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In July, the South Dakota Supreme Court issued its unanimous decision in Meyers vs. Eich, 2006 SD 69 authored by Justice Konnenkamp. While the facts are much too detailed and complex to adequately summarize here, the transaction boiled down to Mr. Meyers advancing sums to Michael and Sheri Eich to redeem their property from foreclosure, with a warranty deed to Meyers being recorded.

When the Eichs became delinquent in their obligations to repay Meyers, he sought to evict them, claiming they were merely tenants on property to which he held title. The Meyers succeeded in arguing that the transaction "bore the earmarks of an equitable mortgage" and required Meyers to proceed with a lengthy foreclosure action, rather than eviction. "The circumstances surrounding this case present a multitude of factors tending to prove an equitable mortgage," the court wrote. Thus, the deed was essentially re-characterized as a mortgage instrument.

An accountant was acquitted by a jury of his peers on the charge of aiding and abetting false tax return filings. U.S. vs. Petrino, 2006 TNT 87-7 (E.D. N.Y. 2006). The accountant claimed that his clients could not be taxed on their salaries, since wages represent a non-taxable return of labor. In other words, the accountant argued that people, as they work, "wear out" just like depreciable assets. The accountant prepared listed a nontaxable income deduction or offsetting loss equal to reported wages on the returns he prepared.

The jury acquitted the accountant on all of the 36 counts brought against him, concluding that the government had failed to prove that he did not believe that his clients were not entitled to the deduction.

Accountants in Trouble II

In O'Bryan vs. Ashland, 717 NW2d 732 (S.D. 2006), Rapid City certified public accountant Bruce Ashland unsuccessfully appealed a jury's determination that he was responsible for a client's interest charges owed to the IRS. 

Doug O'Bryan Contracting operated a well-drilling business that incorporated, at Ashland's advice, in April of 1995. Incorporating meant that O'Bryan would have been a cash basis taxpayer for the first quarter of the year, and an accrual basis taxpayer thereafter. 

This meant that the taxpayer had to recognize all its accounts receivable as income for the last three quarters of that year, and that the receivables could not be spread the adjustments over three years given the timing of incorporating. O'Bryan's tax return mistakenly utilized first quarter accrual based figures, resulting in an understatement of income in the amount of approximately $240,000 and $50,000 in interest. 

At issue on appeal was the proper calculations of damages. It is settled law that the $240,000 delinquent tax debt could not be recovered since this was solely the taxpayer's obligation, and the additional accounting fees in amending the return could be. The $50,000 in interest, however, was disputed as a measure of damages against Ashland.

Ashland argued that since O'Bryan did not have ready cash to pay the additional tax in 1995, he would have had to borrow $240,000 (at a higher rate of interest than the IRS charges of 4-9%, presumably) in order to timely pay the tax. As a result, Ashland concluded, the loss O'Bryan sustained should not have included the interest assessed by the IRS.