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Kardash v. Commissioner of IRS

United States Court of Appeals, Eleventh Circuit

August 4, 2017

WILLIAM J. KARDASH, SR., Petitioner - Appellant,
COMMISSIONER OF IRS, Respondent - Appellee.

         Petition for Review of a Decision of the U.S. Tax Court Agency No. 012681-10

          Before WILLIAM PRYOR, MARTIN, and BOGGS, [*] Circuit Judges.

          BOGGS, Circuit Judge.

         Appellant William Kardash challenges the Tax Court's determination that he is liable as a transferee under 26 U.S.C. § 6901 for his former employer's unpaid taxes. For the following reasons, we affirm.


         Appellant William Kardash was a shareholder and employee of Florida Engineered Construction Products Corporation ("FECP"). FECP manufactured concrete lintels and sills for use in construction, particularly new residential construction, and had been doing so in some corporate form since 1955.[1] Kardash joined the company, then called Cast Crete, in 1979 as a plant engineer and was quickly promoted to president of engineering in 1980. When FECP was formed in 1986, Kardash was one of its founding shareholders and was promoted again, this time to president of manufacturing and operations. Kardash remained in this position until he retired from the company in January 2014.

         At all times relevant to this appeal, Kardash owned 575, 000 shares of FECP stock. The company's remaining shares were owned by Ralph Hughes, John Stanton, and Charles Robb. Hughes and Stanton, who served as FECP's chairman of the board and president respectively, each owned 3, 000, 000 shares of stock. Robb served as president of FECP's residential division and owned 75, 000 shares of stock. As the proportion of their stock ownership suggests, Hughes and Stanton effectively controlled the company.

         During the early 2000s, FECP's revenues rose dramatically with the booming housing market. In 1999, FECP earned $39.9 million in revenue, but by 2005, FECP's revenues had risen to $132.2 million. Unfortunately for FECP, however, 2005 represented the high-water mark for the company. By 2007, the housing bubble in Florida had already begun to burst, and FECP's revenues shrank to $55.4 million.

         Throughout this period, FECP paid no federal income tax and its majority shareholders, Hughes and Stanton, siphoned substantially all of the cash out of the company.[2] The two are believed to have used hidden bank accounts and shell corporations to facilitate their fraud undetected. At no point was Kardash, who focused on managing FECP's production operations, involved in the cash-siphoning scheme.

         In 2009, the Commissioner issued a notice to FECP informing the company of its tax deficiencies, additions, penalties, and interest accrued during the years 2001 to 2007. This marked the beginning of a three-year investigation into FECP's assets and other outstanding liabilities. The investigation revealed that FECP's assets had a fair market value of approximately $3, 000, 000. Of some relevance to this appeal, Kardash contests this valuation, arguing that FECP actually possessed cash and equity worth approximately $8, 500, 000.[3] Regardless, the Commissioner never elected to levy FECP's bank accounts or seize its assets. Instead, the Commissioner entered into an agreement with FECP in which the company stipulated that it owed the IRS $129, 130, 131.60, which it would repay in monthly installments of $70, 000. At this rate of payment, FECP would satisfy its tax liability in a little over 150 years. Should FECP begin to afford larger monthly installments, however, the agreement stipulated that the Commissioner could increase FECP's monthly obligation at his discretion.

         While its investigation into FECP's tax liability was still ongoing, the Commissioner began to pursue funds that, he argues, FECP fraudulently transferred to its shareholders. Stanton and Hughes, the majority-shareholder masterminds of the cash-siphoning scheme, were easy targets. Stanton was ultimately convicted on eight counts of federal tax crimes and, per the terms of his sentencing order, required to pay restitution. The Commissioner likewise reached an agreement with the estate of Hughes, who had passed away in 2008. Robb and Kardash, however, contested the Commissioner's determination of liability in the tax court below, arguing that they were not liable as transferees for FECP's outstanding tax liability. Only Kardash's transfers are the subject of this appeal.


         As detailed by the tax court in the proceedings below, the Commissioner's theory of transferee liability focused on two sets of payments from FECP to Kardash: "Advance Transfers" of $250, 000 and $300, 000 in 2003 and 2004 respectively, and "Dividend Payments" of approximately $1.5 million, $1.9 million, and $57, 500 in 2005, 2006, and 2007. According to the Commissioner, all of these payments were actually or constructively fraudulent transfers under the Florida Uniform Fraudulent Transfer Act ("FUFTA") because FECP did not receive any value from Kardash in exchange and FECP was insolvent or the transfers led to FECP's insolvency. Kardash argued that both the Advance Transfers and Dividend Payments were designed to replace his lucrative bonuses, which FECP had temporarily suspended in 2003. Thus, according to Kardash, the transfers were part of his compensation package and not fraudulent. In any event, Kardash reasoned, FECP did not become insolvent until 2006, meaning that any prior payments could not satisfy the insolvency element of constructive fraud. Kardash also argued that, FUFTA notwithstanding, the IRS failed to exhaust all reasonable collection efforts against FECP before pursuing transferee liability against him, in violation of 26 U.S.C. § 6901.

         The tax court below rejected Kardash's exhaustion argument out of hand, reasoning that the existence of any exhaustion requirement depended upon state law, and FUFTA did not impose one. Although the tax court agreed with Kardash with respect to the Advance Transfers, reasoning that they were designed to replace FECP's prior bonus program, it held that the Dividend Payments were not compensation and therefore constituted actual or constructive fraud. The tax court further held that, despite the fact that FECP only became insolvent in 2006, Kardash's 2005 dividend payment could be grouped together with the 2005 dividend payments to Stanton and Hughes and considered constructively fraudulent ...

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