Disturbing Conference Call

[erchess]

Today a client asked me to join a conference call and since I had nothing pressing to do at that time (He is also a social friend and outside of tax season I call or drop by his house about that time almost every Friday afternoon.) I called in. It turns out that he and the co-owner who is providing most of the money were on the line with (as best I could tell) representatives of a company that wants to sell them water purification systems manufactured by other companies that were not named and that my clients would resell. The claim was made by one of the middlemen that the water from these systems is both more tasty and more healthy than tap water because it has reduced amounts of such things as pesticides, pharmaceuticals, and heavy metals and all that made sense to me. However they also claimed health and taste benefits based on the relatively alkaline PH of the water (between 7 and 7.5) and the 'fact" that the water molecules are compressed so that they are (I think) both smaller and closer together. It was also alleged that drinking this water increases oxygen in t he blood. The speaker said that she could not say that this water cures cancer or any other disease but she said it does flush out impurities from one's system. I really do try to believe that people I run into are honest but these claims strike me as fraudulent.

I may fire this client anyway but what I want to know is whether I risk discipline from the taxing agencies or any other risk to myself and my business from correctly preparing tax returns for a business that makes claims about its products that are false to the point of being criminal.

[Gretel]

Erchess, you might want to be careful about calling this fraudulent. I just read an very interesting book: The battle for health is over ph. Having low ph levels, which almost every one has, creates and supports a lot of health conditions. Drinking water with a higher ph level will support healing (cancer not excluded), but of course is not enough.

Where I have problems is when people use a strong word like "cancer" and the fear it revokes in most of us to sell something. At a least also some literature information (not from the company) should also be provided so people can go online or buy books to make a good informed decision.

[JohnH]

I don't think you have anything to worry about.
This water does have several special qualities due its high purity, proper pH, and compressed molecules - it flushes lots of money into the hands of the promoters. You may as well get your share of it by charging them a bunch of money to prepare their returns. That will be the most important benefit you will derive from their water purification systems.

[JON]

Why and what were you on the line for?

You prepare tax returns for money, not advice on water???? Do not even understand the question. If you have a car salesman can you do his return if has robust sales pitch??? Why were you even on the line???

[JohnH]

erchess was on the line because these MLM promoters always tell their "distributors" to do or say whatever is necessary to get their accountant, doctor, lawyer, etc interested in the product. They tell them that we have lots of contacts and buying influence, so getting us interested will be the ticket to their "downline" (or whatever they call it) taking off and making them rich.

The clients listen to this nonsense and then they will tell you any sort of lie or mislead you in an effort to bring you into the scheme. They are well-meaning, but so blinded by the prospect of having all their financial dreams fulfilled that they will say anything to get you in front of the promoter, who is supposed to close the deal.

I've gotten pretty good at spotting this at the outset and usually tell the client I don't participate in any of this stuff, but will look forward to doing their work as they get rich. A year or two later we are usually trying to figure out when to write off the obsolete inventory sitting in their garage.

[DTS]

...The claim was made by one of the middlemen that the water from these systems is both more tasty and more healthy than tap water because it has reduced amounts of such things as pesticides, pharmaceuticals, and heavy metals and all that made sense to me. However they also claimed health and taste benefits based on the relatively alkaline PH of the water (between 7 and 7.5) and the 'fact" that the water molecules are compressed so that they are (I think) both smaller and closer together. It was also alleged that drinking this water increases oxygen in t he blood. The speaker said that she could not say that this water cures cancer or any other disease but she said it does flush out impurities from one's system. I really do try to believe that people I run into are honest but these claims strike me as fraudulent...

Not sure how fraudulant these claims are.

*More than likely, the taste is better. Our water systems are purified with ammonia, not tasty and are full of pesticides and metals. Again, not tasty.
*Water is very good for the blood and muscles (not sure if this is because of the increased oxygen or not).
*If you drink enough water, as one should, it does flush impurities and other things from our systems.
*Our pH balance is in that range, around 7.4

I'd be thinking more along the lines of getting rid of this guy as a friend for dragging me into this sales pitch and wasting my time, but would continue to do his tax returns and would put a sizeable amount of his earnings from this product sales into my bank account. You will now be preparing a Sch. C for him and all that form entails. He may even form an LLC or S, which is huge, dollar-wise.

I don't see the problem on your end.

[erchess]

Responses

First, thank you to all who have responded and thank you for any future responses. I have a few things to say in response.

This guy is not into MLM or at least if he is that would be new behavior. He has for some time been trying to sell high end water filtration systems for homes. He actually sold a few although because of his lavish expenses entertaining and supposedly training his sales force and the high commissions he paid the sales force and the installers, he has yet to show a profit. I really don't know why he is looking for a new supplier. The one he had was giving him the units within a day of his selling them and not asking for payment until the customer paid him which in turn came after installation. The last time I spoke with him before today he was all excited about a unit that would provide water for a household out of the water vapor in the air. I am not sure if today's outfit is the same or not because as I said I came in on the middle of the call. One reason I believe that they are not MLM is that the machines and packaging will bear the logo of my client's business. One thing I did pick up on is that my client will apparently no longer be receiving the units but will instead have them shipped to the buyers. I do not know whether the Company will continue to pay plumbers to install the units or if that is now something customers will be involved in.

Thank you to those who pointed out that the PH of water is relevant to the health of the drinker. I will stand corrected on that.

I still say that the claims that the water molecules are compressed so that they are smaller and closer together sounds bogus to me. It seems to me to violate the laws of physics unless they mean that the water is under pressure and I have two problems with that. First there is a limit to how much pressure the plumbing in a house will bear and second the pressure will disappear as soon as the water leaves the tap.

The point of bringing me onto the call had to do with whether the middlemen had to charge sales tax. Based on prior research I sad that they did not and they accepted that. Everyone in the company is well aware that I am not interested in sharing ownership. I long ago declined the "opportunities" to invest my money in the company or to do my tax work in exchange for stock.

[Uncle Sam]

Disturbing Call

Erchess - you are a tax professional. Providing financial information is what you're trained at to provide clients. You are NOT an authority on judging their advertising claims. Your only concern with this conference call should have been how the financial arrangements were going to work and how it would effect your client.

[Snaggletooth]

Friendship

If you are interested in retaining this person as a "friend" you will caution him, not drop him. He's not necessarily being dishonest with you, he's probably just being an innocent sucker.

One telltale earmark is the lack of physical identity of the sources. No addresses - if they are pressed they might give you a P.O. box. If one knows their localities, someone could check the Better Business Bureau and Chamber of Commerce.

Many people believe claims because they simply want to believe there is something out there that is healthy, pure, and aesthetic. Some of them will even give positive testimonies simply because of the psychosomatic effect that makes them believe this stuff is really what is claimed.

If you continue to file taxes for him, there is no reason for this farce to taint your practice. Brush up on things like NOLs, low-income credits, and LOCOM inventory valuations.
If you show up and this guy is trying to sell purple refrigerators covered in 2 inches of dust, there is a strong possibility of slow-moving inventory.

[erchess]

One Other Comment

I was given individual names and company name of the middlemen but I don't think I was given any information on the manufacturer. I no longer have any idea what information I was given. The call took place on one of these conference calling services where if you have been invited to a call you dial a toll free number and when prompted key in your pin. My client's money man had convened the call and acted as host.

I will say that one of the middlemen seemed a trifle upset when I joined the call and had to be reassured that I was in fact supposed to be there.

[ChEAr$]

sales tax

has to be collected and remitted to the state when a sale takes place in that state.

But for the larger question, these water purifiers have been around for a really looonnngg
time, and are MLM schemes. And for that reason, ethics aside, I would personally not
prepare a return for someone so involved.

But I could and not run afoul of circular 230.

[Gary]

Molecules

As a physicist, I reject the idea that this system can force water molecules to be compressed so that they are both smaller and closer together.

Gary

[Snaggletooth]

Good post

Gary, I'm glad you posted because with your expertise you are exposing this scheme for the lunacy it really is.

If I remember my scant knowledge of atomic theory, numbers of molecules can be spaced apart by various phenomena such as temperature, but the structure of each molecule individually is intact and cannot be compressed. A chemical transaction with a molecule of a different compound could alter the molecule.

[erchess]

Thanks again everyone

Gary thank you for your expertise in Physics.

Harlan just because an item is sold in many MLM schemes it is not necessarily the case that every outfit that sells the item is MLM. Both Brookstone and The Sharper Image sell water and air filtration units but they are not MLM companies. I can't speak authoritatively about the company my guy is talking to now but the first units he sold were made by General Electric and yes he was buying directly from that company without a middleman. He found GE by doing internet research on water filtration systems. .

Also Harlan in NC when a contractor installs a product on a home with one charge for everything (as opposed to a bill for parts and labor) there is no sales tax due on the sale. I have been reassured of that repeatedly by the NCDOR equivalent of the IRS PPL and I have been given a cite and sure enough the General Statues of NC do contain that rather odd provision.

The first thing this guy did when he wanted to go into business for himself was pay a regular lawyer (not a tax lawyer) to incorporate him and then he hired me to make the S Election and give tax planning advice. The company is relatively simple as S Corporations go because it has never operated as a C Corp, has relatively few sales, relatively few expense items, only four shareholders, and has in the past not maintained an inventory or any assets to speak of because money is contributed only when and to the extent there is an immediate need or desire to spend it. Naturally I adjust the basis of the shares. .

[ChEAr$]

Well then,

Gary thank you for your expertise in Physics.

Harlan just because an item is sold in many MLM schemes it is not necessarily the case that every outfit that sells the item is MLM. Both Brookstone and The Sharper Image sell water and air filtration units but they are not MLM companies. I can't speak authoritatively about the company my guy is talking to now but the first units he sold were made by General Electric and yes he was buying directly from that company without a middleman. He found GE by doing internet research on water filtration systems. .

Also Harlan in NC when a contractor installs a product on a home with one charge for everything (as opposed to a bill for parts and labor) there is no sales tax due on the sale. I have been reassured of that repeatedly by the NCDOR equivalent of the IRS PPL and I have been given a cite and sure enough the General Statues of NC do contain that rather odd provision.

.

\

I can agree that not all water filtration sales are via MLM, but you can't blame me for
that first reaction (grin)

As for sales tax, just who DOES pay the sales tax? and how is it paid? Contractors
typically paid sales tax on the lumber, plumbing supplies, electrical boxes, as they
purchase the materials at Lowes.