Scott and Robin Baker married in 1998, and had two children. At that time, Scott and his business partner were running numerous Planet Fitness gyms. In 1999, 2000, and 2001, Scott and Robin filed joint tax returns.
In 2001, the Baker's faced taxable income of over $1.1 million, and to mitigate this they attempted to use a Son of BOSS tax shelter, a type of abusive tax shelter that was mass marketed to affluent individuals around this time by KPMG. This Son of BOSS shelter artificially reduced Baker's taxable income from the $1.1 million to about $290,000.
For those who are curious, my good friend Bob Sommers, a San Francisco tax attorney, wrote an excellent description of the Son of BOSS tax shelter here. For those unfamiliar with tax shelter acronyms, BOSS stood for "Bond and Options Sales Strategy". The IRS eventually collected $3.2 Billion from folks who engaged in that shelter. KPMG paid the IRS the sum of $456 million and admitted criminal wrongdoing,
The next year, 2002, Scott and his business partner sold eight Planet Fitness gyms to Bally Fitness for close to $15 million in Bally stock. Scott ultimately received $4.6 million in Bally stock that he eventually liquidated for $3.4 million in cash.
That year, still in 2002, Scott and Robin did not file jointly, but instead filed separate tax returns. Scott then participated in a second Son of BOSS shelter to reduce his taxable income to a net loss, yes loss, of $2.5 million against real income of $4.6 million.
Getting greedy, Scott not only used the Son of BOSS shelter to offset income for 2002, but also used the excess loss against his returns from 1997 to 2001 by amending his returns and getting a refund from the IRS for nearly the entire amount.
As those who get caught in abusive tax shelters almost always do, Baker later testified that he believed the Son of BOSS shelter was "perfectly legal" and "what everyone did."
This takes us to 2003, when the second Son of BOSS shelter was apparently still being finalized. Scott created and funded with the proceeds of his Bally's stock the Scott Baker Family Trust as a Cayman Island Trust, with an account at Royal Bank of Canada. Scott himself was a 1/3rd beneficiary in the Trust, with Robin and the children the remaining beneficiaries. Scott designated Royal Bank of Canada as the first Trustee. Later, Scott directed Royal Bank of Canada as the Trustee to investment most of the money with an Atlanta-based hedge fund called International Management Associates.
By 2004, the Son of BOSS tax shelter was known not to work as advertised, or at all. In fact, it was an awful failure that would eventually see KPMG barely dodging a criminal indictment, and some of its involved partners and one outside tax attorney seeing serious jail time.
In that year, the Bakers entered into a settlement agreement with the IRS for the first, 2001, Son of BOSS shelter (but not the second), as part of a Global Settlement Initiative offered by the IRS. That Initiative allowed those who participated in the shelter to pay their back taxes if the IRS had not yet started enforcement action; in exchange, the participants received certain tax benefits and paid lower penalties.
In August of 2005, the IRS opened an examination of Scott Baker's 2002 return, and in that same month the Bakers purchased a home in Hingham, Massachusetts, as tenants by the entirety for $1.6 million.
Scott Baker by then had decided that he would participate in the IRS Global Settlement Initiative, and enter into a settlement with the IRS for the second, 2002, Son of BOSS Shelter. That was his plan, but later in 2005, the Bakers discovered that International Management Associates -- the Atlanta-based hedge fund into which the bulk of the money from their Cayman Island Trust was invested -- was actually just a Ponzi scheme, and their money had disappeared.
By February, 2006, the U.S. Securities & Exchange Commission had sued International Management Associates, and that Ponzi scheme filed for bankruptcy. After a Bankruptcy Trustee was appointed, Scott Baker was designated to be one of the seven members of a committee representing the investors, and he hired a bankruptcy lawyer to pursue his own interests as well.
This gets us to 2007, which proved to be an interesting year for the Bakers. In February, the IRS requested that Scott Baker complete a Form 433-A by which he was to list all of his assets by March 1, 2007. This is a form that the IRS uses to try to determine what a taxpayer can really pay in a settlement, in either assets or income, to decide whether to accept the taxpayer's proposed settlement. This form came up in the context of the Global Settlement Initiative as to Scott Baker's 2002 Son of BOSS transaction.
Soon thereafter, also in February 2007, the Bakers established the S&R Realty Trust ("S&R Trust"), with Robin as the Trustee. The Bakers then took another mortgage on their Hingham home, with Scott Baker as the sole mortgagor, and then they by quitclaim deed transferred the title to the home into the S&R Trust (it's only asset). Scott Baker did not receive anything in exchange for his 1/2 interest in the Hingham home to the S&R Trust.
Why did this transfer occur so quickly after the IRS requested the Form 433-A? According to the Bakers, they made the transfer, first, to make it easier to deal with the property in case they later divorced, and, second, because they were concerned that Scott Baker might have creditors from his construction business, and they didn't want the home exposed to those creditors. Of course, Scott Baker wasn't aware of any such claims at the time.
Still in February, 2007, the Bakers created a second real estate trust, called C&S Realty Trust ("C&S Trust") and named after the Bakers' children. Robin Baker was make the sole Trustee of the C&S Trust. Into the C&S Trust went the Bakers' beach house at 253 Humarock Beach Road in Scituate, Massachusetts. This transfer was also made in contemplation that Scott Baker might have claimants from his construction business, or so the Bakers claimed. Scott Baker did not receive anything in exchange for his 1/2 interest in the Humarock beach house that he transferred to the C&S Trust.
On March 5, 2007, the Bakers recorded the deeds transferring the Hingham home and the Humarock beach house into S&R Trust and C&S Trust, respectively. Then, the next day, March 6, the Bakers completed and signed the Form 433-A which was requested by the IRS. In the form, the Bakers listed both properties, with the Hingham home described as being encumbered by a $1.155 million mortgage, and also two other properties the couple owned in New Hampshire worth $200,000.
Later, the IRS disqualified Scott Baker as being eligible for a deal on his second Son of BOSS shelter, apparently because he showed negative cash flow and no ability to meet the settlement amount.
On November 17, 2007, Robin Baker sold Humarock on behalf of the C&S Trust, and deposited the proceeds of $433,000 into an account held by that Trust as South Shore Bank. She used $300,000 from that account to pay down the equity line of credit on the couple's Hingham home, and the rest to fund living expenses. In January, 2008, C&S Trust made a $258,801 payment to IndyMac Bank for the mortgage on the Hingham home. Eventually, C&S Trust was wound up.
On January 10, 2008, the Bakers signed a marital Separation Agreement which Scott had drafted, and the next day the couple file for divorce. The Separation Agreement noted that irreconcilable differences had arisen between the couple, and that divorce was anticipated. The Bakers agreed that each would have joint custody of their children, neither would pay support or alimony, and there were also provisions for insurance and other family expenses.
The Separation Agreement divided the Baker's property, by giving sole ownership to Robin Baker, though noting that it was held in the S&R Realty Trust for the benefit of their children. Robin Baker also got the two New Hampshire properties, a $21,000 boat, a car and two motorcycles, and "any monies stolen from the parties" (presumably referring to any potential recovery in the IMA Ponzi Scheme).
For his part, Scott Baker was required to assume the mortgage on the Hingham home, and for utility payments and repairs. Scott Baker kept his business interests, which included a 25% interest in a Plant Fitness gym in Scarsdale apparently worth about $1 million. Scott Baker did receive some other minor assets, such as a pickup truck and a tractor. Though Scott only received a dash of assets, he did get liability for the couple's full indebtedness, including responsibility for mortgage payments. Oh, and Scott had the right to continue to live in the Hingham home.
Curiously, the Form 433-A which the Bakers had submitted to the IRS under penalty of perjury had not attributed to Scott Baker any interest in the Planet Fitness Scarsdale, though his 2007 and 2008 tax returns claims losses for that business of $210,532 and $54,735 respectively. In fact, in 2008, Scott Baker was sued by Eastern Bank for $450,000 for guaranteeing a loan to Planet Fitness Scarsdale which was not being paid, and the gym apparently also owed $650,000 to its supplier of gym equipment. Scott Baker would later report on his tax return that the gym had been sold to satisfy the debt of a secured creditor, and that the other partners effectively stole his interest.
The couple's divorce became final on May 29, 2008, after the Probate Court had incorporated their Separation Agreement into a judgment. Still, Scott continued to live in the Hingham property and the utility bills remained in his name.
For her part, Robin claimed that the divorce was necessary due to their financial shocks and Scott's poor "decision-making." A long-time friend of Robin testified that Robin was under great financial distress, and, telling "the IRS was coming after both of them".
Just days after the divorce was finalized, Robin Baker on June 3, 2008, made a request for a loan modification to IndyMac Bank, and included a statement from Scott that he had sold his business and "retired with my wife and two kids."
By the end of 2008, even worse storm clouds were gathering for the couple. In December, Robin received notices from the IRS stating that she was liable for some portion of the refund that Scott Baker had obtained through the second Son of BOSS shelter. But on March 23, 2009, Robin Baker filed a petition with the U.S. Tax Court contesting the assessment against her, and that court agreed with her and entered judgment in her favor.
Meanwhile, on February 20, 2009, the Baker's Cayman Islands Trust filed a proof of claim for $3.26 million in the bankruptcy proceedings for the IMA Ponzi scheme. The claim omitted an additional $750,000 that Scott Baker had deposited at the end of 2004.
Was the divorce real?
Consider that on May 11, 2009, the dating service called The Right One put out a press release discussing Robin Baker's hiring as a "relationship consultant" for the company. That press release said she resided in Hingham "with her husband and two children". Robin also posted a picture on Twitter of her, Scott and their two children, with the caption, "Loving My Life". Scott Baker later testify that he never told his (now teenage) children that he and Robin divorced, and did not know if they knew of the separation.
A witness was later to testify that she and her husband later became friends with the Bakers, after the latter's divorce, and stated that the Bakers continued to live and take vacations together, and held themselves out as husband and wife in all ways. The witness also testified that she found Robin Baker to be untruthful on numerous occasions.
Despite the divorce, the Bakers continued with joint business transactions, including a new gym that was built by Scott and managed by Robin. Scott Baker also caused Royal Bank of Canada to be removed as Trustee of their Cayman Islands Trust, and instead inserted Robin into that role. Scott Baker would also perform construction work, and Robin would receive the payments.
At one point, in 2013, Robin Baker invested $202,000 into a company owned by one of her friends -- by transferring money to her friend in $9,000 increments because she "didn't want the IRS to take my money." Robin also took $84,000 from the Cayman Islands Trust to pay her and Scott's legal fees.
This brings us to 2014, where Robin Baker -- who had been working for her neighbor's company -- left and went to work for a competitor. A dispute ensued, after which Scott Baker allegedly sucker punched the neighbor and attempted to gouge his eyes out (criminal charges were filed against Scott Baker and were pending as of the date of the court's opinion). The neighbor was hospitalized with severe injuries, but was able to testify that Scott Baker told him during the assault "You're going against me. You're testifying against me in the IRS case."
Later, the Court would note that "[t]t is difficult to interpret the enraged assault on [the neighbor] as anything other than the mindless act of a cuckolded husband."
Moving towards the end of 2014, it came out that Robin Baker had been having an affair with the neighbor, though she later accused the neighbor of forcing her into a nonconsensual sexual relationship (which the neighbor disputed). Soon thereafter, Scott Baker finally left the Hingham home and rented an apartment.
Anyhoo, the U.S. government sued the Bakers for fraudulent transfers, and asked the Court to forfeit Scott Baker's interest in the Hingham home, the New Hampshire properties, and the payout from the International Management Association funds that were transferred to Robin Baker. The U.S. also sought to have the existing tax liens against Scott Baker enforced against those same assets.
For their part, the Bakers asserted that their 2008 divorce had to be respected, and that the 2008 state court judgment for divorce definitively settled the issue of ownership in favor of Robin Baker and thus must be given preclusive effect, i.e., was res judicata of those issues.
The Court noted that state fraudulent transfer law (here, Massachusett's Uniform Fraudulent Transfer Act a/k/a "MUFTA") controlled the U.S.'s ability to reach the property of a taxpayer. The MUFTA declares to be voidable a transfer where the debtor intended to put property beyond the reach of creditors, or where the transfer was without "reasonably equivalent value" (a term of art in the MUFTA) and the debtor knew or should have know that he would not be able to pay his debts as a result of the transfer.
The Court then noted that proving the debtor's intent by direct evidence is "often impractical" (the Court might as well said "because debtors will frequently lie about their intent"), and thus such intent could be established by circumstantial evidence, e.g., the "Badges of Fraud" that are so often discussed in fraudulent transfer cases.
But the Court also noted that it must be sensitive to the interests of a non-debtor spouse (Robin Baker) in fashion relief, which brought the Court head-to-head with the divorce issue. But being sensitive to these issues does not mean that the Court must swallow a divorce wholesale, as the Bakers desperately desired. Instead:
7. The actual intent provisions of the UFTA apply to divorce settlements even after reduction to judgment. [ ] The acceptance of a separation agreement by a judge in a divorce proceeding as fair among the two parties does not
represent a determination that the agreement perpetrates no fraud upon the creditors of one spouse, particularly where the claims of creditors are not made known to the court. [ ]
8. In addition to the badges of fraud identified in Section 5(b) of the UFTA, in determining whether a divorce settlement is fraudulent a court may also consider:
(1) A quickly agreed upon property division;
(2) The completion of the divorce proceeding on a 'fast-track;'
(3) The fact that only one of the spouses is represented by counsel in the divorce proceeding;
(4) The fact that the spouses continue to live together after the divorce degree in the very house that was transferred;
(5) The fact that the transferor spouse continues to pay the mortgage, taxes, and other costs on the transferred house; and
(6) The inequitable distribution of debts and assets in the divorce.
A fraudulent transfer may be found where the divorce is entirely a sham and also where there is a bona fide divorce, but the transferor nonetheless favors transferring assets to the ex-spouse rather than seeing them go to a creditor body. [ ] In this latter situation, the divorce itself may be valid while the division of property is not.
(Internal quotations and citations omitted)
Here, it was not at all difficult for the Court to find that the Bakers "began rearranging assets" which faced with the IRS assessments for the second Son of BOSS shelter. Scott Baker made his transfers to insiders (Robin and his children), continued to reside in the Hingham home even after the transfer, the Bakers concealed the transfers from the IRS on the Form 433-A, the transfers were of all his substantial assets, and Scott Baker did not receive any "reasonably equivalent value" for the transfers.
When it came to the divorce, the Court noted that it did not practically change the Baker's relationship, but Scott Baker was able to divest himself of his assets while Robin Baker received a disproportionately large share of their marital estate. Thus, while the Court did not declare the divorce itself to be invalid, it did hold that the property transferred in the divorce from Scott to Robin did constitute fraudulent transfers, notwithstanding the state divorce judgment.
As lagniappe, the Court felt compelled to add:
In general, the court finds neither of the Bakers to be credible witnesses, at least insofar as their financial interests are concerned. [Robin's friend] credibly testified that R. Baker has problems with honesty. [ ] Baker admitted in her testimony that she struggles with the truth [ ], that she concealed a sexual relationship with the husband of her employer and family friend [ ], and that, on at least one occasion, she structured a cash withdrawal to conceal the transaction from the IRS [ ]. S. Baker, for his part, has engaged in a history of questionable financial finagling for purposes of tax avoidance, including participation in two illegal tax shelters [ ], paying expenses like mortgages and meals in cash [ ], hiding assets on third-party's property [ ] (boat and gym equipment), and using R. Baker as a front for his involvement in various business ventures [ ].
(internal citations omitted)
And, with that, the Court entered judgment in favor of the U.S. on its fraudulent transfer claims against the Bakers.
ANALYSIS
Hardly a month goes by that some debtor in deep financial distress doesn't call me, seeking "asset protection", and wondering if he or she can protect all their assets by simply getting a divorce.
The answer is always maybe, depending on a lot of facts, but most importantly whether the divorce is a real divorce or not. If the divorce is real, and there was a substantial history of marital discord, then sometimes in some very limited instances a divorce can have some limited benefits as established by the case law in some states.
But this type of circumstance is very rare, and most debtors want a divorce just to gain protection from their creditors. In that event, the Court will probably see right through it, as here, and the divorce will accomplish little other than to complicate a couple's future planning and also put the usually innocent spouse on the hook for a fraudulent transfer claim.
It is worth nothing that creditors in attempting to collect a debt will look for "pressure points" where they can cause the debtor deep misery such that the debtor finds that last pile of cash hidden under the mattress to settle the matter. Creditors thus love to go after spouses on any theory, particularly fraudulent transfers, as they can then make the spouse miserable as well and put pressure on the debtor to cough up the cash.
Many times, a creditor can put so much pressure on the spouse that he or she will turn on the debtor, and then things can get really ugly, particularly where the spouse testifies as to the existence of assets that the debtor has previously denied under oath do not exist.
Attempting a phony divorce will not only usually fail, but will put the innocent spouse clearly in the creditor's cross-hairs. In other words, a phony divorce has a much greater chance of making things worse than making them better for the debtor.
But this article would not be complete without mentioning another factor that lead to this result, which is sheer, unadulterated greed.
If Scott Baker had simply been a good taxpayer and paid the taxes that he owed, none of this mess would have come about. But Scott Baker got greedy, and not only engaged in the Son of BOSS transaction once, but twice -- and then asked for a refund of his back taxes.
Pigs get fat, hogs get slaughtered; witnesseth the slaughtered hog.
Greed was apparently also a factor in Scott Baker investing in the Ponzi scheme; chasing high returns when more conservative investments (and a diversification of his portfolio) would have been the far more prudent course.
At the end of the day, we see a business owner who should have pocketed millions against his future, but instead is left broke and with a substantial tax debt to retire. Greed is indeed a powerful emotion; whether that emotion can be harnessed in a positive way is the trick.
I can't even count the number of times that I have seen this phenomena in my career, where somebody sells their business for many millions and then ends up losing it all. It is not too different from the professional athletes who make unimaginable salaries for a few years, and then retire utterly broke as they to launch their second life (I've personally known not just a few of these too).
As my grandfather often told me, "It's not what you make, it's what you keep". Only in later years have I realized that is oh so true.
CITE
U.S. v. Baker, 2015 WL 4886081 (D.Mass., Aug. 17 2015). Full opinion at http://goo.gl/fFKLHA
This article at http://onforb.es/1NMQV51 and http://goo.gl/GQpw5X
