So No Penalty
That’s Judge Goeke’s lesson for IRS in Frank Sawyer Trust of May 1992, Transferee, Carol S. Parks, Trustee, Docket No. 5526-07, filed 8/29/14.
And it’s a good thing I’m not out on my yacht or in my house in the Hamptons at the start of the Labor Day weekend, like my $1200-per-hour colleagues, because I don’t have either a yacht or a house in the Hamptons, so that I can dig through seven (count ‘em, seven) pages of Tax Court orders to bring my now-118 followers the latest Tax Court skinny.
Remember Frank and Carol? No? Then refresh your recollection with my blogpost “Little Deuce Coup”, 6/25/14. Frank and Carol dodged the penalty there, but IRS is back with a Rule 161 try-again.
And it doesn’t work.
Judge Goeke: “The transfer to petitioner was not actually fraudulent as we found in the Court’s Memorandum Findings of Fact and Opinion (T.C. Memo. 2011-298) and was accepted as such by the United States Court of Appeals for the First Circuit. For a transfer to be constructively fraudulent, the transferor must receive less than reasonably equivalent value for it. The trust gave value for the transfer, but it was not reasonably equivalent value, so the transfer was constructively fraudulent. However, only the portion of the transfer that exceeds the value of the assets transferred was constructively fraudulent. Therefore, only that portion is subject to the Mass. UFTA and transferee liability….. In other words, a transferee’s liability is capped at the amount of the constructively fraudulent transfer it received.” Order, at p. 1 (Citations omitted).
State law (here Massachusetts) only lets the defrauded creditor get what they should have gotten, not a windfall.
“Allowing respondent to collect penalties would subject petitioner to transferee liability in excess of the amount of the fraudulent transfer it received, and consequently in excess of the maximum recovery provided by the UFTA.” Order, at p. 2.
IRS, you were wrong before and you’re wrong now.
And another tip of the Taishoff baseball cap to David R. Andelman, Esq., and the team at Lourie & Cutler, counsel for taxpayer.