United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON PLAINTIFF UNITED STATES OF AMERICA'S MOTION FOR SUMMARY JUDGMENT
RICHARD G. STEARNS, District Judge.
The United States filed this Complaint on May 1, 2013, seeking a monetary judgment against defendant Scott Baker for $4.4 million in unpaid federal income taxes assessed by the Internal Revenue Service (IRS) in 2009 and 2010. The United States also sought to enforce related tax liens against real property located at 667 Main Street, Hingham, Massachusetts (the Hingham Property), and sought a judgment against defendant Robyn Baker, individually and as trustee of the C&S Realty Trust and the S&R Realty Trust, for tortious conversion of encumbered assets.
The individual claim against Scott Baker is stayed, pending resolution of his bankruptcy petition (Case No. 13-13618 (Bankr. D. Mass), filed in June of 2013), but the claims against the real property (and against Robyn Baker) are not subject to the bankruptcy stay as the affected assets are not part of Scott Baker's bankruptcy estate. The United States now moves for summary judgment on the non-stayed claims.
The IRS has assessed Scott Baker more than $4 million in unpaid income tax liabilities (consisting of $2, 476, 526 in tax assessments for income tax years 1997-2002, and $1, 960, 924 in accrued penalties and interest as of May 1, 2013). Baker is a self-employed construction manager who currently earns over $80, 000 per year. He was previously involved (beginning in 1997) in the construction of various Planet Fitness gyms as part of his business. Robyn Baker (nee Robyn Gauthier) is Scott Baker's ex-wife. (The couple married on December 12, 1998, and they have two teenage children. They divorced in 2008). They filed joint income tax returns for tax years 1999, 2000, and 2001. They filed separate income tax returns for tax year 2002.
2001 Tax Return
In October of 2002, the Bakers jointly filed their 2001 federal income tax return, reporting an Adjusted Gross Income (AGI) of over $1 million. The Bakers were taxed on roughly a quarter of that income, significantly less than what would have been due, because of reported "paper" losses that reduced their taxable income from $1, 114, 449 to $289, 688. The losses were generated by a "Son-of-Boss" tax shelter scheme.
2002 Tax Return
In December of 2002, Scott Baker, together with a college friend, sold eight Planet Fitness gyms to Bally Fitness for approximately $15 million. Scott Baker received roughly $4, 600, 000 in Bally Fitness stock, which he eventually sold for $3.4 million. See Adv. Proc., Compl. ¶ 5. As noted, Scott and Robyn Baker filed separate tax returns for tax year 2002. Scott Baker, resorting to a second abusive tax shelter to avoid income tax on the gains from the Planet Fitness sale, reported a negative $2.5 million in income on his 2002 return, which he filed on September 23, 2003. He thus claimed a tax refund of $42, 655 for income taxes he had already paid that year, and then amended the couple's joint 1997-2001 tax returns to claim (and receive) additional refunds by carrying-back the uncredited portion of the 2002 losses. As a result, the IRS refunded the Bakers roughly all of the tax amounts they had paid for these earlier years. Scott Baker deposited the Planet Fitness sale proceeds and the tax refunds into an account in the name of the "Scott Baker Family Trust."
The Scott Baker Family Trust
On June 30, 2003, Scott Baker established and became the settlor of the "Scott Baker Family Trust, " a Cayman Island Trust, with a Royal Bank of Canada account in the Cayman Islands. Baker granted himself a one-third beneficial interest in the Trust. The remaining beneficial interests were divided among Robyn Baker and the Bakers' minor children. Scott Baker created the Trust for the purpose of engaging in the tax sheltering transaction used in his 2002 return to offset the $3.4 million gain. See Adv. Proc., Compl. ¶ 7. The entire corpus of the Trust was invested in a fund called "IMA." According to Robyn Baker, at some point in late 2005, the Bakers learned that the investment in IMA was essentially worthless, as it proved to be a Ponzi scheme. See C&S Trustee Dep., 40:1-10.
IRS Examines Scott Baker's 2002 Return and Related Carrybacks
On December 6, 2004, the Bakers signed an agreement with the IRS, pursuant to a Global Settlement Initiative, resolving the claims arising from the use of the 2001 Son-of-Boss tax shelter. See Adv. Proc., Dkt. #41-4. On August 22, 2005, the Bakers purchased the Hingham Property as tenants by the entirety for $1, 622, 500. Also in August of 2005, the IRS opened an examination of Scott Baker's (individually filed) 2002 tax return. While Scott Baker initially elected to participate in a second IRS Global Settlement Initiative, agreeing to pay $1.2 million, he was ultimately removed ...