The United States District Court for the Western District of Washington ruled against the government in United States of America v. Thomas Weathers, et al., Case No.: 3:18-cv-5189-BHS decided February 8, 2022 because the government failed to prove its alter ego and nominee claims by a preponderance of the evidence and failed to prove its fraudulent transfer claim by clear and satisfactory evidence. This case was commenced by the Government to reduce tax assessments to judgment and foreclose federal tax liens. The Government alleged that three entities owned or controlled by the Weathers were their nominees or alter egos and that certain properties owned by the Weathers were transferred fraudulently for their purpose of avoiding the tax lien. The Government simply got carried away on this claim. In part, the reason for that was because there were 8 other properties that the Government was successful in foreclosing through Summary Judgment Motion. In this case, however, the Court ruled that the taxpayers never had an ownership interest in the entity that owned the relevant property, they were never officers, never received personal benefit and the only funds flowing from the entity were for services that were legitimate. There was no shifting of ownership from the Weathers to the entity/owner and no evidence of actual intent to hinder or delay. This case details the factors of alter ego/nominee claims and fraudulent transfers carefully, then applies the facts of this case to those factors, clearly showing the Government fell far short of its burden to establish the claims.
Tax Lien Attachment
I.R.C. Section 6321
The Federal District Court for the Western District of Washington in USA v. Elmer Buckardt, Case No. 2:19-cv-00052-RAJ, entered an order on September 18, 2020 that a tax liability cannot be avoided with frivolous arguments and the IRS may foreclose property for tax liens when the entity owning the property is a taxpayer’s alter ego. Though a W-2 earner until retirement, the taxpayer created a religious society for the purpose of transferring property to his family. It was meant to be a trust, of sorts. The taxpayer and his wife transferred properties they purchased to the entity without consideration. They personally paid the mortgage on these properties. Around the same time, the taxpayer ceased filing tax returns because of the belief that the tax system was not valid. The taxpayer began reporting his tax liability as zero. After a variety of litigation in the Tax Court, the taxpayer ultimately ended up owing around $739,000. The government then filed the instant action seeking to foreclose the tax liens and set aside the transfers to the religious society that the taxpayer executed years before. The Court ruled that it was clear Mr. Buckardt owed the taxes. The taxpayer offered no argument other than his belief that he was not required to pay federal income taxes, along with a variety of well-known arguments the Courts have deemed frivolous over the years. The Court ruled those arguments were without merit. The Court concluded that the religious society the taxpayer created and transferred property to was his alter ego. It based its decision on Washington law recognizing the nominee or alter-ego doctrine where one individual so dominates and controls a corporation that such corporation is the individual’s alter ego, and therefore, one in the same. The fact that the taxpayer had complete control over the entity, that he and his wife were the only ones making decisions for the entity, that the taxpayer and his wife live in a home owned by the entity, but do not pay rent, were all determining factors. They maintained the properties with personal funds. The taxpayer allowed his children to reside in the properties rent free. The Court deemed the lien to be a valid lien against the properties of the entity and authorized the Government to foreclose.
Fraudulent Transfers, Alter Ego, Nominee and Successor Liability
I.R.C. Section 6321
The United States Bankruptcy Court for the District of Arizona explores the extent to which the federal tax lien remains attached to assets transferred to others through alleged fraudulent transfers in Bullseye Holdings, LLC v. Internal Revenue Service, Case Number 4:16-ap-00449-BMW dated October 15, 2018. This action was essentially one for Declaratory relief filed by Bullseye Holdings, LLC asking the Court to determine that assets owned by the related entity Bullseye Feeders, LLC, were not encumbered by the federal tax lien. The entities at issue are owned by a variety of individuals in the same immediate family. At the time of trial, those members did not exactly know who held precise interests in the various LLC’s. The United States may impose a lien on property or rights to property belonging to a taxpayer in order to satisfy a taxpayer’s tax deficiency. Property that is fraudulently transferred remains subject to the federal tax lien against it. Additionally, where property is placed in the name of another as the taxpayer’s alter ego, nominee, or successor, federal tax liens remain attached to the property. The Court ruled that the IRS failed to prove by a preponderance of the evidence that the property was fraudulently transferred. The court went through numerous factors relating to required provisions of substantiating fraudulent transfers. It seemed the IRS simply did not do their job in Court. They did a better job relating to the Alter Ego Theory – possibly because it is easier to prove. The IRS had to prove that there was a unity of control and observing the corporate form would sanction fraud or promote injustice. Some of the factors causing the alter ego theory to be upheld were: 1) close family membership of all entities, 2) One person essentially in charge of both, 3) neither entity held formal meetings, 4) no corporate records, 5) one entity did not have a bank account, 6) no payments made on obligations from one entity to the other, 7) no consideration paid on the transfer of a few promissory notes, 8) operating agreements stated the purpose was exactly the same, 9) at the time of the transfer, one entity could not pay its debts as they become due and the property transferred was the only remaining asset of the entity. Unity of control was clearly met. As for whether or not justice requires recognizing substance over corporate form, the Court found that to invalidate the IRS lien against the Property would promote injustice. Ultimately, the lien stood against the property.
Fraudulent Transfers, Alter Ego, Nominee and Successor Liability
I.R.C. Section 6321
The United States Bankruptcy Court for the District of Arizona explores the extent to which the federal tax lien remains attached to assets transferred to others through alleged fraudulent transfers in Bullseye Holdings, LLC v. Internal Revenue Service, Case Number 4:16-ap-00449-BMW dated October 15, 2018. This action was essentially one for Declaratory relief filed by Bullseye Holdings, LLC asking the Court to determine that assets owned by the related entity Bullseye Feeders, LLC, were not encumbered by the federal tax lien. The entities at issue are owned by a variety of individuals in the same immediate family. At the time of trial, those members did not exactly know who held precise interests in the various LLC’s. The United States may impose a lien on property or rights to property belonging to a taxpayer in order to satisfy a taxpayer’s tax deficiency. Property that is fraudulently transferred remains subject to the federal tax lien against it. Additionally, where property is placed in the name of another as the taxpayer’s alter ego, nominee, or successor, federal tax liens remain attached to the property. The Court ruled that the IRS failed to prove by a preponderance of the evidence that the property was fraudulently transferred. The court went through numerous factors relating to required provisions of substantiating fraudulent transfers. It seemed the IRS simply did not do their job in Court. They did a better job relating to the Alter Ego Theory – possibly because it is easier to prove. The IRS had to prove that there was a unity of control and observing the corporate form would sanction fraud or promote injustice. Some of the factors causing the alter ego theory to be upheld were: 1) close family membership of all entities, 2) One person essentially in charge of both, 3) neither entity held formal meetings, 4) no corporate records, 5) one entity did not have a bank account, 6) no payments made on obligations from one entity to the other, 7) no consideration paid on the transfer of a few promissory notes, 8) operating agreements stated the purpose was exactly the same, 9) at the time of the transfer, one entity could not pay its debts as they become due and the property transferred was the only remaining asset of the entity. Unity of control was clearly met. As for whether or not justice requires recognizing substance over corporate form, the Court found that to invalidate the IRS lien against the Property would promote injustice. Ultimately, the lien stood against the property.
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