In re Kardash

• Citation: 573 B.R. 257
• Decision Date: 21 September 2017
• Docket Number: Case No.: 8:16–bk–05715–KRM
• Parties: IN RE William J. KARDASH, Sr., Debtor.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Middle District of Florida

573 B.R. 257

IN RE William J. KARDASH, Sr., Debtor.

Case No.: 8:16–bk–05715–KRM

United States Bankruptcy Court, M.D. Florida, Tampa Division.

Signed September 21, 2017

Alberto F. Gomez, Jr., Johnson Pope Bokor Ruppel & Burns, LLP, Tampa, FL, Erica G. Pless, The Pless Law Firm, P.A., St. Petersburg, FL, for Debtor.

Nicole Peair, Timberlake Annex, Tampa, FL, for U.S. Trustee.

MEMORANDUM OPINION AND ORDER GRANTING DEBTOR'S MOTION FOR SUMMARY JUDGMENT AND SUSTAINING DEBTOR'S OBJECTION TO CLAIM

K. Rodney May, United States Bankruptcy Judge

The parties have filed competing motions for summary judgment on the Debtor's objection to the proof of claim filed by the United States of America on behalf of the Internal Revenue Service (the "United States").¹ The United States asserts that the Debtor's liability from a Tax Court judgment, for his having received about $4.3 million of fraudulent transfers from the corporate taxpayer, is equivalent to a "tax" and, therefore, the claim is entitled to priority as a tax pursuant to 11 U.S.C. § 507(a)(8)(iii). Debtor argues that the liability arose under state fraudulent transfer law ("FUFTA") and should have the status of a general unsecured claim.

Summary judgment is appropriate because the parties have stipulated to all relevant facts.² After considering the pleadings and the arguments made by counsel, summary judgment is due to be granted in favor of the Debtor. Thus, Debtor's objection will be sustained and the United States' claim will be disallowed priority status.

FACTUAL BACKGROUND

From 2003 to 2007, Debtor was an employee and minority shareholder (8.65%) of a now-defunct company, Florida Engineered Construction Products Corporation, d/b/a Cast–Crete ("FECP"). Debtor managed FECP's operations but he was not a "responsible person" under 26 U.S.C. § 6672.

During that period, FECP had revenues in excess of $450 million, but paid no income taxes. A later IRS audit determined that FECP owed over $120 million in taxes for those years. FECP's two controlling shareholders, John Stanton and Ralph Hughes, siphoned substantially all of the cash out of the company.³ By 2005, FECP was insolvent.

In 2005, 2006, and 2007, Debtor received $3,562,490 in dividends on his FECP stock. He reported the dividends on his individual tax returns and paid income taxes on those dividends.

In 2010, the United States commenced an action in Tax Court against Debtor, pursuant to Section 6901(a) of the Tax Code,⁴ to recover the dividends he received in 2005–2007 and bonuses he received in 2003 and 2004. Section 6901(a) provides:

"[t]he amounts of the following liabilities 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 ... [including] [t]he liability, at law or in equity, of a transferee of property ...."

In 2015, the Tax Court ruled that the dividends paid to Debtor in 2005–2007 were fraudulent transfers under Florida law ("FUFTA"),⁵ because they were not made in compensation for his services and FECP was either insolvent when the dividends were paid or caused to become insolvent later by reason of the dividends.⁶ The dividends were found to be constructively fraudulent; actual fraud was not found.⁷ Debtor was found liable for $3,562,490, the amount of the dividends he had received and interest under Internal Revenue Code § 6601 from the date of the Notice of Liability, March 3, 2010.⁸ The Eleventh Circuit affirmed the Tax Court's decision.⁹

Debtor filed for protection under Chapter 11 on July 1, 2016. The United States assessed a liability for the judgment on July 28, 2016, and filed a proof of claim in this case (Claim No. 2) on September 9, 2016, in the amount of $4,376,210.94, including $4,365,810.94 as a priority claim under § 507(a)(8) of the Bankruptcy Code.¹⁰ Debtor has objected only to the priority status of the unsecured claim.¹¹

ANALYSIS

Under § 507(a)(8)(A) of the Bankruptcy Code, the allowed unsecured claims of governmental units have priority over general unsecured claims to the extent that such claims are for "a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition ...."¹² The United States asserts that Debtor's transferee liability is the functional equivalent to a tax for purposes of § 507(a)(8)(A).¹³

But, § 6901(a) of the Tax Code does not by its terms impose a tax. The Debtor's liability to the United States arises from the Tax Court's judgment, which was premised on the legal conclusion that the dividends that Debtor had received were constructive fraudulent transfers—received for less than reasonably equivalent value while FECP was insolvent.¹⁴ The Tax Court summarized the statutory bases for its judgment:

" Section 6901(a)(1) is a procedural statute authorizing the assessment of transferee liability in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the transferee liability was incurred. Section 6901(a) does not create or define a substantive liability but merely provides the Commissioner a remedy for enforcing and collecting from the transferee of the property the transferor's existing liability ."¹⁵

* * *

"Under section 6901(a) the Commissioner may establish transferee liability if a basis exists under applicable State law or State equity principles for holding the transferee liable for the transferor's debts. Comm'r v. Stern , 357 U.S. 39, 42–47 [78 S.Ct. 1047, 2 L.Ed.2d 1126] (1958) ; Bresson v. Comm'r , 111 T.C. 172, 179–180 (1998), aff'd , 213 F.3d 1173 (9th Cir. 2000) ; Starnes v. Comm'r , T.C. Memo. 2011-63. ‘[T]he existence and extent of liability should be determined by state law.’ Comm'r v. Stern , 357 U.S. at 45 . 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. Comm'r , 305 F.2d 664, 667 (2d Cir. 1962), aff'g 35 T.C. 1148 (1961)."¹⁶

In upholding the Tax Court's judgment, the Eleventh Circuit also affirmed the Tax Court's application of Florida law:

"The question for us, then, is what source of law provides the definition of substantive liability in this case? The text of the statute provides a helpful clue. § 6901 discusses the liability of a transferee in terms of "at law or in equity." 26 U.S.C. § 6901(a)(1)(A). As Stern discussed, this statute was passed against a backdrop of various legal and equitable remedies that the Commissioner could use to collect against a transferee—remedies that the Court made clear that § 6901, as a purely procedural statute, left unchanged."¹⁷

In 1994, the Eleventh Circuit ruled, in Baptiste v. Commissioner of Internal Revenue , that "any liability to which section 6901(a) applies is not a tax liability, but rather an independent liability."¹⁸ Baptiste had received life insurance proceeds upon the death of his father.¹⁹ But, there was an estate tax deficiency.²⁰ Thus, the Tax Court found Baptiste liable to repay the insurance proceeds he had received,²¹ plus interest.²² In reviewing the Tax Court's decision, the Eleventh Circuit reasoned that while § 6901(a) is a purely procedural statute, Baptiste was also subject to 26 U.S.C. § 6324(a)(2), which provided a separate liability for estates' transferees:²³

"The language of section 6324(a)(2) does not provide that the liability of a transferee is a tax liability. Rather, it imposes an obligation on the transferee to satisfy the underlying tax liability of the transferor estate. Because the estate's obligation is one in the nature of a tax does not mean the transferee also has a tax liability. "²⁴

"Were transferee liability under section 6324(a)(2) a tax liability, there would be no need for the authorizations and provisions of section 6901(a). In fact, that section would be superfluous and wholly unnecessary, a statutory construction that is both disfavored and unlikely. Accordingly, any liability to which section 6901(a) applies is not a tax liability, but rather an independent liability."²⁵

"Baptiste's liability under section 6324(a)(2), therefore, is not a tax liability, but is an independent personal obligation which, pursuant to section 6901(a), may be collected in a manner similar to that employed in collecting tax liabilities ."²⁶

Faced with a similar issue, this court (per Judge Baynes) likewise determined that transferee liability is not a tax under § 507 of the Bankruptcy Code.²⁷ Citing Baptiste as binding precedent, the Court opined that a determination of transferee liability is "separate and independent of the underlying tax obligation owed by the [transferor]."²⁸ Not being a tax, the transferee liability was not entitled to priority under § 507(a)(8), and is "[a]t best ... a general unsecured claim, assuming a timely proof of claim."²⁹

The above decisions control the outcome here. Debtor's liability is not a tax, but an independent financial obligation, arising under state law, to repay the amount of the dividends he received in 2005–2007.

The Court has considered, but is not persuaded to apply, the cases cited by the United States, particularly the Tenth Circuit's decision in McKowen v. Internal Revenue Service .³⁰ In that case, the debtor had dismantled his business after it failed to pay taxes or file a return; then, he had all of the business assets transferred to himself.³¹ The IRS assessed the debtor for the amount of the asset transfer, under 26 U.S.C. § 6901(a).³² The debtor reopened his prior Chapter 7 case to determine whether that liability had been discharged.³³ On appeal, the Tenth Circuit decided that the transferee liability was equivalent to a tax, under § 6901(a), which provides that transferee liability should be collected "in the same manner and subject to the same provisions and limitations as in the case of taxes with respect to which the...