The Tax Court decision in the case of William Kardash and Charles Robb is one of those where the back story is quite a bit more interesting than the decision. The problems of Mr. Kardash and Mr. Robb are collateral damage in the collapse of Florida Engineered Construction Products Corp (FECP). Their former boss John D. Stanton currently resides at a low security federal correctional institution in Sumterville FL having been sentenced to 10 years and payment of $37,816,875 in 2013. According to the DOJ news release
According to evidence presented at trial, Stanton was the former president of Florida Engineered Construction Products Corporation ("FECP"), more commonly known as Cast Crete Corporation. FECP/Cast Crete manufactured and sold concrete construction products. As president of the company, Stanton interfered with the administration of the tax laws by impeding an Internal Revenue Service ("IRS") audit of the company, creating and backdating two fraudulent demand promissory notes totaling $500,000,000, causing false Forms 1099 to be filed with the IRS, failing to file corporate tax returns on behalf of the company, and other acts of obstruction and concealment. During approximately 2004 through 2008, the company made well over $100 million and failed to file a single corporate income tax return.
The Florida Uniform Fraudulent [*24] Transfer Act (FUFTA) does not require a creditor to pursue all reasonable collection efforts against the transferor. Therefore, respondent was not required to exhaust collection efforts against FECP, and petitioners may be held liable.
An analysis of the experts' reports shows that FECP was insolvent for all transfers starting in 2005. It is clear FECP was insolvent once the dividends were transferred to the shareholders beginning in 2005, essentially stripping the company of its assets. Other than the tax liability of FECP, there is no evidence that FECP was not paying its debts as they became due. Further, even with the advance payments in 2003 and 2004, FECP's assets exceeded the fair value of its [*35] debts. However, with the large distributions of money to the shareholders starting in 2005 and the accumulation of the tax liability, FECP's assets did not exceed the fair value of its debts. We find that FECP was solvent for the years 2003 and 2004 and insolvent for the years 2005, 2006, and 2007.
The corporate veil exists to protect shareholders from actions taken against the corporation. However, as is seen in Kardash, this protection is not unlimited. Proper capitalization and record keeping, segregation of corporate and personal assets, and following corporate formalities are all requirements necessary to protect the veil. Where significant undercapitalization is present, specifically undercapitalization caused by fraud, the protections afforded by the veil are pierced exposing the shareholders to liability. Taxpayers should take note of the decision in Kardash as it serves as a reminder to respect the separate and distinct nature of the corporate entity.
An interesting case, and what seems to be a tough result for some transferees who were screwed by their employer.
Moral of the story is that anyone receiving funds from an entity that does not pay its taxes can be subject to transferee liability and the recipient of the funds should be sure to document the goods or services provided to the company for which payment is received or risk transferee liability.