William J. Kardash, Sr. v. Commissioner of IRS
2017 U.S. App. LEXIS 14389
| 11th Cir. | 2017Background
- William Kardash was a minority shareholder (575,000 shares) and president of manufacturing at Florida Engineered Construction Products (FECP) from 1979 until 2014; majority shareholders Hughes and Stanton effectively controlled FECP.
- From 2001–2007 FECP incurred large unpaid federal taxes; Commissioner determined FECP owed about $129.13 million and entered a long-term payment agreement rather than levying assets.
- Hughes and Stanton siphoned tens of millions from FECP (decoded later as fraud); Stanton was convicted and Hughes’s estate settled. Kardash was not involved in the siphoning scheme but received transfers from FECP.
- The IRS sought transferee liability under 26 U.S.C. § 6901 for payments FECP made to Kardash: two earlier Advance Transfers (2003–2004) and Dividend Payments (2005–2007). Tax Court found Advance Transfers were replacement compensation (not fraudulent) but Dividend Payments were actually or constructively fraudulent.
- Key contested legal points on appeal: whether § 6901 requires the IRS to exhaust collection against FECP before suing a transferee, whether the Dividend Payments were compensation (value to FECP), and whether a small 2005 payment to Kardash could be grouped with larger 2005 payments to Hughes and Stanton to satisfy FUFTA’s insolvency element.
Issues
| Issue | Kardash's Argument | Commissioner/Defendant's Argument | Held |
|---|---|---|---|
| Whether § 6901 imposes a federal exhaustion requirement before pursuing transferees | § 6901 requires IRS to exhaust reasonable collection efforts against transferor first | § 6901 is procedural; substantive liability is governed by state law (FUFTA) which imposes no exhaustion requirement | No federal exhaustion required where state law provides statutory remedy; FUFTA governs and contains no exhaustion rule |
| Whether Dividend Payments constituted reasonably equivalent value (compensation) | Dividends were substitute compensation for suspended bonuses; FECP received value | Payments were labeled and treated as dividends; no employment contract or evidence tying them to compensation | Payments were dividends in form and substance; FECP did not receive reasonably equivalent value; constructive fraud element satisfied |
| Whether the 2005 Kardashian dividend can be grouped with Stanton/Hughes payments to satisfy insolvency element | Kardash’s 2005 payment was small and unrelated; should not be grouped | Dividends were paid pro rata on share ownership and were part of same series of transactions causing insolvency | Grouping was proper; 2005 payment was part of series that rendered FECP insolvent by Jan 2006 |
| Standard of review for Tax Court findings challenged on appeal | (implicit) factual findings should be reversed if clearly erroneous | (implicit) appellate review defers to Tax Court factual findings | Court applies de novo to legal conclusions, clear-error to factual findings and affirms Tax Court |
Key Cases Cited
- Commissioner v. Stern, 357 U.S. 39 (Sup. Ct.) (§ 6901 predecessor is procedural; substantive transferee liability derived from other law)
- Healy v. Commissioner, 345 U.S. 278 (Sup. Ct.) (federal equity principles require inability to collect from transferor to sustain transferee liability)
- In re Brentwood Lexford Partners, LLC, 292 B.R. 255 (Bankr. N.D. Tex.) (dividend-form payments held not to be compensation absent contract/evidence)
- In re Northlake Foods, Inc., 715 F.3d 1251 (11th Cir.) (shareholder may provide value by altering company’s corporate status in exchange for dividends)
- First Ala. Bank of Montgomery, N.A. v. First State Ins. Co., 899 F.2d 1045 (11th Cir.) (fraud is a factual finding reviewed for clear error)