In many cases, taxpayers attempt to transfer assets or property to third persons to shield those assets and property from the federal tax lien or federal tax levy. Predictably, the IRS has various tools at their disposal to attack the transfer, including seeking a court order to set aside the transfer or, in other cases, to go directly against the recipient. This Insight discusses some of the more common options utilized by the IRS in these circumstances. It also discusses the potential criminal liability associated with transferring assets or property to evade taxes.
The FDCPA
Transfers by taxpayers to third parties may be attacked by the IRS under the Federal Debt Collection Procedures Act of 1990, Pub. L. No. 101-647 (the “FDCPA”). Under this statute, if a taxpayer owes a tax liability to the United States and subsequently transfers property to another person, the United States may seek to attack the transfer as “fraudulent” if: (1) the person makes the transfer without receiving reasonably equivalent value in exchange for the transfer; and (2) the taxpayer is insolvent at the time of the transfer or is rendered insolvent as a result of the transfer. See 28 U.S.C. § 3304(a).
In addition, the FDCPA permits the United States to attack any transfer—whether made before or after a federal tax obligation arises—if the taxpayer makes the transfer: (1) with actual intent to hinder, delay, or defraud the United States, or (2) without receiving reasonably equivalent value in exchange for a transfer, the person intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as those debts became due. 28 U.S.C. § 3304(b).
Under the FDCPA, the following factors are relevant in determining whether actual intent exists: (1) whether the transfer was made to an “insider”; (2) whether, after the transfer, the debtor retained possession or control of the property transferred; (3) whether the transfer was disclosed or concealed; (4) whether before the transfer was made, the debtor had sued or been threatened with suit; (5) whether the transfer was substantially all of the debtor’s estate; (6) whether the debtor absconded; (7) whether the debtor removed or concealed assets; (8) whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred; and (9) whether the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. 28 U.S.C. § 3304(b)(2)(A)-(K).
Under the FDCPA, the United States may obtain: (1) avoidance of the transfer to the extent necessary to satisfy the debt; (2) a remedy against the asset transferred or other property of the transferee; or (3) any other relief as the circumstances may require. 28 U.S.C. § 3306(a)(1)-(3). These remedies apply to most debts owed to the United States, including taxes, interest, and penalties. 28 U.S.C. § 3002(3).
Analogous State Statutes
Many states have statutes that are similar to the FDCPA. For example, the State of Texas has enacted the Texas Fraudulent Transfers Act (“TUFTA”). Similar to the FDCPA, TUFTA authorizes the United States (or other creditors) to bring suit against a taxpayer to attack fraudulent transfers. Indeed, the same or similar standards discussed above under the FDCPA apply equally to claims brought under TUFTA. See Tex. Bus. & Com. Code § 24.005, § 24.006. And, as discussed below, the United States has used state statutes—such as TUFTA—to set aside fraudulent conveyances made to avoid the payment of federal taxes.
Statute of Limitations Issues for Fraudulent Transfers
Although the FDCPA and TUFTA have statutory statute of limitations to bring fraudulent conveyance claims, these statute of limitations do not apply to the United States when it seeks to set aside a fraudulent transfer due to unpaid federal taxes. See, e.g., U.S. v. Wade, 790 Fed. Appx. 906, 909 (10th Cir. 2019) (“While . . . [the United States] proceeds ‘by invoking a provision of state law[,] . . . the government’s claim is not subject to state statutes of limitation or extinguishment.”); U.S. v. Patras, 544 Fed. Appx. 137, 143 (3d Cir. 2013) (“The Supreme Court has explained . . . that ‘the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights.”); U.S. v. West Tex. State Bank, 357 F.2d 198 (5th Cir. 1966) (state law cannot shorten limitation period available to the government, but it may extend the time to file suit); U.S. v. Park, NO. 16 C 10787, 2017 WL 4417826 (N.D. Ill. Oct. 5, 2017); U.S. v. Halpern, 2015 WL 5821620 (E.D.N.Y. Oct. 5, 2015); U.S. v. Shearer, No. 2:12-cv-02334, 2018 WL 3770042 (E.D. Cal. Aug. 7, 2018); U.S. v. Bantau, 907 F. Supp. 988, 990 (N.D. Tex. Sept. 26, 1996) (“as this is a suit for the collection of taxes, the statute of limitations found in the FDCPA is not applicable.”). Instead, federal courts have held that the applicable statute of limitations under either the FDCPA or TUFTA is 10 years after an assessment has been made. See I.R.C. §6502(a)(1).
Example Cases
There are a litany of federal cases in which the United States has utilized either the FDCPA or similar state statutes to set aside fraudulent conveyances. For example, in U.S. v. Chapman, 756 F.2d 1237 (5th Cir. 1985), the taxpayer—Mr. Chapman—engaged in gambling activities from 1962 through 1972. Those activities were subject to wagering excise taxes which were 10% of the amount of each bet taken by Mr. Chapman. In late 1986, Mr. Chapman and his wife transferred their home in Dallas, Texas (the “Cordova Home”) to their 19-year old son, “Bobby E.”, for no consideration except Bobby E.’s assumption of the mortgage. After the transfer, Mr. Chapman and his wife continued to live in the Cordova Home and continued to make mortgage payments to the original lender.
In 1973, Bobby E. conveyed the Cordova Home to his sister, “Kitty Joy,” who was 18-years old, for $3,535. Mr. Chapman and his wife continued to live in the Cordova Home after the transfer. Moreover, they continued to make mortgage payments to the lender. According to Mr. Chapman, these mortgage payments were in lieu of rent payments to their son.
In 1975, Kitty Joy, who had no income at the time, exchanged the Cordova Home and $35,000 cash for another home (the “Shannon Court Home”). After the purchase, Mr. Chapman and his wife moved into the Shannon Court Home and resided with Kitty Joy until Kitty Joy remarried in 1978, at which time Mr. Chapman and his wife resided at the Shannon Court Home alone. During their time at the Shannon Court Home, Mr. and Mrs. Chapman made substantial improvements and repairs to the home and had utility bills in their name.
Eventually, the IRS assessed wagering excise taxes against Mr. Chapman for his 1971 and 1972 tax years. Thereafter, the IRS sought to seize the Shannon Court Home from Kitty Joy on the basis that the transfer of both the Cordova Home and the Shannon Court Home were made with the intent to defraud the IRS under TUFTA. At trial, Mr. Chapman contended that he had transferred the property in the name of his children to protect the asset from his “risky business of gambling.”
On these facts, the district court concluded that the Cordova Home and the Shannon Court Home had been transferred with the intent to defraud the IRS. Accordingly, the district court held that both the transfers were void and that the IRS could seize the Shannon Court Home from Kitty Joy. The Fifth Circuit affirmed the district court’s decision. In so holding, the Fifth Circuit stated:
[Under Texas law], ‘a conveyance which is found to be fraudulent as to creditors is wholly null and void as to such creditors,’ and ‘the legal as well as the equitable title remains in the debtor for the purpose of satisfying debts.’ Thus, a judgment creditor with a lien on the debtor’s property may enforce that lien directly against realty that had been placed in the name of another with intent to defraud the creditor.
Chapman, 756 F.2d at 1240 (citations omitted). In sum, the Fifth Circuit concluded that although Mr. Chapman’s tax debts arose after the transfer of the Cordova Home, the IRS nevertheless could void the transfer because it had shown that “the transfer . . . [was] made with fraudulent intent at the time of transfer to evade future liabilities of a subsequent creditor.” Id. at 1241.
Three years later, the Fifth Circuit heard a similar case to that in Chapman. In Roland v. U.S., the IRS sought to levy real property that had been transferred from Charles and Renee Roland (the “Rolands”) to their son, Scott Roland (“Scott”). See 838 F.2d 1400 (5th Cir. 1988). More specifically, the Rolands had used funds from the sale of a prior home to purchase property near Detroit, Texas (the “Detroit Home”). However, at the closing, Mr. Roland signed Scott’s name to the closing documents. After the closing, the Rolands resided in the Detroit Home; Scott, on the other hand, resided in Irving, Texas. After graduating from high school in 1981, Scott occasionally lived with his parents; but, the Rolands continued to make mortgage payments and paid or helped to pay the property taxes, utility bills, and insurance on the Detroit Home. Scott never reported any rental income from his parents on his tax returns.
In March 1983, the IRS issued the Rolands a notice of deficiency asserting taxes due for their 1997, 1978, and 1979 tax years. On August 16, 1984, the IRS assessed the additional tax deficiencies against the Rolands. In July 1985, the IRS attempted to seize and levy the Detroit Home to satisfy the federal taxes owed. Scott then filed a lawsuit against the IRS seeking to stop the levy.
Similar to Chapman, the government contended that it may set aside the transfer of the Detroit Home under TUFTA. That is, the government argued that the Rolands had transferred the Detroit Home to Scott with the intent to delay, hinder, or defraud the United States from obtaining the property. Citing to Chapman, the Fifth Circuit concluded that the transfer fell within TUFTA and permitted the IRS to levy the Detroit Home.
Can a Transfer of Property to Evade Tax be Criminal?
The Internal Revenue Code (the “Code”) contains a host of criminal statutes to deter taxpayers from transferring assets or property to other parties when federal taxes are owed. For example, Section 7201 makes it a felony for any person to attempt in any manner to evade or defeat any tax imposed under the Code or the payment thereof. Section 7206(4) makes it a felony to remove or conceal any property upon which levy is authorized with the intent to evade or defeat the assessment or collection of any tax imposed under the Code. Finally, the Code also contains an obstruction provision which makes it unlawful to interfere with the administration of the laws of the Code. See Sec. 7212.
Each statute above has its own elements the government must prove. To prove a Section 7201 violation, the government must show beyond a reasonable doubt: (1) willfulness; (2) existence of a tax deficiency; and (3) an affirmative act constituting an evasion or attempted evasion of tax. Sansone v. U.S., 380 U.S. 343, 351 (1965). Thus, any affirmative act of a taxpayer to transfer assets with the intent to avoid the payment of tax could potentially constitute a necessary element of the government’s case.
In some cases, a taxpayer may transfer assets or property prior to the date in which the federal tax is assessed by the IRS. In these cases, a common question is whether the United States can prove a violation of Section 7201—notwithstanding that the federal tax has not technically become due and owing.
The federal court decision of Voorhies provides a cautionary tale to taxpayers who wish to transfer assets or property prior to an assessment, however. See U.S. v. Voorhies, 658 F.2d 710 (9th Cir. 1981). In that case, the taxpayer as audited by the IRS for his 1971 federal income tax return in 1973. During that period, the IRS discovered that Mr. Voorhies had failed to file personal income tax returns for the 1970 and 1972 calendar years. The IRS later prepared substitute-for-returns based on records available to the IRS to prepare his 1970 and 1972 returns. Thereafter, on February 12, 1974, the IRS issued a “30-day letter” proposing assessment of tax and penalties for those same years. The assessments were eventually made in February 1975 for both years.
Prior to the assessment dates, though, on January 18, 1974, Mr. Voorhies sold his wedding chapel business for cash and a promissory note. He then exchanged the cash for cashier’s checks and sold the promissory note for gold coins and platinum bars. In late January 1974, Mr. Voorhies took many of the cashier’s checks with him to Europe to exchange for Swiss francs in Zurich.
On these facts, the United States indicted Mr. Voorhies under Section 7201 for evading the payment of income taxes for his 1970 and 1972 tax years. At the conclusion of the trial, the court found Mr. Voorhies guilty of Section 7201 violations and sentenced him to a prison term. Mr. Voorhies appealed the district court’s decision, arguing among other things, that the taxes had not yet been assessed when he began the alleged criminal conduct.
The Ninth Circuit held against Mr. Voorhies. More specifically, the court concluded that for purposes of Section 7201, “[a] tax deficiency exists from the date a return is due to be filed[.]” The Ninth Circuit further held that “[a]lthough a prior valid assessment may be used to show a tax deficiency under section 7201, it is not required to show that deficiency.” In other subsequent cases, the United States has cited to the Voorhies decision to support its contention that criminal liability can arise even before the formal assessment is made against the taxpayer.
Conclusion
As the above shows, transferring assets when a tax debt is due can be risky business—even criminally so in some cases. Taxpayers are well advised to consult tax professionals when they owe or will owe substantial federal taxes and intend to transfer property or other assets to third parties.
See also:
- Fraudulent Conveyances
- What’s the Difference Between Civil and Criminal Tax Fraud?
- Jury Convicts Roman Catholic Priest of Tax Evasion, Money Laundering, and Wire Fraud – Orders Restitution
- Tax Evasion: Evading the Payment of Tax
Criminal Tax Defense Attorneys
Freeman Law represents companies, executives, and individuals in regulatory and white-collar government investigations and prosecutions. We employ a proactive approach to defend vigorously and strategically position our clients. White-collar matters often involve parallel regulatory and civil proceedings. Freeman Law can navigate the complexities and collateral consequences of multiple proceedings. And when it comes to the court of public opinion, we employ ethical and strategic tactics to manage publicity. Schedule a consultation or call (214) 984-3000 to discuss your allegations and investigations concerns.
