United States v. Lax
| Decision Date | 31 March 2022 |
| Docket Number | 18-CV-4061(ILG)(PK) |
| Citation | 596 F.Supp.3d 421 |
| Parties | UNITED STATES of America, Plaintiff, v. Moshe LAX, individually, as an executor of the Chaim Lax Estate, as a trustee of the Chaim Lax Family Trust, and as a trustee of the GAMA Trust; Zlaty Schwartz, individually, as executor of the Chaim Lax Estate, as trustee of the Chaim Lax Family Trust, and as a trustee of the GAMA Trust; Shaindy Lax; Judith Lax; J.L., a minor; 299 Hewes Street Realty Corp; 307 Hewes Street Realty Corp; JBAM Realty LLC, a/k/a JBAM Realty 2 LLC; Ben Zion Jacobowitz; Toby Jacobowitz; SL Holdings I, LLC; SL Holdings II, LLC ; SL Holdings III, LLC; SL Holdings IV, LLC; SL Holdings V, LLC; Diamond Dynamics LLC; KGK Jewelry LLC ; Congregation Bais Yehudah D'Ganitch; LX Holdings LLC; Morris Schlager; Gitty Schlager; Joseph Green; Hannah Green; Henny Green; and Hershi Green, Defendants. |
| Court | U.S. District Court — Eastern District of New York |
Kari Larson, Samuel Patrick Jones, Stephanie W. Chernoff, Ali Gadelhak, Philip Leonard Bednar, Steven S. Tennyson, U.S. Department of Justice - Tax Division, Washington, DC, Edward K. Newman, United States Attorneys Office, Brooklyn, NY, for Plaintiff.
Noah Ephraim Shelanski, Law Office of Noah E. Shelanski, New York, NY, for Defendant Moshe Lax.
James John Mahon, Jr., Glenn H. Spiegel, Oliver Edwards, Samantha Allie Lesser, Sarah Emily Klein, Becker & Poliakoff LLP, New York, NY, for Defendant Zlaty Schwartz.
Joseph Y. Balisok, Law Office of Joseph Y. Balisok, P.C., Brooklyn, NY, for Defendant Shaindy Lax.
Paul Thomas Shoemaker, Greenfield, Stein & Senior, LLP, New York, NY, for Defendants Judith Lax, A Minor.
Solomon N. Klein, The Law Office of Solomon N. Klein, New York, NY, for Defendants 299 Hewes Street Realty Corp, Morris Schlager, Gitty Schlager, Joseph Green, Hannah Green, Henny Green, Hershi Green.
Matthew L. Levine, Leah Frankel, Phillips Nizer LLP, Craig E. Penn, NYS Office of Court Administration, New York, NY, for Defendant 307 Hewes Street Realty Corp.
Donald Jay Pols, Beilis & Pols, P.C., Brooklyn, NY, for Defendant JBAM Realty LLC.
Steven Y. Yurowitz, Newman & Greenberg, New York, NY, for Defendants Ben Zion Jacobowitz, Tony Jacobowitz.
Doron Aviram Leiby, Miller Leiby & Associates PC, New York, NY, for Defendant KGK Jewelry LLC.
The United States commenced this civil action against the Estate of Chaim Lax ("Lax Estate"), Judith Lax, Moshe Lax, Zlaty Schwartz ("Schwartz"), and related individuals and entities, to recover millions of dollars that the United States says are owed on unpaid federal tax liabilities.
Pending before the Court are Schwartz's Motion to Dismiss pursuant to Fed. R. Civ. P. 11 and the Court's inherent powers [ECF No. 143], and the United States’ Motion for Partial Summary Judgment [ECF No. 188]. Oppositions to the United States’ motion have been filed by Judith Lax and J.L. [ECF Nos. 191-94], and Schwartz [ECF Nos. 199-203]. Moshe Lax, appearing pro se , submitted a declaration joining in and adopting Schwartz's opposition. [ECF No. 211]. For the following reasons, the Motion to Dismiss is DENIED and the Motion for Partial Summary Judgment is GRANTED IN PART and DENIED IN PART .
Chaim Lax was a real estate developer and diamond merchant in New York; he died in 2008 from stomach cancer
. Am. Compl. [ECF No. 106] at ¶¶ 27, 35. Judith Lax was his wife. Id. at ¶ 29. Moshe Lax and Schwartz are his son and daughter, respectively, and are the executors of the Lax Estate. Id. at ¶ 37.
Between 2005 and 2012, the Internal Revenue Service ("IRS") conducted a series of examinations of the tax returns filed by Chaim and Judith Lax, and the Lax Estate. As a result of these examinations, the IRS made significant assessments against Chaim Lax and the Lax Estate for what it alleges is unpaid income tax. The balances due on these assessments, as of September 23, 2020, is $63,244,515.25; interest and penalties have accrued and will continue to do so until the balances are paid. Decl. of Andrew Barone in Supp. of Pl. United States’ Mot. for Partial Summ. J., dated Nov. 5, 2020 [ECF No. 188-2], at ¶¶ 3-4. Details of the IRS's examinations and assessments are as follows.
Between October 2005 and May 2006, the IRS began examinations of Chaim and Judith Lax's jointly filed federal income tax returns for the 2002, 2003, and 2004 tax years. Am. Compl. at ¶¶ 30, 42. On June 17, 2009, the IRS issued Chaim and Judith Lax Notices of Deficiency advising them that they owed income taxes for 2002, 2003, and 2004. Id. at ¶ 43.
In 2010, the Lax Estate, Moshe Lax and Schwartz (in their capacities as executors of the Lax Estate), and Judith Lax entered into stipulated agreements with the IRS as to Chaim Lax's 2002, 2003, and 2004 federal income tax liabilities. Id. at ¶ 48. In accordance with the stipulated agreements, the U.S. Tax Court entered judgments in favor of the United States on the dates and in the amounts shown below:
| Tax | Date | Tax | Penalty | Total |
| 2002 | 11/22/2010 | $6,277,961.00 | $1,255,592.20 | $7,533.553.20 |
| 2003 | 11/22/2010 | $7,802,857.00 | $1,560,571.40 | $9,363,428.40 |
| 2004 | 11/22/2010 | $6,052,688.00 | $1,526,510.25 | $7,579,198.25 |
Decl. of Philip L. Bednar in Supp. of Mot. for Partial Summ. J., dated Dec. 11, 2020 [ECF No. 188-3] ("Bednar's Dec. 2020 Decl."), at Ex. A (Decision, Est. of Chaim Lax v. Comm'r of Internal Revenue , Dkt. No. 22208-09 (T.C. Nov. 22, 2010)). These amounts have not, to date, been paid.
Chaim Lax failed to file an income tax return for 2006 during his life. Am. Compl. at ¶ 50. On April 6, 2011, after the IRS had opened an examination of Chaim Lax's failure to file a return, Moshe Lax and Schwartz, as executors of the Lax Estate, filed a 2006 tax return on Chaim Lax's behalf. Id. On or about August 16, 2012, an individual who purportedly had a power of attorney for the Lax Estate signed an IRS Form 870, consenting to the IRS's immediate assessment of $5,216,234 in federal income tax for year 2006, plus $2,347,339 in penalties. Decl. of Brent Roberson in Supp. of Mot. for Partial Summ. J., dated Oct. 28, 2020 [ECF No. 188-5], at Ex. A (Form 870). This amount has not, to date, been paid.
In November 2009, the IRS opened an examination of Chaim and Judith Lax's jointly filed income tax returns for the 2007 tax year. Am. Compl. at ¶ 45. The United States alleges that "[i]n or around November 2006, Chaim was diagnosed with stomach cancer
," and that in order to avoid the taxes he owed and that his estate would owe following his death, he "undertook a series of sham transactions designed to shield his assets from collection by the Internal Revenue Service." Id. at ¶¶ 31-32. The United States further alleges that Chaim Lax's children – Moshe Lax and Schwartz – continued these sham transactions following Chaim's death in November 2008. Id. at ¶¶ 32, 39, 58.
One of these allegedly sham transactions involved Chaim Lax's transfer of ownership of LX Holdings to the Lax Family Trust. As consideration for the transfer, Moshe Lax and Schwartz (the trustees of the Lax Family Trust) signed a Self-Cancelling Installment Note ("SCIN") whereby the Lax Family Trust was to pay directly to Chaim Lax $40,750,000, in semiannual payments of $3,887,360, until Chaim Lax died. At that point the note would ‘self-cancel.’ Id. at ¶¶ 64-65. The United States alleges that this transfer was actually made for no consideration and that the Lax Estate should still be responsible for taxes as the owner of LX Holdings. Id. at ¶¶ 66-71.
On February 1, 2010, the IRS issued a Notice of Deficiency to advise Chaim (now deceased) and Judith Lax that they owed income taxes for the 2007 tax year. Id. at ¶ 46. In December 2012, the U.S. Tax Court entered a judgment in favor of the United States regarding the Lax Estate's 2007 tax liability, on the date and in the amount shown in the table below, pursuant to a second stipulated agreement entered into by the Lax Estate, Moshe Lax (in his capacity as executor), and Judith Lax:
| Tax | Date | Tax | Penalty | Total |
| 2007 | 12/4/2012 | $ 273,309.00 | $ 54,662.00 | $327,971.00 |
Bednar's Dec. 2020 Decl. at Ex. B (Decision, Est. of Chaim Lax v. Comm'r of Internal Revenue , Dkt. No. 10587-10 (T.C. Dec. 4, 2012)). Schwartz is not listed in the caption of that proceeding. This amount has not, to date, been paid.
The IRS also conducted an examination of the Lax Estate's Form 706 federal estate tax return. Am. Compl. at ¶ 54. On or about December 3, 2012, Moshe Lax and Schwartz (in their capacities as executors) signed an IRS Form 890, consenting to the IRS's immediate assessment of $4,456,718 in federal estate tax. Decl. of Terrence Fraser in Supp. of Mot. for Partial Summ. J., dated Nov. 9, 2020 [ECF No. 188-4], at Ex. A (Form 890). This amount has not, to date, been paid.
Schwartz moves to dismiss the Amended Complaint in its entirety pursuant to Fed. R. Civ. P. 11(b) and the Court's inherent powers because, she argues, "the government has made allegations that are not grounded in fact, and are obviously contradicted by indisputable facts." Def. Zlaty Schwartz's Mem. of Law in Supp. of Mot. to Dismiss [ECF No. 143-1] ("Schwartz Mot."), at 6. Specifically, she contends that the Government's case is premised on the allegation that Chaim Lax concocted an illegal estate plan following his terminal cancer diagnosis
in November 2006. However, she says, the facts known to the Government show that it was not until at least March of 2007 that Chaim Lax learned he was seriously ill. Id. at 6-7. Furthermore, she asserts that the alleged schemes detailed in the Amended Complaint have previously been examined by the Department of Justice and the IRS and found to be "nothing more than a well-recognized estate planning strategy." Id. at 7. Finally, she identifies three purported "intentional misrepresentations" in the Amended...
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