Massachusetts divorce lawyer Jason V. Owens reviews a recent federal Appeals Court case about a Hingham couple that tried to defraud the IRS through their divorce.
Divorce can be highly emotional at the best of times. After all, filing for divorce represents a mutual decision by spouses to stop trying to make things work in a marriage and to go their separate ways.
However, some divorces have something else behind them. A recent case from the Federal Appeals Court in Massachusetts involves a Hingham couple a who filed for divorce for the wrong reasons: in order to hide assets from the federal government so they could pay less in federal taxes. Unfortunately, the scheme amounted to tax fraud that even the formality of a Judgment of divorce could not hide.
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The facts of the case, United States v. Baker, No. 16-1415 (1st Cir. 2017), would make a good movie plotline. In December 2002, Scott Baker and his business partner sold eight Planet Fitness gyms for $15 million, as well as stock in the purchasing company, which was later sold for $3.4 million.
In an attempt to avoid paying federal taxes on his huge payday, Mr. Baker created a “Son-of-BOSS” tax shelter: A business partnership with a foreign national that allowed Mr. Baker to take all of the partnership’s tax losses, while the foreign national took all of the gains. Despite Mr. Baker’s income from the sale of the gyms, the “losses” from the Son-of-BOSS tax scheme let him claim a $2.5 million deficit on his federal tax returns. Mr. Baker then “carried back” this loss to previous years, leading the IRS to refund nearly all of the tax payments he made since 1997. Baker invested the refunds in an offshore account and bought a home in Hingham, Massachusetts, for over $1.6 million.
Then everything collapsed. Within weeks of buying the house, the IRS caught on to Mr. Baker’s tax scheme and he agreed to repay $1.2 million in taxes. Only a couple of months later, however, Mr. Baker found out that the offshore account was actually a Ponzi scheme, and that he’d lost everything.
So Mr. and Mrs. Baker conducted an elaborate set of transactions that used multiple trusts to move nearly all of the family’s debts into Mr. Baker’s name, and nearly all of the family’s assets into Mrs. Baker’s name. Then they divorced.
But the divorce only seemed to be on paper. In real life, Mr. and Mrs. Baker kept living together in their Hingham home, concealing their divorce from friends by referring to each other as husband and wife:
After the divorce, Robyn continued to refer to Scott as her husband, though she testified that those references were mistakes or oversights. Scott testified that he had never told his children of the divorce, and he did not know if they were aware of the separation. The Bakers continued to vacation together, often with their family friends, Michael Theriault and his wife Lori Leo. Theriault testified that the Bakers took an estimated fifteen ski trips with them, as well as numerous camping trips. Theriault also estimated that over the course of four years, he and his wife had dinner with the Bakers approximately 250 times. For the duration of their friendship, Theriault and Leo were under the impression that the Bakers were married.
Then the plot thickened – Mr. Baker found out about Mrs. Baker’s alleged infidelity with Mr. Theriault, the family friend referenced above. According to the Appeals Court, Baker then “allegedly assaulted him, gouged out Theriault’s artificial eye and attempted to gouge out his good eye as well.”
But it was the fraudulent divorce and conveyances that brought the couple to the First Circuit Appellate Court in Massachusetts.
When the IRS sued Mr. Baker for his tax fraud scheme, their claims against him – for more than $5 million, according to the court – were worth far more than what Mr. Baker owned at the time. The IRS examined what Mr. Baker had done with the money generated by his tax fraud, and then argued that the IRS could take what it was owed from these assets. The Bakers’ divorce agreement, however, placed the property resulting from Mr. Baker’s tax fraud in his wife’s name.
However, because of the circumstances leading up to the Bakers’ divorce, as well as their relationship afterwards, the divorce proved insufficient to shield the assets. The district court judge pointed to four indicators that showed the divorce was done to fraudulently move assets from Mr. Baker to Mrs. Baker:
(1) only Robyn had been represented by counsel; (2) they continued to live together in the house that had been transferred by the divorce; (3) Scott paid the mortgage and other bills related to the house; and (4) Robyn received most of the assets while Scott received most of the debts in the divorce.
Because the asset division was the product of fraud, the federal District Court redistributed the assets according to the equitable distribution law of Massachusetts, placing many of them back in Mr. Baker’s name, opening the door for the IRS to take the assets for itself. Perhaps unsurprisingly, the federal District Court – which is decidedly not a Probate and Family Court – made several errors when dividing the assets. Massachusetts courts must use the fourteen factors of Massachusetts General Laws chapter 208, § 34, to determine the equitable division of assets. However, the District Court in Baker applied a mechanical 50/50 division of property, resulting in the following comment from the Appeals Court:
Contrary to the statement of the district court, Massachusetts is not a community property state, and its laws do not prescribe a “50/50” division of marital assets upon divorce. Rather, Massachusetts law requires “an equitable, rather than an equal division of property.”
Although the case was remanded to the District Court for further findings, it is worth noting how financially disastrous the original decision was for Mr. Baker:
The district court found that the government’s tax liens attached to Scott’s one-half interest in the Hingham Property, and ordered that the property be sold to satisfy Scott’s tax liabilities. It also ruled that Scott had one-half interests in the New Hampshire properties and other personal property, which he had fraudulently conveyed to Robyn, and that the government could take necessary action to recover those assets. Finally, it found that the liens attached to Scott’s interest in the Escrowed Funds and ordered the funds be turned over to the United States, giving Robyn time to submit a claim for whatever portion of the funds she believed she was due.
The Appeals Court’s criticism of the District Court’s methodology won’t necessarily result in a major change on remand. Indeed, there is a good chance that after conducting a Section 34 analysis, the District Court will still opt for a near 50/50 division of assets between the parties.
In a footnote, the Appeals Court took a nuanced view of Mrs. Baker’s role in the tax fraud, noting that although Mrs. Baker was not guilty of tax fraud, she participated in parts of the scheme:
As will become clear in this opinion, Robyn appears to be implicated in at least some of Scott’s fraudulent activity. However, she was never put on trial, and it appears that the government is not pursuing any claims for fraud against her. As such, nothing in this opinion is meant to suggest that Robyn has been found guilty of fraud.
One thing that the appeals court noted, though, was that the divorce – even though it was done for fraudulent purposes – was still a valid divorce:
Although the divorce of the Bakers was entered into in order to fraudulently transfer assets, the divorce itself was not therefore invalid.
This meant that, even though Mr. and Mrs. Baker had gone through the divorce process to hide assets instead of separating, they were still deemed to have divorced, in the eyes of the law.
Editor’s Note: the facts asserted in this blog reflect the findings of the Appeals Court in United States v. Baker, No. 16-1415 (1st Cir. 2017), and do not reflect the personal views of the author or Lynch & Owens, P.C.
About the Author: Jason V. Owens is a Massachusetts divorce lawyer and Massachusetts family law attorney for Lynch & Owens, located in Hingham, Massachusetts.
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