IRS Loses Injunction Case Against Mother After Raising Its Eyebrow

This time of year, we honor mothers.  Perhaps the IRS should have brought this case earlier or later in the year.  In an opinion issued just two days after Mother’s Day adopting the Magistrate’s Report and Recommendation issued 11 days before Mother’s Day, the district court in United States v. DuBois, No. 9:23-cv-80279 (S.D. Fla. 2023) decided not to enjoin a mother from using proceeds from a settlement.  For different reasons prior posts have noted Mother’s Day here and here

The issue in the DuBois case turns on the interest of her son in the settlement which in turn depends on the proof the IRS can put forward.  This case serves as a good one for explaining the tactic of relying on cross rather than positive evidence and why that tactic fails here.

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Robert DuBois and his mother are beneficiaries of a trust.  In 2016 they brought an action against the trustee for breach of fiduciary duty.  While that suit was pending, the IRS brought suit against Mr. DuBois in 2021 for failure to pay income and other taxes.  The suit against Mr. DuBois resulted in a judgment for the IRS of almost $1.3 million.

On January 18, 2022, the IRS (or DOJ) met with Mr. DuBois to discuss payment of the judgment including his interest in the lawsuit initiated in 2016; however, the discussion did not result in an agreement.  The following day, Mr. DuBois and his mom met with their adversary in the suit against the trustee and that discussion led shortly thereafter to a global agreement to settle for $665,000.

After the agreement, Mr. DuBois’ attorney advised the opposing party that Mr. DuBois would not be a party to the settlement as he had previously assigned his interest in the action to his mother.  Although the opinion does not say this, it appears that he failed to mention that assignment during his discussion of the case with the IRS on January 18.

Mr. DuBois’ attempt to back out of signing the settlement agreement led the fiduciary to file a Motion to Enforce Settlement Agreement.  This reminded me of cases in which taxpayers sought to back out of settlements with the IRS which we have discussed previously here.  The court told Mr. DuBois he had to sign because the settlement was an enforceable agreement.  He signed as ordered and the defendant paid over the settlement amount to the attorney for Mr. DuBois and his mother.

Before signing the settlement agreement, however, Mr. DuBois also signed an assignment agreement assigning all of “his right, title, and interest in any settlement proceeds arising” from the suit to his mom.  The assignment called for no consideration other than her agreement to indemnify him from any claims arising out of his share of the proceeds.  It’s easy to see why the IRS would seek a fraudulent conveyance under these circumstances.  The facts are classic.  Despite a son’s natural affection for his mother and despite need to give her something for Mother’s Day, this gift struck the IRS as a bit much.

But, this is a story about the failure of the IRS to obtain an injunction so the story does not end here with what looks like a clear winner for the IRS.

The IRS brings a motion for preliminary injunction seeking to keep the mother from dissipating the proceeds of the settlement.  In a hearing on that motion, Peter Feaman, the attorney for the mother and son in the suit against the fiduciary, was called to testify.  He says that the son had verbally agreed to assign his interest at an earlier point and that he had advised the son to do so because the son’s claim against the fiduciary lacked merit.  The IRS’s unstated response is “Yeah, sure.”

The court notes that:

To prevail on a fraudulent transfer claim under 28 U.S.C. §3304(a)(1), the Government must show: (1) the transfer was made after the Government’s claim arose; (2) the debtor did not receive reasonably equivalent value in exchange for the transfer; and (3) the debtor was insolvent at the time of the transfer. United States v. Andrews, No. 1:09-CV-112 (HL), 2011 WL 13323634, at *2 (M.D. Ga. July 13, 2011) (discussing the elements of a fraudulent transfer claim).

The IRS argues Mr. DuBois should have received half of the settlement (less attorney’s fees – for those of you wondering about whether the attorney could take his fee before the IRS receives all of the proceeds based on its lien against Mr. DuBois see the superpriority provision of 6323(b)(6) allowing attorneys a superpriority in this situation even against a filed federal tax lien for creating the fund except in situations where the defendant is the federal government.)

The court cites again to the testimony of Peter Feaman who explained that during discovery in the case facts developed showing the son had lost his beneficial interest in the trust.  Mr. Feaman said that he decided to keep Mr. DuBois as a party because he felt this would help with negotiations.  He further said that he would have dropped the son if the case had gone to trial.  Other than cross-examining Mr. Feaman the IRS put on no affirmative evidence regarding the value of Mr. DuBois interest in the settlement.  I don’t consider the failure of the IRS to put on affirmative evidence to be a knock on the IRS or the DOJ attorney representing them in this case.  In a high percentage of cases the taxpayer controls the information and the government’s case is based on puncturing holes in the credibility of the taxpayer or the taxpayer’s witness.  My former colleague, Jan Pierce, described the government’s typical trial actions in these cases as “the raised eyebrow.”  Certainly, the facts here do merit a raised eyebrow; however, this is also a case in which the IRS is seeking an injunction and that raises the bar a bit.

The court’s take on the raised eyebrow here is

The Court finds Attorney Feaman’s testimony to be credible. As the moving party, the Government bears the burden of showing its entitlement to the “extraordinary and drastic remedy” of a preliminary injunction. All Care Nursing Serv., Inc., 887 F.2d at 1537. This is especially true where the Government essentially seeks a pre-judgment freeze of assets in the possession of a third party by way of an injunction. The Court finds the Government has not met this burden. This does not preclude a different result at trial, where the Government might come forward with different evidence to rebut Attorney Feaman’s opinion as to the value of Son’s interest in the settlement proceeds.

So, the IRS will have a second chance to win the case but at this stage the raised eyebrow does not work to win the issue.

The court notes that three other elements exist in order for the IRS to win, says that they don’t matter since the IRS must win all four elements and then proceeds to go through the other elements anyway.  It finds the other three elements would not keep it from issuing the injunction had the government prevailed on the first element.

The IRS does not bring many injunction cases of this type.  Perhaps the problem here is one reason.  In order to win it needed positive evidence and not just the unstated assumption that this smells to high heaven.  It could have hired another lawyer as an expert witness to evaluate the case and challenge the testimony of Mr. Feaman.  It made a tactical decision not to do so.  Maybe it would change tactics in a future case, but my guess is that it will most often continue to rely on the raised eyebrow.