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
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
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
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.
Another shocker
A few days letter the bank records came in and Ben and the accountant prepared all of the back tax returns that had not been filed for employment, income, sales and unemployment taxes. Ben had no money in the business at that point to pay the taxes, so he just filed the returns without payment. The total due without penalties and interest was $50,000 to IRS, $50,000 to the state for sales taxes and unemployment taxes, $10,000 for state withholding taxes, and $10,000 for county taxes.
A few weeks later, Mr. Sorbe returned to the business and asked to see Ben. Ben came out wiping his hands on his apron. “What can I do for you, Sir”. The agent then informed Ben that he needed to interview Ben to see if he was a responsible party under the Internal Revenue Code Section 6672. If he was, then Ben would be responsible for the taxes. The questionnaire asked a ton of questions and Ben answered that he didn’t know the taxes were owing and that his partner handled the finances, but he was generally aware that these taxes needed to be filed and that he signed checks occasionally and hired and fired personnel and negotiated their wages. At the close of the interview Mr. Sorbe asked Ben to check his answers and sign the form, which Ben did.
A few weeks later, Ben personally received a bill from the IRS for $33,000 plus interest of $10,000 for a total of $43,000. Ben was aghast. He called Sorbe, “what is the meaning of this bill? he asked. “Its for the trust fund monies that you diverted from the IRS that should have gone to pay for your employees taxes. You’re responsible personally for that”, the agent replied matter of factly. Ben let fly a torrent of expletives and hung up. That afternoon Ben called his lawyer. “How come the IRS is now hitting me personally. I thought that when I got incorporated that I wouldn’t have any liabilities to creditors, what’s going on?” The lawyer cleared his throat, “well that’s not entirely true. You are liable to the Federal government and the states personally for trust fund taxes that are not paid to them such as withholding taxes, sales taxes, and corporate income taxes to some states. And its worse, those taxes are not dischargeable in bankruptcy, so they stay with you for at least 10 years” “You mean to say, that I’m personally liable for $100,000 in taxes to the states and feds. I haven’t got that kind of money?” “I think you should see a tax specialist who can advise you on this”.