A recent court decision by the US Court of Appeals for the 11th Circuit found a shareholder and employee of a defunct company was liable for his share of the company’s tax debt problems. The case was particularly hard on the taxpayer since he was a victim of the majority shareholders’ fraud, but was still found to be responsible for repaying monies he had received.
The case involved Florida Engineered Construction Products Corporation (“FECP”). For years during the early and mid-2000s, FECP paid no federal income tax, and its majority shareholders, Ralph Hughes and John Stanton, siphoned most of the cash out of the company. While investigating FECP, the IRS Commissioner began to pursue funds that he argued were fraudulently transferred to its shareholders. Among the funds sought by the Commissioner were certain payments to William Kardash, Sr., a shareholder, and employee of the company who was not involved in the fraud by Hughes and Stanton.
The Commissioner argued that “Advance Transfers” in 2003 and 2004 and “Dividend Payments” in 2005, 2006, and 2007 were “fraudulent transfers under the Florida Uniform Fraudulent Transfer Act (“FUFTA”) because FECP did not receive any value from Kardash in exchange and FECP was insolvent or the transfers led to FECP’s insolvency.” Although the tax court agreed with Kardash that the Advance Transfers basically replaced FECP’s prior employee bonus program, it held that the Dividend Payments were not compensation and therefore constituted actual or constructive fraud.
The 11th Circuit Court agreed with the Tax Court finding that although Kardash was a victim of fraud by Hughes and Stanton, the Dividend Payments he received belonged to the IRS, and he was required to pay them back under Florida law. In addition, the Commissioner was not required to exhaust remedies against FECP before going after Kardash as a transferee of FECP’s funds.
It’s clear from this case that the IRS has many tools to collect taxes owed. People facing tax debt problems with the IRS should speak with a qualified attorney as soon as possible about their options.