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Sunday, September 22, 2019

U.S. Court of Appeals for the 11th Circuit rules that victim of tax fraud still liable for IRS payments

By Olivia Olsen | Aug 16, 2017

ATLANTA — A federal appeals court has affirmed a lower court's decision to rule in favor of the Internal Revenue Service (IRS) in a tax fraud case involving William Kardash. 

On August 4, the U.S. Court of Appeals for the 11th Circuit determined that although Kardash was a victim of his former business partners’ poor practices, he is still responsible for the funds he received that belong to the federal government.

Kardash, a shareholder and employee of Florida Engineered Construction Products Corporation (FECP), held 575,000 shares in the company along with Ralph Hughes, John Stanton and Charles Robb. Hughes and Stanton, however, controlled the company, according to the appellate court's decision. 

FECP had several lucrative years between 1999 and 2007, when the housing bubble burst. During this time, Hughes and Stanton allegedly did not pay any income tax and instead siphoned the money from the company. Kardash, however, was not a party to the fraud or was even aware of it. 

The IRS launched an investigation in 2009 and its commissioner determined that FECP fraudulently transferred to its shareholders, including Kardash, funds owed to the IRS

While the IRS argued that several payments made to Kardash between 2003 and 2007 as “advanced transfers” and “dividend payments” were fraudulent, Kardash argued that they were used to replace his bonuses that had been suspended in 2003. Though the courts agreed that the advanced transfers had replaced his bonus, it held that the dividends were fraudulent, and, therefore, the money is owed to the IRS.

“I think the case was correctly decided,” Steve R. Johnson, a law professor at the Florida State University College, told the Florida Record

Johnson said he appreciated the court’s recognition of the human realities of the situation and noted that Kardash was not the villain. 

“He was a victim of these two other guys who looted the company, and as a result of what they did, the IRS was cheated," Johnson said. "The IRS is now using its legal rights to get back its money.” 

The IRS has the legal right to reclaim the money that was owed to them regardless of who was responsible.

“Transfer liability is a very complex area of the law,” Johnson said. It sits at the “intersection of multiple conflicting currents.” 

Though Kardash and his attorneys were able to make compelling arguments, the fact remains that the money belongs to the IRS, and it has the right to collect it. 

Johnson advises people who could find themselves in this situation to be diligent and careful about who you go into business with. 

"You have to monitor what's going on when you're involved in a venture with other people," he said. 

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Organizations in this Story

U.S. Court of Appeals for the Eleventh Circuit U.S. Internal Revenue Service