Opinion ID: 1253249
Heading Depth: 2
Heading Rank: 2

Heading: The IRS Investigation and Josephberg's Re-routing of Assets

Text: In 1986, the IRS sent Josephberg a letter indicating that it calculated he owed some $372,000 in taxes for the years 1977-1980, based on its rejection of losses generated by the Cralin tax shelter partnerships in which Josephberg participated. ( See GX PW-1.) The letter informed Josephberg of his right to challenge this calculation through the IRS appeals process. Josephberg appealed these adjustments unsuccessfully, and the IRS in 1993 issued a notice of deficiency to Josephberg with respect to this debt ( see GX 152). Josephberg had also received a notice of deficiency in December 1992 stating that he had an additional tax liability of $548,592 for 1985. ( See GX PW-6.) Josephberg commenced tax court actions, petitioning for redeterminations of these deficiencies. In the action challenging the calculations for 1977-1980, Josephberg failed to answer, object to, or otherwise respond to IRS requests for factual admissions; the facts set forth in those requests were deemed admitted; and the IRS motion for summary judgment against him was granted. See Josephberg v. CIR, No. 496-94 (Tax Ct. Jan. 31, 1996) (Tax Court Judgment I). Josephberg's action challenging the calculation of his tax deficiency for 1985 was dismissed for lack of prosecution after neither he nor anyone representing him showed up for trial. See Josephberg v. CIR, No. 4824-93 (Tax Ct. Apr. 16, 1996) (Tax Court Judgment II). After the entry of these tax court judgments, the IRS commenced efforts to collect Josephberg's tax debts for 1977-1980 and 1985, including accrued interest and penalties. In addition, in 1997 it issued to Josephberg notices of deficiency for the tax years 1983 and 1984, which Josephberg did not challenge. The IRS's efforts to collect Josephberg's tax debts were impeded because Josephberg repeatedly maintained, in the ensuing IRS interviews and in his representations on IRS asset disclosure forms, that he had no assets that had not already been seized by the IRS. In fact, however, Josephberg was merely hiding his income. On his IRS asset disclosure form dated June 4, 1997, Josephberg represented that he owned only a 50 percent interest in his investment banking firm, Josephberg Grosz & Co. Inc. (Josephberg-Grosz) ( see GX 181-B), despite the fact that since 1993 he had owned 100 percent of that firm ( see Tr. 967-69). In the fall of 1997, Josephberg created two new entities, JG Capital, Inc. (JG Capital), and JG Partners. ( See GX 201-C.) JG Capital was wholly owned by JG Partners, which in turn was 99-percent-owned by Josephberg's three children, unbeknownst to them; Josephberg owned the remaining 1 percent. ( See Tr. 418-19.) On his subsequent IRS asset disclosure form, Josephberg did not disclose the existence of JG Capital or JG Partners. ( See, e.g., GX 181-D.) He told Fox, his accountant, that he created the two entities for the purpose of placing his investment banking income beyond the reach of the IRS, because any account in his name would undoubtedly have been levied upon. ( See Tr. 976-77.) In addition, in or around 1993 ( see id. at 1060), the year in which he received the IRS notice of deficiency for 1977-1980, Josephberg had created securities accounts in the names of his children, likewise unbeknownst to them, which he alone managed ( see, e.g., id. at 754-55, 772, 782-83, 788). Josephberg then, as compensation for his investment banking and other professional services, had his clients issue stock in the names of JG Capital, JG Partners, his wife, or his children. ( See, e.g., id. at 328, 357-58, 698-700.) Josephberg did not disclose the existence or contents of these accounts, or his unfettered control over them, to the IRS. ( See GX JD-7, 181-B, 181-D.) For example, although Josephberg stated in a May 1997 IRS interview that he lacked the wherewithal to pay his bills and that he had not closed a deal as an investment banker in two years ( see Tr. 535-37), in fact within that period Josephberg had raised capital for GK Intelligent Systems (GK) and had caused hundreds of thousands of dollars of his fee to be paid in the form of stock and placed in the accounts of his children. Although the stock was restricted stock, in that it could not be sold for a period of time, when the restrictions lapsed Josephberg used those assets at will. In 1998 and 1999, for example, without the knowledge of his daughter Kara, Josephberg sold shares of GK stock that had been issued in her name as compensation for his services, and he caused the gains resulting from those sales  some $59,000 for 1998 and $30,000 for 1999  to be reported on Kara's tax returns. (See Tr. 779-81; GX 130, GX 131.) At trial, Kara testified that she had never filed her own tax returns before 2001, that she had not signed the returns showing the sales of the GK stock, and that she had not even been aware that she owned GK stock. (See Tr. 774, 782.) In 2001, Kara filed an individual tax return for the year 2000, reporting income she had received for her work as a summer associate at a law firm, and she expected a significant tax refund. Instead of receiving a refund, she learned that she had a personal tax liability of more than $10,000 resulting from Josephberg's sales of the GK stock he had had put in her name. ( See id. at 779-81.) Josephberg also had some of his income placed in accounts in the name of his younger daughter, Jessica; and in 1998, 1999, and 2000, he sold shares of stock in her name for a total of more than $148,000. ( See GX 133, GX 134, GX 135.) The parties stipulated that if Jessica were called as a witness at trial, she would testify that she had no recollection of signing or filing, and no role in preparing, tax returns; that she had never been required to file a return and had not known that in fact returns in her name were filed for the tax years 1998, 1999, and 2000  when she was 11-13 years of age. As a result of those returns, Jessica's tax liability by the time of trial, including penalties and interest resulting from nonpayment of taxes, was some $52,600. ( See Tr. 755-56.) Josephberg told Fox that he caused stock to be issued in his children's names because [t]he IRS had levied all of his bank accounts, [and] he had no place else to put it. (Tr. 976.) As a result, while his tax debts remained outstanding, Josephberg used the accounts of his children and the corporate accounts of JG Capital and JG Partners to pay various personal expenses, such as rent (totaling some $250,000), country club dues (totaling nearly $300,000), and parties costing tens of thousands of dollars. ( See, e.g., GX JD-6; GX JD-13.)