The trial, conviction and sentencing of Marc Howard Berger, tax partner in a large regional CPA firm, for assisting in filing a false tax return has not gotten much coverage beyond parroting DOJ press releases, which make him out to be a bad guy.

“We commend today’s jury verdict,” said Acting United States Attorney Alex G. Tse. “Tax preparers must know that they cannot willfully assist clients in defrauding the IRS and failing to pay their fair share.”

Photocredit: GettyGETTY

The Mistake

My own coverage, here and here, based on poring through the documents and my own experience as a tax partner in a large regional CPA firm, came to the conclusion that Marc Howard Berger was just an unlucky guy.  Not only did I not see the crime, I couldn’t even find the mistake.

I have kept plugging and have found an expert who seems to think I may be going to easy in my judgment of Berger.  He didn’t bring me around on that, but I think he did show me the mistake Berger made.  I can at least tell myself that I might not have made it.

The mistake was not bringing in a tax attorney early enough in the process. Here is a thumbnail of the events which are described in more detail in the earlier posts.

A Brief Summary

Berger was convicted of aiding in filing false tax returns for G. Steven Burrill, who managed biotech investment funds through a company called Burrill Capital LLC.  The LLC was a disregarded entity that dropped straight onto Burrill’s individual returns.

One of the funds Burrill  Capital LLC managed was Burrill Life Sciences Capital Fund III LLC .  We’ll call them the management company and the Fund. The Fund was required to pay a 2% management fee on its $283 million in assets and Burrill had a carried interest in the Fund.

Beginning in 2007, the management company began taking its fees a little early.  The practice grew until it had taken $18 million – more than it could ever earn in the Fund’s ten year scheduled life.  The management company only recorded as income the amount that it actually earned.  That was what was reported on Burrill’s individual return.

Berger’s firm was not doing the work on the Fund.  That was done by PwC.  One of the members of Berger’s team noticed the growing “deferred revenue” on the management company’s books while working on Burrill’s 2011 tax return.  We will get back to that.

Berger’s “crime” was not reporting the excess payments as income.  Rather once he became aware of them, he did a lot of research and concluded that the extra money was, in effect, a loan.  He encouraged the management company to document the transactions consistently with that position, which corresponded with how the transactions were reflected on the PwC financial statements.

That practice continued with the 2011, 2012 and 2013 returns.  It was in 2013, that the managing directors of the fund became aware of what was going on. That is pretty much when the “you know” hit the “you know what”. Burrill ended up with a thirty-month sentence pleading guilty to two counts of a 34 count indictment (Investment Adviser Fraud and Tax Evasion).

A Jury Verdict Should Be Respected

I spoke with Arthue “Kip” Dellinger about the case.  Mr. Dellinger is the author of  Practical Guide to Federal Tax Practice Standards.  He teaches on ethics in tax practice and is on the Tax Practice Management Committee of the AICPA. His also former Chair of the Division’s Tax Practice Responsibilities Committee of the AICPA.

Mr. Dellinger told me that he has heard quite a few people at his seminars sympathizing with Berger.  His view is a little different.  He pointed out to me that there was a jury there listening to the testimony that I just read and making a judgment.  We should not lightly dismiss the conclusion of a jury. He wasn’t saying that Berger was guilty, just that the jury deserves respect.

Where I Think Berger Missed It

Well OK.  I guess.  What really became clear to me from our discussion was the key error that Bergen made. (At one point, I had thought the error was having Burrill as a client).  Probably in 2012, but no later than early 2014, Berger should have gotten Burrill to hire a tax attorney to handle the revenue recognition issue.  The tax attorney would then have engaged Berger’s firm.

In that scenario, any directions to the management company to clean up its act would likely have been coming from the attorney and privileged.  The government would not have been able to advance the notion that Berger was enabling some sort of coverup.

The question of privilege in other areas is a complicated one, because of the pre-existing relationship between Berger’s firm and Burrill, but it couldn’t have hurt.

It is possible that a tax attorney might have discerned that Burrill had crossed the line in taking the extra money out of the Fund.  That might have created the 2013 crisis a bit earlier when it could have been managed better.  Burrill was not a Madoff just outright stealing money.  He was more of an over-optimistic entrepreneur who believed that it would all work out if there was just enough time for his magic to work.

Back to 2012, when Berger’s staff raised the issue.  At that point, the only thing that was clear was that Berger’s firm in following the management company’s numbers might have adopted an incorrect accounting method in 2007 or 2008, when the extra money started coming out of the fund.  The dollars had gotten pretty big, so you really should not try to unscramble that egg on your own.

The Other Important Lesson

One of the observations I have made in writing about this case is that tax practitioners generally are not as cognizant of the rules governing them as they should be.  When you get a power of attorney from a client  (Form 2848), among the representations you make are that you are subject of the provisions of Circular 230.  Has that prompted you to read them? Then there are the AICPS Statements on Standards For Tax Services.  When was the last time you cracked those open?

I got strong agreement from Mr. Dellinger on that advice.  He wrote me:

I do like your admonition about the SSTS’s as I was on the Task Force that wrote the current standards and Chair of the Tax Divisions Tax Practice Responsibilities Committee that approved them when issued.

Tax practitioners should definitely take caution from the Berger case and, perhaps, the lesson is when to call in the tax lawyer cavalry.

Follow me on Twitter @peterreillycpa. Non-tax matters check out We Are The Future Generations. Tax stories not quite forbes worthy on Your Tax Matters Partner.

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