Schussel v. Werfel

• Decision Date: 08 July 2014
• Docket Number: No. 13–1717.,13–1717.
• Citation: 758 F.3d 82
• Court: U.S. Court of Appeals — First Circuit
• Parties: George SCHUSSEL, Transferee, Petitioner, Appellant, v. Daniel I. WERFEL, Acting Commissioner of the Internal Revenue Service, Respondent, Appellee.

758 F.3d 82

George SCHUSSEL, Transferee, Petitioner, Appellant,
v.
Daniel I. WERFEL, Acting Commissioner of the Internal Revenue Service, Respondent, Appellee.

No. 13–1717.

United States Court of Appeals,
First Circuit.

July 8, 2014.

[758 F.3d 84]

Francis J. DiMento, with whom Jason A. Kosow and DiMento & Sullivan were on brief, for appellant.

Regina S. Moriarty, Tax Division, Department of Justice, with whom Richard Farber, Attorney, Tax Division, Department of Justice, and Kathryn Keneally, Assistant Attorney General, were on brief, for appellee.

Before THOMPSON, STAHL, and KAYATTA, Circuit Judges.

KAYATTA, Circuit Judge.

George Schussel appeals a decision of the United States Tax Court holding him

[758 F.3d 85]

liable, as the recipient of a fraudulent transfer from his former company, for the company's back taxes (including penalties) of over $4.9 million, plus interest of at least $8.7 million. On appeal, he does not dispute that his company fraudulently transferred millions of dollars to him in an effort to avoid paying income taxes to the IRS. What he disputes is how much he owes the IRS as a result of those transfers. First, he argues that the tax court erred in applying the federal tax interest statute, and that he should only have to pay the likely much lower amount of prejudgment interest that would be due under Massachusetts law. Second, he claims that the tax court should have accepted his corrected tax returns as establishing the amount of the assets he misappropriated. Third, he maintains that he should have received credit for money he loaned back to his company, which the company then used to pay his legal bills. Concluding that the tax court calculated prejudgment interest under the wrong statute, we affirm in part, reverse in part, and remand for further proceedings.

I. Background

We have previously recounted George Schussel's efforts to circumvent U.S. tax law, affirming his convictions for tax evasion and conspiracy to defraud the United States. See United States v. Schussel, 291 Fed.Appx. 336 (1st Cir.2008). We recount the basics here, adding only the details necessary to resolve this appeal (most of which were stipulated by the parties).

Beginning in the early 1980s, Schussel operated a Massachusetts corporation called Digital Consulting, Inc. (“DCI”). Until 1996, DCI was a subchapter C corporation.¹ During the relevant period, Schussel controlled 95% of DCI.² Schussel set up an offshore shell company to siphon DCI income into accounts that he controlled, all without paying the requisite corporate or individual taxes. DCI failed to report all of its income to the IRS, and eventually, the IRS issued a notice of deficiency regarding DCI's 1993, 1994, and 1995 tax returns. DCI neither contested nor paid the assessed liabilities. It has been insolvent since 2004.

As we explain below, the IRS can, by statute, collect a person's tax debt by reclaiming assets the debtor has transferred to someone else (a “transferee”). See26 U.S.C. § 6901. On November 24, 2010, the IRS sent Schussel a notice of liability (“Notice”), claiming that he was liable as a transferee for DCI's 1993–1995 tax deficiencies. The Notice claimed that DCI had tax deficiencies of $1,796,477.71, $2,596,817.21, and $3,878,275.77 for those three years “as shown in the attached statement,” and that “[t]his portion of total assessed income tax deficiencies, plus interest as provided by law, constitute your liability as transferee....” In summary, the attached statement provided:

1993	1994	1995
DCI Tax Assesed	$622,455.00	$889,445.00	$1,321,449.00
Fraud Penalty	$466,841.25	$667,083.75	$991,086.75
Interest	$2,249,268.11	$2,752,369.18	$5,467,439.66 3
DCI Funds Diverted to Schussel	$2,044,106.00	$2,522,944.00	$4,356,279.00 4

[758 F.3d 86]

The statement also said that, of DCI's tax liability, “only $2,044,106.00, $2,522,944.00 and $4,356,279.00 [i.e. the amounts transferred] for these respective tax years, plus interest as provided by law from the date of this notice, will be assessed against George Schussel as transferee....” (These sums, not including interest, add up to $8,923,329.) A note at the base of the page explained that Schussel was:

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.

Schussel challenged the Notice in tax court, claiming (among other things) that he should receive credit against any transferee liability for money that he loaned back to DCI. Most of that money, Schussel readily admits, DCI used to cover expenses related to his tax litigation.⁵ According to the stipulated facts and evidence at trial, DCI's gross receipts, legal and consulting expenses, and loans from Schussel amounted to:

Year
Gross Receipts
Legal
Consulting
Loans

2001	$26,773,417	$34,152	$513,440	$500,000
2003	$12,325,807	$21,288	$522,000	$200,000
2004	$4,615,479	$1,034,291	$0	($75,000)
2005	$0	$477,709	$0	$549,194
2006	$0	$409,391	$0	$187,900
2007	$0	$543,790	$0	$77,132
2008	$0	$35,866	$0	$585,747
2009	$0	$22,835	$0	$37,167
2010	$0	$2,834	$0	$4,646

The IRS's answer to Schussel's petition for review asked that the Notice of Liability simply be confirmed. However, its later-filed pretrial memorandum abandoned the limited theory of Schussel's liability for interest advanced in the Notice and Statement. Instead, it argued that Schussel was liable for DCI's back taxes, plus interest as determined under the federal tax interest statute from the due date of DCI's tax returns, and that his liability was not

[758 F.3d 87]

limited to the amount of assets that DCI fraudulently transferred to him.⁶

After trial, the tax court ruled on a large number of issues, only a few of which are relevant to this appeal. As pertinent here, it first determined that Schussel received from DCI fraudulent transfers in the amounts of $2,044,106 during 1993, $2,522,944 during 1994, and $4,356,279 during 1995 to 1997, for a total of $8,923,329. Then, at the IRS's request, the court held Schussel liable for DCI's back taxes, plus prejudgment interest at the federal rate from the respective dates on which DCI's income taxes were due for 1993, 1994, and 1995.⁷ So calculated, prejudgment interest alone totaled approximately $8.7 million by the time the IRS issued the Notice, leaving Schussel liable for over $13.6 million plus further accruing interest at the federal rate. Finally, the tax court refused to give Schussel credit against his liability for the amount he loaned back to DCI from 2001 to 2010, or to limit his liability to the amount of assets he received (no matter how that figure was calculated).

Schussel timely appealed, Fed. R.App. P. 13(a)(1), challenging each of those conclusions. First, he argues that his total liability should have been limited to $7,358,394, the undeclared income figure the IRS used to correct his individual tax returns, or at most to the $8.9 million of DCI assets that the IRS's Notice and Statement claimed he received. Second, he contends that any prejudgment interest on the fraudulently transferred funds should have been assessed at the Massachusetts rate of 12% per year, but only from the date of the 2010 IRS Notice rather than the dates on which DCI's unpaid taxes were due in 1993–1995, resulting in a substantial reduction in his total liability. Third, he argues that he should receive credit, to be counted against his liability, for roughly $2.1 million in loans he made to DCI between 2001 and 2010.

We have jurisdiction under 26 U.S.C. § 7482. We address each of Schussel's arguments, assessing first the question of interest, then the amount transferred, and then whether Schussel should receive credit for any alleged retransfers.

II. Standard of Review

Our review of the tax court's ruling is “in most respects similar to our review of district court decisions: factual findings for clear error and legal rulings de novo.” Drake v. Comm'r, 511 F.3d 65, 68 (1st Cir.2007); see also26 U.S.C. § 7482(a)(1), (c)(1). “The clear error standard of review extends to factual findings based on inferences from stipulated facts.” Capital Video Corp. v. Comm'r, 311 F.3d 458, 463 (1st Cir.2002) (internal quotation marks omitted). “A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” Interex, Inc. v. Comm'r, 321 F.3d 55, 58 (1st Cir.2003) (internal quotation marks omitted). Although the burden is usually on the taxpayer to demonstrate that an IRS ruling is wrong, in transferee cases the IRS bears the burden of showing that the petitioner “is liable as a transferee of property of a taxpayer, but not [of showing] that the taxpayer was liable for the tax.” 26 U.S.C. § 6902(a); see generallyU.S. Tax Ct. R. 142(a), (d).⁸

[758 F.3d 88]

III. Analysis A. The Tax Court Applied the Wrong Framework to Assess How Much Schussel Owes.
1. The Fraudulent Transfer Claim

In its effort to recover sums transferred to Schussel by DCI, the IRS availed itself of the procedures set forth in 26 U.S.C. § 6901. Section 6901 specifies the procedures by which the IRS may administratively assert (among other claims) state law remedies for fraudulent transfers, subject to challenge in tax court.⁹ While the procedures are federal, state substantive law controls in determining whether and to what extent the transferee is liable. See Frank Sawyer Trust of May 1992 v. Comm'r, 712 F.3d 597, 602–03 (1st Cir.2013).¹⁰ Here, nearly all of the transfers are covered by the now-repealed Massachusetts Uniform Fraudulent Conveyance Act (“MUFCA”). Mass. Gen. Laws ch. 109A, §§ 1 et seq. (1995). The few made after October 1996 fall under the Massachusetts Uniform Fraudulent Transfer Act (“MUFTA”). Id. §§ 1 et seq. (2014).

Schussel did...