The opinion of the court was delivered by: Matsumoto, United States District Judge:
This case arises out of efforts by the United States (the "government") to collect taxes owed by Jacob Evseroff ("Evseroff") by accessing assets currently held by a trust that Evseroff established in 1992 for the benefit of his two sons (the "Trust"). The United States argues that Evseroff's attempts to transfer various pieces of his own property to the Trust should not frustrate the government's collection efforts under several legal theories. A bench trial was held before Judge David G. Trager on November 7 and 8, 2005, and a post-trial order was entered on September 27, 2006 that rejected the government's claims, holding that the Trust property could not be used to satisfy Evseroff's tax debts (the "Post-Trial Order").
The government appealed the Post-Trial Order, and on March 21, 2008, the United States Court of Appeals for the Second Circuit reversed and remanded. In its remand order, the Second Circuit directed the district court to reconsider its findings regarding whether certain conveyances by Evseroff to the Trust were actually fraudulent and whether the Trust was Evseroff's alter ego or held property as his nominee. For the reasons discussed below, the government may collect on all property held by the Trust.
This case has been discussed in several prior opinions. See United States v. Evseroff, No. 00-CV-6029, 2001 WL 1571881 (E.D.N.Y. Nov. 6, 2001) (entering judgment on the judgment of the United States Tax Court regarding Evseroff's tax liability) ("Evseroff I"); United States v. Evseroff, No. 00-CV-6029, 2002 WL 1973196 (E.D.N.Y. July 8, 2002) (allowing Evseroff to designate an expert to testify as to the value of his assets and ordering that interest on Evseroff's tax debts continue to accrue) ("Evseroff II"); United States v. Evseroff, No. 00-CV-6029, 2003 WL 22872522 (E.D.N.Y. Sept. 30, 2003) (denying the government's summary judgment motion on its claim to access the Trust's assets) ("Evseroff III"); Evseroff v. United States, No. 03-CV-0317, 2004 WL 3127981 (E.D.N.Y. Sept. 22, 2004) (rejecting Evseroff's claim under the Taxpayer Bill of Rights) ("Evseroff IV"); United States v. Evseroff, No. 00-CV-6029, 2006 WL 2792750 (E.D.N.Y. Sept. 27, 2006) (finding, after a bench trial, that the government could not access assets held by the Trust) ("Evseroff V" or the Post-Trial Order). It is assumed that the reader has some familiarity with these decisions and, therefore, the relevant facts and procedural history are described only as necessary below.
Evseroff's tax liability arose primarily from his decision to invest in a series of tax shelters between 1978 and 1982 that generated deductions which were later disallowed by the Internal Revenue Service ("IRS"). Evseroff III, 2003 WL 22872522, at *1.*fn1
Evseroff was first notified that he had outstanding tax liabilities in December 1990, when he received a letter from the IRS after being audited. This letter indicated that he owed $227,282 in taxes and penalties. Evseroff V, 2006 WL 2792750, at *1. Evseroff received another letter from the IRS in January 1991, and the parties stipulated that, as of December 6, 1990, Evseroff owed $647,549.40 in back taxes and accrued interest. Id. In January of 1992, the IRS sent Evseroff a notice of deficiency indicating that he had accrued more than $700,000 in tax liability. Id. at *2.
Also in January of 1992, Evseroff met with an attorney to set up the Trust. Id. It is unclear whether Evseroff first met with the attorney about the Trust before or after receiving the January 1992 letter from the IRS. Id. In April 1992, Evseroff challenged the IRS's calculation of his tax liabilities in a petition to the United States Tax Court. Id. In June 1992, the Trust was created, with Evseroff's sons as the named beneficiaries. Evseroff III, 2003 WL 22872522, at *2. Also in June 1992, Evseroff transferred approximately $220,000 to the Trust ("the $220,000"). Id. In October 1992, Evseroff transferred his primary residence, located at 155 Dover Street in Brooklyn ("the Dover Street Residence"), to the Trust. Id. In November of 1992, the Tax Court entered judgment against Evseroff in the amount of $209,113 in taxes and penalties and $560,000 in interest. Evseroff V, 2006 WL 2792750, at *2.
The particulars of the transfer of the Dover Street Residence are set forth here in detail. Evseroff received no consideration for the deed transferring the Dover Street residence to the Trust. (See Deposition of Jacob Evseroff dated February 7 and 21, 2002 ("J. Evseroff Dep."), Ex. 12 (the "Transfer Agreement").)*fn2 Pursuant to the Transfer Agreement*fn3 , Evseroff was allowed to live in the house and pay the expenses as he had before.
(Id.) Evseroff did not pay the Trust any cash rent, but he was responsible for the expenses of the Dover Street Residence, such as the mortgage and taxes on the property. (Id.) Moreover, the Transfer Agreement specified no end date after which Evseroff's right to live in the Dover Street Residence expired. (Id.) There is no evidence that the Trust assumed Evseroff's mortgage obligations. The Transfer Agreement did not give Evseroff the power to sell the home, id., and Evseroff never attempted to do so, Evseroff V, 2006 WL 2792750, at *4. The fair market value of the Dover Street Residence in 1992 was $515,000. (United States ("Gov't") Ex. 6 at 5; ECF No. 190, Defendant's Post-Remand Memorandum of Law ("Evseroff Mem.") at A-1.) In 1995, the payments on the mortgage were $1,044 per month. (ECF No. 186-3, United States' Post-Remand Supplemental Memorandum ("Gov't Mem.") at 3; Evseroff Mem. at A-3.) In 1992, the mortgage was scheduled to be paid off in approximately five years. (Tr. at 91-93; Evseroff Mem. at A-3.)
With respect to the management of the Trust, a series of Evseroff family friends and business associates served as trustees. Evseroff III, 2003 WL 22872522, at *9. There is little evidence that they were actively involved in managing the Trust or its assets. Indeed, one trustee appears to have believed that he had no responsibilities until Evseroff's death. (Transcript of Deposition of Barry Schneider dated January 3, 2002 ("Schneider Dep. Tr.") at 20.) The accounting work for the Trust was performed by Frederick Blumer, an accountant who also performed accounting work for Evseroff and Evseroff's law firm. Evseroff III, 2003 WL 22872522, at *3. The accountant was not paid for his work on behalf of the Trust, which he did as a professional courtesy to Evseroff. Id. The Trust's tax returns took Blumer between one-half hour and an hour to prepare. (Transcript of Deposition of Frederick Blumer dated February 21, 2002 ("02/21/02 Blumer Dep. Tr.") at 39.) The Trust's tax statements were apparently never even sent to the trustees, and instead were sent directly to Evseroff. Evseroff III, 2003 WL 22872522, at *3, *11.
Between 1992 and 1998, the Trust did not record Evseroff's payment of expenses for the Dover Street Residence as income.*fn4
(02/21/02 Blumer Dep., Exs. 1-7.) The Trust also did not claim the mortgage interest deduction for the Dover Street Residence between those years, though it did claim the deduction for real estate taxes between 1994 and 1998. (Id.) Indeed, the Trust never assumed the mortgage for the Dover Street Residence. (Gov't Mem. at 3; Evseroff Mem. at A-2, A-3.) Evseroff also remained the named beneficiary of the flood and fire insurance policies on the Dover Street Residence.
(J. Evseroff Dep., Exs. 32-33; Evseroff Mem. at A-7.)
Several other facts bear generally on Evseroff's financial affairs. For one, Evseroff had a wife from whom he had been separated for eleven years at the time he created the Trust. Evseroff III, 2003 WL 22872522, at *2 n.3. Evseroff would later state that one of his reasons for setting up the Trust was to ensure that his two sons, rather than his estranged wife, received the benefit of his estate. Id. at *2. Additionally, he purchased a home in Florida in September of 1991. Evseroff V, 2006 WL 2792750, at *2-3. He apparently believed that the Florida home could not be seized by the IRS. Id. at *2.
Starting in 1997, Evseroff moved his funds around from place to place and, at one time, had his sons hold money for him rather than establishing a bank account. Id. at *3; Evseroff III, 2003 WL 22872522, at *5-6. Further, Evseroff admitted that he kept personal funds in his law firm checking account and wrote checks on the account to pay for some personal expenses because he was concerned that the IRS would seize funds from his personal checking account. (Tr. at 72-73, 82-85; see also J. Evseroff Dep., Ex. 28.)
Evseroff's financial situation at the time of his transfer of the Dover Street Residence and the $220,000 to the Trust is difficult to discern with precision. Two points, however, are clear: (1) Evseroff was technically solvent after these transfers despite his tax debts, and (2) Evseroff's readily accessible assets*fn5 were insufficient to satisfy his tax debt.
First, with regard to Evseroff's solvency, the court found in its Post-Trial Order that on October 18th, 1992 - just ten days after Evseroff transferred the Dover Street Residence to the Trust - Evseroff's tax liabilities totaled $770,530.64. Evseroff V, 2006 WL 2792750, at *2-3. Evseroff's total assets, after and excluding the two transfers involving the Dover Street Residence and the $220,000, could be reasonably estimated at anywhere between $847,342*fn6 to $1,422,646.*fn7 See id. at *3-5. Thus, as of October 18, 1992, he had assets valued somewhere between $76,811 and $652,115 over and above his tax liabilities. See id. Regardless of where within that range the value of Evseroff's assets actually fell, the results of the fraudulent transfer, nominee, and alter ego analyses would be the same.
Second, with regard to Evseroff's readily accessible assets, those assets were insufficient to satisfy Evseroff's tax liabilities. In the Post-Trial Order, the court identified two readily accessible assets in Evseroff's possession: his $230,000 Florida residence and his $75,575 law practice. See id. at *3-4. The court did not find Evseroff's retirement accounts to be readily accessible because the government could be delayed in its efforts to collect future distributions from the $355,304 in Evseroff's retirement accounts.*fn8 Id. at *5 n.7. In addition, the court heard evidence that Evseroff moved his cash assets from one account to another and hid them in his law practice checking account, with his sons, and in his sons' businesses in an effort to prevent the United States from collecting his cash assets. Evseroff V, 2006 WL 2792750, at *3; (see Tr. at 72-73, 82-85; J. Evseroff Dep., Ex. 28; 02/21/02 Blumer Dep., Ex. 19). Thus, considering only Evseroff's readily accessible assets, the law practice and the Florida residence, those assets would be worth considerably less than Evseroff's tax debt. The value of Evseroff's law practice and Florida Residence totaled a mere $305,575, which was almost $465,000 less than his tax debt. See Evseroff V, 2006 WL 2792750, at *3.
At the bench trial held before The Honorable David G. Trager on November 7 and 8, 2005, the government pressed three theories for recovering assets from the Trust: (1) that Evseroff transferred assets to the Trust through constructively fraudulent conveyances; (2) that Evseroff transferred assets to the Trust through actually fraudulent conveyances; and (3) that the Trust was Evseroff's alter ego/nominee. Id. at *4-7.
Evseroff claimed that his motivation in setting up the Trust was estate planning. Id. at *2. At the time that Evseroff started the process of setting up the Trust, he was 68 years old and had a wife from whom he had been separated. Id. at *2-3. He testified that he set up the Trust so that (1) his sons would get the benefit of his estate, (2) his estranged wife would not receive a portion of his assets, and (3) he could avoid the estate tax. Id. at *2. The government, by contrast, argued that his motive in setting up the Trust was to avoid his outstanding tax debts.
In the Post-Trial Order, Judge Trager noted that Evseroff's motives were mixed, specifically that:
At trial, it became apparent that Evseroff had mixed motives in establishing the Trust: he was concerned about his separated wife taking a share of his estate, he wished to provide for his two unmarried sons who were living with him and he was concerned about the government's potential collection efforts. All of these motives were present. If the issue were decided today, based on all that happened in the interim, it is clear that his tax problems would be the predominate concern. However, when these events occurred, the separation from his wife and need for estate planning based on this separation was much more at the forefront of his life.
Id. at *3. With respect to the government's legal arguments, the Post-Trial Order found that the property transfers to the Trust were neither constructively nor actually fraudulent, based primarily on the fact that Evseroff was still solvent, despite his tax debts, after transferring both the Dover Street Residence and the $220,000 to the Trust. Id. at *5-6. The Post-Trial Order also rejected the government's claim that the Trust was either Evseroff's alter ego or that it held property as his nominee. Id. at *6-7. With respect to the latter two findings, the Post-Trial Order reasoned that Evseroff's creation of the Trust was not primarily motivated by his desire to avoid the government's collection efforts. Id. at *7. The Post-Trial Order also noted that there was no evidence that Evseroff had used or controlled any of the money in the Trust, id., and that he was solvent at the time of the transfers, id. at *6. Finally, the Post-Trial Order discussed the fact that Evseroff provided valuable consideration to the Trust in exchange for the use of the Dover Street Residence in that he paid the mortgage and other expenses related to the property. Id. at *7.
The government appealed and the Second Circuit reversed and remanded by summary order. United States v. Evseroff, 270 F. App'x 75 (2d Cir. 2008) (summary order).*fn9 Regarding the actual fraud finding, the Second Circuit held that a finding that the transfers did not leave Evseroff insolvent did not preclude a finding that the transfers constituted actually fraudulent conveyances. Id. at 77. On remand, the Second Circuit directed the district court to consider both ...