IRS Takes Assets Husband Tried to Shield

by Bruce Givner on January 31, 2012

The bankruptcy court has held that an outstanding Federal tax liability owed by the husband can be satisfied by monies the husband fraudulently transferred to his wife and a later nonrelated entity.  In re Schofield-Johnson, LLC, 2011 WL 4433653 (Bkrtcy.M.D.N.C., Slip Copy, Sept. 22, 2011).

In 2006, Mr. Johnson received a $1 million settlement from a lawsuit he had filed against his previous employer.  Mr. Johnson deposited the $1 million into his wife’s banking account, since he did not have a bank account, and then the monies were used to buy personal assets, invest in a money market account and an investment account, and make gifts to the wife’s children.  In 2008 the wife withdrew money from the investment account to buy additional property and to create a limited liability company (LLC) to protect her personal assets from potential malpractice claims (she was a physician).  The IRS noted that Mr. Johnson contributed no assets to the LLC.  .

Mr. Johnson included the $1 million as taxable income on his 2007 tax return, but paid only $1 thousand on the resulting tax liability.  When Mr. Johnson failed to pay the balance of his 2007 tax liability, the IRS filed a lien against the LLC, which filed for bankruptcy in 2009 to avoid paying Mr. Johnson’s tax liability.

In determining the transfer of the $1 million by Mr. Johnson to his wife was a fraudulent transfer, the court noted, among several factors, that the transfer was to an insider (his wife), that despite the transfer Mr. Johnson had retained some control over the monies, that the monies represented substantially all of Mr. Johnson’s assets, and that Mr. Johnson should have known the monies were taxable to him.  The court also noted that Mr. Johnson did not receive any value for his monies – he had no ownership in the LLC but his wife owned 91%.

If you need advice on tax liability or transferring of property to protect your assets, please call Givner & Kaye at (310) 207-8008.

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