Shady Deals LLC?

[DaveinTexas]

Here's the scenario: A new client comes to me, let's call him Slim Shady, and describes his business. He is a single member LLC, taxed as a sole prop. Slim approaches people who are in financial trouble and about to lose their homes due to non-payment. He agrees to pay their next 3 payments if they move out of the home and sign over the deed to his LLC. The LLC is now the registered owner on the title at the county courthouse. In the meantime, the original owner is still the mortgage/note holder. Slim then rents the home to another party; but gives them deposit coupons for the LLC's bank account, so that the renters think that they are actually paying a mortgage company. The renters usually do not have Social Security Numbers.

Is your head spinning yet? These homes are on a lease to purchase contract; all payments go to the client's LLC bank account, Slim turns around and pays the mortgage payment on the home; the mortgage in which he is not liable for----translates to no interest deduction. When Slim finally sells this home, so he tells me, the sale is reported to the original note holder---the one that abandoned the home to avoid foreclosure. The proceeds are reported to the original note holder on a 1099S and the proceeds are wire transferred to the client's bank account. No source documents, other than the wire transfer, track the proceeds of the sale to this guy. Slim tells me that his lawyer draws up the deal and it is legit...I've never heard of this type of arrangement so it all sounds fishy to me. In fact, after he left I wrote down every word he said just in case I am summons to a court involving Slim and about 50 angry people.

My questions are:
1. Is this arrangement illegal and should I even touch this guy's return?

2. Since neither his LLC nor himself is liable for the mortgage, he can't deduct the payment or the interest, right?

3. Since the only cash outlay for the home was the next three payments made on behalf of the original home owner, this is his only basis in the property and the proceeds to his LLC is all taxable income, right?

4. I am thinking that every dollar that is deposited to his account is taxable income: the rents he collects and the proceeds from the sale, and the only deductions he has is the repairs on the homes and the property taxes since the LLC is on the title. Would this be considered SE income or rents?

5. Should I call the police? Just kidding.

Sorry for the extremely long post; I had to give you all the details.

TIA

[Bees Knees]

You are not a lawyer, nor are you the police. You are not expected to know whether there is some kind of mortgage fraud going on here. I suspect there is, but I don’t know.

As a tax preparer, I wouldn’t touch this client, unless he is willing to pay me a retainer up front which will pay for my own legal advice. I would then take the money, hire my own real estate attorney to check the facts and then inform me whether or not I could get sued or into some kind of trouble working with this guy.

Regardless of whether it is legit or not, even if it is fraud, it is taxable income to your client. Money going into your client’s account is SE taxable income. Money going out of your client’s account may or may not be deductible, depending upon whether or not your client is legally liable for the debt.

That is the beauty of tax law for crooks. They pay tax on 100% of illegal income but can’t deduct illegal expenses. You need to assume it is illegal until independent legal advice tells you otherwise.

[JoshinNC]

I read an article in Business Week magazine about similar operations

The article gave the impression that the actions are not illegal, but are very unscrupulous. Usually the rent on the property is set so high that the renter can't afford the payments and the "default" occurs quicker than the 3 months, with the LLC getting claim to the property. I will go back through my old articles and try to find the volume number.

[jimmcg]

A person would have to be brain dead to be associated in any manner with this type of business...Your reputation is more important than any other asset you may have!

[JohnH]

I agree

He's already informed you he's a shyster at several levels. You can't charge this bottom fisher enough to make it worth your while to take on the risk of a client like him.

People who think it's shrewd to enrich themselves by taking advantage of other people's misfortune eventually betray anyone who does business with them. If you should take him as a client, I'm betting it would only be a matter of time before he either:
1) Stiffs you for your fees or
2) Drags you down with him in a lawsuit or a criminal case.

I'd probably feed his twisted ego by telling him his situaiton is much too complicated for my practice and he needs to seek out somene else - like maybe his current accountant who has probably sent him packing.

[DaveinTexas]

Thanks guys

Thank you JoshinNC for your research.

His former accountant filed a 2003 return with:

$20000 wages
$20000 Unemployment Income; actual figure was $10000
-$30000 Loss on Schedule C
$80000 listed on line 21 with the description "house". Found out later this was his home that was foreclosed.
$7,000 SE tax---This puzzled me; couldn't tell where the SE tax was coming from.

Anyway, I think I will try to dodge this guy. I told him to track down his bank statements so that I could stall and maybe even move my office!

Thanks for all the comments.

[JohnH]

Send him back

Looks like he & his former accountant were made for one another.

They may even get to share the same cell someday.

[DTS]

DaveinTexas

I had to fire a client this week and I felt like a HUGE load came off my shoulders. Hated to do it, as it would have been a big $$ client in the next few years, but I wouldn't have slept well at night.

You do the same!

Dennis