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Transferee Liability Denied in FBAR Debt Conflict

Court denies attempt to collect unpaid penalties from a decendent’s children.

In U.S. v. Park, Case No. 16C10787, the U.S. District Court for the Northern District of Illinois concluded that the government failed to adequately plead claims for fraudulent transfer and transferee liability against the children of a deceased taxpayer. 

Government Seeks Penalty from Estate

According to the Court’s summary description of the facts, the taxpayer, Que Te Park, filed a Foreign Bank Account Report in 2008, reporting numerous foreign bank accounts for the first time. As a result of this filing, the U.S. government assessed a tax penalty of nearly $4 million against him. The government didn’t successfully collect this penalty during the taxpayer’s lifetime, so after his death in 2012, the government sought to collect the penalty from his estate.  

Park didn’t leave any probate estate in the United States at his death from which to collect, and he may not have left property in the United States. The pleadings describe his estate without specificity, referring to the possibility of assets in South Korea that may have been held in an Illinois trust or may have passed to his surviving spouse and children through South Korean probate proceedings. The government attempted to collect its unpaid debt from Park’s surviving spouse and children on the grounds of fraudulent transfer, common-law transferee liability and fiduciary liability.

No Facts to Support Claims

In response to the government’s complaint, Park’s children filed a motion to dismiss the claims against the estate. The children raised various defenses and counterclaims, several of which the Court rejected. However, the Court did grant their request for a motion to dismiss because the government had failed to allege particular facts adequate to support its claims of fraudulent transfer and transferee liability. In fact, the Court found that “the factual allegations [did] not raise a right to relief above the speculative level,” and therefore the government’s complaint failed to state a claim against Park’s children.

The dismissal of the transferee liability claim is particularly notable because such claims don’t need to meet the stringent standard applied to claims of fraud. Transferee liability claims must merely satisfy the liberal requirements of Rule 8 of the Federal Rules of Civil Procedure. In this case, the government provided only “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements.”

Accounting Claim Dismissed

Similarly, the Court found that the factual allegations in the complaint were so inadequate that the Court also dismissed the government’s claim against Park’s children for an accounting. While the Court confirmed that the liberal standard of the FRCP Rule 8 applies to claims for an accounting, the government’s allegations still needed to rise to a higher level than mere speculation.

More to Come?

This opinion may provide a valuable reference for taxpayers who face claims containing few alleged facts, but its direct application likely will be limited, as the opinion is non-binding, fact specific and not a final judgment. The claims against the Park children were dismissed without prejudice, granting leave for the government to file an amended complaint by Nov. 7, 2017. If the government can gather information sufficient to demonstrate actual transfers to or control by Park’s children, then it might still be able to bring suit against them. Finally, the Court’s order didn’t address the claims against Park’s wife, so there may be more to come. 

 

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