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Trevor Milton Built a Fake Truck Empire and Then Got a Presidential Pardon for It

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In January 2018, a video exploded across social media. It showed a massive, futuristic semi-truck silently gliding down a desert highway. The caption read, “Behold the 1,000-horsepower, zero-emission Nikola One semi truck in motion.”

People lost their minds. The truck looked like something out of a sci-fi movie. Nikola Corporation was going to revolutionize trucking with hydrogen fuel and zero emissions. The future had arrived.

There was just one problem. The truck had no motor, no fuel cell, and no gears. It wasn’t driving. It was rolling.

In a recent Oh My Fraud episode, host Caleb Newquist traces Trevor Milton’s journey from a college dropout with a string of failed ventures to the founder of a $30 billion public company built on claims that were, in the most literal sense, rolling downhill.

 

The Making of a Serial Entrepreneur

Trevor Robert Milton was born in 1982 in Layton, Utah. He grew up in Kanab, a small town in southern Utah with a population of a few thousand and more red rock than anything else. His dad worked for Union Pacific Railroad. His mom was a realtor. She died of cancer when Trevor was 15. 

By any normal resume standard, Trevor wasn’t the obvious candidate to become a billionaire truck company founder. He dropped out of Utah Valley University after one semester. He had no engineering background, no finance background. But he could walk into a room, start talking, and make people feel like whatever he was selling was the future.

He later described his learning style this way: “I gained all my knowledge in the real world. I like to learn by touching things.” As Caleb observes, this was “a charming way of saying ‘I figured it out as I went.’”

For a surprisingly long while, that worked.

A Pattern of Failure and Forward Motion

Trevor’s first company was St. George Security and Alarms, a home security installation business. He sold it to a Nevada businessman named Glen Pilz, who drained his 401(k) and savings account to buy it. Glen later told CNN the books weren’t what they appeared to be. He described the experience as a section of his life that “sucked.”

Then came uPillar, an online classified site for used cars. Trevor later said, without apparent irony, the company “would have ended up being Amazon, but they grew too fast.” As Caleb notes, “uPillar was not Amazon. It was a used car website in Utah.”

Around this time, while investors were waiting for revolutionary technology, uPillar sponsored what it hoped would be the world’s largest silly string fight. Thousands of people, strobe lights, 8,000 cans of silly string, and money cannons blasting cash into the crowd. What did this have to do with selling used cars online? Nothing. Nothing at all.

Next was dHybrid, a company that converted diesel truck engines to run on compressed natural gas. This venture landed a deal with Swift Transportation, one of the largest trucking companies in the United States. Swift gave Trevor $2 million up front and a $322,000 loan to get conversions rolling. By the time the money was gone, dHybrid had completed exactly five test conversions. Swift and another investor sued. The company failed.

These early investors weren’t all sophisticated funders. One man put in $40,000, which was basically everything he had. Another scraped together about $3,000, partly with credit card cash advances. All of it was gone, but Trevor kept moving forward.

The Birth of Nikola and a Very Expensive Prop

In 2015, Trevor founded Nikola Motor Company in Salt Lake City. The name wasn’t subtle. Nikola Tesla’s last name was already on Elon Musk’s electric car company, so Trevor took the first name.

Trevor talked about Elon constantly, sometimes admiringly, sometimes competitively, often both at once. When Elon announced it was time to go all out on the Tesla Semi, Trevor responded publicly, saying, “He doesn’t like us, and that’s okay.” He told journalists with complete sincerity, “There are very few people who can out-Elon in this world, and I’m one of them.”

The pitch for Nikola was ambitious. He wanted hydrogen-electric semi-trucks to replace diesel across the American trucking industry. And not just the trucks. Nikola would build hundreds of hydrogen fueling stations across the U.S. and Canada, bundling the trucks and the fuel together. Nikola was going to be the next Tesla AND the next ExxonMobil, too.

On December 1, 2016, Trevor walked onto a stage in Salt Lake City. Behind him, hidden under a large white sheet, sat the Nikola One. Trevor built to the reveal, addressing his doubters. “For every person out there that said, ‘There’s no way this can be true. How can that be possible?’ We’ve done it.”

When the sheet dropped, the crowd went wild. The truck was enormous and futuristic, with swooping lines and aggressive angles. It looked like someone asked a Hollywood designer to imagine trucking in 2050.

Trevor told the crowd, “This thing fully functions and works.” He joked about putting up a chain to keep people from driving off. He explicitly stated the truck was “not just a pusher,” which is industry slang for a vehicle that looks real but has to be pushed around.

The crowd didn’t know that a few weeks earlier, Nikola’s chief engineer had told Trevor the truck wouldn’t be functional for the unveiling. He recommended postponing, but Trevor proceeded anyway. According to Bloomberg, gears and motors were missing, and there was no fuel cell on board. The Nikola One was, in the most literal sense possible, a very expensive prop.

The Video That Changed Everything

More than a year later, in January 2018, Nikola posted a video called “Nikola One in Motion.” It showed the truck cruising down what appeared to be a flat desert highway. The company framed it as proof the technology worked.

But remember, the truck had no motor, fuel cell, or gears. So how was it moving?

Hindenburg Research, the short-selling firm that eventually exposed everything, sent an investigator to find the filming location. They found it on a remote stretch of road on the old Mormon Trail south of Grantsville, Utah. Straight, lightly traveled, and sloped downhill just enough to get a 21,000-pound truck rolling at what looked like highway speed.

Nikola had towed the truck to the top of the hill, positioned cameras so the road looked flat (even slightly uphill in some shots), and filmed it rolling down. When challenged, Nikola’s official response was that it “never stated its truck was driving under its own propulsion in the video.” 

An Ocean of Lies

The false claims cascaded across nearly every aspect of Nikola’s business. Trevor claimed Nikola was producing hydrogen at costs that undercut competitors. If true, Nikola would have the trucks, the fuel, and the stations. But Nikola wasn’t producing hydrogen.

The Nikola Badger pickup truck, announced in 2020, was described as “built from the ground up” using Nikola’s own technology. The actual plan was to rely on General Motors technology through a partnership the company hadn’t yet finalized.

Trevor talked constantly about billions in reservations, a backlog proving the market wanted what Nikola was building. He didn’t emphasize that most were non-binding, there were no deposits, and customers could cancel their orders anytime for free.

Then there was Trevor’s brother, Travis, appointed director of hydrogen production and infrastructure. This job required deep technical expertise in engineering and manufacturing. According to Hindenburg Research, Travis’s prior experience “appeared to consist largely of construction and remodeling work in Hawaii.”

The Perfect Storm for Fraud

Nikola went public on June 4, 2020, by merging with a special purpose acquisition company (SPAC) rather than going the traditional initial public offering (IPO) route. This gave Trevor far more room to promote future projections than he would have had in a traditional IPO process. And Trevor, as Caleb says, “exploited that room with everything he had.”

The timing was perfect. The pandemic had shut down the economy and trapped millions at home with stimulus checks they weren’t sure what to do with. Commission-free trading apps like Robinhood made buying stocks feel as easy as ordering takeout. A new generation of retail investors piled into the market, many for the first time.

These people hadn’t spent years looking at balance sheets. They’d watched the market recover from 2008 and missed it. They’d seen early Tesla investors become millionaires and were looking for the next Tesla. People who were home, online, scrolling, and susceptible to a great story told with confidence.

Trevor went straight for this audience. He posted on Twitter “like a man who had nothing to hide, which was a very effective thing to do when you had everything to hide.” He answered questions from random retail investors like they were old friends. When skeptics pushed back, he made doubt look like jealousy. They were haters, paid attack accounts, Tesla fans trying to tear down a competitor.

Within five days of going public, Nikola’s stock had more than doubled. On June 9, it peaked near $80 a share. The market cap briefly touched $30 billion, surpassing Ford, a company that had been manufacturing vehicles for 117 years. Nikola had zero revenue and hadn’t delivered a single truck. Trevor’s personal stake was worth around $12 billion. He bought a $6 million Gulfstream jet with Nikola stock from a Nikola board member.

The Two-Day Partnership

On September 8, 2020, Nikola announced a partnership with General Motors. GM would receive an 11% stake, valued at roughly $2 billion, in exchange for supplying technology and manufacturing the Badger. Trevor called it “a partnership made in heaven.”

General Motors had just legitimized Nikola. Trevor had parlayed what Hindenburg called “an ocean of lies into a partnership with the largest auto OEM in America.”

It lasted two days.

On September 10, Hindenburg Research published its report. It included text messages from former employees, recorded phone calls, private emails, and behind-the-scenes photographs. It detailed everything, including the hill, the hydrogen claims, and the Badger.

Trevor’s response was to call it a hit job on Twitter. “It will take the rest of the day to address the one-sided false claims,” he wrote. “In the meantime, troll on.” He never addressed them. Ten days later, he resigned as executive chairman and deleted his social media accounts.

Trial, Conviction, and a Presidential Phone Call

The Securities and Exchange Committee (SEC) and the Department of Justice (DOJ) launched investigations. The GM deal fell apart. In July 2021, a federal grand jury indicted Trevor on securities and wire fraud charges.

The trial testimony was devastating. CEO Mark Russell testified he learned only after joining that the Nikola One never had a working turbine or fuel cell when Trevor unveiled it. He, CFO Kim Brady, and chief counsel had staged what he called “an intervention” with Trevor over his public statements. Mark threatened to quit but didn’t, worried it would destabilize the company.

Kim offered perhaps the most revealing detail. When Nikola’s stock fell by $5 on its first day of trading, Trevor called Kim to ask if something was wrong with the Nasdaq. Kim explained it was simply supply and demand. Trevor insisted Kim contact the exchange. Kim didn’t because, as Caleb puts it, “that would be insane and humiliating.”

The jury convicted Trevor on three of four counts. Judge Edgardo Ramos sentenced him to four years in prison, a $1 million fine, and sought $660 million in restitution for investors.

Then, on March 27, 2024, while Trevor was still free on bail, President Trump called him personally to offer a full and unconditional pardon. Trevor posted a celebratory video, calling it a “pardon of innocence.” That’s not what a pardon is. As Judge Emmet Sullivan noted in the Michael Flynn case, “The Supreme Court has recognized that the acceptance of a pardon implies a confession of guilt.”

Trump’s explanation was straightforward. Trevor “was one of the first people who supported a gentleman named Donald Trump for president.” Trevor had donated almost $2 million to Trump’s efforts. The pardon wiped away the prison sentence and the $660 million in restitution. Nikola had already filed for bankruptcy. The investors got nothing.

By October 2025, Trevor was CEO of SyberJet Aircraft, staffed with former Nikola employees. He told the Wall Street Journal, “I love to find products that are unreal and need someone with vision or guts to be able to bring it to market.” Unreal is right.

Lessons for Accounting Professionals

Caleb distills several crucial lessons from the Nikola fraud:

  • “Fake it till you make it” isn’t a legal defense. There’s a difference between selling a vision and stating things as fact when you know they’re false. Founders are allowed to be optimistic. They’re allowed to sell the vision. They’re not allowed to tell investors they’re producing hydrogen when they’re producing no hydrogen at all.
  • SPACs deserve extra scrutiny. The SPAC structure gave Trevor far more room to promote future projections than a traditional IPO would have, and he used it like a personal marketing budget. The SEC has since tightened disclosure rules around SPACs, but the lesson stands. If a company goes public via a SPAC, consider whether what the founder has said publicly is actually verifiable.
  • Watch the people around the founder, not just the founder. If a company promises to build a national hydrogen infrastructure network, and the person running that effort has a background in home remodeling, that’s a red flag.
  • Retail investors can be a target. Trevor went looking for people who were emotionally invested, unlikely to do professional due diligence, and hungry for the next Tesla. Green tech companies that promise to save the world still have to deliver the goods. 

The Truck That Couldn’t Drive, But Almost Got Away With It

Trevor built a $30 billion company on a truck that rolled downhill. He was convicted on three counts of fraud, sentenced to four years in prison, and then pardoned before he served a single day by a president he’d donated nearly $2 million to support. The retail investors who lost everything got nothing.

What makes the Nikola story worth studying is how long the lies worked, and who bore the cost when they didn’t. The engineers and executives knew. The CFO testified that Trevor’s statements “could be inaccurate or exaggerated.” And yet the company kept going, the stock kept climbing, and ordinary people kept buying in.

That’s the part that should keep accounting professionals up at night.

For the full story, including Caleb’s breakdown of the infamous downhill video, the GM partnership that lasted 48 hours, and the pardon that wiped away $660 million in restitution, listen to the full Oh My Fraud episode. 

Forty Percent of Workers Admit Faking Receipts With Company-Paid AI Tools

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Forty percent of U.S. workers admit to using AI to generate fake receipts for expense reports. Even more troubling is that 40% of those workers use AI tools their own companies paid for.

Blake Oliver and David Leary opened Episode 494 of The Accounting Podcast with these startling statistics from new surveys by AppZen and Emburse. David introduced a new term that’s emerged from this trend: “revenge spending,” in which employees who fear AI will replace their jobs turn the company’s own AI tools against it by submitting fraudulent expense reports.

“It’s similar to spam,” David explained. “AI and technology make it easier than ever for people to send you millions of spam messages. But then on your side, you’re using all these AI tools to detect the spam messages and move them to your trash.”

The numbers tell an interesting story. In just 14 months, AI-generated fake receipts went from virtually nonexistent to representing 70% of fraud flags in expense systems. These fake receipts average about $100 each, with a median of $32. Those deliberately small amounts are designed to slip under auto-approval thresholds.

NASBA Backs Down

The theme of shifting power dynamics became personal for Blake when he shared the resolution of Earmark’s standoff with the National Association of State Boards of Accountancy (NASBA).

Back in April, NASBA sent Blake a demand letter over comments he made at an AICPA conference. While demonstrating how to use AI to create CPE courses, Blake criticized NASBA’s methods as “backward” and called out the problems with current CPE practices, including webinar polling questions that serve as mere check-the-box exercises, attendees doing email during sessions, and people sleeping through in-person presentations.

NASBA’s letter directed Blake to “cease making any unfavorable, unprofessional, or inappropriate comments” about the organization, citing a sponsor agreement requiring programs to “reflect favorably on NASBA.”

Blake pushed back hard. “I felt that it was wrong, even unconstitutional, for an organization like the National Association of State Boards of Accountancy to tell a sponsor of CPE, a CPA, a professional educator, what they may and may not say about NASBA,” he explained to David.

In his response letter, Blake argued his comments were meant to improve CPE, not attack NASBA. He also asked for clarification on what exactly would constitute a violation, since terms like “unfavorable” weren’t defined in the agreement.

The resolution came in June when Amy Tongate, NASBA’s Director of Compliance Services, essentially backed down, writing, “NASBA welcomes constructive professional dialogue regarding continuing professional education. Based on your response and subsequent discussions, NASBA considers this matter resolved. No further action is required.”

Blake sees a deeper issue here. NASBA isn’t actually a regulator; the state boards are. NASBA was created as an administrator to handle licensure efficiently across all states. But it often acts like a regulator, which Blake argues oversteps its bounds.

“If a state board of accountancy tried to do what NASBA tried to do with that demand letter, that would be unconstitutional,” Blake said. “The question is whether or not the state boards can set up a private company, a nonprofit that then acts on their behalf and suppresses the speech of CPAs. And I would be willing to bet that they can’t.”

Big Firms Can’t Command Loyalty Anymore

While regulators discover the limits of their authority, big accounting firms are finding they can’t control their workforce as they once did.

A new academic study published in Contemporary Accounting Research with the dramatic title Losing Control: The Erosion of Disciplinary and Pastoral Power in Accounting Firms, reveals just how much has changed. Based on 31 interviews with Canadian auditors from 2021 to 2023, the research shows firms are struggling to shape employees into the traditional model of the committed, overworking auditor.

The numbers are striking. What the study calls “default auditors,” defined as people who enter under weaker selection standards and treat the job transactionally, are replacing the highly socialized, career-committed auditors of the past.

“The Big Four is becoming less of a cult,” David summarized bluntly.

The breakdown is happening on multiple fronts. Remote work disrupted the in-person observation that once normalized 80-hour weeks. When young auditors don’t see everyone else burning the midnight oil, logging off at a reasonable hour becomes much easier. The “we’re all in this together” busy-season rituals, like late-night pizza parties, matter less and less.

But employees aren’t just passively benefiting from remote work. They’re actively pushing back. According to the study, they’re setting firmer personal boundaries, prioritizing family and mental health, rejecting unpaid symbolic rewards, and openly comparing their compensation to that of partners and managers.

The partners and managers feel trapped. They’re taking on more work themselves, reviewing more because of lower work quality, and offering higher pay and more flexibility, but it’s not working. As Blake noted, “They are feeling more exhausted, underappreciated, unable to enforce the old standards and unable to design convincing new ones.”

This cultural breakdown makes the recent wave of private equity investments in accounting firms particularly puzzling. Eide Bailly just became the latest to take PE money: a majority stake from Reverence Capital valuing the firm at $1.8 billion, about 2.1 times revenue.

Looking at a chart of the top 30 U.S. firms, Blake and David counted that a majority now carry outside capital. Yet the hosts are skeptical these investments will pay off.

“I have not heard of a PE success story where PE came in and the company became this rah-rah great thing,” David said. “It gets worse from PE, right?”

“Are they really going to be able to turn it around and sell it for more?” Blake asked, pointing at the math problem.

David’s verdict was characteristically direct: “Put lipstick on that pig and sell it to somebody else.”

The AI Revolution Gives Power to Individuals

While institutions struggle to maintain control, individual practitioners gain capabilities that once required entire companies or expensive software.

The adoption numbers are explosive. According to Blue J and CPA.com’s latest survey, 60% of tax professionals now use AI for tax research at least weekly, up from just 33% a year ago. They use it for advisory projects (44%), tax planning (40%), and compliance research (39%).

“Where are the other 40% getting answers?” David wondered about those who are not using AI, noting that even Google searches now show AI answers first.

This surge in AI use prompted the IRS Advisory Council to issue its first-ever guidance on AI in tax practice. The guidelines don’t create new rules but clarify how existing standards apply. Most notably, practitioners can’t bill for time not actually spent, can’t charge manual rates for AI-assisted work, or double-bill for work done by both staff and software.

“This is the nail in the coffin of hourly billing,” Blake declared. If you use AI to cut your work time in half, you’re ethically obligated to pass those savings to the client.

The democratization goes even further. David highlighted Xero Developer’s new YouTube series, Is Everyone a Developer Now?, where the development team “vibe codes” working applications in real-time. In one episode, they built a functional month-end close tool in just an hour and fifteen minutes.

“Instead of chasing a small pool of developers to build apps, they basically have now opened up millions of accountants that could actually create apps,” David explained.

Blake shared his own example. He’d been procrastinating about converting Earmark’s books from a cash to an accrual basis because building the revenue recognition workpapers seemed overwhelming. Then he tried Claude.

“I just asked it what I needed,” Blake said. The AI walked him through methodology choices, downloaded sales reports from Apple and Google, and built a complete waterfall table that spread revenue across 12 months, plus reconciliation tabs and journal entries.

“This is the right template. This is the right format for me to have done this manually,” Blake marveled. “I don’t even know how many days it would have taken me to put this together.”

This shift in capabilities has venture-backed companies worried. Pilot, valued at $1.6 billion, just spun off its internal AI close platform as a standalone product. Another startup raised millions for similar technology. But as David pointed out, if you can “vibe code” these solutions in an afternoon, “is the app ecosystem the way it’s traditionally been just going away now?”

The Power Shift Is Just Beginning

These aren’t isolated stories; they’re all symptoms of the same fundamental change. Power is flowing away from institutions and into the hands of individuals.

Regulators like NASBA are discovering they can’t dictate what professionals say. Big firms can’t enforce the overwork culture that once defined public accounting. Private equity investors are betting billions on firms whose fundamental model is breaking down. And the same AI that helps Blake build sophisticated workpapers helps employees create fake receipts.

“It’s rules-driven innovation instead of customer-driven innovation,” David said about the institutional mindset that’s failing across the profession.

This shift brings opportunity and responsibility for accounting professionals. The tools that can build a revenue recognition system before lunch can just as easily fabricate an expense report. The capability is neutral; how the profession uses it isn’t.

Want to hear Blake’s complete walkthrough of building his rev rec workpaper, more details on the NASBA correspondence, and the hosts’ full analysis of these industry shifts? Listen to the complete Episode 494 of The Accounting Podcast. You can even earn free CPE credit through Earmark.

As Blake and David make clear, the redistribution of power in accounting is just getting started, and every practitioner needs to understand what it means for their future.

The Four Words Congress Never Defined That Could Cost Your Clients Thousands in Self-Employment Tax

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Congress once wrote four words into the tax code: “limited partner as such.” But then it never explained what those words meant. Even worse, they wrote these words before limited liability companies existed. Today, those four words are at the center of a legal battle moving through multiple appellate courts, and the outcome will determine whether your partnership clients owe self-employment tax on their share of income.

In Episode 32 of the Tax in Action podcast, host Jeremy Wells, EA, CPA, picks up where his previous episode on partnerships left off. He tackles two critical questions: What actually makes someone a partner under federal tax law? And which partners must pay self-employment tax on their distributive share?

The answers turn on substance rather than paperwork, and that’s where things get complicated. Since Congress never defined “limited partner as such,” and since the phrase predates LLCs entirely, the courts have split into openly conflicting camps. One camp reads it as a test of whether someone is truly a passive investor. Another looks at state-law definitions and dual-role partners. This is a genuine circuit split that could land at the Supreme Court.

Until it’s resolved, Jeremy makes clear you can’t rely on the “limited partner” label in a K-1 or operating agreement. You have to evaluate what each partner actually does. Let’s walk through how courts define who counts as a partner, why the “limited partner as such” exception is so unclear, and how this circuit split affects your clients right now.

Who Actually Counts as a Partner?

Before we can figure out who owes self-employment tax, we need to answer a more basic question: who counts as a partner in the first place? The answer has always been rooted in substance over form, and that principle causes today’s self-employment tax disputes.

Jeremy opens with a scenario you’ve likely seen. Two individuals register an LLC, each listed as a member. Under the check-the-box regulations, that’s a partnership for federal tax purposes. One member works full time in the business, keeping it running. The other contributed startup capital, works elsewhere, and rarely touches the business. They’re a classic silent partner. With equal 50% interests, the Form 1065 and K-1s report a 50/50 income split.

But are these two partners truly equal under federal tax law? One earns income through labor, while the other just wrote a check. Should the tax code treat them the same?

When the Code Said Nothing

Before 1951, the Internal Revenue Code had no definition of “partner.” This silence created disputes that reached the Supreme Court. With no statute to guide them, the courts had to define it themselves and made a decision that still shapes practice today. They largely ignored state-law labels.

“Partner” can mean one thing under state law and something different under federal tax law. The courts focused on the parties’ stated and implied intent, examining partnership agreements, contributions of capital or services, and how they actually behaved once the business was running.

Tower Sets the Standard

The first landmark case was Tower v. Commissioner (1946). The Court asked whether the individuals truly intended to join together to carry on a business and share in profits and losses. The answer, they said, depends on multiple factors, none of them individually decisive. There’s no simple checklist that automatically makes someone a partner.

The Court said an individual may be a partner if she “either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things.”

The backstory drives the point home. Mr. Tower, following tax advice, converted his corporation to a partnership and made his wife a partner purely to shift income to her lower tax bracket. But Mrs. Tower contributed no capital, provided no services, and exercised no control. The Court saw through it and taxed the income to Mr. Tower, who actually earned it.

Culbertson Clarifies the Mess

Three years later was Culbertson v. Commissioner (1949). The Tax Court had misread Tower, treating its list of factors as rigid requirements and denying partnership status left and right. The Supreme Court pushed back, saying the Tax Court “ignores what we said is the ultimate question for decision and makes decisive what we described as circumstances to be taken into consideration.”

The real test is subjective intent: whether the parties, in good faith and with a business purpose, intended to join together in the present conduct of the enterprise.

Congress Steps In for Family Partnerships

In 1951, Congress finally added a statutory definition, now in Section 761(b). A person is recognized as a partner if they own a capital interest in a partnership where capital is a material income-producing factor, whether acquired by purchase or gift.

Congress targeted family partnerships, in which high-earning patriarchs would gift interests to lower-earning relatives to spread income into lower tax brackets while retaining control. According to the Joint Committee’s Blue Book, Congress wasn’t overriding Tower and Culbertson; it was carving out a legitimate transaction, making clear the IRS couldn’t deny partner status just because an interest came from a family member.

The Capital Interest Test

Everything circles back to the concept of capital interest, or an interest in partnership assets that would be distributable upon withdrawal or liquidation. It’s different from a mere profits interest because just sharing in earnings doesn’t cut it.

Courts apply a hypothetical liquidation test. If the partnership shut down tomorrow and sold everything, would this person get a slice of the assets? If not, are they really a partner?

The pattern of economic reality, not paperwork, determines who is a partner. And this same substance-over-form logic becomes far more contentious when we turn to self-employment tax.

The Four Words Nobody Can Define

Now we reach the phrase causing all the trouble, where ambiguity stops being academic and starts costing real money.

First, Jeremy lays down the foundational rules. Partners are treated as self-employed for tax purposes, regardless of their role. This means partners cannot be employees of their own partnership. “You should never have a partner getting both a W-2 and a K-1 from the same partnership,” Jeremy emphasizes. While there are “exceedingly rare” exceptions, the rule holds: partners don’t go on payroll. If a partner wants a fixed income for services, it flows through as guaranteed payments, not wages.

The general partner rule is unforgiving. A general partner’s distributive share is subject to self-employment tax. It doesn’t matter if the interest is passive under Section 469. It doesn’t even matter if the partnership elected out of Subchapter K under Section 761(a). As Jeremy notes, that election only affects Subchapter K. It does nothing to shield general partners from self-employment tax.

The Exception and Its Giant Hole

IRC Section 1402(a)(13) creates an escape hatch by excluding “limited partners, as such” from self-employment tax on their distributive share. But even for limited partners, guaranteed payments for services are subject to self-employment tax.

The problem is Congress never defined “limited partner as such” anywhere.

In 1997, the Treasury proposed regulations to define the term for Section 1402 purposes. The controversy was so intense that Congress imposed a moratorium on any such regulation, and that moratorium was originally set to expire on July 1, 1998. “It’s now 28 years later, and neither Congress nor the Treasury has provided any sort of update on this question,” Jeremy says.

The LLC Problem

Making everything worse, Section 1402(a)(13) was written before LLCs existed. LLC members aren’t personally liable for entity debts. That’s the whole point of limited liability, making them look like limited partners. Yet those same members often actively manage the business and provide services, making them look like general partners.

So which are they for self-employment tax purposes? The statute offers no answer. Congress wrote a rule for a world of general and limited partnerships and never updated it for the entity that now dominates small business.

Courts Split on What “Limited Partner” Means

With no definition and no regulation, the courts filled the vacuum, and they didn’t all fill it the same way.

The Tax Court’s Passive Investor Test

The first approach comes from Renkemeyer, Campbell & Weaver v. Commissioner (2011), involving a law firm. The Tax Court examined the legislative history and concluded Congress intended to “ensure mere passive investors would not receive credits toward Social Security coverage.”

On this reading, “limited partner as such” means “passive investor.” The phrase “as such” signals the exemption applies to those who operate as limited partners. Once a partner participates in operations, they’re no longer a limited partner for federal tax purposes.

The Tax Court expanded this in Soroban Capital Partners (2023), applying its “functional analysis” test. The inquiry is, does the partner functionally participate or stay out? Notably, Soroban involved a state-law limited partnership, yet the court still held that a partner labeled “limited” who acts like a general partner owes self-employment tax. Soroban is currently on appeal in the Second Circuit.

The Fifth Circuit’s State-Law Approach

The competing view comes from Sirius Solutions LLP v. Commissioner. The Fifth Circuit, which Jeremy notes “tends to be different from a lot of the other appellate courts,” rejected the passive-investor approach entirely.

Instead, the court looked at how “limited partner” was defined in legal dictionaries and by the IRS and Social Security Administration when Section 1402 was written. The court’s logic ran three ways.

First, the guaranteed-payments carve-out shows Congress expected limited partners to provide services. As the court said, “the text of the exception itself contemplates that limited partners would provide actual services to the partnership.”

Second, Congress used “passive” terminology elsewhere in the code but not in Section 1402. It used “rendered no services” in Section 1402(a)(10) just a few paragraphs above, yet chose different language in (a)(13). Why different wording for the same concept?

Third, “as such” refers to dual-status partners, or people who act as general partners sometimes and as limited partners at others, clarifying that only their limited-partner income escapes tax.

A Geographic Lottery

These approaches directly conflict. When appellate courts interpret the same federal statute in opposite ways, the natural endpoint is the Supreme Court.

Meanwhile, Jeremy flags a practical complication from the Golsen rule. The Tax Court must follow the precedent of whichever appellate circuit would hear a given case. So a partnership in the Fifth Circuit gets one result while an identical partnership elsewhere gets another. The outcomes are driven purely by geography.

The Jurisdiction Question

Jeremy also discusses Denham Capital Management, on which the First Circuit heard oral arguments in early 2024. Rather than debate what “limited partner” means, the partners argue the Tax Court lacks jurisdiction to decide this in a partnership-level audit. Under TEFRA, net earnings from self-employment are a partner-level item, since individual partners calculate their own self-employment tax.

The wrinkle is partnerships must report self-employment earnings in Box 14 of the K-1. The IRS argues that the “characterization” of income makes it a partnership item. This could add another layer to an already complex issue.

What This Means for Your Practice

Let’s return to Jeremy’s opening scenario. The member working full time is almost certainly a partner whose income is subject to self-employment tax. The capital-only member likely holds a valid partnership interest too. But under the Tax Court’s current precedent, their income probably escapes self-employment tax if they genuinely stay out of the business.

That last part is crucial. Jeremy cites Howell v. Commissioner (2012), where a married couple treated the wife’s LLC earnings as exempt from self-employment tax. But her testimony revealed she occasionally provided managerial and marketing advice to her husband. That occasional participation was enough. The Tax Court held she wasn’t a “limited partner as such,” and her earnings were subject to self-employment tax.

Key Takeaways for Tax Professionals

Jeremy leaves us with clear lessons from this uncertainty:

  • Federal tax law determines partner status based on economic reality, not state-law labels. That’s the through-line from Tower and Culbertson.
  • The IRS and Tax Court currently apply a functional analysis to determine if a partner is “limited” for self-employment tax purposes. But recent developments cast doubt on this approach.
  • Look beyond the paperwork. The words “limited partner” on a K-1 or operating agreement won’t protect a client who functions like a general partner.
  • Never combine a W-2 and a K-1 from the same partnership. Partners are self-employed; fixed compensation comes through guaranteed payments.
  • Remember what’s always taxable. General partners’ distributive shares are subject to self-employment tax even if passive or if the partnership elected out of Subchapter K. Guaranteed payments to any partner for services remain subject to SE tax.
  • Document everything. Track each partner’s participation, services, and management role. As Howell shows, even occasional input can trigger self-employment tax.

Until the Supreme Court resolves this circuit split, you’re advising clients under real uncertainty. The prudent response isn’t to guess which approach will win. Build positions based on what every court agrees matters, which is what each partner actually does.

For Jeremy’s complete analysis of the cases, statutory history, and practical implications, plus previews of upcoming episodes on capital accounts and special allocations, listen to episode 32 of Tax in Action.

The IRS Answered Only 21% of Your Calls This Season, and It’s Getting Worse

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During the 2026 filing season, the IRS received 48.1 million phone calls but answered just 9.9 million. That’s only 21%. As Blake Oliver put it on Episode 495 of The Accounting Podcast, “79% of the time when you call the IRS, you hang up before you get somebody because the wait times are that long.”

Blake and David Leary recorded this Independence Day episode on Friday, July 3rd, covering everything from the IRS’s service failures to Trump accounts going live on July 4th. They even shared a wild story about EY staff accessing Australia’s Prime Minister’s bank account. But it’s the IRS story that really captures where the profession stands right now, caught between a federal agency that can’t serve taxpayers and new AI tools that are changing how tax work gets done.

The IRS Report Card: Success and Failure at the Same Time

The National Taxpayer Advocate, Erin M. Collins, issued her midyear report with a positive-sounding headline: the IRS “largely succeeded” in the 2026 filing season. That’s actually impressive given that the agency faced a 27% staffing reduction, major tax law changes, and leadership turnover. Technology modernization helped keep things running.

But while the IRS kept the machinery working for routine returns, anyone needing individual help ran into serious problems. More than 14 million of the 139 million individual returns filed got suspended for additional review. Over a million taxpayers waited beyond normal processing times for refunds, with delays averaging about 5.5 weeks. Identity theft victims face an average of 20 months for case resolution, with over 500,000 cases still pending at the end of the filing season.

The Trump administration’s push to move federal agencies away from paper checks created its own mess. The IRS sent about 4 million notices to taxpayers whose returns lacked valid direct deposit information. The problem is, most of these taxpayers are unbanked, elderly, or living abroad, don’t have online accounts, and struggle to create them. The notices had poor instructions about requesting waivers, and as Blake pointed out, they didn’t even mention that taxpayers could request a paper check waiver by calling the 1040 phone line.

Speaking of that phone line, the numbers are getting worse, not better. The IRS answered 21% of calls this season with an average hold time of 14 minutes. Last season, they answered 25% of calls, with an average wait of eight minutes.

Every Door Is Broken

If you can’t get through on the phone, maybe you could walk into an IRS Taxpayer Assistance Center for in-person help? The Treasury Inspector General decided to find out, conducting 91 unannounced “secret shopping” visits at 82 different centers nationwide.

Of the 91 visits, 30 failed completely. Either the building was unexpectedly closed, security wouldn’t let them in, or they couldn’t get a real answer. Of the 61 “successful” visits in which someone actually spoke with an IRS employee, 28 received incorrect assistance. That’s nearly half.

“That’s like almost half the time if you go to an IRS Taxpayer Assistance Center, if you get in the door, you’re probably going to get the wrong answer,” David said. 

A review of the IRS’s expanding chatbot and live chat options found that 60% of live chat assistors were handling multiple chats at once. That’s normal for a call center, but one report claimed an assistor was handling 603 chats simultaneously. Both hosts found that number impossible to believe. The automated chatbot wasn’t much better, failing to provide enough information or recognize what taxpayers were typing in 29 responses and 44 keywords or questions.

Behind all this is another problem because the IRS can’t even track its own data. A new Inspector General report found the agency has about 1,124 data-sharing agreements with different states and agencies. Ohio alone has 42 separate agreements. But the kicker is, 30 of these agreements are completely unknown to the IRS’s own privacy office. As David explained, “There’s just IRS data going out to third parties, other government agencies that the IRS does not know is happening.”

AI Tools Fill the Void

“Hey, all of this means tax professionals will continue to be in demand,” Blake observed. And increasingly, those professionals turn to AI tools to handle the grunt work.

Blake described how he treats Claude as a coworker. Using Wispr Flow dictation software on his Mac, he can now just hold down the function key and speak to the AI. “It’s way faster than typing,” he said.

The hosts shared a listener example. Florida’s Board of Accountancy requires CPAs to enter each CPE course separately into its web portal. The listener had manually typed about 80 different courses last year. This year, he pointed Claude’s Cowork at a folder containing all his CPE certificates and had it create a consolidated Excel list, validate it against the PDFs, then log into the portal and enter everything automatically. The AI even caught and corrected its own duplicate entries without being told. “Cowork took care of this tedious task in the background while I caught up on the show Severance on Apple TV,” the listener shared. 

KPMG is taking this further with Tax Sim, an AI simulation tool that trains tax professionals through rapid scenarios, replacing the routine prep work that junior staff used to learn on. As Blake explained, it’s like a high-performance racing simulator where users encounter many scenarios quickly and improve through feedback.

Other Major Stories from the Episode

The hosts also covered several other significant developments:

  • Trump Accounts go live. These new savings accounts for children born between 2025 and 2028 began accepting contributions on July 4th, with the Treasury contributing $1,000 per child. The catch is children gain full control at age 18, and, unlike 529 plans, distributions are taxable. But there’s a strategy. You can convert it to a Roth IRA at 18 when the child is in a low tax bracket. According to one analysis, $200,000 in a Trump account could potentially grow to $9.6 million tax-free over 42 years after Roth conversion.
  • Australian Big Four scandals. Two EY graduates on an audit engagement at Commonwealth Bank accessed the accounts of the Prime Minister and an EY partner. They’ve been fired and, as David noted, “they’re never going to work in accounting again.” This is just the latest in a series of Australian Big Four scandals that have the government talking about breaking up the firms, splitting audit and consulting divisions, and requiring mandatory audit firm rotation every 20 years.
  • Coca-Cola’s $20 Billion tax fight. The company faces potential exposure of $20 billion in a transfer pricing dispute with the IRS, but has only reserved half a billion for the loss on its books. That’s a potentially nasty surprise for investors.

The Bigger Picture

The 2026 filing season tells two stories at once. The IRS survived a brutal year institutionally, but it’s failing the individual taxpayers who need help. For tax professionals, this creates an opportunity and a responsibility. Taxpayers need someone who can actually answer their questions and resolve their issues. The responsibility is hard to ignore. The people hit hardest by these failures are often those who can’t afford professional help.

As Blake and David make clear throughout the episode, pairing human expertise with AI tools that can handle the tedious compliance work will help firms thrive. The void the IRS leaves behind becomes a competitive advantage for the prepared firm.

Want to hear the full discussion, including more details on Trump accounts, the Australian scandals, and practical AI workflows? Listen to episode 495 of The Accounting Podcast. You can even earn free CPE for listening through Earmark.

Mel Brooks Accidentally Wrote the Perfect Fraud Triangle Case Study in 1967

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What if the smartest fraud scheme you’ve ever studied wasn’t from a court filing or an SEC enforcement action, but from a 1967 Mel Brooks comedy?

In the latest Oh My Fraud episode, hosts Caleb Newquist and Zach Frank dissect The Producers with the same rigor they apply to actual fraud cases. This is their third movie analysis, following The Informant and The Accountant, and it might be their most revealing yet.

The scheme at the heart of Mel Brooks’s debut film is deceptively simple. A washed-up Broadway producer and his neurotic accountant partner raise far more money than a show costs, deliberately produce a guaranteed flop, and keep the excess cash. When the show fails, investors shrug off their losses as just another bad Broadway bet. No questions asked. No money trail to follow. Just a clean exit. It’s something Bernie Madoff never figured out and Rita Crundwell never had.

 

The $2,000 Gateway Drug

The fraud doesn’t start big. It never does.

When accountant Leo Bloom, played by Gene Wilder, arrives at the office of Max Bialystock, played by Zero Mostel, to do his books, he immediately spots a problem. Max raised $60,000 from elderly investors for a play that only cost $58,000. There’s $2,000 missing, or about $20,000 in today’s money.

“I am being stung by a society that demands success when all I can offer is failure,” Max pleads. “Bloom, I’m reaching out to you. Don’t send me to prison.”

Leo caves. He writes off the missing money as a “Turkish bath” production expense. That single compromise, the first small lie in the books, opens the door to everything that follows.

While covering up this minor fraud, Leo has his revelation. “Under the right circumstances, a producer could make more money with a flop than he could with a hit.”

Max’s eyes light up. “How?”

“It’s simply a matter of creative accounting.”

Broadway Economics Make It All Possible

The genius of the scheme relies on Broadway’s brutal economics. As Zach explains in the episode, only 20% of Broadway shows recoup their investment, and many of those don’t break even during their Broadway run. They have to slash costs, cut the band, and tour the country before investors see a dime.

In 1967, between 85 and 100 shows opened each year, compared to 40 to 45 today. Multiple investors buy percentage ownership stakes to finance productions. Producers raise all the capital before opening because, as the hosts note, “directors and actors aren’t working for free.”

Max and Leo exploit this system by raising $1 million for a show that costs $60,000. They find the worst possible play, Springtime for Hitler, a sincere love letter to the Third Reich written by a former German soldier. They hire the worst possible talent. The show bombs on opening night, and they pocket $940,000.

But they don’t just oversell the production. They obliterate any pretense of legitimate fundraising.

“Mrs. Sarah Catheart. She owns 50% of the profits,” Max explains to Leo, flipping through his investor cards. “Mrs. Virginia Resnick, she also owns 50% of the profits. Mrs. Eleanor Biddlecombe, she also owns 50% of the profits.”

Leo’s calculator starts smoking. “Max, you can only sell 100% of anything.”

“And how much of Springtime for Hitler have we sold?”

“25,000%.”

The Exit Strategy Every Real Fraudster Lacks

What makes this scheme brilliant is the built-in escape route.

“The play fails,” Zach explains. “They disappear. They have their money. It’s done.”

Compare that to real fraudsters the podcast has covered. Rita Crundwell, who embezzled $53 million from the City of Dixon, Illinois, got caught when she went on vacation and someone else had to access her accounts. Bernie Madoff’s exit plan, the hosts note, was essentially dying. He couldn’t stop recruiting new investors to pay off old ones.

“You can’t pretend like an entire fund just failed and lost everyone’s money,” Zach argues, “especially a diversified fund. But you absolutely can have a Broadway show bomb.”

The hosts draw a parallel to art dealer Inigo Philbrick, who sold more than 100% ownership stakes in paintings, just as Max sells multiple 100% stakes in his play. The critical difference is, “you can’t have a painting fail,” Zach points out. A painting keeps existing. People want their share. A flopped Broadway show simply vanishes.

When Trying Too Hard Backfires

The scheme had one fatal flaw: Max and Leo tried too hard to fail.

They didn’t just find a bad show. They found Springtime for Hitler. They cast a flamboyant director who saw it as high camp. They hired a hippie to play Hitler who showed up at the wrong audition. Fun fact from the episode: Dustin Hoffman was originally cast as the German writer, but Mel Brooks let him audition for The Graduate, thinking he’d never get it. He did.

When opening night arrives, Max tries to bribe a critic to anger him into writing a terrible one. The show opens with a production number that includes the terrible line, “Springtime for Hitler and Germany / Deutschland is happy and gay.”

The audience looks confused, disgusted, angry. Max and Leo slip out to celebrate at a bar across the street. They toast to failure.

Then intermission comes. Theater patrons flood the bar, all talking about the same show. “Who would have thought a show about Hitler would make me laugh?” one says. Another predicts it will “run for five years.”

Leo’s face goes white. He starts recalculating percentages on a napkin.

“If four out of five Broadway plays fail on their own,” Zach observes, “he probably could have just done anything and it most likely would have failed.”

By reaching for the most spectacularly awful production imaginable, they accidentally created something so over-the-top that audiences thought it was brilliant satire.

The Fraud Triangle Fits Like a Glove

Max Bialystock hits every point of the fraud triangle perfectly.

His pressure is crushing. He once had six shows running on Broadway simultaneously, and now he’s seducing elderly women for small checks in a decrepit office. His opportunity is a stream of lonely, wealthy widows who crave attention. His rationalization writes itself. These investors knew the risks, so who’s really hurt if a risky show fails?

Leo’s fraud triangle is weaker but more unsettling. He has no financial pressure, just existential resentment. “I’ve spent my life counting other people’s money,” he says. “I want my share.”

As the hosts observe, “It does not take much for him to be down with committing massive fraud.”

But what should worry every accounting professional is that Leo’s expertise makes the entire scheme possible. He sees the opportunity in Max’s messy books. He understands how to structure the fundraising. He knows how to make fraudulent numbers look legitimate.

The hosts connect this to real cases. Lou Pearlman studied accounting before running his Ponzi scheme. Nathan Mueller, a former podcast guest, was an accountant turned embezzler.

“It almost gives accountants an advantage to commit fraud compared to a layman,” Zach argues, “because they know how things are supposed to look.”

Do Fraudsters Ever Change?

The film’s final scene answers this question with dark comedy. After being found “incredibly guilty” (only Mel Brooks could write that verdict), Max and Leo land in prison.

Are they reformed? Are they reflecting on their crimes?

No, they’re producing Prisoners of Love and running the exact same scheme, selling ownership percentages to inmates and even the warden.

The hosts see parallels everywhere. Eiyahu Weinstein ran a Ponzi scheme, got pardoned by President Trump, and started another Ponzi scheme six months later. Barry Minkow committed multiple frauds across decades.

But the picture isn’t entirely bleak. Nathan Mueller and Jonathan Schwartz, both convicted fraudsters who appeared on the podcast, seem to have genuinely reformed.

The evidence leans toward skepticism about reform but doesn’t entirely close the door. Max and Leo’s answer is probably the most honest. They don’t change; they just find a new venue.

What Accounting Professionals Should Take Away

For a 1967 comedy, The Producers delivers a surprisingly sophisticated fraud lesson. The mechanics are sound, the psychology is real, and the parallels to actual cases make it essential viewing.

The most important lesson might be to ask, when examining any financial arrangement, “How does this end?” If there’s no plausible conclusion that doesn’t involve collapse, discovery, or death, you’re probably looking at fraud. Max and Leo had an answer. Most real fraudsters don’t.

Watch for that first compromise. A $2,000 discrepancy becomes 25,000% ownership sold in a single production. The massive fraud almost never starts massive. It starts with a small ask, a minor adjustment, or a favor for someone desperate.

Remember that accountants have unique power in fraud schemes, which means we carry a unique responsibility to prevent them. The person who understands the numbers can be the most dangerous person in the room or the most essential line of defense.

You can stream The Producers on Tubi for free (with ads). It’s a tight 90 minutes from when movies didn’t overstay their welcome. But for the full forensic breakdown, complete with Broadway economics, fraud triangle analysis, and connections to real cases, listen to the complete Oh My Fraud episode.