Meet Dr. Dim Bulb

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Dr. Dim Bulb was a Pediatric Neurosurgeon. A handsome man of 45, he was a graduate of Jumanji School of Medicine with his residency at the Brain Surgery Hospital of Northhampton. He was recently divorced and had no children. He as six feet tall, lean and dark haired with a tan that spoke of weekends on Nantucket. He had an ample supply of willing women to date and he watched his diet and avoided alcohol and drugs which could impair his surgical talents. He was in this profession for the long haul. His office was in an upscale suburb of Boston and he practiced out of the Boston Municipal Hospital and Clinic.

Dr. Dim Bulb was worried. He still had lots of outstanding student loans from his medical school and college to the tune of $300,000. Further, despite the fact that he was a pediatric neurosurgeon, one of the most elite specialties in the medical profession, his income was severely reduced when he was placed on a fixed rate schedule by the Physicians Review Board which was established in the Health Care Reform Act of 2009. Once his rate was set by this Board for reimbursement by the Government Health Plan every private insurance company followed suit. He wasn’t sure how he was going to make it. Further, his malpractice premiums were $100,000 per year and since no one had passed any malpractice reform in the bill, he was looking at either going without malpractice insurance, or having to pay the piper. He had a 401(k) plan with about $400,000 in it and his home which he owned in his own name since he had recently divorced from his wife of ten years, Bright Bulb. To pay her off and borrowed against the house all but about ten percent of the equity. The house is now under water. However, since then, he was able to put away another $500,000. He was concerned that all that he had worked for over the years would go down the tubes.

Domestic Asset Protection Trusts

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We are going to embark over the next week or two on the subject of self-settled Asset Protection Trusts and the future effects of FATCAT (as named by my friend at Deathandtaxes, John T. Nolan) for the Foreign Account Tax Compliance Act of 2009 which is pending before Congress. Self-Settled Domestic Trusts provide little protection against creditors, because while the assets may be in Delaware, the Settlor is still around and a court can use its contempt powers to force the Settlor to get his money back. So, we’ll show this scenario in the case of Dr. Dim Bulb and his efforts at Asset Protection.

Postscript

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While he escaped ruinous personal liability that could have stayed with him his entire life, it was a costly less for Ben. His business was ruined and would have to liquidate the debts were too much. He had expended tens of thousands of dollars on attorneys to get him out of his predicament. He now had a mortgage on his house when he was debt free. At 60 years old, he had to start all over again, but this time without a partner, and he was determined to keep total control of the checkbook in the future, so that he could ensure that all taxes were paid.

Sam Shadewell sat looking at the Caribbean drinking fruity rum drinks and living the life. He was Manny Rodriguez now thanks to a bribe to a local official, and no one would ever find him.

The resolution

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Branch got a check from Ben to the US Treasury, he noted on the check what it was for and he put the same information on the back of the check and in a cover letter. After the check cleared, he filled out Form 830 Request for Refund. He noted that Ben had paid the trust fund taxes for one Pedro Gonzales a bakery assistant and that he did not owe the taxes because he did not intentionally fail to withhold the taxes. The check was for the first quarter of 2007 and for $28.70. The refund request was sent to the IRS. Ben got a letter from the Service demanding payment of the trust fund taxes. Branch responded to the letter by sending a letter back to the IRS noting that it was Ben’s position that the IRS owed him money. This seemed to stop the letters. A few months later, Branch received a letter noting that the refund was denied. This was Ben’s ticket to the US Claims Court. /

Branch filed suit for Ben in the United States Court of Federal Claims in Washington, D.C. He claimed that Ben was not intentionally responsible for the failure to collect and pay over taxes. He alleged that the responsible party was the evil Sam Shadewell. About sixty days later the government responded denying everything and countersuing for the full amount. After some discussion between counsel depositions were agreed to. There was one problem for everyone, no what knew where Sam had disappeared to. Without a live witness to rebut Ben’s testimony and those of his co-workers the Government had little choice but to settle. It was agreed that Ben would pick up one quarter of taxes for a total of $10,000. This was far less than he would have spent pursuing the matter to trial and risking perhaps that the Government would find Sam on the eve of trial. Ben was happy that he was in the clear.

Then of course came the certified letter from the State Department of Taxation assessing its substitution tax on Ben personally for unpaid sales taxes and unpaid employment taxes. Ben notified the state that he was appealing the assessment and after a few months a meeting was held with the State Tax Commissioner. The Commissioner did not understand the law very well and was loathe to grant any relief in the matter and challenged Ben to go to Court. Ben then appealled the assessment to the local Circuit Court. As trial neared the state figured out that it didn’t have the witness it needed, namely Sam, and Ben’s attorney produced affidavits from employees and Ben stating that he was not intentionally responsible. At that point the State agreed withdraw the assessment.

A Plan

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That afternoon Ben called Branch Jazzwell a noted tax attorney about his need for a consultation. After a fee was agreed to, he appeared at the lawyers office. Ben explained the facts of the case to Branch and brought the payroll statements that he had for the taxes involved. Branch reviewed them thoroughly. Branch explained to Ben that these trust fund taxes are assessed against officers responsible for paying over and withholding taxes. “However, there is only liability if the failure to pay is intentional, not merely negligent. It appears that in your case, you have a defense, it’s the other guys fault, the other guy who split, the other guy, who had the secret bank account, the other guy who was stealing money from the company.” “How do I fight this, I got a bill from the IRS for $43,000 and I”m sure one will follow from the state?” asked Ben.

“You could pay the whole tax and ask for a refund, but that’s not necessary. Your trust fund obligations are called divisible taxes. That means that your obligation is determined on an employee by employee basis. Thus, you merely need to pay the tax for one employee for one quarter, and apply for refund. After six months, you can take the IRS to court and seek a refund. There is a risk to this strategy. The IRS can and will countersue you and if you lose, you have to wait at least 20 years and up to 40 years to be cleared of this liability instead of ten years. But there is no guarantee that they wouldn’t sue you anyway to get that kind of judgment (even though to date they rarely do so). If what you are telling me is true, you have a good case, but nothing’s a guarantee”, Branch answered. “And if you win, you might get your attorney’s fees”, he added. Branch then went on to discuss the cost of the litigation.

“I guess we should go for it, we have nothing to lose” said Ben.