look into what happened. He faxed them the proof it was sold to another distributor and explained the timing issue. The agent got the $800,000 refunded as overpaid excise tax. And the attorney made the easiest $200,000 he'd ever made. ๐ฐ My client called me livid. After seeing how fast it was recovered, he was convinced he'd been had. He asked for a revision of the contingency but my referral didn't budge. It sucked because in Part 2 (next week), we really could have used his help navigating more excise tax SNAFUs - but we're banned by the client from talking to him about any of it. And he would have made more money over a year or two resolving the bigger issue. This was a wild ride for my largest client - and as a new partner was stressful as hell to manage and balance. But this was just an appetizer for the next phase of excise tax drama. ๐ค Next UpNext week, we'll cover the biggest penalty and interest abatement I've ever been a part of - $30,000,000 in penalties + $10,000,000 ish in interest when it was all resolved. ๐ซก ๐ฅ Hottest Finance Posts This Week ๐ฅโ
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