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Trust as Taxpayer's Alter Ego was Property Right Subject to Tax Debt Collection.
(Parker Tax Publishing February 2014)

A trust created by a businessman was his alter ego and, consequently, the assets and funds held by the trust were subject to collection by the government as a result of tax judgments and tax liens against the taxpayer. Acheff v. Lazare, 2014 PTC 50 (D. N.Mex. 1/29/14).

Jon Edelman was a businessman who specialized in tax shelters and tax deferral techniques. In 1984, Jon purchased a 55-foot yacht and took title in the name of an Oregon corporation of which he was president. Jon and his wife, Barbara, also purchased a 30-acre property in Taos, New Mexico from William Acheff. Subsequently, Jon was convicted of federal income tax fraud and sentenced to prison. While his criminal case was pending, he transferred title to the yacht, named "Elusive," to a Cayman Islands company, which was solely owned by Barbara. He also created a trust in Liechtenstein (the Delos trust), designating himself and his family as beneficiaries. A Liechtenstein company was named as trustee.

In 1993, shortly after he began to serve his prison sentence, Jon escaped and, for more than two years, lived on the yacht with his family, moving among several nations in the South Pacific. While Jon was a fugitive, the Taos property went into default and was repurchased by William while it was in foreclosure. Jon was recaptured and sent back to prison in 1995. While in prison, Jon contacted William about repurchasing the property. William agreed to sell the property back to Jon under sale terms that included a $1 million down payment, semi-annual interest payments for five years, and a balloon payment at the end of five years. A second trust created by Jon under the laws of New York, the Edelman trust, was the buyer for the property, and the Delos trust paid the down payment as a loan to the New York trust. In 1999, Jon was released from prison and lived on the Taos property for the next 12 years. Also in 1999, he and Barbara were divorced and her share of the company that owned the yacht was transferred to the Delos trust as part of the divorce.

From 2001 to 2005, the Delos trust transferred payments to the New York trust for the semi-annual interest payments on the Taos property, which would in turn pay William by check. William and the trustee of the New York trust, Peter Lazare, a long-time friend of Jon's, agreed to a loan modification that continued the interest-only payments and delayed the balloon payment. After several loan modifications, William filed suit in 2012 to collect on the defaulted promissory note and foreclose the mortgage. The government was added as a defendant, since it held two judgments against Jon for delinquent federal income taxes exceeding $334 million. The government filed a counterclaim, seeking to enforce its tax judgments and liens against the Taos property, the New York trust, and the yacht. The court ruled that William's mortgage on the Taos property was senior to the government's tax liens and issued a preliminary injunction enjoining the trustee of the New York trust from liquidating or distributing the New York trust assets.

Under Code Sec. 6321, if a taxpayer that is liable for any tax neglects or refuses to pay such tax after a demand is made, the tax (including any interest and penalties, together with any costs that may accrue in addition thereto) becomes a lien in favor of the government upon all property and rights to property, whether real or personal, belonging to the taxpayer.

OBSERVATION: The government can collect on tax liens from a taxpayer who holds property in the name of another entity on either of two theories, the "nominee" theory and the "alter ego" theory. While related, the concepts of nominee and alter ego are independent grounds for attaching the property of a third party in satisfaction of a delinquent taxpayer's liability. A nominee theory involves the determination of the true beneficial ownership of property, while an alter ego theory focuses more on those facts associated with a "piercing of the corporate veil" analysis.

A district court held that the Delos trust was the alter ego of Jon, and its assets were subject to collection by the government. The court cited G.M. Leasing Corp. v. U.S., 429 U.S. 338 (1977), which found that property held by the alter ego of a taxpayer is regarded as the taxpayer's property and is subject to the government's judgments and collection attempts. The court noted that Jon personally used the funds from the Delos trust during a time period when the government had several tax judgments against him and liens against his property. According to the court, Jon exerted near-complete control over the Delos trust and how the funds were spent. The trust was used as an overseas safe haven for Jon's money, and he simply withdrew funds on an as-needed basis.

Although Jon routed the money from the trust through various sources in an attempt to avoid seizure of the funds to satisfy his tax debt, the government was able to identify many transactions originating in the Delos trust that directly benefited Jon.

The court also determined that the appropriate remedy for Jon's unlawful use of the Delos trust as his alter ego was to impose a constructive trust on the Edelman trust for $1.6 million. Thus, the government may seize and foreclose on any assets in the New York trust up to the $1.6 million constructive trust amount. The government could also seize and collect against the New Mexico property, subject to any superior encumbrances, including William's.

Finally, the court found that the government was entitled to a permanent injunction against the Edelman trust for the amount of the constructive trust. The government established that irreparable harm was likely unless the permanent injunction was issued, since Jon avoided paying his federal tax debt for over two decades and depletion of the trust assets would prevent the government from any meaningful recovery. Also, the balance of equities favored preserving the government's ability to collect Jon's tax debt over the interests of Jon's adult children, the trust's other beneficiaries. Moreover, the permanent injunction was in the public interest by preserving assets that are subject to Jon's federal tax obligation that he actively avoided for many years, the court concluded.

For a discussion of tax liens, see Parker Tax ΒΆ260,530. (Staff Contributor Parker Tax Publishing)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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