The heirs, executors, trustees and distributees of the late Billy Hawk, Jr. take on the IRS, but the game ends in no score, as Judge Wells is giving away nothing in Billy F. Hawk, Jr., GST Non-Exempt Marital Trust, Trustee, Transferee, Nancy Sue Hawk and Regions Bank, Co-Trustees, Et Al., 2012 T.C. Mem. 154, filed 5/30/12.
We’ve heard this same old song before. Billyhawk owned a string of Tennessee bowling alleys in a C Corp, Billyhawk Inc; basis zero, FMV astronomical. Mrs Hawk, his wife of 48 years and principal beneficiary of Billyhawk the man and the C Corp, knows from nothing; her business acumen is a gutterball.
So she and her advisors, attorneys and accountants hawk the alleys via Hansell, a bowling alley broker with nationwide connections (you can’t make this stuff up). Hansell finds la famille Corley, New England bowlerini of vast experience, who are willing to fling boatloads of USD at the C Corp. Mrs Hawk loves it, until she hears about double taxation, capital gains, estate taxes and other disturbers of the sleep of the righteous distributee.
Hansell offers a solution. How do you spell “MidCoast Financial”, friend of the zero-basis, cash rich C Corp? And how do you spell “here we go again”? See my blogposts “Substance Matters”, 3/1/12, and “A Good Day for Taxpayers”, 3/15/11.
MidCoast swears they’re getting the cash to buy all the Billyhawk Inc stock from their own and borrowed funds, but there’s no proof of this, and MidCoast avers it will operate Billyhawk Inc. for the foreseeable future, laying off short-term capital losses against tax from the sale of the bowling alleys to la famille Corley, which MidCoast will close and leave the cash in Billyhawk Inc. Needless to say, MidCoast strips Billyhawk Inc. of the cash, does a phony Danish kroner mix-and-match forex deal with its trusty offshore (see my blogpost “An Option Isn’t a Contract”, 4/14/11), and when IRS challenges the deal, waltzes away into the sunset, pursued by DOJ brandishing handcuffs and breathing fire and slaughter.
Of course, Section 6901 transferee liability rains down upon Mrs Hawk and the hawklings near and far. The IRS yells “intermediary transaction”. MidCoast gave the hawklings the Corley boodle less whatever rake-off (not referring to a certain USDCSDNY Judge; he’s a different Rakoff) MidCoast got for facilitating these shenanigans. MidCoast did nothing but play ring-a-ring-a-rosie with the Corley cash, says IRS, and Mrs Hawk and the hawklings made a fraudulent conveyance of the Billyhawk stock to MidCoast to defeat, delay, defraud, vex, harass and swindle the United States Treasury, its lawful creditor.
Mrs Hawk and the hawklings seek summary judgment. They shower Judge Wells with affidavits proclaiming the bona fides with which they acted, the due diligence they pursued, with attorneys and accountants checking references, doing research and all that jazz.
But summary judgment is a hunt for disputed facts, and Judge Wells finds a biggie. Although the hawklings swear MidCoast got funds to close the purchase of Billyhawk Inc from Mid-Coast’s own monies and a private loan from an offshore, and didn’t strip Billyhawk Inc’s proceeds from the sale to Corley, they don’t have checks, bank statements or anything else to prove it. Every payment to the hawklings came out of MidCoast’s attorneys’ escrow account. If MidCoast did get outside funds, then Billyhawk Inc wasn’t rendered insolvent when the hawklings got the boodle, as the Corley cash was still aboard, so no fraudulent conveyance. But if there was the ring-a-ring-a-rosie with the same money, namely, the Corley cash, then Billyhawk Inc was rendered insolvent when the hawklings and MidCoast chopped the pot, and there might be a fraudulent conveyance, depending upon the facts and circumstances (strike up the band, Eddie Elgar). So there must be a trial.
No there mustn’t, says IRS, at least not yet. We need a continuance, stay, time out on the field, if there’s going to be a trial here. There’s a criminal investigation going on into MidCoast, and we can’t permit the defendants to use the liberal civil litigation discovery proceedings, such as we have in Tax Court, against the government, which could torpedo the investigation.
The hawklings squawk that they’re not the subjects of any criminal investigation, MidCoast isn’t a party here, and IRS is just stalling, hoping for some evidence to fall from the sky and bail them out of their losing litigation.
Judge Wells: “… petitioners are not targets of the criminal investigation of MidCoast. Respondent’s (IRS) contention that the testimony of certain MidCoast employees might be inhibited by the criminal investigation is, at this stage, purely conjectural. Moreover, respondent’s contention is at odds with the undisputed fact that, in other cases involving MidCoast, respondent has taken the depositions of numerous MidCoast employees, including the individuals who served as MidCoast’s president, general counsel, and controller during 2003. We conclude that the criminal investigation of MidCoast does not warrant a stay of the instant proceedings at this time. Accordingly, we will deny respondent’s motion for a stay of proceedings.” 2012 T. C. Mem. 154, at pp. 23-24 (Footnote omitted).
So game ends in no score. Stay tuned, fans. Rematch coming up.