Dear John:

I really appreciate your willingness to give me your opinion as a fellow professional accountant on what I should do and on what I should advise the minority owner to do. Given that I was asked to help out Ruby, a family friend, and have found myself in the following situation, your advice is welcomed. Please take into account that I am not (and have not been) retained, nor am I being compensated in any manner related to the situation;

I have not been providing accounting services in any shape or form related to the situation, and I have ensured that Ruby did seek out accounting advice from another party as events unfolded.

Approximately three years ago, Jimmy, an owner of a small auto body shop, approached Ruby to give her a 10% equity stake in the shop and asked her to provide day-to-day management functions for the entity. Jimmy wanted Ruby to allow certain cash receipts to bypass the books of the shop, and in return Ruby would directly receive a commission on these transactions.

We do not know if these amounts were claimed as taxable income by Jimmy, but it is possible. This cash bypass requirement was incorporated into the shareholders’

agreement, signed by both parties, and witnessed.

I informed Ruby and her accountant that these amounts must be tracked and reported on Ruby’s tax returns as taxable income without deduction.

Ruby was lax and followed Jimmy’s advice in completing certain paperwork, so the incorporation documents and subsequent filings still reflect her as the sole director of the company, even though she merely set up the new company formed at the time of the initial transaction. Now, Jimmy has approached her to buy her out.

During the course of the negotiations, which I attended, Jimmy’s accountant disclosed he was aware that the “off-book”

revenue was occurring, but I am still unaware of how it was treated for tax purposes.

There is a high likelihood of premeditated tax evasion on Jimmy’s part. Jimmy has had—and continues to have—various taxation “issues,” including one for approximately

\($80,000\) that caused him to approach Ruby in the first place. Jimmy was apparently attempting to hide assets from the tax authorities and used the then-unaware Ruby to effectively be a shield for him.

By the way, Jimmy’s accountant has indicated that he is a professional accountant, and the negotiations for the sale of the minority shares have now been transferred to Ruby’s lawyer. I am still providing some help through her lawyer.

I am looking forward to receiving your advice.

Sincerely, Sam

Questions:-

1. Keeping in mind that no compensation or accounting services, were ever received or provided, has Sam stepped

“out of bounds”?

2. What is your advice for Sam?

3. What is your advice for Ruby?

4. Given the alleged disclosure by Jimmy’s accountant, has he crossed any boundaries? If so, does Sam have to take any actions, and what would these actions be?