Thursday, June 13, 2013

You Can Cheat the Tax Collector and Get Away With It, But...You Must Pass Into The Next Life In Order To Do So, And What About The Spouse Who is Still Alive and Well?

A fourth marriage, an involuntary bankruptcy, a secret divorce and reconciliation, an erroneous federal tax
refund of almost $600,000 deposited into an out-of-country bank account, an unexpected death (shortly after the federal government filed suit), and an Ontario fishing lodge!  This is the kind of tale which mystery writers love to develop, and we have it free of charge courtesy of the United States District Court for the District of Minnesota.  Your editor had previously thought that MN was populated only by thoroughly righteous persons; now he isn’t so sure.

Fred and Jo Anna Bame entered into an antenuptial agreement (aka a prenuptial agreement) which provided for separate ownership of property “free and clear of any and all claims by the other party.”  The couple
married in March 1992 and Jo Anna conveyed property which she owned at 5110 Meadville St., Excelsior, MN to herself and Fred as joint tenants.  Fred and Jo Anna heavily mortgaged the property and used the money to support Fred’s business ventures (which failed).  Fred’s creditors filed an involuntary petition in bankruptcy against Fred in 1998.  He saw the handwriting on the wall and, shortly before the petition was filed, Fred transferred his 100% ownership in a business named Hook ‘n Horn (which consisted of a camp or fishing lodge) to Jo Anna for $1.

Jo Anna filed a proof of claim against Fred’s bankruptcy estate for $1,228,984.  The bankruptcy trustee countersued to set aside several pre-petition transfers by Fred to JoAnna as fraudulent, and she settled with the bankruptcy estate in March 2000.  One of the transfers invalidated was the Hook ‘n Horn transfer, so Jo Ann agreed to purchase that business for $250,000 (quite a bit more than her original “purchase” price of $1).

As a result of the bankruptcy, their relationship became strained, and Fred and Jo Ann filed a divorce petition in October 2001.  In January 2002, they filed for Social Security benefits and listed themselves as married, although by that time they were apparently divorced.   By 2003 they were again living together.  Fred’s 2007 obituary named Jo Ann as his current wife.  While Jo Ann admitted to having written the obituary, she claimed that one of Fred’s children edited it and named her as his wife.

The Social Security Administration inquired about Jo Ann’s benefits and she responded by admitting “that she had lied about being married because she did not think it (i.e. SSA) would find out about the divorce.”

In January 2003, the bankruptcy trustee remitted $580,000 to the IRS to satisfy unspecified federal income tax obligations.  Although the IRS received the payment, it had not assessed a tax and for two years there remained a credit balance on the bankruptcy estate’s account equal to the payment.  Now it really becomes interesting,..

In May 2005, the $580,000 credit balance was transferred to Fred’s personal income tax account for the year 1998.   This transfer then created a personal income tax overpayment of $519,360 + interest, and the IRS notified Fred that he would be receiving a refund.  Not to look a gift horse in the mouth, but just to be sure that this once in a lifetime opportunity was true, Fred twice contacted the IRS and was assured that yes, he would be receiving a refund.  Oh, not to forget that Fred was in involuntary bankruptcy during 1998.

Fred also received a letter from the Taxpayer Advocate Service to the effect that there would be a refund.  The court narrative is silent as to how the Taxpayer Advocate became involved.  Sure enough, the refund check was issued July 29, 2005.  After receiving the check, Fred and Jo Anna almost immediately drove to Canada and deposited it into their joint account at a credit union in Nester Falls, Ontario.  By October 6, 2005, the credit union account balance had been reduced to $4,732 as a result of a series of checks to pay mortgages and to transfer funds to two of Jo Anna’s companies---I Am Home, Inc.** and Hook ‘n Horn.  Most of the $185,000 transferred into Hook ‘n Horn was then paid out of that account by August 15, 2005.

Did they live happily ever after?  Well, not quite.  The IRS eventually discovered that the computer had made a mistake (as good an excuse as any) and so they attempted to contact Mr. & Mrs. Bame.  They were unsuccessful (why are you not surprised).  So, they wrote to Fred to notify him that they would levy his Social Security benefits (that would surely go a long way toward recovering $600,000 or so).  The notification letter was rejected and marked “return to sender.”  The IRS then sued Fred.  Fred died shortly thereafter and his estate was substituted as a defendant.

The IRS moved to recover under the Federal Debt Collection Procedures Act and the Minnesota Uniform Fraudulent Transfer Act.

**In its’ decision, the Court found that “I Am Home is an incorporated entity that she uses to conduct her personal business.  It does not observe any corporate formalities, keeps no corporate records, and is simply a façade for Jo Anna’s individual dealings.”
“The Government’s statutory claims raise several issues concerning statutes of limitation, insider status, the effect of the Bames’ antenuptial agreement, possible estoppels, and more that the Court need not address.”  (par. 1, line 1 of the case analysis – page 8).  The Court reasoned that even if the defendants prevailed in their defense arguments, “equity dictates that they return the erroneously distributed funds under the doctrine of unjust enrichment.”  Jo Anna argued that the funds transferred to her (mortgage payments and deposits to businesses which she owned) were in satisfaction of debts which Fred owed under the divorce decree.  The Court could find only $17,780 in marital debt and various tax liens listed on the divorce decree.  Jo Anna could offer no proof or other evidence of marital debt which Fred would be obligated to pay.  As part of the divorce settlement, Jo Anna “irrevocably withdrew all claims against Fred’s estate…and she retained no power to collect on any debts that accrued before January 27, 2000.”

Jo Anna countered the claim that she was unjustly enriched by arguing that she relied on the IRS’s assurances regarding the refund.  “As a matter of law, however, Jo Anna cannot rely on the mistaken advice of an IRS agent…We have been very clear in the past that a mistake of law by a Government agent, acting without audit or examination, does not amount to an act or interpretation upon which [the taxpayer] could justifiably rely…Those who deal with the government are expected to know the law and may not rely on the conduct of government agents contrary to the law.”

The IRS sought to recover $185,000 transferred to I Am Home (simply a façade for Jo Anna’s individual dealings) as well as $100,000 transferred to Hook ‘n Horn (subsequently HnH Ltd) which the government characterized as Jo Anna’s alter ego.  The bank account (after incorporation) remained under her exclusive control and she continued to run the business as she had run it when it was a sole proprietorship.  Actually, she used a bank account entitled Hook ‘n Horn Ltd. for three years prior to the formal incorporation.

The corporation was formed only after the IRS initiated collection action against Fred.  The camp, which was the only asset of Hook n’ Horn, was transferred to Jo Anna by Fred “as a constructive fraud to avoid…creditors.”  The Court determined that HnH Ltd. was indeed Jo Anna’s alter ego.

As a result, Jo Anna was ordered to repay $526,022 with the HnH Ltd. corporation liable for $100,000 and the I Am Home entity liable for $185,000.  Jo Anna Bame, et. All v. United States of America, US Distr. Ct. MN Civ. No. 11-62 (8/16/2012).

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