IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers Make a Fresh Start | |
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Monday, May 21, 2012
changes in the IRS offers in compromise
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Sham trusts may be disregarded
The IRS has identified as an “abusive trust arrangement” as
described in Notice 97-24, 1997-1 C.B.
409, in which the taxpayer attempts to minimize income taxation by transferring
assets to a trust with no meaningful change in the taxpayer's control over the
assets. See also Zmuda v. Commissioner,
79 T.C. 714 (1982), aff'd. 731 F.2d 1417 (1984); Markosian v.
Commissioner, 73 T.C. 1235 (1980). The
Service has won several cases involving such “sham trusts.” See Zachman v.
Commissioner, T.C. Memo 1999-391 (1999).
Accordingly, your office may wish to examine the returns of A and B to
determine whether these arrangements constitute “sham trusts.”
CCA 201220027
UIL No. 9300.99-07Letter rulings, information letters, and
determination letters—refusal of IRS to issue rulings requested by
taxpayers—sham trusts—frivolous issues.
Headnote:
IRS refused to issue letter rulings requested by taxpayers
to determine specific tax laws applicable to trusts purported to have been
created by Social Security Administration, where trusts appeared to be “sham
trusts.”
Reference(s): IRC Sec(s). 6702
FULL TEXT:
Number: 201220027
Release Date: 05/18/2012 Office of Chief Counsel
Internal Revenue Service Memorandum
Number: 201220027 Release Date: 5/18/2012
CC:PSI:2 Third Party Communication: None
POSTN-105364-12 Date of Communication: Not Applicable
UILC: 9300.99-07
date: February 07, 2012
ALLEN O. ZACHMAN AND BERNADETTE ZACHMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
Case Information:
[pg. 99-2468]
Code Sec(s):
6662
Docket: Dkt.
No. 13252-91.
Date Issued:
12/01/1999.
Judge: Opinion by
Thornton, J.
Tax Year(s): Years
1987, 1988, 1989.
Disposition: Decision
for Commissioner.
Cites: TC Memo
1999-391, RIA TC Memo P 99391, 78 CCH TCM 880.
HEADNOTE
Business trust to
which taxpayers transferred their income-producing property, including farm and
parts business, was sham that lacked economic substance: taxpayers retained
control over farm where together with sons, they provided all labor; corporate
trustees weren't independent and [pg. 99-2469] didn't perform duties or control
farm; trustees' presidents were figureheads and merely signed documents when
asked by trust organizers; trustee-appointed “managers” served no meaningful
function; under trust, no economic interest would pass to any beneficiary other
than taxpayers; trust wasn't created for estate planning purposes where it
wouldn't have assured that farm would remain in family; claimed limited
liability objective to protect farm property was rejected as peripheral to tax
savings objective; and taxpayers were properly treated as receiving all farm
and parts income due to their control.
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Sunday, May 20, 2012
Proposed new tax on expatriates section 877A
On May 17, Senators Charles E. Schumer (D-NY) and Bob Casey
(D-PA) unveiled the Ex-PATRIOT Act (“Expatriation Prevention by Abolishing
Tax-Related Incentives for Offshore Tenancy” Act). It's specifically aimed at
individuals like a Facebook co-founder and partial owner who has lived abroad
since 2009 in a no-capital-gains country, and has renounced his U.S.
citizenship, thus avoiding U.S. capital gains tax on potentially huge gains.
Code Sec. 877A already imposes an exit tax on expatriating
individuals who either have a net worth of $2 million or more, or have an
average income tax liability greater than an inflation-adjusted amount
($151,000 in 2012) over the last five years. The tax is based on the value of
all property and assets owned by the departing individual. According to Schumer
and Casey, the Ex-PATRIOT Act would provide that when an individual expatriates
for a substantial tax purpose (as determined by IRS), he or she would be
subject to a 30% capital gains tax on future investment gains. Code Sec. 871
already taxes non-resident aliens for dividends, interest and other items at
the 30% rate; the Ex-PATRIOT Act would add capital gains to this mix of taxable
earnings. The tax would apply to anyone who gave up his citizenship in the last
ten years but only would tax capital gains earned in the U.S. following the
enactment date.
The Ex-PATRIOT Act also provides that if IRS finds that
avoidance of taxes was a substantial purpose of expatriation, an individual who
renounced citizenship would be barred from any type of re-entry into the U.S.
Under the provision, IRS would have to make a decision regarding tax-avoidance
intent for every individual subject to Code Sec. 877A who renounces
citizenship. This change would be retroactive and apply to individuals who have
renounced citizenship for the 10-year period before the enactment date.
§ 877A Tax responsibilities of expatriation.
877A(a)(a) General
rules.
For purposes of
this subtitle—
877A(a)(1)(1)
New Law Analysis Mark to market.
All property of a covered expatriate shall be
treated as sold on the day before the expatriation date for its fair market
value.
877A(a)(2)(2)
New Law Analysis Recognition of gain or loss.
In the case of
any sale under paragraph (1)—
877A(a)(2)(A)(A) notwithstanding any
other provision of this title, any gain arising from such sale shall be taken
into account for the taxable year of the sale, and
877A(a)(2)(B)(B) any loss arising from such sale shall be taken into
account for the taxable year of the sale to the extent otherwise provided by
this title, except that section 1091 shall not apply to any such loss.
Proper adjustment
shall be made in the amount of any gain or loss subsequently realized for gain
or loss taken into account under the preceding sentence, determined without
regard to paragraph (3) .
877A(a)(3)(3)
Exclusion for certain gain.
877A(a)(3)(A)(A) New Law Analysis In general. The amount which would
(but for this paragraph) be includible in the gross income of any individual by
reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
877A(a)(3)(B)(B) Adjustment for inflation.
877A(a)(3)(B)(i)(i) New Law Analysis In general. In the case of any
taxable year beginning in a calendar year after 2008, the dollar amount in
subparagraph (A) shall be increased by an amount equal to—
877A(a)(3)(B)(i)(I)(I) such dollar amount, multiplied by
877A(a)(3)(B)(i)(II)(II) the cost-of-living adjustment determined under
section 1(f)(3) for the calendar year in which the taxable year begins, by
substituting “calendar year 2007” for “calendar year 1992” in subparagraph (B)
thereof.
877A(a)(3)(B)(ii)(ii) New Law Analysis Rounding. If any amount as
adjusted under clause (i) is not a multiple of $1,000, such amount shall be
rounded to the nearest multiple of $1,000.
877A(b)(b)
Election to defer tax.
877A(b)(1)(1)
New Law Analysis In general.
If the
taxpayer elects the application of this subsection with respect to any property
treated as sold by reason of subsection (a) , the time for payment of the
additional tax attributable to such property shall be extended until the due
date of the return for the taxable year in which such property is disposed of
(or, in the case of property disposed of in a transaction in which gain is not
recognized in whole or in part, until such other date as the Secretary may
prescribe).
877A(b)(2)(2)
New Law Analysis Determination of tax with respect to property.
For purposes
of paragraph (1), the additional tax attributable to any property is an amount
which bears the same ratio to the additional tax imposed by this chapter for
the taxable year solely by reason of subsection (a) as the gain taken into
account under subsection (a) with respect to such property bears to the total
gain taken into account under subsection (a) with respect to all property to
which subsection (a) applies.
877A(b)(3)(3)
New Law Analysis Termination of extension.
The due date
for payment of tax may not be extended under this subsection later than the due
date for the return of tax imposed by this chapter for the taxable year which
includes the date of death of the expatriate (or, if earlier, the time that the
security provided with respect to the property fails to meet the requirements
of paragraph (4) , unless the taxpayer corrects such failure within the time
specified by the Secretary).
877A(b)(4)(4)
Security.
877A(b)(4)(A)(A) New Law Analysis In general. No election may be made
under paragraph (1) with respect to any property unless adequate security is
provided with respect to such property.
877A(b)(4)(B)(B) Adequate security. For purposes of subparagraph (A),
security with respect to any property shall be treated as adequate security if—
877A(b)(4)(B)(i)(i) New Law Analysis it is a bond which is furnished to,
and accepted by, the Secretary, which is conditioned on the payment of tax (and
interest thereon), and which meets the requirements of section 6325, or
877A(b)(4)(B)(ii)(ii) New Law Analysis it is another form of security
for such payment (including letters of credit) that meets such requirements as
the Secretary may prescribe.
877A(b)(5)(5)
New Law Analysis Waiver of certain rights.
No election
may be made under paragraph (1) unless the taxpayer makes an irrevocable waiver
of any right under any treaty of the United States which would preclude
assessment or collection of any tax imposed by reason of this section.
877A(b)(6)(6)
New Law Analysis Elections.
An election
under paragraph (1) shall only apply to property described in the election and,
once made, is irrevocable.
877A(b)(7)(7)
New Law Analysis Interest.
For purposes
of section 6601, the last date for the payment of tax shall be determined
without regard to the election under this subsection .
877A(c)(c)
Exception for certain property.
Subsection (a)
shall not apply to—
877A(c)(1)(1)
New Law Analysis any deferred compensation item (as defined in subsection
(d)(4)),
877A(c)(2)(2)
New Law Analysis any specified tax deferred account (as defined in subsection
(e)(2)), and
877A(c)(3)(3)
New Law Analysis any interest in a nongrantor trust (as defined in subsection
(f)(3)).
877A(d)(d)
WG&L Treatises Treatment of deferred compensation items.
877A(d)(1)(1)
WG&L Treatises Withholding on eligible deferred compensation items.
877A(d)(1)(A)(A) New Law Analysis In general. In the case of any
eligible deferred compensation item, the payor shall deduct and withhold from
any taxable payment to a covered expatriate with respect to such item a tax
equal to 30 percent thereof.
877A(d)(1)(B)(B) New Law Analysis Taxable payment. For purposes of
subparagraph (A), the term “taxable payment” means with respect to a covered
expatriate any payment to the extent it would be includible in the gross income
of the covered expatriate if such expatriate continued to be subject to tax as
a citizen or resident of the United States. A deferred compensation item shall
be taken into account as a payment under the preceding sentence when such item
would be so includible.
877A(d)(2)(2)
Other deferred compensation items.
In the case of
any deferred compensation item which is not an eligible deferred compensation
item—
877A(d)(2)(A)(A)
877A(d)(2)(A)(i)(i) New Law Analysis with respect to any deferred
compensation item to which clause (ii) does not apply, an amount equal to the
present value of the covered expatriate's accrued benefit shall be treated as
having been received by such individual on the day before the expatriation date
as a distribution under the plan, and
877A(d)(2)(A)(ii)(ii) New Law Analysis with respect to any deferred
compensation item referred to in paragraph (4)(D), the rights of the covered
expatriate to such item shall be treated as becoming transferable and not
subject to a substantial risk of forfeiture on the day before the expatriation
date,
877A(d)(2)(B)(B) New Law Analysis no early distribution tax shall apply
by reason of such treatment, and
877A(d)(2)(C)(C) New Law Analysis appropriate adjustments shall be made
to subsequent distributions from the plan to reflect such treatment.
877A(d)(3)(3)
WG&L Treatises Eligible deferred compensation items.
For purposes
of this subsection , the term “eligible deferred compensation item” means any
deferred compensation item with respect to which—
877A(d)(3)(A)(A) the payor of such item is—
877A(d)(3)(A)(i)(i) New Law Analysis a United States person, or
877A(d)(3)(A)(ii)(ii) New Law Analysis a person who is not a United
States person but who elects to be treated as a United States person for
purposes of paragraph (1) and meets such requirements as the Secretary may
provide to ensure that the payor will meet the requirements of paragraph (1),
and
877A(d)(3)(B)(B) the covered expatriate—
877A(d)(3)(B)(i)(i) New Law Analysis notifies the payor of his status as
a covered expatriate, and
877A(d)(3)(B)(ii)(ii) New Law Analysis makes an irrevocable waiver of
any right to claim any reduction under any treaty with the United States in
withholding on such item.
877A(d)(4)(4)
Deferred compensation item.
For purposes of this subsection , the term
“deferred compensation item” means—
877A(d)(4)(A)(A) New Law Analysis any interest in a plan or arrangement
described in section 219(g)(5) ,
877A(d)(4)(B)(B) New Law Analysis any interest in a foreign pension plan
or similar retirement arrangement or program,
877A(d)(4)(C)(C) New Law Analysis any item of deferred compensation, and
877A(d)(4)(D)(D) New Law Analysis any property, or right to property,
which the individual is entitled to receive in connection with the performance
of services to the extent not previously taken into account under section 83 or
in accordance with section 83.
877A(d)(5)(5)
New Law Analysis Exception.
Paragraphs (1)
and (2) shall not apply to any deferred compensation item to the extent
attributable to services performed outside the United States while the covered
expatriate was not a citizen or resident of the United States.
877A(d)(6)(6)
Special rules.
877A(d)(6)(A)(A) New Law Analysis Application of withholding rules.
Rules similar to the rules of subchapter B of chapter 3 shall apply for
purposes of this subsection.
877A(d)(6)(B)(B)
New Law Analysis Application of tax. Any item subject to the withholding tax
imposed under paragraph (1) shall be subject to tax under section 871.
877A(d)(6)(C)(C) New Law Analysis Coordination with other withholding
requirements. Any item subject to withholding under paragraph (1) shall not be
subject to withholding under section 1441 or chapter 24.
877A(e)(e)
WG&L Treatises Treatment of specified tax deferred accounts.
877A(e)(1)(1)
Account treated as distributed.
In the case of any interest in a
specified tax deferred account held by a covered expatriate on the day before
the expatriation date—
877A(e)(1)(A)(A) New Law Analysis the covered expatriate shall be
treated as receiving a distribution of his entire interest in such account on
the day before the expatriation date,
877A(e)(1)(B)(B) New Law Analysis no early distribution tax shall apply
by reason of such treatment, and
877A(e)(1)(C)(C) New Law Analysis appropriate adjustments shall be made
to subsequent distributions from the account to reflect such treatment.
877A(e)(2)(2)
New Law Analysis Specified tax deferred account.
For purposes
of paragraph (1), the term “specified tax deferred account” means an individual
retirement plan (as defined in section 7701(a)(37) ) other than any arrangement
described in subsection (k) or (p) of section 408, a qualified tuition program
(as defined in section 529), a Coverdell education savings account (as defined
in section 530), a health savings account (as defined in section 223), and an
Archer MSA (as defined in section 220).
877A(f)(f) Special
rules for nongrantor trusts.
877A(f)(1)(1)
In general.
In the case of
a distribution (directly or indirectly) of any property from a nongrantor trust
to a covered expatriate—
877A(f)(1)(A)(A) New Law Analysis the trustee shall deduct and withhold
from such distribution an amount equal to 30 percent of the taxable portion of
the distribution, and
877A(f)(1)(B)(B) New Law Analysis if the fair market value of such
property exceeds its adjusted basis in the hands of the trust, gain shall be
recognized to the trust as if such property were sold to the expatriate at its
fair market value.
877A(f)(2)(2)
New Law Analysis Taxable portion.
For purposes
of this subsection, the term “taxable portion” means, with respect to any
distribution, that portion of the distribution which would be includible in the
gross income of the covered expatriate if such expatriate continued to be
subject to tax as a citizen or resident of the United States.
877A(f)(3)(3)
New Law Analysis Nongrantor trust.
For purposes
of this subsection, the term “nongrantor trust” means the portion of any trust
that the individual is not considered the owner of under subpart E of part I of
subchapter J. The determination under the preceding sentence shall be made
immediately before the expatriation date.
877A(f)(4)(4)
Special rules relating to withholding.
For purposes
of this subsection —
877A(f)(4)(A)(A) New Law Analysis rules similar to the rules of
subsection (d)(6) shall apply, and
877A(f)(4)(B)(B) New Law Analysis the covered expatriate shall be
treated as having waived any right to claim any reduction under any treaty with
the United States in withholding on any distribution to which paragraph (1)(A)
applies unless the covered expatriate agrees to such other treatment as the
Secretary determines appropriate.
877A(f)(5)(5)
New Law Analysis Application.
This
subsection shall apply to a nongrantor trust only if the covered expatriate was
a beneficiary of the trust on the day before the expatriation date.
877A(g)(g)
Definitions and special rules relating to expatriation.
For purposes of
this section—
877A(g)(1)(1)
Covered expatriate.
877A(g)(1)(A)(A) New Law Analysis In general. The term “covered
expatriate” means an expatriate who meets the requirements of subparagraph (A)
, (B), or (C) of section 877(a)(2) .
877A(g)(1)(B)(B) Exceptions. An individual shall not be treated as
meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if—
877A(g)(1)(B)(i)(i) the individual—
877A(g)(1)(B)(i)(I)(I) New Law Analysis became at birth a citizen of the
United States and a citizen of another country and, as of the expatriation
date, continues to be a citizen of, and is taxed as a resident of, such other
country, and
877A(g)(1)(B)(i)(II)(II) New Law Analysis has been a resident of the
United States (as defined in section 7701(b)(1)(A)(ii) ) for not more than 10
taxable years during the 15-taxable year period ending with the taxable year
during which the expatriation date occurs, or
877A(g)(1)(B)(ii)(ii)
877A(g)(1)(B)(ii)(I)(I) New Law Analysis the individual's relinquishment
of United States citizenship occurs before such individual attains age 181/2
and
877A(g)(1)(B)(ii)(II)(II) New Law Analysis the individual has been a
resident of the United States (as so defined) for not more than 10 taxable
years before the date of relinquishment.
877A(g)(1)(C)(C) New Law Analysis Covered expatriates also subject to
tax as citizens or residents. In the case of any covered expatriate who is subject
to tax as a citizen or resident of the United States for any period beginning
after the expatriation date, such individual shall not be treated as a covered
expatriate during such period for purposes of subsections (d)(1) and (f) and
section 2801.
877A(g)(2)(2)
WG&L Treatises Expatriate.
The term
“expatriate” means—
877A(g)(2)(A)(A) New Law Analysis any United States citizen who
relinquishes his citizenship, and
877A(g)(2)(B)(B) New Law Analysis any long-term resident of the United
States who ceases to be a lawful permanent resident of the United States
(within the meaning of section 7701(b)(6)).
877A(g)(3)(3)
Expatriation date.
The term
“expatriation date” means—
877A(g)(3)(A)(A) New Law Analysis the date an individual relinquishes
United States citizenship, or
877A(g)(3)(B)(B) New Law Analysis in the case of a long-term resident of
the United States, the date on which the individual ceases to be a lawful
permanent resident of the United States (within the meaning of section
7701(b)(6)).
877A(g)(4)(4)
New Law Analysis Relinquishment of citizenship.
A citizen
shall be treated as relinquishing his United States citizenship on the earliest
of—
877A(g)(4)(A)(A) New Law Analysis the date the individual renounces his
United States nationality before a diplomatic or consular officer of the United
States pursuant to paragraph (5) of section 349(a) of the Immigration and
Nationality Act (8 U.S.C. 1481(a)(5)),
877A(g)(4)(B)(B) New Law Analysis the date the individual furnishes to
the United States Department of State a signed statement of voluntary
relinquishment of United States nationality confirming the performance of an
act of expatriation specified in paragraph (1), (2), (3), or (4) of section
349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
877A(g)(4)(C)(C) New Law Analysis the date the United States Department
of State issues to the individual a certificate of loss of nationality, or
877A(g)(4)(D)(D) New Law Analysis the date a court of the United States
cancels a naturalized citizen's certificate of naturalization.
Subparagraph
(A) or (B) shall not apply to any individual unless the renunciation or
voluntary relinquishment is subsequently approved by the issuance to the
individual of a certificate of loss of nationality by the United States
Department of State.
877A(g)(5)(5)
New Law Analysis Long-term resident.
The term
“long-term resident” has the meaning given to such term by section 877(e)(2) .
877A(g)(6)(6)
New Law Analysis Early distribution tax.
The term
“early distribution tax” means any increase in tax imposed under section 72(t),
220(e)(4) , 223(f)(4), 409A(a)(1)(B) , 529(c)(6), or 530(d)(4).
877A(h)(h) Other
rules.
877A(h)(1)(1)
Termination of deferrals, etc.
In the case of
any covered expatriate, notwithstanding any other provision of this title—
877A(h)(1)(A)(A) New Law Analysis any time period for acquiring property
which would result in the reduction in the amount of gain recognized with
respect to property disposed of by the taxpayer shall terminate on the day
before the expatriation date, and
877A(h)(1)(B)(B) New Law Analysis any extension of time for payment of
tax shall cease to apply on the day before the expatriation date and the unpaid
portion of such tax shall be due and payable at the time and in the manner
prescribed by the Secretary.
877A(h)(2)(2)
New Law Analysis Step-up in basis.
Solely for
purposes of determining any tax imposed by reason of subsection (a) , property
which was held by an individual on the date the individual first became a
resident of the United States (within the meaning of section 7701(b)) shall be
treated as having a basis on such date of not less than the fair market value of
such property on such date. The preceding sentence shall not apply if the
individual elects not to have such sentence apply. Such an election, once made,
shall be irrevocable.
877A(h)(3)(3)
New Law Analysis Coordination with section 684.
If the expatriation of any individual would
result in the recognition of gain under section 684, this section shall be
applied after the application of section 684 .
877A(i)(i) New Law
Analysis Regulations.
The Secretary
shall prescribe such regulations as may be necessary or appropriate to carry
out the purposes of this section.
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Saturday, May 19, 2012
Bankruptcy and the IRS
FS-2005-18,
November 2005
The
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) amends
the U.S. Bankruptcy Code by adding new responsibilities for debtors.
In
general, the new law requires that debtors comply with their tax-filing responsibilities,
make available previously-filed tax returns, in many cases, and seek credit
counseling services. Most BAPCPA provisions apply to cases filed on or after
Oct. 17, 2005.
Tax Returns Must be Filed
Tax Returns Must be Filed
Under
the new law, if debtors fail to file a return that becomes due after the date
of their bankruptcy petition, or fail to file an extension, the IRS may request
the Court to order a conversion (change from Chapter 7 to Chapter 11 or from
Chapter 11 to Chapter 13, for example) or dismissal of the case. Conversion or
dismissal may also be ordered if a Chapter 11 debtor fails to timely pay tax
obligations owed after the date of the bankruptcy petition.
In
order to have their plan confirmed, Chapter 13 debtors must also file all tax
returns with the IRS for the four-year period before the bankruptcy petition.
The debtor must establish filing by the first meeting of creditors.
Seven
days before the first meeting of creditors, debtors must provide trustees a
copy of their most recently filed federal tax return or a transcript of the
return. Similarly, copies of amendments to such returns, and any past due
returns filed while the case is pending, must also be filed with the court if
requested. The returns or transcripts must be provided to the court at the
same time they are filed with the IRS. If the returns or transcripts are
not filed, a Chapter 7 discharge will not be granted, or a Chapter 11 or 13
plan will not be confirmed. In addition, debtors must also provide a copy of
the tax return or transcript to requesting creditors.
Means Testing for Chapter 13
Under
the new law, individual debtors who meet certain income tests will be required
to make regular payments on their debts under a Chapter 13 plan. The new law
also authorizes the bankruptcy courts to modify IRS expense standards and use
them to make this “means test.”
EDeclaring
Bankruptcy
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Here are some helpful tips
for bankruptcy trustees who receive IRS Collection notices:
- If
the IRS is a creditor in a bankruptcy case, and you determine that IRS was
not originally listed as a creditor, notification of the filing should be
sent to IRS to prevent violations of the automatic stay. Send notification
to:
Internal Revenue Service
Centralized Insolvency Operation
P. O. Box 7346
Philadelphia, PA 19101-7346
Centralized Insolvency Operation
P. O. Box 7346
Philadelphia, PA 19101-7346
- IRS
notices are sent to the last known address. This address is determined by
the most recently filed tax return, Form
8822,
Change of Address, or change of address information obtained from the
United States Postal Service. As an official National Change of Address
licensee of the USPS, the IRS receives weekly updates of change of address
information.
- Bankruptcy
does not prohibit issuance of all IRS notices, and not all IRS notices
violate the automatic stay. Some notices, for example inquiries concerning
unfiled returns, will continue to be sent to the debtor’s last known
address.
- For
individual debtors, the last known address should always remain the
debtor’s address. Returns should not be filed “in care of” the trustee.
Doing so will change the debtor’s address to that of the trustee and all
IRS correspondence relating to that taxpayer will be sent to the trustee.
- In
cases not involving an individual debtor,
the debtor’s IRS address of record will be changed to the trustee’s
address if the trustee:
- files
a debtor’s tax return in care of the trustee at the trustee’s address, or
- files
a change of address for the debtor with the USPS, or
- files
a Form 8822, Change of
Address, with the IRS.
Any of the above will result in all future IRS
correspondence being sent to the trustee.
Treas. Reg. §301.6212-2 and Rev. Proc. 2010-16, provide
guidance on the procedures for making a change of address and explain the
requirements for giving the IRS “clear and concise notification” of a change of
address.
·
IRS notices
concerning taxes incurred by bankruptcy estates of individuals in chapter 7 and
11 cases, which file separate Form 1041returns, are
properly sent to the bankruptcy trustee. Notices will continue to be sent until
the liability is satisfied or the statute of limitations for collection
expires.
- Certain
penalties may apply to returns filed by the trustee for taxes owed by the
bankruptcy estate. The penalties may be waived if the Bankruptcy Court
finds there are insufficient funds to pay administrative expenses. Contact
the Centralized Insolvency Operation at the phone number below if you
believe any of the penalties should be waived.
- If
you have questions regarding a case where IRS is listed as a creditor,
contact the Centralized Insolvency Operation. Be prepared to provide the
debtor's bankruptcy case number or taxpayer identification number. The IRS
may only disclose the information permitted by I.R.C. section 6103.
- Call
(800) 973-0424 to reach the Centralized Insolvency Operation. Hours are 7
a.m. to 10 p.m. eastern time.
xamples
of Bankruptcy Fraud Investigations - Fiscal Year 2012
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www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
Friday, May 18, 2012
tax fraud usually includes some degree of concealment
U.S. v. GHADDAR, Cite as 109 AFTR 2d 2012-XXXX, 05/08/2012
United States Court
of Appeals For the Seventh Circuit,
Date Decided:
05/08/2012.
As we explained in
United States v. Kontny, 238 F.3d 815, 820 [87 AFTR 2d 2001-390]–21 (7th Cir.
2001), some degree of concealment “is inherent in criminal tax fraud,” and situations
where a shop-owner simply empties the cash register and hides the day's
receipts under his bed “must be distinguished from efforts over and above that
concealment to prevent detection.”See United States v. Tin Yat Chin , 371 F.3d
31, 42 [93 AFTR 2d 2004-2519] (2d Cir. 2004) (suggesting that requiring
customers to pay with currency is not sophisticated); United States v. Hart,
324 F.3d 575, 579 (8th Cir. 2003) (concluding that not recording personal
income is not sophisticated). For that reason, the adjustment for sophisticated
means is warranted only ““when the conduct shows a greater level of planning or
concealment than a typical fraud of its kind.””United States v. Green , 648
F.3d 569, 576 (7th Cir. 2011) (quoting United States v. Landwer, 640 F.3d 769,
771 (7th Cir. 2011)).
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
Thursday, May 17, 2012
fraudulent transfer - nominee - alter ego
U.S. v. EVSEROFF, ET AL., Cite as 109 AFTR 2d 2012-XXXX,
04/30/2012
UNITED STATES OF AMERICA, Plaintiff, v. JACOB EVSEROFF, ET
AL., Defendants.
Case Information:
Code Sec(s):
Court Name: UNITED
STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK,
Docket No.: 00-CV-06029
(KAM),
Date Decided:
04/30/2012.
Disposition:
HEADNOTE
.
Reference(s):
OPINION
UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK,
MEMORANDUM & ORDER
Judge: Matsumoto, United States District Judge:
This case arises out of efforts by the United States (the
“government”) to collect taxes owed by Jacob Evseroff (“Evseroff”) by accessing
assets currently held by a trust that Evseroff established in 1992 for the
benefit of his two sons (the “Trust”). The United States argues that Evseroff's
attempts to transfer various pieces of his own property to the Trust should not
frustrate the government's collection efforts under several legal theories. A
bench trial was held before Judge David G. Trager on November 7 and 8, 2005, and
a post-trial order was entered on September 27, 2006 that rejected the
government's claims, holding that the Trust property could not be used to
satisfy Evseroff's tax debts (the “Post-Trial Order”).
The government appealed the Post-Trial Order, and on March
21, 2008, the United States Court of Appeals for the Second Circuit reversed
and remanded. In its remand order, the Second Circuit directed the district
court to reconsider its findings regarding whether certain conveyances by
Evseroff to the Trust were actually fraudulent and whether the Trust was
Evseroff's alter ego or held property as his nominee. For the reasons discussed
below, the government may collect on all property held by the Trust.
BACKGROUND
This case has been discussed in several prior opinions.See
United States v. Evseroff , No. 00-CV-6029, 2001 WL 1571881 [88 AFTR 2d
2001-6926] (E.D.N.Y. Nov. 6, 2001) (entering judgment on the judgment of the
United States Tax Court regarding Evseroff's tax liability) (“Evseroff I”);
United States v. Evseroff, No. 00-CV-6029, 2002 WL 1973196 [90 AFTR 2d
2002-5541] (E.D.N.Y. July 8, 2002) (allowing Evseroff to designate an expert to
testify as to the value of his assets and ordering that interest on Evseroff's
tax debts continue to accrue) (“Evseroff II”); United States v. Evseroff, No.
00-CV-6029, 2003 WL 22872522 [92 AFTR 2d 2003-6987] (E.D.N.Y. Sept. 30, 2003)
(denying the government's summary judgment motion on its claim to access the
Trust's assets) (“Evseroff III”); Evseroff v. United States, No. 03-CV-0317,
2004 WL 3127981 [95 AFTR 2d 2005-1146] (E.D.N.Y. Sept. 22, 2004) (rejecting
Evseroff's claim under the Taxpayer Bill of Rights) (“Evseroff IV”); United
States v. Evseroff, No. 00-CV-6029, 2006 WL 2792750 [98 AFTR 2d 2006-7034]
(E.D.N.Y. Sept. 27, 2006) (finding, after a bench trial, that the government
could not access assets held by the Trust) (“Evseroff V” or the Post-Trial
Order). It is assumed that the reader has some familiarity with these decisions
and, therefore, the relevant facts and procedural history are described only as
necessary below.
Evseroff's tax liability arose primarily from his decision
to invest in a series of tax shelters between 1978 and 1982 that generated
deductions which were later disallowed by the Internal Revenue Service (“IRS”).
Evseroff III, 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 1. 1 Evseroff was
first notified that he had outstanding tax liabilities in December 1990, when
he received a letter from the IRS after being audited. This letter indicated
that he owed $227,282 in taxes and penalties. Evseroff V, 2006 WL 2792750 [98
AFTR 2d 2006-7034], at 1. Evseroff received another letter from the IRS in
January 1991, and the parties stipulated that, as of December 6, 1990, Evseroff
owed $647,549.40 in back taxes and accrued interest.Id. In January of 1992, the
IRS sent Evseroff a notice of deficiency indicating that he had accrued more
than $700,000 in tax liability. Id. at 2.
Also in January of 1992, Evseroff met with an attorney to
set up the Trust. Id. It is unclear whether Evseroff first met with the
attorney about the Trust before or after receiving the January 1992 letter from
the IRS. Id. In April 1992, Evseroff challenged the IRS's calculation of his
tax liabilities in a petition to the United States Tax Court.Id. In June 1992,
the Trust was created, with Evseroff's sons as the named beneficiaries.
Evseroff III, 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 2. Also in June 1992,
Evseroff transferred approximately $220,000 to the Trust (“the $220,000”). Id.
In October 1992, Evseroff transferred his primary residence, located at 155
Dover Street in Brooklyn (“the Dover Street Residence”), to the Trust.Id. In
November of 1992, the Tax Court entered judgment against Evseroff in the amount
of $209,113 in taxes and penalties and $560,000 in interest. Evseroff V, 2006
WL 2792750 [98 AFTR 2d 2006-7034], at 2.
The particulars of the transfer of the Dover Street
Residence are set forth here in detail. Evseroff received no consideration for
the deed transferring the Dover Street residence to the Trust. (See Deposition
of Jacob Evseroff dated February 7 and 21, 2002 (“J. Evseroff Dep.”), Ex. 12
(the “Transfer Agreement”).) 2 Pursuant to the Transfer Agreement 3, Evseroff
was allowed to live in the house and pay the expenses as he had before. (Id.)
Evseroff did not pay the Trust any cash rent, but he was responsible for the
expenses of the Dover Street Residence, such as the mortgage and taxes on the
property. (Id.) Moreover, the Transfer Agreement specified no end date after
which Evseroff's right to live in the Dover Street Residence expired. (Id.)
There is no evidence that the Trust assumed Evseroff's mortgage obligations.
The Transfer Agreement did not give Evseroff the power to sell the home, id.,
and Evseroff never attempted to do so, Evseroff V, 2006 WL 2792750 [98 AFTR 2d
2006-7034], at 4. The fair market value of the Dover Street Residence in 1992
was $515,000. (United States (“Gov't”) Ex. 6 at 5; ECF No. 190, Defendant's Post-Remand
Memorandum of Law (“Evseroff Mem.”) at A-1.) In 1995, the payments on the
mortgage were $1,044 per month. (ECF No. 186-3, United States' Post-Remand
Supplemental Memorandum (“Gov't Mem.”) at 3; Evseroff Mem. at A-3.) In 1992,
the mortgage was scheduled to be paid off in approximately five years. (Tr. at
91–93; Evseroff Mem. at A-3.)
With respect to the management of the Trust, a series of
Evseroff family friends and business associates served as trustees. Evseroff
III, 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 9. There is little evidence
that they were actively involved in managing the Trust or its assets. Indeed,
one trustee appears to have believed that he had no responsibilities until
Evseroff's death. (Transcript of Deposition of Barry Schneider dated January 3,
2002 (“Schneider Dep. Tr.”) at 20.) The accounting work for the Trust was
performed by Frederick Blumer, an accountant who also performed accounting work
for Evseroff and Evseroff's law firm. Evseroff III, 2003 WL 22872522 [92 AFTR
2d 2003-6987], at 3. The accountant was not paid for his work on behalf of the
Trust, which he did as a professional courtesy to Evseroff.Id. The Trust's tax
returns took Blumer between one-half hour and an hour to prepare. (Transcript
of Deposition of Frederick Blumer dated February 21, 2002 (“02/21/02 Blumer
Dep. Tr.”) at 39.) The Trust's tax statements were apparently never even sent
to the trustees, and instead were sent directly to Evseroff. Evseroff III, 2003
WL 22872522 [92 AFTR 2d 2003-6987], at 3, 11.
Between 1992 and 1998, the Trust did not record Evseroff's
payment of expenses for the Dover Street Residence as income. 4 (02/21/02
Blumer Dep., Exs. 1–7.) The Trust also did not claim the mortgage interest
deduction for the Dover Street Residence between those years, though it did
claim the deduction for real estate taxes between 1994 and 1998. (Id.) Indeed,
the Trust never assumed the mortgage for the Dover Street Residence. (Gov't
Mem. at 3; Evseroff Mem. at A-2, A-3.) Evseroff also remained the named beneficiary
of the flood and fire insurance policies on the Dover Street Residence. (J.
Evseroff Dep., Exs. 32–33; Evseroff Mem. at A-7.)
Several other facts bear generally on Evseroff's financial
affairs. For one, Evseroff had a wife from whom he had been separated for
eleven years at the time he created the Trust.Evseroff III , 2003 WL 22872522
[92 AFTR 2d 2003-6987], at 2 n.3. Evseroff would later state that one of his
reasons for setting up the Trust was to ensure that his two sons, rather than
his estranged wife, received the benefit of his estate. Id. at 2. Additionally,
he purchased a home in Florida in September of 1991. Evseroff V, 2006 WL
2792750 [98 AFTR 2d 2006-7034], at 2–3. He apparently believed that the Florida
home could not be seized by the IRS. Id. at 2.
Starting in 1997, Evseroff moved his funds around from place
to place and, at one time, had his sons hold money for him rather than
establishing a bank account. Id. at 3;Evseroff III , 2003 WL 22872522 [92 AFTR
2d 2003-6987], at 5–6. Further, Evseroff admitted that he kept personal funds
in his law firm checking account and wrote checks on the account to pay for
some personal expenses because he was concerned that the IRS would seize funds
from his personal checking account. (Tr. at 72–73, 82–85; see also J. Evseroff
Dep., Ex. 28.)
Evseroff's financial situation at the time of his transfer
of the Dover Street Residence and the $220,000 to the Trust is difficult to
discern with precision. Two points, however, are clear: (1) Evseroff was technically
solvent after these transfers despite his tax debts, and (2) Evseroff's readily
accessible assets 5 were insufficient to satisfy his tax debt.
First, with regard to Evseroff's solvency, the court found
in its Post-Trial Order that on October 18th, 1992 — just ten days after
Evseroff transferred the Dover Street Residence to the Trust — Evseroff's tax
liabilities totaled $770,530.64.Evseroff V , 2006 WL 2792750 [98 AFTR 2d
2006-7034], at 2–3. Evseroff's total assets, after and excluding the two transfers
involving the Dover Street Residence and the $220,000, could be reasonably
estimated at anywhere between $847,342 6 to $1,422,646. 7 See id. at 3–5. Thus,
as of October 18, 1992, he had assets valued somewhere between $76,811 and
$652,115 over and above his tax liabilities.See id. Regardless of where within
that range the value of Evseroff's assets actually fell, the results of the
fraudulent transfer, nominee, and alter ego analyses would be the same.
Second, with regard to Evseroff's readily accessible assets,
those assets were insufficient to satisfy Evseroff's tax liabilities. In the
Post-Trial Order, the court identified two readily accessible assets in
Evseroff's possession: his $230,000 Florida residence and his $75,575 law
practice. See id. at 3–4. The court did not find Evseroff's retirement accounts
to be readily accessible because the government could be delayed in its efforts
to collect future distributions from the $355,304 in Evseroff's retirement
accounts. 8 Id. at 5 n.7. In addition, the court heard evidence that Evseroff
moved his cash assets from one account to another and hid them in his law
practice checking account, with his sons, and in his sons' businesses in an
effort to prevent the United States from collecting his cash assets. Evseroff
V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3; (see Tr. at 72–73, 82–85; J.
Evseroff Dep., Ex. 28; 02/21/02 Blumer Dep., Ex. 19). Thus, considering only
Evseroff's readily accessible assets, the law practice and the Florida
residence, those assets would be worth considerably less than Evseroff's tax
debt. The value of Evseroff's law practice and Florida Residence totaled a mere
$305,575, which was almost $465,000 less than his tax debt.See Evseroff V ,
2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3.
At the bench trial held before The Honorable David G. Trager
on November 7 and 8, 2005, the government pressed three theories for recovering
assets from the Trust: (1) that Evseroff transferred assets to the Trust
through constructively fraudulent conveyances; (2) that Evseroff transferred
assets to the Trust through actually fraudulent conveyances; and (3) that the
Trust was Evseroff's alter ego/nominee. Id. at 4–7.
Evseroff claimed that his motivation in setting up the Trust
was estate planning. Id. at 2. At the time that Evseroff started the process of
setting up the Trust, he was 68 years old and had a wife from whom he had been
separated.Id. at 2–3. He testified that he set up the Trust so that (1) his
sons would get the benefit of his estate, (2) his estranged wife would not
receive a portion of his assets, and (3) he could avoid the estate tax. Id. at
2. The government, by contrast, argued that his motive in setting up the Trust
was to avoid his outstanding tax debts.
In the Post-Trial Order, Judge Trager noted that Evseroff's
motives were mixed, specifically that:
At trial, it became apparent that Evseroff had mixed motives
in establishing the Trust: he was concerned about his separated wife taking a
share of his estate, he wished to provide for his two unmarried sons who were
living with him and he was concerned about the government's potential
collection efforts. All of these motives were present. If the issue were
decided today, based on all that happened in the interim, it is clear that his
tax problems would be the predominate concern. However, when these events
occurred, the separation from his wife and need for estate planning based on
this separation was much more at the forefront of his life.
Id. at 3. With respect to the government's legal arguments,
the Post-Trial Order found that the property transfers to the Trust were
neither constructively nor actually fraudulent, based primarily on the fact
that Evseroff was still solvent, despite his tax debts, after transferring both
the Dover Street Residence and the $220,000 to the Trust. Id. at 5–6. The
Post-Trial Order also rejected the government's claim that the Trust was either
Evseroff's alter ego or that it held property as his nominee. Id. at 6–7. With
respect to the latter two findings, the Post-Trial Order reasoned that
Evseroff's creation of the Trust was not primarily motivated by his desire to
avoid the government's collection efforts.Id. at 7. The Post-Trial Order also
noted that there was no evidence that Evseroff had used or controlled any of
the money in the Trust, id., and that he was solvent at the time of the
transfers, id. at 6. Finally, the Post-Trial Order discussed the fact that
Evseroff provided valuable consideration to the Trust in exchange for the use
of the Dover Street Residence in that he paid the mortgage and other expenses
related to the property. Id. at 7.
The government appealed and the Second Circuit reversed and
remanded by summary order. United States v. Evseroff, 270 F. App'x 75 [101 AFTR
2d 2008-1406] (2d Cir. 2008) (summary order). 9 Regarding the actual fraud
finding, the Second Circuit held that a finding that the transfers did not
leave Evseroff insolvent did not preclude a finding that the transfers constituted
actually fraudulent conveyances. Id. at 77. On remand, the Second Circuit
directed the district court to consider both whether Evseroff intended to
defraud the government and also whether he intended to hinder or delay its
collection efforts. Id.
In analyzing the alter ego and nominee issues, the Second
Circuit instructed that “the critical issue in resolving a nominee or alter ego
claim is not motive, but control.”Id. The Second Circuit further noted that, if
Evseroff controlled the trust, this court should then determine “whether
Evseroff used this control to commit fraud or other wrongful conduct, such as
whether he ever used the trust for his benefit rather than the benefit of his
two sons.”Id. at 78. In order to determine whether Evseroff used control of the
Trust to commit wrongful conduct, the Second Circuit suggested that this court
consider factors such as (1) how the payments made by Evseroff for the Dover
Street Residence's expenses compared to the value of the house, and (2) how the
payments were treated by the relevant entities for accounting and tax purposes.
Id.
DISCUSSION
I. Fraudulent Conveyance
On remand, the government argues that Evseroff's transfers
of the Dover Street Residence and the $220,000 to the Trust represent
fraudulent conveyances under a theory of actual fraud. Under New York law,
“[e]very conveyance made and every obligation incurred with actual intent, as
distinguished from intent presumed in law, to hinder, delay, or defraud either
present or future creditors, is fraudulent as to both present and future
creditors.” N.Y. Debt. & Cred. Law § 276. As this section indicates, a
conveyance may be fraudulent whether a debtor intends to actually “defraud” a
creditor or merely intends to “hinder or delay” their collection efforts.
“The requisite intent required by this section need not be
proven by direct evidence, but may be inferred from the circumstances
surrounding the allegedly fraudulent transfer.”Steinberg v. Levine , 774
N.Y.S.2d 810, 810 (N.Y. App. Div. 2d Dep't 2004) (citation omitted); see also
Capital Distributions Servs., Ltd. v. Ducor Exp. Airlines, Inc., 440 F. Supp.
2d 195, 204 (E.D.N.Y. 2006) (citingSteinberg ). Whether a conveyance is
fraudulent “is ordinarily a question of fact,” Grumman Aerospace Corp. v. Rice,
605 N.Y.S.2d 305, 307 (N.Y. App. Div. 2d Dep't 1993), and a creditor must prove
his case by “clear and convincing evidence.” Lippe v. Bairnco Corp., 249 F.
Supp. 2d 357, 374 (S.D.N.Y. 2003) (quotingHBE Leasing Corp. v. Frank , 48 F.3d
623, 639 (2d Cir. 1995)).
In determining whether Evseroff had the requisite fraudulent
intent, it is necessary to examine a series of factors that are generally
referred to as “badges of fraud.”Capital Distributions Servs. , 440 F. Supp. 2d
at 205 (quoting Steinberg, 774 N.Y.S.2d at 810).
These badges of fraud include lack or inadequacy of
consideration, family, friendship, or close associate relationship between
transferor and transferee, the debtor's retention of possession, benefit, or
use of the property in question, the existence of a pattern or series of
transactions or course of conduct after the incurring of debt, and the
transferor's knowledge of the creditor's claim and the inability to pay it ....
Steinberg, 774 N.Y.S.2d at 810 (citations omitted). A court
may also consider “the financial condition of the party sought to be charged
both before and after the transaction in question .... [and the] shifting of
assets by the debtor to a corporation wholly controlled by him ....” In re
Kaiser, 722 F.2d 1574, 1582–83 (2d Cir. 1983) (citations omitted).
Based on the clear and convincing evidence in the record,
factual findings in the Post-Trial Order establish that both conveyances at
issue were actually fraudulent. As noted above, the Post-Trial Order found that
Evseroff's motives for creating the Trust were mixed: he was concerned with
estate planning and with avoiding collection by the IRS and a claim by his
estranged wife. Evseroff V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3. The
Post-Trial Order also found that Evseroff did not receive consideration for the
transfer of $220,000 of personal funds to the trust. Evseroff V, 2006 WL
2792750 [98 AFTR 2d 2006-7034], at 2, 5. Nor did he receive consideration for
the transfer of the Dover Street Residence other than a rental agreement with
the Trust allowing him to reside in the home in exchange for his payment of
operating and maintenance expenses in lieu of rent.Id. at 4. Further, the court
found that Evseroff was solvent after the transfers. Id. at 6. Nothing has been
presented that contradicts these findings.
Nevertheless, neither the fact that Evseroff had mixed
motives in establishing the Trust nor the fact that he was solvent after he
made the transfers absolves him of liability. The primary issue is his intent —
not his actual financial status.See N.Y. Debt. & Cred. Law § 276;see also
Grumman Aerospace Corp. , 605 N.Y.S.2d at 307 (finding that a cause of action
predicated upon § 276 “may lie even where fair consideration was paid and where
the debtor remains solvent”). Although there must be some actual financial harm
to a creditor to support a fraudulent conveyance finding, a debtor need merely
“deplete or otherwise diminish the value of the assets of the debtor's estate
remaining available to creditors” to be liable. Lippe, 249 F. Supp. 2d at 375
(citations omitted).
By making the transfers of the Dover Street Residence and
the $220,000 to the Trust, Evseroff unambiguously caused the requisite actual
harm to his creditors by reducing the assets he had available to satisfy his
tax debt and reducing the value of his readily accessible assets well below the
amount of his tax debt. As noted above, at the time of the conveyances,
Evseroff's tax liabilities totaled $770,530.64. See Evseroff V, 2006 WL 2792750
[98 AFTR 2d 2006-7034], at 3. As discussed previously, Evseroff's total assets
after and excluding the two transfers could reasonably be estimated at anywhere
from $847,342 to $1,422,646 — leaving him somewhere between $76,811 and
$652,115 over and above his tax debts if all of his assets are included. As
such, the IRS would have had to collect somewhere between half and ninety
percent of Evseroff's total assets in order to satisfy his tax debts. This
would be a difficult task — particularly given evidence in the record that
Evseroff was not inclined to cooperate with collection efforts. 10 And if one
includes only Evseroff's readily accessible assets, the transfers reduced the
value of Evseroff's remaining assets to $305,575 — well below the amount of his
tax liability. At the very least, the transfers made collection efforts much
more difficult.
Moreover, Evseroff's financial picture was even less
favorable than the snapshot of the amount he owed the IRS in 1992 would
suggest. That federal tax debt was not the only potential demand on his assets.
Evseroff was sixty-eight at the time he created the Trust, and, as he testified
at trial, he was getting ready to retire. (Tr. at 38–39, 187–88.) Although
Evseroff's assets exceeded his tax liability, his assets were not so substantial
as to guarantee that he would not outlive them. Moreover, Evseroff's IRS debt
would continue to accrue interest to the extent that he did not pay it down.
Evseroff was also aware that he might need to make payments to his estranged
wife should they divorce, and he wished to provide as substantial an
inheritance as possible to his two sons. These probable demands on his assets,
combined with his tax debt, exceeded the assets he had available after the
transfers.
Evseroff was well aware of his financial difficulties,
including his tax liabilities, when he transferred the assets to the Trust. In
December 1990 — more than a year before he first met with his attorney to set
up the Trust — Evseroff received an IRS estimate that he owed $227,282, not
including interest. Evseroff V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 1.
Just a few weeks later, in January 1991, he received another letter from the
IRS reflecting a total liability that he inaccurately estimated at $800,000.
Id. In January 1992, he received an IRS letter indicating that he had a
liability of more than $700,000. Id. at 2. Although it is not clear whether
Evseroff had received the January 1992 letter at the time that he first met
with an attorney to establish the Trust, he had received the January 1991
letter. Moreover, Evseroff certainly had received the January 1992 letter at
the time that he actually conveyed the $220,000 in cash and the Dover Street
Residence to the Trust in June and October of 1992 respectively. The other
demands on his assets — such as his family obligations — were also undoubtedly
apparent to him at that time. It is therefore reasonable to conclude that
Evseroff knew that he was jeopardizing his ability to pay his taxes when he
conveyed the Dover Street Residence and the $220,000 to the Trust. 11
In addition to the evidence of Evseroff's financial
situation, evidence of Evseroff's conduct at the time he made the transfers
further supports a finding that he intended to hinder or delay collection of
his assets, particularly his tax debt. For one, he engaged in a “pattern or
series of transactions or course of conduct after the incurring of debt” that
establish his intent to impair, handle, or delay the IRS's ability to collect
his tax debts when he made the relevant conveyances.Steinberg , 774 N.Y.S.2d at
810. Around the time that Evseroff established the Trust in 1992, he purchased
a Florida home that he appears to have thought could not be seized by the IRS.
Evseroff V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 2. Five years
thereafter, in 1997, Evseroff also moved his funds from place to place and, on
one occasion, had his son hold money for him rather than establishing a bank
account. Id. at 3;Evseroff III , 2003 WL 22872522 [92 AFTR 2d 2003-6987], at
5–6. Although these suspicious movements of funds did not occur until 1997 —
about five years after Evseroff transferred the Dover Street Residence and the
$220,000 to the Trust — they nonetheless shed light on Evseroff's general
intent in conveying assets to the Trust because they show additional attempts
to avoid paying a known tax debt.
These monetary transactions in 1997 are particularly
significant because the IRS could only collect his assets to the extent that it
could find them. Much of Evseroff's net worth consisted of cash. If the IRS
could only reliably collect on Evseroff's readily accessible assets, it would
only have access to $305,575 — almost $465,000 less than his tax debt in 1992.
Thus, Evseroff's movement of cash assets to avoid collection in combination
with his earlier conveyances of the $220,000 and the Dover Street Residence
made collection efforts much more difficult.
Finally, Evseroff's intent to shield his assets from the
IRS's collection is demonstrated by the fact that he retained the benefits of
ownership of the Dover Street Residence after he transferred it to the Trust
for no consideration. As noted above, Evseroff continued to live in the
residence after the transfer. Evseroff argues that he was, in fact, renting the
residence from the Trust, as evidenced by the Transfer Agreement that obligated
him to pay certain expenses in lieu of rent, (Evseroff Mem. at 4; J. Evseroff
Dep., Ex. 12), and that his ability to live in the house was limited by the
fact that the trustees had the power to sell the house at any time, (Evseroff Mem.
at A-2). But neither of these arguments is persuasive.
As discussed infra Part II, Evseroff's post-transfer payment
of the mortgage and other expenses related to the property in lieu of rent were
the type of payments that an owner of property would make, not those that a
renter would make. Additionally, although the trustees nominally had the power
to remove Evseroff from the Dover Street Residence, there was no evidence that
they would actually utilize that power because, as discussed more fully infra
Part III, Evseroff dominated the Trust to such a degree that it was not a bona
fide entity, but merely an extension of Evseroff. Among other things, the
trustees were his friends and business associates, and at least one trustee was
unaware of any duties he had as a trustee. (Schneider Dep. Tr. at 19–20.)
Although the Trust could have removed Evseroff from the Dover Street Residence,
as a practical matter, Evseroff's enjoyment of the residence was secure,
allowing him to enjoy use and occupancy of the Dover Street Residence as an
owner would, given the lack of evidence that either Evseroff or the Trust ever
tried to rent or sell the property. See Evseroff V, 2006 WL 2792750 [98 AFTR 2d
2006-7034], at 4.
Evseroff's de facto ownership of the Dover Street Residence
is further demonstrated by the fact that Evseroff received no consideration for
transferring the Dover Street Residence to the Trust. (J. Evseroff Dep., Ex.
12.) The lack of consideration to Evseroff indicates that Evseroff was not
relinquishing any rights to the property in exchange for which he would be
paid. And because his sons were the beneficiaries of the Trust, the transfer
allowed Evseroff to ensure that they would receive the Dover Street Residence
upon his passing, as they would have had he remained the owner of the property.
12
Evseroff responds that his true intention was not to avoid
paying his taxes to the United States, but rather to engage in estate planning
— primarily by ensuring that his assets passed to his two sons rather than to
his estranged wife on his passing. The Post-Trial Order found that Evseroff's
estate planning motive was but one of his motives in addition to protecting the
assets from the IRS and his estranged wife at the time that he created the
Trust, Evseroff V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3, and there is
no reason to question that finding. Nonetheless, even if Evseroff was motivated
to create the Trust, in part, by his desire to provide an inheritance for his
sons and shield his assets from his wife, his intent to evade the IRS's
collection effort was substantial and sufficient on its own. Evidence in the
record, as discussed above, demonstrates Evseroff's intent to shield his assets
specifically from the government's collection efforts. Moreover, the IRS was
seeking to collect much more than Evseroff's wife was likely to obtain in a
divorce settlement as she did not seek a settlement during the years of their
separation. Thus, Evseroff's intent to evade, hinder, delay, and frustrate the
IRS's collection efforts was sufficient to cause him to transfer the assets to
the Trust, regardless of any additional motive that he might have had.
Accordingly, Evseroff's transfer of the Dover Street Residence and the $220,000
to the Trust was fraudulent as provided by New York Debtor and Creditor Law §
276. See Capital Distributions Servs., 440 F. Supp. 2d at 204 (noting that the
remedy for a fraudulent conveyance is that the creditor may collect upon the
fraudulently conveyed property). 13
II. Nominee
The government also argues that it should also be able to
collect upon the Dover Street Residence and the $220,000 because Evseroff is
the real owner of both. Though both assets are legally held by the Trust, the
government argues that the Trust merely holds them as Evseroff's nominee. 14
“Under the nominee doctrine, an owner of property may be considered a mere
“nominee” and thus may be considered to hold only bare legal title to the
property.” United States v. Snyder, 233 F. Supp. 2d 293, 296 [90 AFTR 2d
2002-6321] (D. Conn. 2002).
The nominee theory focuses
on the relationship between the taxpayer and the property
... to discern whether a taxpayer has engaged in a sort of legal fiction, for
federal tax purposes, by placing legal title to property in the hands of another
while, in actuality, retaining all or some of the benefits of being the true
owner.
Richards v. United States (In reRichards) , 231 B.R. 571,
578 [83 AFTR 2d 99-1138] (E.D. Pa. 1999). As distinct from the government's
claim that Evseroff's conveyances were actually fraudulent, a nominee finding
can be made even where there was no intent to defraud creditors or hinder
collection efforts. In re Richards, 231 B.R. at 579–80 (finding that a trust
held assets as a taxpayer's nominee even when the conveyance of the property to
the trust was not fraudulent). Rather than intent, the nominee theory focuses
on control. Id.
The nominee theory also differs from the alter ego theory in
that the nominee theory focuses on the taxpayer's control over and benefit from
the property while the alter ego theory emphasizes the taxpayer's control over
theentity that holds the property. 15 Compare In reRichards , 231 B.R. at 579
(discussing the nominee theory and noting that “the critical consideration is
whether the taxpayer exercised active or substantial control over the
property”), and United States v. Stonier, No. 88 N 993, 1994 WL 395644 [73 AFTR
2d 94-2084], at 4 (D. Colo. Feb. 28, 1994) (listing five factors for making a
nominee determination, three of which relate to the transferor's control over
or benefit from the property), with Babitt v. Vebeliunas (In reVebeliunas) ,
332 F.3d 85, 91–92 (2d Cir. 2003) (discussing the alter ego theory and noting
that an individual must control the corporation for alter ego liability to
attach);and Dean v. United States , 987 F. Supp. 1160, 1166 [83 AFTR 2d
99-1251] (W.D. Mo. 1997) (collecting cases and stating that “the common thrust
... is that the alter ego doctrine will apply when the delinquent taxpayer is
really in control of the corporation or trust and so dominates it that the
corporate or trust form exists, but there is no substance to it”).
Where a nominee relationship is found, the government may
access only the property held on the taxpayer's behalf by the nominee, not all
property of the nominee. See In reRichards , 231 B.R. at 580; see also Giardino
v. United States, No. 96-CV-6348T, 1997 WL 1038197 [80 AFTR 2d 97-8048], at 2
(W.D.N.Y. Oct. 29, 1997) (“[T]he government has the authority to seize or levy
on the property of the taxpayer held by the nominee in order to collect the tax
liabilities of the taxpayer.” (emphasis added) (citations omitted)).
In determining whether a taxpayer's property is held by a
nominee, courts examine:
(1) whether inadequate or no consideration was paid by the
nominee; (2) whether the property was placed in the nominee's name in
anticipation of a lawsuit or other liability while the transferor remains in
control of the property; (3) whether there is a close relationship between the
nominee and the transferor; (4) whether they failed to record the conveyance;
(5) whether the transferor retains possession; and (6) whether the transferor
continues to enjoy the benefits of the transferred property.
Giardino, 19libu97 WL 1038197, at 2 (citation omitted);
LiButti v. United States, 968 F. Supp. 71, 76 [80 AFTR 2d 97-5463] (N.D.N.Y
1997); see also In reRichards , 231 B.R. at 579 (considering these factors as
well as whether the transferor spent personal funds maintaining the property).
As noted above, “the critical consideration is whether the taxpayer exercised
active or substantial control over the property.” In reRichards , 231 B.R. at
579 (citation omitted). The government bears the burden of proving that the
taxpayer's property is held by a nominee. 16
In the instant case, the Trust held the Dover Street
Residence, but not the $220,000, as Evseroff's nominee. Turning first to the
Dover Street Residence, an examination of the factors listed above demonstrates
that the Trust was Evseroff's nominee. Considering the first factor, the Trust
paid no consideration to Evseroff for the property. (J. Evseroff Dep., Ex. 12.)
Evidence in the record indicates that the second factor is satisfied in that
the Trust was created and the property was transferred in anticipation of
Evseroff's liability to the IRS and possibly his estranged wife, and Evseroff
remained in possession and control of the Dover Street Residence. The third
factor is also satisfied in that Evseroff had a close relationship with the
trustees, having selected close friends and associates to manage the Trust.
Evseroff III, 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 9.
As for the fifth and sixth factors, there is substantial
evidence in the record that Evseroff retained and enjoyed possession and control
of the Dover Street Residence, even after title was legally transferred to the
Trust. Despite the transfer, Evseroff retained possession of the Dover Street
Residence and benefitted from it as though he were an owner: he continued to
live in the Dover Street Residence without paying rent although he continued to
pay the mortgage and other expenses necessary to operate and maintain the
property, including taxes, water, sewer charges, utilities, fuel, and insurance
(J. Evseroff Dep., Ex. 12); he remained the named beneficiary of the flood and
fire insurance policies (J. Evseroff Dep., Exs. 32–33; Evseroff Mem. at A-7);
and there is no evidence that the Trust ever officially assumed the mortgage
for the Dover Street Residence nor did the Trust claim the mortgage interest
deduction between 1992 and 1998 (see 02/21/02 Blumer Dep., Exs. 1–7; Evseroff
Mem. at A-2, A-3). Furthermore, there is no evidence that the Trust ever took
any action that would have interfered with Evseroff's enjoyment of the
property: his rental agreement had no set end date (J. Evseroff Dep., Ex. 12)
and there is no evidence that the Trust ever contemplated selling or renting
the property to anyone other than Evseroff. These facts all indicate that
Evseroff retained possession and benefitted from his use and occupancy of the
Dover Street Residence much as he had when he held legal title to it. Cf. In
reRichards , 231 B.R. at 580.
In response, Evseroff argues that the Trust was not his
nominee with regard to the Dover Street Residence because: (1) his status was
that of a renter rather than that of an owner, as demonstrated by the fact that
he paid the mortgage and upkeep costs on the property in lieu of rent; (2) he
only had a license to the property, and therefore could have been evicted at any
time; and (3) he did not act like an owner in that he never tried to sell the
property. None of these arguments is persuasive.
With regard to Evseroff's first argument, the mere fact that
Evseroff made some payments relating to the property does not rebut the
inference that he was the de facto owner of the property. See City View Trust
v. Hutton, No. 98-CV-1001-B, 1998 WL 1031525, at 10 (D. Wyo. Nov. 02, 1998).
The payments Evseroff made in exchange for his occupancy of the property —
taxes, insurance, water and the mortgage — were precisely those that an owner
of the property would make. The Trust did not claim Evseroff's payments between
1992 and 1998 as income, the Trust's tax returns were prepared by Evseroff's
accountant and sent to Evseroff rather than the Trust, and the Trust did not
claim mortgage interest deductions but did claim real estate tax deductions
between 1994 and 1998.Evseroff III , 2003 WL 22872522 [92 AFTR 2d 2003-6987],
at 3, 11; (see 02/21/02 Blumer Dep. Tr. at 39, Exs. 1–7). Indeed, payment of
upkeep costs for a property has been specifically identified as a factor
favoring a nominee finding. In re Richards, 231 B.R. at 579. Thus, the
inference that the Trust was merely his nominee is a strong one.
Moreover, the payments that a renter would have made on the
Dover Street Residence would have differed greatly from those that Evseroff
made. Although Evseroff made mortgage payments for about five years after the
inception of the purported lease, after that he was only responsible for the
property's upkeep and expenses. (Tr. at 91–93; J. Evseroff Ex. 12.) Therefore,
after the mortgage was paid off, the Trust received no net return on the Dover
Street Residence. Were the Trust truly the owner, it would have sought to
receive market rental rates, which would likely have exceeded the mere cost of
maintaining the property. Furthermore, even for the term where Evseroff was
paying for both the mortgage and the upkeep of the property, those combined
payments were still low in comparison to the property's fair market value in
1992 of $515,000.
Evseroff's argument that he was merely a licensee who could
have been evicted from the property at any time fares no better. According to
Evseroff, because the agreement allowing him to live in the Dover Street
Residence did not contain an end date, it did not constitute a lease under New
York law. (Evseroff Mem. at 9.) Instead, Evseroff contends that the agreement
was a mere license, revocable at any time. (Id.)
Even assuming that Evseroff is correct regarding the legal
status of the agreement, it would provide little support for his argument that
he did not exercise active control over the property. Given Evseroff's control
over the Trust,see infra Part III, there was no realistic prospect that his
possession and enjoyment of the Dover Street Residence would be challenged. A
merely theoretical possibility that the transferor could be evicted does
nothing to rebut a nominee finding. See City View Trust, 1998 WL 1031525, at
10.
Finally, Evseroff's argument that he did not act like an
owner in that he never tried to sell the property and never attempted to use it
as collateral for a loan is not enough to avoid a nominee finding given the
evidence discussed above. See Evseroff, 270 F. App'x at 78 (citing LiButti v.
United States, 107 F.3d 110, 119 [79 AFTR 2d 97-1240] (2d Cir. 1997)). Many
property owners neither use their property as collateral (apart from their
mortgage) nor attempt to sell their property. Thus, the fact that Evseroff has
not attempted to sell the Dover Street Residence and has not pledged it as
collateral does little to refute that he was acting as the de facto owner of
the property. Accordingly, the Trust plainly holds the Dover Street Residence
as Evseroff's nominee and the United States may therefore recover against the
Dover Street Residence under a nominee theory.
The government, however, has not shown that the Trust holds
the $220,000 as Evseroff's nominee. Indeed, only a few thousand dollars have
ever been distributed by the Trust, and that money went towards paying taxes
owed by the Trust, namely, income taxes on interest earned by the Trust and
real estate taxes in specific years for the Dover Street Residence. (See Tr. at
61; J. Evseroff Dep. Tr. at 126–27; 02/21/02 Blumer Dep., Exs. 1–7.) There is
no evidence that those funds were distributed at Evseroff's direction. And even
if they were, the distribution benefitted the Trust significantly more than it
benefitted Evseroff. 17
The overall objective of the nominee analysis is to determine
whether the debtor retained the practical benefits of ownership while
transferring legal title. See In reRichards , 231 B.R. at 578. The most
important factors in the nominee analysis center on the transferor retaining
possession of the property and deriving benefits from it. See id. at 579. Given
that the money held by the Trust has remained substantially unused by Evseroff,
he has neither retained possession nor derived benefit from the funds.
The government responds by emphasizing Evseroff's control
over the funds. According to the government, the fact that the Trust's cash has
remained undistributed demonstrates Evseroff's control of the funds because
Evseroff did not want the funds to be distributed. (Gov't Mem. at 4 (citing Tr.
at 61; J. Evseroff Dep. Tr. at 126–27).) The fact that the Trust's retention of
the funds was consistent with Evseroff's wishes, however, is of minimal
evidentiary value without some evidence that Evseroff controlled the funds by
actions intended to ensure that the Trust funds would not be distributed. In
that regard, there is no evidence that Evseroff intervened to prevent any
disbursements that would have been made if the Trust really were the owner of
the $220,000. Absent any evidence that Evseroff actively tried to control the
Trust funds, the government has failed to prove by a preponderance of the
evidence that Evseroff was a nominee of the funds.
III. Alter Ego
Finally, the government argues that it should be able to
reach the assets held in the Trust because the Trust is Evseroff's alter ego.
The alter ego doctrine arose from the law of corporations
and allows a creditor to disregard the corporate form (also known as “piercing
the corporate veil”) either by using an owner's assets to satisfy a
corporation's debt or by using the corporation's assets to satisfy the
individual's debt.See State v. Easton , 647 N.Y.S.2d 904, 908–09 (N.Y. Sup. Ct.
Albany Cnty. 1995). The essence of the alter ego theory is that the entity in
question really has no separate existence — it is merely a tool of someone or
something else. See Bridgestone/Firestone v. Recovery Credit Servs., 98 F.3d
13, 17–18 (2d Cir. 1996). 18
Although the New York Court of Appeals has never held that
the alter ego theory may be applied to reach assets held in a trust, In re
Vebeliunas, 332 F.3d at 90–91;Winchester Global Trust Co. v. Donovan , 880
N.Y.S.2d 877 (Table), 2009 WL 294685, at 9–10 (N.Y. Sup. Ct. Nassau Cnty. Feb.
4, 2009) (noting the lack of precedent but finding that veil piercing applies
to trusts), there is no policy reason why veil piercing would apply only to
corporations but not to trusts. The policy behind corporate veil piercing is to
prevent a debtor from using the corporate legal form to unjustly avoid
liability. See Wm. Passalacqua Builders, Inc. v. Resnick Developers S. Inc.,
933 F.2d 131, 138 (2d Cir. 1991). That policy applies equally to trusts. Cf.
Winchester Global Trust, 2009 WL 294685, at 9–10. Moreover, there is some
precedent indicating that the alter ego doctrine also applies to trusts. See
Evseroff, 270 F. Appx. at 77–78;see also Dean , 987 F. Supp. at 1165; Katz v.
Alpert, 919 N.Y.S.2d 148, 148 (N.Y. App. Div. 1st Dep't 2011); Winchester
Global Trust, 2009 WL 294685, at 9–10. Accordingly, for the reasons below, the
alter ego theory will be applied to the Trust.
To pierce the veil in New York, a plaintiff must show that
“(1) the owner exercised such control that the corporation has become a mere
instrumentality of the owner, who is the real actor; (2) the owner used this
control to commit a fraud or “other wrong”; and (3) the fraud or wrong results
in an unjust loss or injury to the plaintiff.” In reVebeliunas , 332 F.3d at
91–92 (citations omitted); see also Wm. Passalacqua Builders, 933 F.2d at 138
(noting that the alter ego theory and the three factor test discussed above
“are indistinguishable ... and should be treated as interchangeable” (citation
omitted)).
With regard to the question of Evseroff's control over the
Trust, the relevant factors can be drawn by analogy from the corporate context.
In analyzing the alter ego question as it relates to a corporation, courts
consider factors such as “the absence of ... formalities ..., the amount of
business discretion displayed by the allegedly dominated corporation ...,
whether the related corporations deal with the dominated corporation at arms
length ... [and] whether the corporation in question had property that was used
by other of the corporations as if it were its own.” In reVebeliunas , 332 F.3d
at 91 n.3 (citation omitted). Though these factors require adaptation as
applied to a trust, they nonetheless provide some guidance in determining the
issue of control. In particular, they indicate that it is necessary to examine
whether the Trust's formalities were observed, whether the Trust exercised its
own discretion and made its own decisions as an entity, and whether it dealt
with Evseroff at arms length or whether Evseroff effectively controlled the
Trust's property.
These factors all indicate that Evseroff dominated the
Trust. Trust formalities were so poorly observed as to give rise to an
inference that the Trust was not a bona fide entity. To be sure, a trust instrument
was prepared, tax returns were filed on behalf of the Trust, and trustees were
appointed. The Trust, however, did not book the payments Evseroff made in lieu
of rent as income between 1992 and 1998 on its tax returns. (See 02/21/02
Blumer Dep., Exs. 1–7.) The Trust never officially assumed the mortgage for the
Dover Street Residence. (See Gov't Mem. at 3; Evseroff Mem. at A-2, A-3.) Thus,
the Trust did not claim the mortgage interest deduction for the Dover Street
Residence between 1992 and 1998 — although it did claim the deduction for real
estate taxes between 1994 and 1998. (See 02/21/02 Blumer Dep., Exs. 1–7.)
Instead, Evseroff paid the mortgage interest and, for some years, paid real
estate taxes and claimed the deductions. (Tr. at 50–51; see Gov't Mem. at 3,
5.) Evseroff remained the named beneficiary of the flood and fire insurance
policies on the Dover Street Residence. (J. Evseroff Dep., Exs. 32–33; Evseroff
Mem. at A-7.) Finally, Evseroff's accountant prepared the Trust's tax returns
as a professional courtesy to Evseroff, spent only half an hour to prepare
them, and sent the Trust returns to Evseroff rather than the trustees.Evseroff
III , 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 3, 11; (02/21/02 Blumer Dep.
Tr. at 36–39). All of the above evidence demonstrates both that there was
little substance to the Trust and that it was merely an extension of Evseroff.
The manner in which the Trust was managed also demonstrates
that it was merely an extension of Evseroff. Though trustees were appointed,
there is little evidence that they played an active role in making decisions
for the Trust. One apparently believed that he had no Trust responsibilities
until Evseroff's death. (Schneider Dep. Tr. at 20.)
Having trustees play an active role in managing the trust is
an important factor in deciding whether to respect the form of a trust. See
Dean, 987 F. Supp. at 1165. Moreover, active involvement of trustees of the
sort that would support the separate existence of a trust looks very different
than the minimal involvement present here. See id. 19 Accordingly, the
trustees' lack of substantial control over the Trust is an important point in
favor of the government.
Similarly, Evseroff also evinced his domination of the Trust
by controlling its property to a high degree. As discussed supra Part II,
Evseroff acted as the owner of the Dover Street Residence. He made the same
payments that an owner would make and had a similar degree of practical control
over and enjoyment of the property as an owner would have. Although Evseroff's
domination of the $220,000 in the Trust appears to have been more limited, see
supra Part II, that fact does not undermine the significant countervailing
evidence that Evseroff dominated the Trust. In 1992, when Evseroff transferred
the assets into the Trust, the Dover Street Residence was worth approximately
$515,000, making it by far the Trust's most valuable asset. Evseroff's control
over the Dover Street Residence establishes a high degree of dominance over
Trust property, further evincing his dominance over the Trust. Thus, it is
clear that Evseroff had the requisite degree of control over the Trust to
support an alter ego finding.
Because Evseroff controlled the Trust, it is necessary to
determine whether he used that control to commit a fraud or wrong against the
government, and whether that wrong resulted in an unjust loss. In re
Vebeliunas, 332 F.3d at 91–92. On the facts presented here, these elements are
plainly satisfied. As noted above, Evseroff essentially used the Trust to
shield his assets from attack by those with potential claims upon them,
including the government. Moreover, given the potential claims on Evseroff's
assets, and his demonstrated ability to shield his liquid assets from
collection through a series of transfers, see Evseroff V, 2006 WL 2792750 [98
AFTR 2d 2006-7034], at 3, Evseroff's use of the Trust undoubtedly caused damage
to the government by hindering its collection of taxes. Indeed, the
government's continuing difficulties collecting Evseroff's taxes are evidence
of the damage caused.
As a result, the government may collect against all assets
held by the Trust. The essence of the alter ego theory is that the existence of
the Trust as a separate entity is a fiction — in fact the Trust is Evseroff.
See Claudio v. United States, 907 F. Supp. 581, 587–88 (E.D.N.Y. 1995) (““The
courts will look beyond the fiction of corporate entity and hold two
corporations to constitute a single unit in legal contemplation, where one is
so related to, or organized, or controlled by, the other as to be its mere
agent, instrumentality, or alter ego.”” (citation omitted));see also Austin
Powder Co. v. McCullough , 628 N.Y.S.2d 855, 857 (N.Y. App. Div. 3d Dep't 1995)
(noting that where an “alter ego” finding is made “the corporate form may be
disregarded to achieve an equitable result”). Based on the court's
determination that the Trust is but an alter ego of Evseroff, its assets should
be subject to collection just as if they were held by Evseroff. Moreover, there
appears to be no reason why it would be inequitable for the government to
collect on all assets held by the Trust on the facts of this case. Accordingly,
all of the Trust's assets are subject to collection.
CONCLUSION
For the foregoing reasons, the government may proceed to
collect against all assets held by the Trust established by Evseroff. The Clerk
of the Court is respectfully requested to enter judgment in favor of the United
States and to close the case.
So ordered.
Dated: Brooklyn, New York
April 30, 2012
Kiyo A. Matsumoto
United States District Judge
1
The IRS also
assessed additional liabilities based on Evseroff's 1991, 1992, and 1996 tax
returns.Evseroff III , 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 6.
2
All deposition
transcripts and exhibits referenced herein were admitted into the trial record,
subject to relevance objections. (See Transcript of Trial held on November 7
and 8, 2005 (“Tr.”) at 86–87.)
3
The Transfer
Agreement also appears to transfer a Florida residence owned by Evseroff to the
Trust in October 1992. (See J. Evseroff Dep., Ex. 12.) It appears, however,
that title to the Florida residence remained with Evseroff, see Evseroff V,
2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3, and thus the transfer of the
Florida residence to the Trust apparently never took place. In any case, the
status of the Florida residence is not material to the outcome here. The
government does not claim that such a residence was fraudulently conveyed.
Moreover, if the Florida residence had been conveyed to the Trust, it would
only further indicate the weakness of Evseroff's financial condition after the
two conveyances at issue here and thereby support the legal conclusions
detailed below.
4
The record does not
contain information on this point for years after 1998.
5
For the reasons
described below, Evseroff's pension fund and tax assets may not be readily
accessible to the United States.
6
This figure includes
$230,000 for Evseroff's Florida residence, $75,575 for his law practice, and
$541,767 for a Citibank account, which may be a pension account. See Evseroff
V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3–4.
7
This figure includes
$230,000 for Evseroff's Florida residence, $75,575 for his law practice, $308,304
for a Citibank pension account, $47,000 for a Republic Bank Keogh account, an
estimated $220,000 in savings accounts or money market accounts, and $541,767
for a different Citibank account, which may have been a pension account. See
Evseroff V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3–4. This figure does
not include the $577,000 cash amount that Evseroff listed in response to the
government's first interrogatories (see Gov't Ex. 6, at 5), which may be
duplicative of the accounts listed above, see Evseroff V, 2006 WL 2792750 [98
AFTR 2d 2006-7034], at 3, 5.
8
As of the beginning
of 1992, Evseroff's retirement accounts consisted of a Citibank pension account
valued at $308,304 and a Republic Bank Keogh account valued at $47,000. See
Evseroff V, 2006 WL 2792750 [98 AFTR 2d 2006-7034], at 3. Neither party has
established whether the Citibank account containing $541,767 was a retirement
account or another type of account, and thus whether it was readily
accessible.Id. at 6.
9
The government
appealed only the actual fraud and nominee/alter ego findings; it did not
appeal the constructive fraud finding. Evseroff, 270 F. App'x at 77.
10
The government
argues that Evseroff's pension funds should be excluded from the calculation of
his assets because they were, at the very least, more difficult to collect. It
is true that pension funds receive substantial protection from creditors under
state law.Cf. Pauk v. Pauk , 648 N.Y.S.2d 134, 135 (N.Y. App. Div. 2d Dep't
1996); 31 Am. Jur. 2d Exemptions § 198 (2009). There is little impediment,
however, to the immediate collection of pension funds by the IRS. The IRS has
broad powers to access a taxpayer's assets notwithstanding protections
available for pension funds under state law. See 26 U.S.C. § 6334(a),(c) (1992)
(noting that “[n]otwithstanding any other law of the United States ... no
property or rights to property shall be exempt from levy other than the
property specifically made exempt by subsection (a),” which does not exempt
retirement accounts like Evseroff's). Moreover, “[s]tate law define[s] the
nature of the taxpayer's interest in the property, but the state-law
consequences of that definition are of no concern to the operation of the
federal tax law.” United States v. Nat'l Bank of Commerce, 472 U.S. 713, 723
[56 AFTR 2d 85-5210] (1985) (holding that state laws governing creditors'
rights did not impair the IRS's levy power); see also Jacobs v. IRS (In
reJacobs) , 147 B.R. 106, 108 [71 AFTR 2d 93-487]–09 (Bankr. W.D. Pa. 1992)
(holding that the IRS could levy on a pension fund protected from creditors
under state law). Indeed, the IRS can levy upon and force the immediate
liquidation of an IRA where the taxpayer can withdraw his funds. Kane v.
Capital Guardian Trust Co., 145 F.3d 1218, 1221 [81 AFTR 2d 98-2323]–24 (10th
Cir. 1998) (noting that the IRS stands in the shoes of the taxpayer for levy
purposes (citations omitted)). As Evseroff apparently had the ability to
withdraw and use his pension funds (see Tr. at 96–97), the government likely
could have accessed the funds as well. Accordingly, the pension funds should
not be categorically excluded from consideration in Evseroff's asset total.
Furthermore, even if the IRS were unable to collect from Evseroff's pension
funds, it would not affect the result reached here.
11
Evseroff argues in
his post-remand submission that he was acting in good faith because he believed
that the IRS had accepted his offer to settle his tax liabilities for
approximately $110,000 in 1993 (the “initial offer in compromise”). See
Evseroff IV, 2004 WL 3127981 [95 AFTR 2d 2005-1146], at 1; (Evseroff Mem. at 5,
21–22.) The evidence of this purported settlement, however, was not admitted at
trial and will not be considered except as discussed here.
Prior to trial, the government indicated that it could prove
that this alleged settlement was fraudulent and, indeed, had done so in another
action. See Evseroff IV, 2004 WL 3127981 [95 AFTR 2d 2005-1146], at 1; see also
Evseroff III, 2003 WL 22872522 [92 AFTR 2d 2003-6987], at 4. The government
also represented that it had evidence of a series of other offers in compromise
that Evseroff submitted. (See Tr. at 24–26.) The government argued that these
other offers were in bad faith and designed to delay collection efforts. (See
id.) Evidence of these other offers in compromise would, however, have been
extremely time-consuming to present.
In a pre-trial evidentiary ruling, the court held that
Evseroff could not introduce evidence of the initial offer in compromise unless
the government introduced evidence of the other offers in compromise. (See Tr.
at 23–26, 193–94.) As the government never sought to introduce evidence
regarding the other offers in compromise, the door was not opened to Evseroff
to present evidence regarding the initial offer in compromise.
Evseroff claims that the door was opened to the evidence of
the initial offer in compromise because the government relied on evidence
regarding Evseroff's actions after the transfers to the Trust. The evidentiary
ruling, however, did not specify that this sort of evidence would open the door
to evidence regarding the offer in compromise. Moreover, post-transfer evidence
is commonly and properly offered as evidence of intent in fraudulent conveyance
cases. Cf. Steinberg, 774 N.Y.S.2d at 810 (noting that a debtor's retention of
control after the legal transfer of the property supports a finding of an
actually fraudulent conveyance). Even apart from the evidentiary ruling, the
government's post-transfer evidence would not open the door to the offer in
compromise evidence Evseroff wishes to present and it will not be considered.
By contrast, the court will consider the government's evidence of Evseroff's
post-transfer actions to the extent it is relevant to Evseroff's intent.
12
Although Evseroff's
transfer of the Dover Street Residence does not bear directly on the $220,000
transfer, the fact that the two transfers were made at around the same time
indicates that Evseroff's intent regarding the $220,000 transfer was the same
as that regarding the Dover Street Residence.
13
If these assets have
been damaged or disbursed, a money judgment may also be available. Capital
Distributions Servs., 440 F. Supp. 2d at 204 (citations omitted). Additionally,
the creditor is generally entitled to recover reasonable attorney's fees. Id.
(citing N.Y. Debt. & Cred. Law. §
276-a).
14
The nominee and
alter ego issues have generally been discussed together in the prior opinions
and filings in this case. As discussed later in this decision, however, there
are relevant analytical differences between the two theories.
15
Although some
authority discerns little practical difference between the nominee and alter
ego theories,see United States v. Engels , No. C98-2096, 2001 WL 1346652 [88
AFTR 2d 2001-6429], at 6 (N.D. Iowa. Sept. 24, 2001), for reasons discussed
below, the differences between the nominee and alter ego theories are relevant
in this case.
16
The parties dispute
whether the government must prove that the Trust is held by Evseroff's nominee
by a preponderance of the evidence or clear and convincing evidence. Because I
find that the government's proof satisfies either standard with regard to the
Dover Street residence and fails to satisfy either standard with regard to the
$220,000, I need not resolve this dispute.
17
The government
argues that the distribution to pay the real estate taxes for the Dover Street
Residence benefitted Evseroff because he had a contractual duty to the Trust to
pay those taxes. The government, however, ignores the fact that the
distribution also benefitted the Trust. The Trust, as owner of the property,
had an independent duty to pay taxes on the residence. N.Y. Real Prop. Tax Law
§ 926(1) (“The owner of real property ... shall be personally liable for the taxes
levied thereon.”); id. § 304(2)
(Although a renter may have an interest in the real property that makes the
renter subject to personal tax liability, “[n]othing in this subdivision shall
relieve the owner of real property from the obligation for paying all taxes due
on the real property under his ownership or vitiate the sale of said real
property for unpaid taxes or special ad valorem levies.”). Therefore, the fact
that the Trust distributed Trust funds to pay taxes for the Dover Street
Residence does not provide sufficient evidence to prove that the funds were
being used to benefit Evseroff, and not the Trust.
18
As with the nominee
issue, the parties dispute whether the government must prove that the Trust was
Evseroff's alter ego by a preponderance of the evidence or clear and convincing
evidence. Because I find that the government's proof satisfies either standard,
I need not resolve this dispute.
19
The Dean court
respected the legal form of a trust as established by two parents for the
benefit of their children against IRS collection efforts when, among other
things:
[O]ther than a brief period ..., the trustees executed all
documents requiring signatures by the owner of the trust property. Tax returns
were executed by the trustee. Checks were signed by the trustees. The trustees
decided how to spend trust assets, when to make repairs on the rental property,
and the rent to be paid by tenants. The trustees borrowed and repaid money in
the name of the trust. In other words, the legal control of the trust assets
has consistently been exercised by the trustee, not the taxpayer.
Dean, 987 F. Supp at 1165.
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