T.C. Memo. 2013-32
UNITED STATES TAX COURT
GEORGE SCHUSSEL, TRANSFEREE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4050-11. Filed January 31, 2013.
Francis J. DiMento, for petitioner.
Carina J. Campobasso, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined that petitioner is liable as a
transferee to the extent of $2,044,106, $2,522,944, and $4,356,279 for 1993, 1994,
and 1995, respectively, for the Federal income tax liabilities and fraud penalties
assessed against Driftwood Massachusetts Business Trust, formerly known as
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[*2] Digital Consulting, Inc. (DCI or corporation). The issues for decision are
whether he is so liable and, if so, to what extent; whether certain funds transferred
to him were payment for his intellectual property and not income of DCI; and
whether he is entitled to credits for retransfers to DCI. A statute of limitations
defense previously asserted by petitioner has been deemed abandoned because of
his failure to address it in his brief. All section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are
incorporated in our findings by this reference. Petitioner resided in Florida when he
filed the petition.
Our findings of fact include only a summary of those material to the
transferee liability issues in this case. Additional details appear in the opinion of the
Court of Appeals that affirmed petitioner’s conviction for tax evasion and
conspiracy to defraud the United States. See United States v. Schussel, 291 Fed.
Appx. 336 (1st Cir. 2008). Those details, however, need not be repeated here. Our
findings simply explain respondent’s determination and DCI’s activities as
background for petitioner’s attempt to recharacterize the transfers from DCI to the
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[*3] DCIL Bermuda account as payments for petitioner’s intellectual property.
The facts found are also those relevant to petitioner’s claims that he retransferred
funds to DCI and is entitled to credit for those retransfers against his liability.
Petitioner incorporated DCI in 1983 as a Massachusetts for profit
corporation. Ronald Gomes joined DCI in 1983. During 1993, 1994, and 1995
petitioner owned 95% of DCI and Gomes owned 5%. Diane Reed was hired as
DCI’s accountant in 1985 and later was promoted to be DCI’s controller. DCI
conducted trade shows and educational seminars for software companies and other
corporations. DCI earned revenue from three sources: (1) “attendee sales”, which
were fees paid by individuals to attend conferences and events put on by DCI; (2)
“exhibit sales” (also called “vendor sales”), which were fees paid by companies to
exhibit their products and services at DCI-sponsored conferences; and (3) “user
group” accounts, which were accounts set up for deposits of fees made by attendees
of events and conferences run by DCI for other companies, such as Sybase,
Microsoft, or IBM (sponsoring companies).
For each “user group” event there was a separate contract between DCI and
the sponsoring company. Each contract provided that profit would be split
between the sponsoring company and DCI and did not provide for profits to be
distributed to petitioner. DCI staff coordinated the events, prepared brochures,
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[*4] made hotel and travel arrangements, and kept track of the participants.
Sometimes petitioner contacted speakers, but other speakers were contacted by DCI
staff. The revenue from the events was deposited in accounts referred to as “user
group accounts”, which used DCI’s Andover, Massachusetts, address and DCI’s
Federal tax identification number. DCI paid the expenses of the events from either
the user group accounts or from DCI’s general account.
Petitioner is married to Sandra Schussel. He is the father of Stacey Griffin
and another daughter and the father-in-law of Michael Griffin. In November 1987,
petitioner, his wife, and Stacey Griffin established an account at Fidelity
Investments in the name of Digital Consulting International. Petitioner also
maintained other accounts with Fidelity Investments. (The various accounts will be
referred to in this opinion as the Fidelity accounts without differentiating the specific
name on each account because petitioner used the funds in all of the accounts as his
personal funds.)
In February 1988, petitioner, his wife, and Stacy Griffin incorporated Digital
Consulting International Limited (DCIL) in Bermuda. The same month they
established an account at the Bank of Bermuda in the name of DCIL. DCIL was a
shell company that never conducted any business and never filed any Federal
income tax returns.
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[*5] Starting in 1988 petitioner caused the following amounts to be transferred to
the DCIL Bermuda bank account:
Year Total
1988 $1,428,000
1989 340,000
1990 45,000
1991 731,000
1992 1,174,000
1993 1,666,121
1994 2,360,453
1995 3,816,546
Most of the funds were thereafter transferred to petitioner’s Fidelity accounts and
used by petitioner as his own. The funds so transferred in 1995 included $610,000
of $850,000 reported as salary on petitioner’s Form 1040, U.S. Individual Income
Tax Return, for 1995. Otherwise, the funds transferred to Bermuda were not
reported on DCI’s income tax returns or on petitioner’s individual income tax
returns.
The amounts transferred from DCI to the Bermuda DCIL account included
checks from user group accounts made out to DCI or DCIL or checks from third
parties made out to DCI. The amounts so transferred were determined to be the
amounts not needed for DCI’s expenses. They were not based on the value of any
services or intellectual property provided by petitioner.
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[*6] In 1995, petitioner was interested in selling DCI. In order to do so, he
wanted DCI’s income to reflect the amounts that had previously been transferred to
the Bermuda account and had not been recorded on DCI’s books or reported on its
Federal income tax returns. As a result, petitioner discontinued the practice of
transferring DCI receipts to the DCIL Bermuda account.
From 1988 through 1995, DCI was a C corporation and filed Forms 1120,
U.S. Corporation Income Tax Return. The transfer of DCI receipts to Bermuda was
not discovered during audits of DCI’s returns for 1986 through 1990 and 1993.
However, in early November 1997, while auditing DCI’s return for 1995, a revenue
agent began questioning checks payable to DCI deposited in DCIL’s account.
Petitioner prepared a bogus contract between DCI and DCIL allegedly for a term of
two years beginning January 4, 1994, to be presented to the revenue agent by the
lawyer he had hired to represent DCI in the audit. Petitioner picked the dates of the
contract to coincide with termination of the practice of sending money to Bermuda,
which was supposed to stop on December 31, 1995. While he was preparing the
contract, he looked out the window of his home and observed his gardener mowing
the lawn. Petitioner signed the name of his gardener as the “managing director”
executing the contract on behalf of DCIL.
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[*7] Petitioner, Gomes, Reed, and Michael Griffin devised a scheme referred to as
“Project Phoenix” to conceal DCI’s true income from the Internal Revenue Service
(IRS). This scheme involved discarding copies of checks and deleting information
from DCI’s computer database. However, the revised computer records were not
provided to the IRS.
On February 26, 2004, petitioner, Gomes, and Reed were indicted on tax
evasion charges. Gomes and Reed pleaded guilty. Petitioner was tried and, on
January 25, 2007, he was convicted of two counts of tax evasion under section 7201
with respect to his 1995 individual return and DCI’s 1995 corporate return. He was
also found guilty of conspiracy to defraud the United States. He was sentenced to
five years in prison and completed his sentence in June 2011.
Beginning with tax year 1996, DCI elected S corporation status. In 1997,
petitioner converted DCI to a Massachusetts business trust. In 2004, the trust’s
name was changed to Driftwood Massachusetts Business Trust (Driftwood).
Driftwood filed Federal income tax returns as an S corporation from 2004 through
2010.
DCI ceased operations in 2004 and became insolvent as a result of the
criminal investigation of petitioner. The last gross receipts reported by DCI or
Driftwood were $4,615,479 for 2004. The DCI and Driftwood returns reported
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[*8] loans from petitioner totaling $2,141,786 from 2001 through 2010 and
deducted legal and consulting expenses that related to defense of the criminal
proceedings against petitioner. The amounts deducted from 2000 through 2010
totaled $3,961,122.
Payments to petitioner’s two daughters for their assistance in case
preparation, processing payments to the Government, and subsequent State
investigations of petitioner’s State tax liability were deducted on the corporation’s
tax returns as consulting expenses, with the resulting losses claimed by petitioner as
the owner of the S corporation. Payments to a clemency attorney after petitioner’s
conviction were also claimed as corporate legal fees for 2008.
On May 5, 2009, respondent issued a notice of deficiency for DCI’s 1993,
1994, and 1995 tax years. DCI did not contest the notice, and on October 19, 2009,
the following amounts were assessed against DCI:
1993 1994 1995
Tax $622,455.00 $889,445.00 $1,321,449.00
Fraud penalty 466,841.25 667,083.75 991,086.75
Total 1,089,296.25 1,556,528.75 2,312,535.75
Because of DCI’s insolvency, efforts to collect the assessed liabilities from its assets
would be futile.
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[*9] In the notice of transferee liability, respondent determined that the value of
property transferred to petitioner was as follows:
1993 1994 1995
Value of Property $2,044,106.00 $2,522,944.00 $4,356,279.00
Transferred to You
The above named transferee is liable for the lesser of the value of the
property transferred, plus interest as provided by law, or the balance of
the liability, plus accrued interest. Accordingly, the transferee’s
liability for the 1993, 1994 and 1995 assessed liability of the transferor
is limited to the above stated value of property transferred to him for
the three years.
The value was determined to be the amounts transferred from the Bermuda DCIL
account back to petitioner’s Fidelity accounts.
OPINION
Section 6901(a) provides that the liability, at law or in equity, of a transferee
of property “shall * * * be assessed, paid, and collected in the same manner and
subject to the same provisions and limitations as in the case of the taxes with
respect to which the liabilities were incurred”. Section 6901(a) does not
independently impose tax liability upon a transferee but provides a procedure
through which the IRS may collect unpaid taxes owed by the transferor of the
assets from a transferee if an independent basis exists under applicable State law
or State equity principles for holding the transferee liable for the transferor’s
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[*10] debts. Commissioner v. Stern, 357 U.S. 39, 45 (1958); Hagaman v.
Commissioner, 100 T.C. 180, 183 (1993). Thus, State law determines the elements
of liability, and section 6901 provides the remedy or procedure to be employed by
the Commissioner as the means of enforcing that liability. Ginsberg v.
Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), aff’g 35 T.C. 1148 (1961). The
IRS bears the burden of proving that the transferee is liable as a transferee of
property of a taxpayer but does not have the burden of proving that the taxpayer was
liable for the tax. Sec. 6902(a); Rule 142(d). The existence and extent of transferee
liability are determined according to the law of the State where the transfer
occurred--in this case, Massachusetts.
Before October 6, 1996, the applicable law was the Massachusetts Uniform
Fraudulent Conveyance Law (MUFCL). Mass. Gen. Laws ch. 109A (repealed
1996). On July 8, 1996, Massachusetts enacted the Uniform Fraudulent Transfer
Act (MUFTA), striking out the MUFCL in its entirety. Uniform Fraudulent
Transfer Act, 1996 Mass. Acts 830. MUFTA was made effective October 6, 1996.
Id. Although the transfers in issue from DCI to DCIL occurred before the effective
date of MUFTA, some of the transfers from DCIL to the Fidelity account occurred
after the effective date. Under either law, transferee liability may result from actual
fraud.
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[*11] The MUFCL provided for liability where either actual fraud or constructive
fraud is present. Mass. Gen. Laws ch. 109A, secs. 4 - 7 (repealed 1996).
Specifically, with respect to actual fraud, MUFCL sec. 7 provided that a debtor’s
conveyance made “with actual intent * * * to hinder, delay or defraud either present
or future creditors, is fraudulent as to both present and future creditors.”
Under MUFTA, transferee liability arises where there is either actual or
constructive fraud. Mass. Ann. Laws ch. 109A, secs. 4 - 7 (LexisNexis 2005).
With respect to actual fraud, MUFTA sec. 5 provides that “[a] transfer made * * *
by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before
or after the transfer was made * * * if the debtor made the transfer * * * with actual
intent to hinder, delay, or defraud any creditor of the debtor”.
Petitioner does not give us any reason to doubt that the transfers from DCI to
DCIL to avoid tax on DCI’s income and to enable transfers of unreported income to
petitioner’s Fidelity accounts were fraudulent as to respondent as a creditor. The
evidence of fraud is compelling. The evidence shows transfers of funds to avoid
payment of Federal income tax, concealment of income, fabrication of records, false
representations to IRS personnel, and other indicia of actual fraud. Thus we need
not discuss principles of constructive fraud.
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[*12] Petitioner does not argue that respondent’s proof is lacking as to any element
of transferee liability under Massachusetts law, and we conclude that respondent’s
burden of proof as to liability has been satisfied. Petitioner asserts that his liability
is limited to $7,358,394 (plus interest as provided by law), which is the amount
respondent determined to be “dividend income” in a separate audit in relation to
petitioner’s individual income tax liabilities for the years in issue. Alternatively
petitioner agrees that his maximum liability is $8,923,329 as determined in the
notice of transferee liability but disagrees with his interest liability.
The “dividends” determination of petitioner’s individual tax liability in a
separate proceeding is not material here. The stipulated evidence in this case
establishes the larger amounts transferred to petitioner’s Fidelity accounts during the
three years in issue.
The real difference between the parties, however, relates to the interest for
which petitioner is liable as a transferee. Petitioner argues that he is liable for
interest under Massachusetts law only from the time of the notice of liability. He
cites only Massachusetts law relating to prejudgment interest in tort cases.
Respondent argues that, under applicable Federal law, petitioner is liable for
the interest accruing on DCI’s liabilities because fraudulently transferred assets
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[*13] were in his hands before DCI’s liabilities for each year accrued on March 15,
1994, 1995, and 1996. Moreover, the value of the fraudulently transferred assets
petitioner received each year exceeded the tax and penalty owed by DCI for 1993,
1994, and 1995 as of March 15 of the following year. Thus, according to
respondent, section 6901(a) applies, and interest on DCI’s deficiencies runs from
the date the tax was due until paid, and section 6601(e)(2)(B) provides the same
period for interest on the fraud penalties due from DCI. See Estate of Stein v.
Commissioner, 37 T.C. 945, 961 (1962); Lowy v. Commissioner, 35 T.C. 393, 396-
397 (1960); Butler v. Commissioner, T.C. Memo. 2002-314.
Respondent concedes in his reply brief that the
Notice of Liability would have been clearer if it had omitted in the
statement of DCI’s assessed liabilities the amount of interest that
respondent assessed, as a routine matter, at the same time he assessed
the tax and penalties. However, the inclusion of this extraneous
information does not invalidate the notice or prohibit respondent from
taking the position, fully supported by the law and not dependent on
any new facts causing surprise to petitioner, that interest runs on the
deficiencies from the due dates of DCI’s returns because the amounts
transferred to petitioner, even under petitioner’s own reckoning,
exceed the amount of assessed tax and penalties.
In other words, respondent is not claiming that petitioner is liable for all of the
interest that has accrued on DCI’s assessed deficiencies and penalties. The
interest for which petitioner is liable is separate and is accruing on the transferee
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[*14] liability determined in the notice. That interest is the amount due under
Federal law and accrues from the time DCI’s payments were due. See Lowy v.
Commissioner, 35 T.C. at 396. Petitioner attempts to distinguish Lowy and Butler
by arguing that the values of the transferred assets in those cases exceeded the
transferors’ liabilities, but that is the same situation as exists here when the interest
assessed against DCI is disregarded. We agree with respondent’s arguments that
interest on the deficiencies and penalties runs against petitioner as of the time that
DCI’s returns were due.
Nature of the Diverted Receipts
Petitioner next argues that the funds transferred to him from user accounts
were payments for his intellectual property and not income of DCI. Respondent
argues that this explanation is not credible because petitioner was not paid for his
intellectual property after 1995, when, according to petitioner, the only change in
DCI’s operation was that the income was retained by DCI. During the earlier years,
DCI received only reimbursement for expenses of the events involved in the user
accounts although DCI employees performed organizational, promotional,
operational, and accounting services in relation to those events. Petitioner was
paid a substantial salary from DCI, including $850,000 in 1995. The argument
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[*15] that all profit from the user group events was additional compensation to
petitioner is not reasonable or credible.
Petitioner asserts that forming DCI as a C corporation was a mistake because
tax at the corporate level could have been avoided if S corporation status had been
elected earlier. He testified: “[W]e’d gotten into this whole mess any way, because
it was like, well, why should I be paying double taxes. We didn’t want to pay
double taxes. Why should you have, basically, a family business, and you are
paying double taxes.” If his present contention is correct, there would have been no
“double taxation” issue because the profits earned on DCI’s operations would have
been deducted as compensation to him.
Petitioner argues in his brief that Reed confirmed that the diverted funds
were payments for petitioner’s intellectual property. Reed’s testimony to that
effect was only in response to leading questions from petitioner’s counsel. She
also testified that from her standpoint petitioner and DCI were the same. She
followed his instructions about transferring funds to Bermuda and knew that the
funds were not being reported on DCI’s tax returns. The scheme by which DCI
gross receipts were diverted to Bermuda was terminated so that prospective
purchasers of DCI’s business could be shown DCI’s true earnings. All of these
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[*16] explanations and all contemporaneous evidence concerning DCI’s operations
are inconsistent with the current claim that the funds were not DCI’s income.
In several other respects, we believe that petitioner’s testimony is improbable
and unreliable. He claims, for example, that he “had no clue” that his attorney was
going to give the bogus contract between DCI and DCIL to the IRS. He claims
naivete about the tax reporting of DCI and the audit of DCI, asserting that Reed and
the accountants were responsible for it, but this scenario is unconvincing in view of
his intelligence and education, his concern with double taxation, and the deliberate
and omitted evasion of personal income tax on millions of dollars of income.
If the transfers from DCI’s user accounts were for bona fide corporate
expenses, they would have been deductible to the corporation and there would not
have been a concern about double taxation or about concealing DCI’s unreported
income. Because the amounts transferred were taxable to petitioner in either event,
and he has been punished for failing to report the income on his personal tax returns,
he sees no downside in attempting to rewrite history. The claim that petitioner was
receiving payments for his intellectual property is improbable and
belated, and we do not accept it.
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[*17] Nature of Loans to DCI or Driftwood
Finally, petitioner claims that his liabilities should be reduced by the amounts
of certain transfers back to DCI accounts from 2001 through 2010 that were
originally recorded as loans to DCI. He asserts that the amounts used to pay
attorney’s fees and consulting expenses were properly regarded as expenses of the
corporation because defending the prosecution defended the business of DCI. He
testified that after DCI assets were sold, he loaned personal funds to the corporation
to pay his legal bills because he was advised by his criminal defense attorney, his
counsel of record in this case, that the legal bills were properly chargeable to and
deducted by the S corporation as legal expenses.
Petitioner has not, however, presented any invoices or other evidence of a
proper apportionment of fees for his personal defense, defense of the count for
evasion of corporate taxes, or work on determining civil tax liabilities. He has
cited neither evidence that the corporation was responsible for the legal and
consulting fees nor authority for the claimed credits. To the extent that there is
testimony about the services performed, that testimony indicates that they were for
petitioner personally. The corporation was out of business when the loans were
made and had nothing to gain or lose by defending or not defending the charges.
The corporation did not contest the civil tax liabilities in response to the notice of
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[*18] deficiency that was the basis of the tax assessed for 1993, 1994, and 1995.
The amounts loaned to the corporation were never available to pay its tax liabilities.
We need not decide whether any of the claimed expenses would be properly
apportioned between petitioner and the corporation, or between deductible or
nondeductible, because we decide only whether loans by petitioner to the
corporation should reduce the transferee liabilities in issue.
It appears that recording loans to a defunct entity, paying expenses and
deducting them on an S corporation return, and passing through the resulting losses
to petitioner’s personal income tax returns was simply a way to create the
appearance that personal expenses were business expenses. In any event, the
amounts that petitioner transferred to DCI accounts were recorded as loans, not as
repayment of income diverted from it in 1993, 1994, and 1995, and he is not entitled
to disregard the contemporaneous characterization. See United States v. Sorrentino,
726 F.2d 876, 883 n.3 (1st Cir. 1984) (citing Moline Props., Inc. v. Commissioner,
319 U.S. 436, 438-439 (1943)). In sum, he contends that his liability as a transferee
for corporate income taxes that he caused to be evaded should be reduced by the
costs of defending himself from the consequences of his fraud. We are not
persuaded that law or reason justifies that result.
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[*19] We have considered the other arguments of petitioner. They are contrary to
the evidence, legally erroneous, or irrelevant. They do not affect our conclusions.
To reflect the foregoing,
Decision will be entered
for respondent.