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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The United States Tax Court in Jeffrey D. Gregory v. Comm’r, Docket No. 1090-16L, filed November 20, 2018, held that a “reprint” of a notice of deficiency is evidence of the creation of the notice before assessment, even though the reprint was prepared more than two years after the alleged mailing of the original notice and omitted or misstated information that would have appeared on any notice actually mailed. Further, the Court ruled, that the omission from a notice of deficiency of the last day to timely file a petition for re-determination does not invalidate the notice. This case was before the Tax Court for review of a determination by IRS Appeals Office to sustain the filing of a notice of Federal Tax Lien for unpaid income tax liabilities. The Petitioner conceded all aspects of the case except the validity of the notice of deficiency issued by the IRS. The IRS asserted that they issued the petitioner a notice of deficiency for the relevant tax period but admitted there was no copy of the original notice that could be reproduced. The Court ultimately ruled that it did not see why the reprints couldn’t serve as evidence that the IRS prepared the notice of deficiency, even if they were not deemed duplicates. The Court inferred from the inclusion in the IRS database of the information about the taxpayer on the reprint that it had created the notice of deficiency in accordance with its “customary practice.” As for the lack of a date to file the Petition in Tax Court, the reprint would not reflect that information as the IRS had explained this information is entered by hand when the original is issued.
If you have experienced a continuing struggle with handling your ongoing employment and income tax filings and payments, you may be facing the stark reality that managing these obligations is getting more and more difficult. Some businesses have operated off the premise that the federal and state government will perpetually respond to their tax problems in a certain way. That response by the government, through a series of notices, delayed responses, and payment plans, is changing faster than ever. This is especially true at the state level. Businesses should not make what was once predictability of tax collections by the government a part of how they manage their ongoing business expenses.
While the government may not upgrade their technologies as quickly as the private sector, the actions being taken are making a difference in closing the Tax Gap. This is true at the federal level and even more so at the State level. As Bloomberg Business Week reports, states are taking much more aggressive action to capture lost sources of tax revenue. States are using better resources of data collection along with other enforcement tools to prevent businesses, large and small, from operating in a non-compliant tax status.
From a business perspective, the stark reality is that there are some businesses on the fringe of existence that may simply be forced to cease operations as the tax collection activity described here intensifies. It’s my opinion that this is not necessary. Rather, if these businesses spend less time juggling some of these obligations and direct their time towards the expertise they have related to their primary business function, their likelihood of success is much greater. We have seen the most success for clients who have long-term tax delinquencies when that client acquires proper legal and accounting assistance. For a long-term problem, a long term solution is necessary.
Certified Public Accountants and other tax return specialists can provide a level of service that is invaluable to any business. Assistance from a tax lawyer can be an important tool which allows for a delinquent taxpayer to create a long term plan for tax debt resolution which is then executed upon by the taxpayer, its accountant and lawyer. Most clients find that the support of professionals that can readily provide expert guidance on stressful tax matters are invaluable. The relief provided to the business owner typically gives them the breathing room they finally need from a stressful situation to focus on the reason they entered their business to begin with. It is highly rewarding for the tax lawyer and accounting professional to observe this process. No business operation will ultimately succeed with the passion of its owners for the services or products it provides.
As a tax lawyer I have observed that the combination of a Certified Public Accountant or other tax return professional with the guidance of a tax lawyer is a highly beneficial combination for a delinquent business taxpayer. The reality is that the Certified Public Accountant or tax return professional likely has all the expertise to resolve these issues, but due to the reality of the tax season, that person lacks the time to provide the level of assistance demanded from a Revenue Officer or other collection agent. Without the obligations of providing return preparation services for clients, I have found the ongoing demands of dealing with delinquent tax matters for clients to be manageable.
Ideally, the long term is a viable business with a plan to manage ongoing tax obligations while addressing delinquencies in a manner that does not effectively shut down the business. Once that plan is in place, the taxpayer’s Certified Public Accountant or return preparation professional can provide services to manage current tax filing and payment obligations. Should the government return for review of the client’s ability to address the tax delinquencies, the tax lawyer can return to representation to assist with that issue.
As a business owner with a long term delinquency a critical perspective to have when acquiring professional assistance is that there is no “quick fix.” A multi-year problem will likely take many months, if not years, to resolve. But it can, and does, happen. Feel free to contact us to discuss these issues if you have them.