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.
Fraud and Statute of Limitations
IRC Section 6501(c)(1)
The United States Tax Court in George S. Harrington v. Comm’r of Internal Revenue handed down an opinion on July 26, 2021 at Docket No. 13531-18, in which it ruled that the taxpayer fraudulently underreported his income for some years at issue and therefore, his argument that the three year statute of limitations found in IRC 6501(a) barred assessment was not valid. This case has an entertaining fact pattern that includes details of the European lumber exporting trade to Canada, bank arrangements in the Cayman Islands and deposit activity in Swiss Bank Accounts. The key transaction at issue, and its evolution over time, relates to the sale of taxpayer’s home that resulted in the availability of $350,000. Taxpayer invested these funds with his former employer’s lawyer into a Union Bank of Switzerland (UBS) account under the name of Reed International, Ltd., a Cayman Islands entity. In 2009, the United States entered into a deferred prosecution agreement with UBS based on charges of conspiracy to defraud the U.S. by impeding the IRS in the ascertainment, computation, assessment and collection of taxes during the period 2002-2007. The taxpayer’s account was closed by UBS, at which point, a UBS banker connected him with a Swiss National who suggested the taxpayer invest in a life insurance policy in Liechtenstein. Ultimately the life insurance policy was canceled and the assets were moved into a bank account in taxpayer’s wife’s name…also in Liechtenstein. Needless to say, none of the income attributable to the offshore accounts appeared on taxpayer’s self-prepared tax returns. The IRS examined taxpayer based on documentation from the deferred prosecution agreement obtained from UBS and proposed assessments. The taxpayer argued that the notice of deficiency was issued more than six years after the period of limitations began to run. However, IRC Section 6501(c)(1) provides that where the taxpayer filed a false or fraudulent return with the intent to evade tax, there is no statute of limitations on assessment. The last half of the opinion, some twenty pages, explores the details of the fraud provision and ultimately allows for partial assessment beyond the normal statutory timeframe.
Caraker Law Firm, P.C. 