Taxpayer Serving as "Voice of Organization" Is Liable for Penalties as Nonprofit's Alter Ego

(Parker Tax Publishing January 2021)

The Second Circuit upheld a penalty imposed on a taxpayer for operating an abusive tax shelter through nonprofit entities he had created. The court concluded that the district court correctly determined that the nonprofit entities were alter egos of the taxpayer since he was by all accounts the only person directing their affairs and drafting their message and serving as the self-proclaimed "voice of the organization." Schulz v. U.S., 2020 PTC 383 (2d Cir. 2020).

Background

Robert Schulz created two nonprofit entities, We the People Foundation for Constitutional Educations, Inc. and We the People Congress, Inc. (collectively, WTP). In 2007, a district court granted the government's request for a permanent injunction against WTP and Schulz, prohibiting them from further promoting an abusive tax shelter known as the "Blue Folder" in violation of Code Sec. 6700. In 2015, Schulz received a tax assessment penalty from the IRS in the amount of $225,000 for promoting the Blue Folders at issue. The IRS arrived at that amount using Schulz's list of 225 individuals to whom WTP had distributed Blue Folders. Schulz initiated an action under Code Sec. 6703(c)(2), alleging that the IRS erroneously assessed the $225,000 penalty against him.

In 2017, the district court granted partial summary judgment to the government and held that Schulz was liable for violating Code Sec. 6700 by distributing the Blue Folders. In 2018, the same court found that WTP was Schulz's alter ego and that WTP's income was attributable to him. The court noted that the only issue remaining for trial was the amount of gross income WTP - and by extension, Schulz - derived from the specified activities used to calculate the penalty amount under Code Sec. 6700. At a subsequent trial in 2019, the district court expressly rejected the government's reliance on the "gross annual income method" for calculating Schulz's penalty, and instead concluded that the proper method was to measure the income derived, or to be derived, from the particular, well-defined activity of distributions of the Blue Folders. The court concluded that the total penalty for distributing the Blue Folders was $4,430. The court rejected Schulz's argument that WTP's income should not be attributed to him because he was not an alter ego of WTP. The court noted that a prior district court decision had already addressed the issue and found that Schulz was an alter ego of WTP. Schulz appeal to the Second Circuit.

Before the Second Circuit Schulz argued that the board of directors retained control over WTP, such that he was not an alter ego of WTP and thus not liable for the $4,430 penalty.

Analysis

The Second Circuit affirmed the district court's decision and held that it was clear that WTP was an alter ego of Schulz for liability purposes. In response to Schulz's argument that the board of directors retained control over WTP, the court looked to the evidence which showed that Schulz served as the president, chief executive officer, and chairman of WTP, and exercised total control over the composition and functions of the nominal board of directors. Despite the presence of a board, the court observed, Schulz was by all accounts the only person directing WTP's affairs and drafting its message, personally writing and publishing all of its petitions and public statements and serving as the self-proclaimed "voice of the organization." The court also noted that WTP's sole physical location was Schulz's home, in which he and his wife were the sole people managing WTP.

Moreover, the court stated, Schulz's activities with WTP displayed the same "intermingling of corporate and personal funds" associated with an alter ego. Schulz used his personal credit cards to pay for WTP's expenses, and WTP's willingness to pay for Schulz's bills - including his personal legal expenses - showed that funds were put in and taken out of the corporation for personal rather than corporate purposes in the manner indicative of an alter ego. Considering the degree of Schulz's involvement in managing and coordinating WTP, his sole control over its message, and the intermingling of his own money with that of WTP, the Second Circuit concluded that the district court correctly granted summary judgment to the government.

For a discussion of the alter ego theory, see Parker Tax ¶260,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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