Watch the Formalities: Government Wins as Court Ignores Taxpayer Structure in Wrongful Levy Case
In WRK RARITIES, LLC v. U.S., ET AL., CaseNo. 4:13cv791, DC OH, 02/29/2016, the taxpayer filed a wrongful levy suit against the government. WRK Rarities, LLC (WRK) is an entity 100 percent owned by William Kimpel (Kimpel) and prior to establishing WRK, Kimpel was the sole owner of Kimpel’s Jewelry and Gifts (KJG). In 2011, the IRS levied KJG’s accounts based on an assessment for unpaid taxes, penalties and interest. This levy produced little because KJG had limited funds and the IRS followed up with a levy on the WRK accounts. They did this by finding that WRK was the “nominee, alter ego and/or fraudulent conveyee of KJG.”
While WRK was not the party that owed the taxes, they had the same ownership, operated a jewelry store in the same location, with the same manager, signage, furniture, fixtures and employees with the same titles and salaries as KJG. In addition to all this, they maintained an account with the same bank and the same signatories. WRK told the IRS that they had purchased KJG’s assets and those funds were in the KJG accounts. The IRS felt that the purchase was not done at an arm’s length price and it did not include “inventory, goodwill or other asserts.”
The IRS’s assertion that WRK was the alter ego of KJG led to the wrongful levy lawsuit. The United States District Court of the Northern District of Ohio Eastern Division (the Court) granted the government’s motion for summary judgment in this matter. WRK had to “initially show that it was not the entity against whom the tax is assessed, has a legally cognizable interest in the property levied, and that the property must have been wrongfully levied upon.” Then the burden shifted to the government to show that there is a “nexus” between KJG and the property levied. The government argued that the IRS has the authority “to levy unpaid taxes on a successor corporation” when it is “merely the alter ego of the predecessor.”
In making its determination, the Court had to consider Ohio state law on alter egos. Based on this, it was clear that the “purchaser of a corporation’s assets is not liable for the debts and obligations of the seller corporation,” but there are four exceptions. In this case, the government showed that WRK was merely a continuation of KJG, and therefore can be held liable for the tax. The Court considered the inadequacy of the compensation and other evidence that WRK was created to escape liability. The Court concluded that “the undisputed facts support the United States’ argument that WRK is merely a continuation of KJG” and “as their alter ego, “WRK may be held liable for KJG’s outstanding tax liability.” If the Court was correct on the facts, this decision appears to be a case study of how to ensure successor liability. Careful planning, formalities and an attempt to ensure an arm’s length transaction would have led to a better result for the taxpayer.
alliantNational, alliantgroup’s national practice, provides subject matter expertise on complex and emerging federal, state and international tax issues as well as legislative and regulatory affairs to help businesses receive timely and precise guidance on all their tax matters. Contact us today to learn how your business can benefit from alliantgroup’s tax consulting services.