Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Wednesday, September 28, 2011

CPA’s Warnings Harmed Clients in the End

Warning L. Michael Stelmacki was the CPA for Southwest Missouri Bone and Joint Inc. (SMBJ). Brain Ellefsen owned SMBJ and his brother, Mark, was the corporation’s business manager. In 1997, the Ellefsens attended a presentation on the Aegis Business Trust System, which utilizes foreign and domestic trusts to shelter assets from taxes. Stelmacki urged the brothers to not participate in the Aegis system, but the Ellefsens decided to enroll in the system anyway in July 1997.

For two months Stelmacki asked his clients to reconsider their enrollment in the Aegis system and sent the brothers articles on the IRS’s crack down on abusive trust schemes. Though the Ellefsens did not head their CPA’s advice, they did keep him on as their preparer.

On SMBJ’s 2000 corporate tax return, the corporation deducted the transfers to the Aegis-created entities as management fees. Brian Ellefsens declared that he had no interest or authority over any foreign accounts on his personal tax return. Stelmacki requested that Brian represent in writing that the transferred management fees were legitimate.

In 2001, Stelmacki raised concerns about the corporation’s categorization of the transfers to the Aegis-created entities as management fees. Stelmacki informed the Ellefsens that the expenses would likely not meet the IRS test as being ordinary and necessary business expenses. Stelmacki included a number of articles discussing abusive trust schemes and the possibility of criminal ramifications in his communications with the brothers.

Mark informed Stelmacki in September 2000 that the corporation had hired another individual (an accountant associated with Aegis) to prepare its 2001 return. In 2003, still concerned for his former clients, Stelmacki sent the Ellefsens an IRS press release that listed offshore transactions as one of the "dirty dozen tax schemes.”

Again, the brothers did not heed Stelmacki’s advice and were later convicted of conspiracy to defraud the United States. In U.S. v. Ellefsen (108 AFTR 2d 2011), the appellate court upheld the brothers’ criminal convictions. In the end, though Stelmacki intended for his numerous warnings to help his clients remedy their actions, the warnings actually served to help the government build its criminal case against the Ellefsens.

See Peter J. Reilly, Can a CPA Bury his Client by Trying to Save Him?, Forbes, Sep. 25, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.


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