Opinion
40466-2008
01-05-2012
David M. Cohen, et al, Plaintiffs, v. Stanley Cohen, et al, Defendants, -and- FIVE TOWNS COLLEGE, Intervenor-Defendant. JANET COHEN KAPLAN, et al, Plaintiffs, v. STANLEY COHEN, et al, Defendants, DAVID COHEN, et al, Plaintiffs, v. STANLEY COHEN, et al, Defendants,
Rosenberg, Calica and Birney, LLP Ruskin Moscou Faltischek, P.C. Bond, Schoeneck & King, PLLC Certilman, Balin Adler & Hyman, LLP Bracken & Margolin, LLP Martin Cohen, PRO SE Court Appoited Referee Brian T. Egan, Esq.
Rosenberg, Calica and Birney, LLP
Ruskin Moscou Faltischek, P.C.
Bond, Schoeneck & King, PLLC
Certilman, Balin Adler & Hyman, LLP
Bracken & Margolin, LLP
Martin Cohen, PRO SE
Court Appoited Referee
Brian T. Egan, Esq.
, J.
Defendants, Five Towns College, Five Towns College Board of Trustees, John D. Quinn, Joseph Castronovo, Milton Hirschfield, Joseph Mansi, Frank Scalzo, Phillip Smith, Samuel Teicher and Bruce Rensing ("College Defendants") move, by Notice of Motion (motion sequence # 014) seeking an Order, dismissing the Amended Complaint against them by David Cohen pursuant to CPLR §§ 3211 (a) (1) and (7) and dismissing the Amended Complaint lodged against them by Janet Cohen Kaplan pursuant to CPLR 3212. Both David Cohen and Janet Cohen Kaplan cross- move, by Notice of Motion (motion sequence #s 016 and 017) for sanctions based on alleged frivolous motions and also vehemently oppose the motions of the College Defendants.
This series of motions and indeed the gravamen of the three cases currently pending before this Court all arise out of a Trust and a Family Limited Partnership, both of which were created by Stanley and Lorraine (now deceased) Cohen, openly for the benefit of their three children as estate planning mechanisms, with the minimum allegedly permissible tax consequence. The College Defendants' current motions assert that these actions are all dismissible since they arise out of and ask this Court to enforce two illegal schemes to avoid the payment of legitimate gift, estate and capital gains taxes.
Background
On May 23, 1992, Stanley and Lorraine Cohen created a Grantor Trust, in order to hold title to real property located in Dix Hills New York, on which the Five Towns College was to be located. The asserted purpose of the Trust was so that the real property could pass from Stanley and Lorraine Cohen to their children, two of whom are the Plaintiffs herein, outside their estates. In order to accomplish this goal, the purchase was financed by a Suffolk IDA bond and Fleet Bank, along with $900,000 from Stanley Cohen. The Cohen children were made "settlors" of the Grantor Trust as well as beneficiaries thereof. On July 27, 1992, the IDA entered into a Master Lease with the Trust, and the Trust subleased the property to the Five Towns College. Under the terms of the sublease, the College was to pay off the loan, pay all property taxes, and all improvements on the real property. The College was given the option under such sublease to purchase the property at a specific point in time for the higher of $3,000,000 or the fair market value of the property. Despite the Sublease Agreement, Stanley Cohen himself paid off the mortgage on the Dix Hills property over the next several years, allowing the Trust to acquire title to the real property. For this, Stanley Cohen took back a promissory note from the Trust in the amount of $2,454,670. As a result of this plan, the Cohen children would receive property, initially worth $3.4 million, without the payment of any gift or estate tax. Then, the
Sublease Agreement was amended and purportedly drafted by David Cohen in 2002 to provide that the College's option to purchase the real property would be reduced from the amount set forth in the original Sublease, from fair market value to the value of 30 vacant one acre residential lots. In addition, the College entered into An allegedly fictitious loan Agreement with the Trust for $10 million, so that the College would be able to exercise its purchase option for a purchase price equal to the Trust's outstanding debt to the College and Stanley Cohen, the debt being thereafter forgiven. This would permit the College to acquire, with no capital gains tax consequences, real property worth today allegedly approximately $53,350,000.00. The children, as settlors, according to the College Defendants, paid no consideration for this alleged sham to avoid gift tax.
On July 2, 2002, Stanley and Lorraine Cohen formed a Family Limited Partnership ("FLP"), the purpose of which was to transfer their ownership of stock in the College to their children, again to avoid gift tax consequences. At the time of the FLP Agreement, Stanley and Lorraine Cohen owned 49.5% each of limited interest , and Stanley owned .6% and Lorraine .4% of the general interest of the FLP. Stanley Cohen obtained an appraisal of the 99 issued limited shares of the FLP at $54,600 per share. However, shortly before the death of Lorraine Cohen on July 27, 2004, an "Assignment and Assumption of the Limited Partnership Interest" in the FLP was prepared by Stanley Cohen's attorney, Mark Hochberg. Each parent then gave each of the three Cohen children 6 shares and sold them each 6 shares so that they each would own 22% of the shares of the FLP. Since the gift of the 6 shares maximized the then gift tax limit of $1,000,000, each child provided the parents with promissory notes in the amount of $267,267 (for a total of $534,534 per child) in order to avoid gift tax on the transfer of the remaining 18 shares. According to the College Defendants, the College twice, at the direction of Stanley Cohen, made distributions to pay the interest on the children's promissory notes. These payments ultimately resulted in monies being deposited in the accounts of the Cohen children, who then wrote checks to Stanley Cohen, to be provided to the federal tax authorities in response to an audit in 2006 of the FLP. The College then drafted a $436,000 promissory note to each of the Cohen children and assigned such notes to Stanley, in order that Stanley Cohen could demonstrate to the taxing authorities that the Notes payable to him had been paid in full. This is acknowledged in affidavits of David Cohen and Janet Cohen Kaplan in these cases. The result of this series of transactions was that the Cohen children each received 22% of the stock of the College without any payment by them and without the family incurring either gift or estate tax.
In addition to the above, the College asserts that it has paid out salaries to the Cohen children, including $562,550 to Janet Cohen, $1.4 million to David Cohen , $730,00 to Martin Cohen, and $1.4 million to their father, Defendant and counterclaimant Stanley Cohen, all of which were taxed only once as personal income and never as required by the Internal Revenue Code § 162 (a) (1), as profits of the FLP, at enhanced corporate tax rates.
College's Claims
Based on the above, the College Defendants assert that the FLP and the Trust which are sought to be enforced via David and Janet Cohen Kaplan's separate actions must be dismissed as their purpose was to engage in tax fraud. In the current actions before the Court, each and every claim by David Cohen, Janet Cohen Kaplan and Stanley Cohen are based on their requests to enforce these agreements. The Tax Code sections cited by the College include, IRC § 250 (a) (1), which imposes a tax on transfer of property by gift; IRC § 2511 (1) stating that gift tax applies whether the gift is transferred by direct or indirect means; IRC § 2043 (a), requiring that transfers which do not constitute a bona fide sale for full value must be included in the gross estate for estate tax purposes; and IRC § 2036, requiring that the gross estate include the value of all property to the extent of any interest of which the decedent has made a transfer, except in the case of a bona fide sale for adequate and full consideration, retaining the lifetime right of income therefrom.
In other arguments, the College Defendants move to dismiss David Cohen's causes of action seeking employment reinstatement, as well as claims against the individual trustees based on this Court's prior determination in the Janet Cohen Kaplan case, for the reasons set forth therein.
Cross Motions
The bases for the Cross Motions on behalf of David Cohen and Janet Cohen Kaplan, as well as their opposition to the motions by the College Defendants are essentially identical. Both aver that the Trust, created in May 1992 was part and parcel of Stanley and Lorraine's comprehensive estate plan and that Stanley, Lorraine and the College, represented by their respective counsel, and not Janet and David, planned and executed the Trust and loan documents. The FLP was the second step in the parents' estate plan; Janet and David were promised that they would receive sufficient funds to cover the promissory note payments, and again, they were neither the architects of nor the attorneys for those who set up this Agreement.
Both parties argue that the College Defendants, as non parties to nor as third party beneficiaries of either the Trust or the FLP, lack standing to bring motions to set them aside based on claims of illegality. They opine that the College's own knowledge of and active participation in the creation and execution of the terms of the Trust and the FLP preclude them from challenging their legality. Indeed, the College paid for the estate planning legal services; oversees the conduct of its President, Stanley Cohen, who signed the Trust documents and entered into the sublease with the College. They both mention that one of the College's Board of Trustees' members was the person who suggested the FLP as a way to transfer ownership of the College to the Cohen children without adverse tax consequences. They assert that all of Stanley Cohen's actions in devising such schemes, becoming the self -appointed President of the College, sole general partner of the FLP and sole Trustee of the Trust until removed by the Surrogate in March 2011 (Czygier, J.), based on an action brought by Janet Cohen Kaplan, can and must be attributed to the College, equitably estopping the College from making the claims asserted. They accuse the College Defendants of unclean hands, thereby barring any equitable arguments by them, as aiding and abetting Stanley Cohen in his numerous alleged breaches of his fiduciary duties to the beneficiaries of the Trust and limited partners of the FLP. Finally, the Cohen children argue that the College Defendants' motion should be barred by laches as they knew of these agreements as far back as 1992 and 2004 yet waited until late 2010 to bring this motion. Based on all of the above, they assert both that the College cannot obtain either Summary Judgment dismissing Janet Cohen Kaplan's action nor 3211 (a) dismissal of David Cohen's action against them. They likewise seek sanctions against the College Defendants pursuant to 22 NYCRR 130-1.1 for making a frivolous motion.
Stanley Cohen submits papers in partial support and partial opposition to the motion of the College Defendants. He denies violation of any of the tax laws in the creation of the Trust and FLP, supplies no law in support thereof; yet, he supports the College Defendants' motion to dismiss his childrens' cases, which are brought against him and such Defendants.
College's Reply
The College Defendants both reply to the legal defenses raised by the Cohen children and the cross-motions of each for sanctions for frivolous conduct. They claim the College has standing as Plaintiffs have sued such Defendants under the very Agreements the children now state cannot be challenged by that entity. The Plaintiffs do assert in their Complaints and Affidavits in support thereof that the College is barred from converting to non-profit status under the FLP and that the Trust prohibits the College from exercising its purchase option under the sublease amendment. The College asserts that the Plaintiffs' claims herein are inexorably intertwined with the enforcibility of the Trust and FLP; that a fiduciary duty must first exist in order to be sued for aiding and abetting the same and that it cannot arise from a transaction that is illegal and against public policy. With regard to the "in pari delicto" defense raised by Plaintiffs, the College Defendants remind the Plaintiffs that they- and not the College -are seeking recovery in equity and that under applicable case law both Stanley Cohen's and the College's purported involvement becomes irrelevant. Thus, they cannot enforce illegal contracts and this is so even if the College Defendants and Stanley Cohen are equally at fault. They argue that it is not necessary for the College Defendants to plead that a contract is illegal and contrary to public policy; it simply cannot be enforced. Thus, the Court has the right, they assert, to step in and deny the Plaintiffs relief on its own. In addition, this defense is not a surprise to Plaintiffs because, according to the College Defendants, the argument was raised over eight months before the Cohens were required to oppose the motion.
With regard to the tax evasion claim, The College reiterates that Janet and David Cohen signed bogus promissory notes via the FLP with foreknowledge that they would not be required to repay them. Thus, when the estate return was audited, Stanley Cohen deposited monies into the childrens' accounts so the Plaintiffs could forward the exact amounts back to Stanley Cohen and make it appear as if they were complying with federal law. This information was actually relayed to the IRS.
The College cited relevant provisions of the Internal Revenue Code, which require that gift tax be paid on the transfer of property by gift; prohibit evasion by indirect donation; prohibit transfers of funds that do not constitute a bona fide sale for full consideration unless included in the gross estate; and require that the gross estate include the value of property transferred to which the decedent retains a lifetime interest from the income of such asset. In this context, the College Defendants cite from numerous statements made by the Cohen children in these lawsuits. Each of these statements were made by Janet Cohen Kaplan and David Cohen in Verified Pleadings and former Affidavits in support and in opposition to prior motions before this Court. The bulk of these statements reflect the view of Stanley Cohen's children that he has breached his fiduciary duties and significant promises to them through his refusal to abide by the terms of the FLP and Trust.
Janet Cohen Kaplan states in her Complaint at para 39: "(t)o accomplish this and also to avoid gift taxes, the lawyer devised a plan whereby each parent would gift each child approximately a 5% interest in the FLP, the sum of which would use up the one million dollar gift tax exemption allowed at the time. In addition, the plan provided for each parent to enter into an installment sale of an addition 6% interest to each child. The sale would be reflected in promissory notes (Notes') payable by each child to each parent in the amount of $267,267". She goes on to state in a Nov. 11, 2009 Affidavit that : "(m)y father knew that neither my brothers nor I had the financial wherewithal to pay more than a half million dollars represented by the promissory notes we each signed. My father specifically told us that we should sign the notes and not have to worry about repaying them, that they were a formality for tax purposes, and that as a General partner he would make sufficient distributions to the partners to pay the notes".In the same Affidavit, Janet Cohen Kaplan restates: "(m)y father was well aware at the time the Assignment and Assumption Agreements and promissory notes were signed that none of the children had the financial wherewithal to pay the notes. However, he made it clear to each of us that we did not have to worry about that. He told us that the notes were needed for tax purposes so that the transfer of additional partnership interests would not be deemed a gift since the lifetime exemption had already been used, . . .". In the same Affidavit, Janet Cohen Kaplan swore to the following: "(t)he promissory notes were just needed in the event that he ever had to show that the transfers of the additional 5% interests were not gifts, since the million dollar gift tax exemption had already been exhausted".
David Cohen averred in a November 13, 2009 Affidavit that: "(t)he history of the payments on these Notes, my father's conduct in connection therewith, as well as the documentary evidence, all establish that it was never intended that these Notes, totaling over $1.5 million dollars, were to be paid by my brother, sister and I out of our ordinary income. Indeed, my father and mother were aware that none of us had the means or ability to pay the Notes. Rather, it was represented to us and the facts and circumstances clearly demonstrate that it was only through distributions from the limited partnership (the profits earned by the College) that the payments, if and at all, were to be made". In the same Affidavit, David Cohen, like his sister, explains that : "(w)hat (Stanley) omits (in his memorandum of law) is that the only reason it was not done as a complete gift and had to be done as a partial sale was because at the time the value of the FLP (which owns 100% of the shares of stock of Five Towns College) was such that if the total interests were gifted to us, a significant gift tax would have arose. Therefore, an 11% interest in the FLP was transferred to each of us by gift and 11% was set up as a purported sale' through the delivery of the Notes, simply to avoid the adverse tax consequences". In a subsequent portion of the same Affidavit, David Cohen swore that : "(m)y father and mother were well aware at that time that none of us had the income sufficient to pay these Notes and it was only by reason of their assurances that any payments necessary would be covered by the FLP distributions, and through the express representation contained in the Assignment and Assumption agreement that we would each be receiving 22% of the net profits of the partnership (meaning 22% of the income of the College)that these Notes were executed . . . Indeed, that is exactly what happened initially as my father on at least two occasions caused the College to make distributions to us (although since I do not have access to the books and records of the College I have no knowledge of what form these distributions took) sufficient to cover our taxes on the income and to cover the payment of interest to him and my mother's estate on the Notes so that he could satisfy any inquiries or audits regarding the authenticity of the Notes". In the same Affidavit, David Cohen goes on to state that : "(t)he Notes were simply created to show the taxing authorities that the transaction was not a complete gift which would have created adverse tax consequences". Most significant is the following David Cohen statement "(a)s checks and receipts for payment annexed hereto . . . unequivocally establish, at first, after the Notes were executed in 2005 and 2006 my father caused payments to be made to us from the College above and beyond our normal salaries. Those payments were then cleared through our accounts and paid to him (since he had inherited my mother's notes at the time as well) and he acknowledged on the receipts for payment in each instance I acknowledge that the payment due on the note is completed' ".
Perhaps, most extraordinary, is the affidavit of R. Mark Hochberg, Esq., former Attorney who created both the Trust and the FLP for Stanley and Lorraine Cohen. He states that a Grantor Trust, such as the one he created in 1992, is a legitimate planning device only provided that bona fide transactions underlie the transfer of property used to fund the Trust. Under the Internal Revenue Code, states Hochberg, as an attorney who specializes in Trusts and Estate law, in order to be a legitimate trust under the Internal Revenue Code, the settlors must actually be the source of the funding of the trust property. He asserts that: "I would never risk my license to practice law, or my own personal reputation as an attorney, by knowingly creating or assisting in the creation of as trust that could be considered a sham'. He avers that he has now been informed that none of the Cohen children contributed any of their own assets towards the purchase of the Trust property and that all mortgage payments on such property have been made by the Five Towns College. This is confirmed by the closing statement annexed to the College Defendant's motions. He goes on to state that the Cohen children could not lawfully avoid significant tax consequences by placing property in trust for themselves as settlors when they did not purchase the property through a bona fide sale. With regard to the FLP, which he also created, Hochberg states that minimizing gift taxes can be legitimate, again so long as the underlying transactions are bona fide. He reviewed the Affidavits and verified statements of Janet Cohen Kaplan and David Cohen in this case and concludes that had he known exactly what the two Plaintiffs swear to therein, he would never have participated in the creation of the FLP. In addition his awareness, through the same affidavits that Stanley Cohen arranged for money to be deposited in the childrens' accounts, and that interest payments were made from the monies provided by Stanley Cohen as opposed to the children seriously troubles him. He avers that: "(h)ad I known at the time of the IRS audit that the purported interest payments from the Cohen children were not made out of their own personal assets, I would have never furnished the checks to the IRS, nor would I have had any part in trying to persuade the IRS that the transfer of Partnership interest to the Cohen children was a bona fide sale". This Affidavit was submitted by the attorney for the Trust and FLP after he allegedly read the admissions of David Cohen and Janet Cohen Kaplan in these cases joined for discovery purposes. Stanley Cohen is his former client; yet he advises that the checks signed by the Cohen children and forwarded by him by Stanley Cohen to respond to an IRS audit constituted a violation of the Tax Code and that he would not have participated in communicating to the IRS has he know the truth. Prior thereto, he had submitted letters and a March 11, 2011 affidavit attesting to the validity of the documents he created.
In post submission letters, attorneys for the children object to the Hochberg Affidavit, being submitted with the College Defendants' Reply papers as well as the College Defendants' citation of specific provisions of the Internal Revenue Code, IRS rulings and federal case law interpreting the requirements of gift and estate tax law. They also state that Hochberg's Affidavit contradicts his earlier opinions and statements as to the validity of the instruments that are at the heart of their actions before this Court.
As a result of the post submission letters on behalf of Janet Cohen Kaplan and David Cohen and in support of the Court's desire to have a full and fair record in this case, the Court held oral argument on these motions on Tuesday, October 11, 2011. All counsel were present and participated.
Counsel for the College Defendants reiterated what was set forth above. Counsel for David Cohen added that since the motion to dismiss his client's action was pre-answer and pursuant to CPLR § 3211 (a), the Court was precluded from searching the record to reach its determination. Counsel for Janet Cohen Kaplan supported this view, as the three actions herein had only been joined, thus far, for discovery purposes.
Further argument was made on behalf of Janet Cohen Kaplan that Summary Judgment was inappropriate because Stanley Cohen denied that he made any promises concerning the promissory notes, thereby raising an issue of fact early in the litigation. She also stated that her client's papers set forth that the money paid by the College at closing must have come from joint accounts owned in part by the settlors to the Trust. Counsel also set forth that no defense of tax fraud had been raised in the College's answer to Janet Cohen Kaplan's amended complaint. In addition, counsel stated that the closing statement annexed to the College's papers, demonstrating the College's payments of the down payment for the real property owned by the Trust was accompanied solely by an attorney's affirmation.
In response, counsel for the College offered the Court copies of all cancelled checks demonstrating the College's payments in connection with the Trust property. Counsel for the College Defendants also set forth that due to the illegality of the transactions and the Court's need to divorce itself from these actions, there was no requirement to plead the illegality defense. Moreover, the College argues that Janet Cohen Kaplan, having made the admissions set forth in this case, was bound by the same.
Post Conversion Submissions
Following oral argument of the CPLR § 3211 (a) motion to dismiss David Cohen's complaint, this Court determined that the issues raised by the College were significant enough to require the Court to search the entire record in all the cases involving the Cohen FLP and Trust before it. Accordingly, rather than rule on procedural grounds, the Court asked the parties to submit whatever papers they believed necessary and converted that motion to one under CPLR § 3212. The Court then received papers on behalf of David Cohen, the College and Stanley Cohen.
In his post conversion Affidavit, David Cohen made the following arguments. First, he asserts, as before, that if it turns out that taxes were not paid in connection with the creation and administration of the Trust and FLP, such would result in Stanley Cohen being required to pay taxes and penalties and would not, in and of itself, result in non- enforcement of such agreements. Second, David Cohen states that his comments were taken out of context and all he had said and/or meant by them was that the promissory notes were promised by his parents to be paid out of income, distributions and profits that the Cohen children were supposed to be paid as limited partners and employees of the College and that such never occurred. Third, David Cohen argues that he never participated in nor conspired with his father in a scheme to evade taxes and if such occurred, it was at the behest of Stanley Cohen alone. Fourth, David Cohen avers that Board members of the College were intimately involved with all of Stanley Cohen's actions, and have belatedly raised these issues in order to avoid the results of their aiding Stanley Cohen's improper conduct. Most significantly, David Cohen now states, for the first time before this Court, that the moneys furnished to purchase the real property owned by the Trust (i e, the $900,000) came from three investment accounts in which each of the three Cohen children were named with Stanley Cohen as joint owners. Janet Cohen Kaplan had already alluded to this possibility in her papers in opposition to the College Defendants' motion for summary judgment. While such money was initially loaned according to David Cohen, by the College to the Trust, he asserts that it was ultimately repaid out of theses investment accounts and that the College's books and records should so reflect. David Cohen annexes copies of these accounts from 1992, each naming the Cohen children and Stanley Cohen as joint owners. David Cohen opines that such accounts no longer exist and, in any case, that such information is solely in the hands of Stanley Cohen. This claim is further supported by an affidavit submitted by Donald Novick, Esq, attorney for the majority co-trustees of the Trust. Thus, under CPLR § 3212(f), David Cohen's counsel counsel urges that facts exist within Stanley Cohen's control precluding summary judgment at this juncture. With regard to the promissory notes linked to the FLP, David Cohen states that he always had every intention of repaying the same and that such were to come out of profits of the FLP. He further argues that Hochberg was well aware of this and counseled him and the other Cohen children that such was legal under the Internal Revenue Code.
David Cohen's counsel reiterates his original argument that the College as non- party to the instruments in question, lacks standing to made the arguments herein and asserts further that under CPLR § 3212(f) there are issues of fact within Stanley Cohen's particular knowledge that they need to discover and that Summary Judgment is thus premature.
Based upon David Cohen's most recent Affidavit and his own review of the two instruments, Louis Borodinsky, an attorney and Certified Public Accountant submits an Affidavit stating that in his professional opinion, the Trust and FLP were lawfully created and executed. According to Borodinsky, Hochberg's statements are based on speculation and couched in terms such as "(h)ad I known". He states further that even if the $900,000 portion of the purchase price for the Trust property did not come from the assets of the Cohen children, a fact now in dispute, this would not invalidate the Trust, but merely require the payment by the College, Stanley or the Cohen children themselves of income or gift taxes. With regard to the FLP, he states that such appears proper on its face and that a partnership is recognized under the Internal Revenue Code, even where the partner's interest is derived from a gift. IRC § 704(e). As with the Trust, he opines that if it is determined that the promissory notes were a sham, the likely outcome is that the FLP will be deemed a gift by Stanley and Lorraine Cohen and subject them to tax liability; but in no event would such invalidate the FLP itself.
In its reply memorandum in further support of its motion for Summary Judgment, the College Defendants state as follows: first, as admitted by David Cohen's own sworn statements, the purpose of the FLP was to evade gift taxes; and second, the promissory notes were created but never real in that "(i)t was never intended that these Notes, totaling over $1.5 million dollars, were to be paid by my brother, sister and I out of our ordinary income. It was represented to us . . . that it was only through distributions from the limited partnership (the profits earned by the College) that the payments, if any at all, were to be made". In addition, the College avers that David set forth that the ruse was created specifically to mislead the IRS in the event that such body were to question the transaction, stating "(t)he Notes were created solely due to the fact that a pure gift to each of us of our entire 22% limited partnership interests in the Stanley and Lorraine Limited Partnership (the FLP) would have resulted in adverse gift tax consequences to my mother and father. . . in order to avoid the tax liability, my father directed that the transfer of the FLP interests be structured as a combination gift/sale. . . . the Notes were simply created to show the taxing authorities that the transaction was not a complete gift which would have created adverse tax consequences". As set forth in its previous papers, the College reiterates that when the IRS actually audited Stanley Cohen's gift tax returns, "(w)hen faced with audits that could have imposed taxes, my father caused distributions or bonuses to be paid to us from the College which were then deposited into our account, and the checks then cut by us to pay interest on these Notes in 2005 and 2006 in order to satisfy the taxing authorities". . .; .It was never intended that my brother, sister and I pay these Notes out of our ordinary income . . . in 2005 and 2006 my father caused payments to be made to us from the College above and beyond our normal salaries. Those payments were then cleared through our accounts and paid to him. . . ."
With regard to the Trust, The College sets forth that David Cohen has averred that the value of the Trust is $54 million dollars. Yet, the College paid the down payment, all mortgage payments, all tax payments and the cost of all improvements on the property owned by the Trust including the construction of the dormitories. The College asserts that despite David Cohen's latter day speculation that the $900,000 payment came at some point from joint accounts owned, in part by the Cohen children, there is still no dispute, that such accounts, even if utilized ultimately to refund the down payment, were funded in toto by Stanley Cohen. David Cohen may argue that $900,000 gifted to him and his siblings prior to 1992 (without any report to the IRS) may have been utilized as an after the fact down payment to purchase a multi million dollar piece of property; however, all mortgage payments and improvements on such Trust property were made by the College and, therefore, by 2004, when the lifetime gift allowance should already have been used, a gift of $1 million dollars partnership interest in the FLP was made to the Cohen children without any payment of gift tax. The College states that there is no question that David Cohen was aware that between 1992 and 2004 at least $1.9 million plus mortgage payments and real estate taxes were gifted to him and his siblings but that far less than that was reported to the IRS. In support of this allegation, the College cites, IRS Revenue Ruling 77-229, which states that the gift tax applies to all transactions whereby property or property rights or interest are gratuitously passed or conferred upon another, regardless of the means or device employed. This being the case, the College asserts that CPLR § 3212 (f) does not apply as there is no question that the funding of the $900,000 came solely from Stanley Cohen and that when added to the College's undisputed payments over the years, has created a gross underpayment of gift tax.
The College Defendants disagree with David Cohen and his CPA's characterization of Hochberg's opinion, since it is not based on speculation; but, rather, on direct sworn statements made by David Cohen in the context of this litigation, years after the formation of the instruments in question. Moreover, the College sets forth that it is absurd to separate the illegal notes from the FLP itself as David Cohen has sworn that "(t)he Notes are inextricably intertwined with all of my mother's estate planning documents and my father and mother affirmatively represented to us at the time the notes were given that the Notes were only necessary so they could avoid the payment of gift taxes . . ." The same is true of the Trust as set forth above, as per the College, even based on David Cohen's unfounded assertion that he was gifted along with his siblings, the $900,000 purportedly used for purchase of property worth $54 million for which no gift tax at the mandated rate of 40% has been paid.
Finally, the College reiterates its assertion that it has a direct interest the real property owned by the Trust, that it is being sued under the very agreements that it now asserts were unlawful in their execution, and that, in any case, the Court has the authority and obligation to remove itself from enforcement of illegal contracts.
Stanley Cohen's submission in response to the Court's conversion is an affidavit in which he states and submits documentary proof that the Five Towns College Trust was the purchaser of the property currently owned by the Trust in which the Cohen children are named as settlors; and that the entire down payment for such transaction came from the College. Stanley Cohen states further that the College paid for all improvements on the property and all taxes on such property. He avers that the joint accounts referred to in Janet Cohen Kaplan's and David Cohen's oppositions to the Summary Judgment motions by the College, were funded solely by him. He states, finally, that his children knew that gift taxes were not paid or going to be paid in connection with his funding of the childrens' investment accounts and that no gift tax return was ever filed in connection with the same.
Both David Cohen and Janet Cohen Kaplan then submitted to the Court, in December, 2011, letters objecting to Stanley Cohen's most recent affidavit, setting forth that it contradicted his earlier affidavit in opposition to the original motions, in which he averred that his actions were not in violation of the Internal Revenue Code. In this vein, the Court also received a letter, which it did consider, from Donald Novick, Esq, , who represents the Cohen children as the majority of co-trustees of the Trust in Surrogate's Court. He seeks to clarify that the documents annexed to his affidavit demonstrate that the promissory note executed by the Trust in the amount of $700,000 in connection with a line of credit from North Fork Bank was secured by the Cohen childrens' Compass Investment Accounts. He states that monies from such accounts were given to North Fork Bank by Stanley Cohen on two occasions in 1996; and that these accounts were later utilized to guaranty additional loans, thus demonstrating that the Cohen children did pay consideration for the purchase of the Trust property and/or the payment of the mortgage on such property.
The College then submitted two further post submission letter to the Court. In these letters, the College's counsel states that Stanley Cohen's new affidavit does not contradict his earlier one; but merely provides documentary proof that he funded the so-called $900,000 payment to the bank and that no gift tax return was filed in connection with the gift of the Trust property to him. In the later letter, the College Defendants' counsel replies to Mr Novick's letter arguing that even if his unfounded allegations are correct, there is no argument that Stanley Cohen funded the $900,00 prior to 1992 and that no gift tax return was filed in connection therewith. Thereafter, in 2004, when another $1,000,000 was gifted to the Cohen children, plus mortgage payments, taxes and utilities on the Trust property, no gift taxes were paid at all. This, as per the movants, is fraud on the U S government.
CPLR §3212In order to obtain summary judgment, dismissing an action, the moving party must make a prima facie showing of entitlement to judgment as a matter of law, offering sufficient evidence to demonstrate the absence of any material issues of fact. Goldberger v Brick & Ballerstein, 217 AD2d 682, 629 NYS 2d 813 (2d Dep't 1995) (internal citations omitted). The burden then shifts to the party opposing the motion to come forward with proof in admissible form demonstrating that there are indeed material issues of fact which preclude the granting of such motion. Zayas v Half Hollow Hills Cent School Dist, 226 AD2d 713, 641 NYS 2d 701 (2d Dep't 2009).
STANDING
One who is not party to an agreement generally lacks standing to challenge its enforcibility, unless it is a third-party beneficiary thereof. Decolator, Cohen & DePrisco LLP v Lysagt Lysagt & Kramer PC, 304 AD2d 86, 756 NYS 2d 147 (1st Dep't 2003). However, the Court of Appeals has opined that standing will be ignored as a defense to a motion based on illegality that invokes principles of public policy. In such cases, the concern of the court is not with the position of the defendant; but, rather, whether recovery on a claim by the plaintiff can proceed where it is destructive of laws enacted for the public in general. See, Flegenhemer v Brogan, 284 NY 268, 30 NE 2d 591 (1940). In that case, the plaintiff administratrix brought a complaint to recover beneficial title to property of her intestate, which he parted with in order to perpetrate a fraud upon the State, having enacted a statute regulating the sale of alcoholic beverages. In response to defendant's motion to dismiss her complaint, the administratrix argued that the defendant was powerless to question the legality of transactions in which he had no part. In rejecting the plaintiff's standing argument, the Court of Appeals stated that: "(b)ut our primary concern is not with the position of the defendant. The immediate question is whether on the presently admitted facts a recovery by the plaintiff should be denied for the sake of public interests. This is a question of public policy in the administration of the law. . .Whatever is injurious to the interests of the public is void on grounds of public policy". Id (internal quotations omitted).
IN PARI DELICTO
This equitable doctrine directs that courts refrain from intercession to resolve a legal dispute between two wrongdoers. Kirschner v KPMG LLP, 15 NY3d 446, 938 NE 2d 841, 912 NYS 2d 508 (2010). The Court of Appeals aptly reminds us that this doctrine has survived for at least two centuries because it denies judicial relief to an admitted wrongdoer, thereby deterring illegality, and it relieves the courts from becoming involved in disputes between wrongdoers. Id. "No court should be required to serve as paymaster of the wages of crime, or referee between thieves. Therefore, the law will not extend its aid to either of the parties or listen to their complaints against each other, but will leave them where their own acts have placed them". Id.
A related doctrine was defined by the United States Supreme Court in the case of Bartle v Nutt, 29 US 184 (1830), where a contract made by the plaintiff with a public agent was sought to be enforced against a partner thereto, despite the fact that it was discovered that it was based upon fraudulent vouchers submitted to the United States government. In rejecting the right to adjudicate such a claim the Court stated that:
"To state such a case is to decide it. Public morals, public justice, and the well established principles of all judicial tribunals, alike forbid the interposition of courts of justice to lend their aid to purposes like this. To enforce a contract which began with the corruption of a public officer, and progressed in the practice of known and willful deception in its execution, can never be consummated or sanctioned by any court. The law leaves the parties to such a contract as it found them. If either has sustained a loss by the bad faith of a particeps criminis, it is but a just infliction for premeditated and deeply practiced fraud, which, when detected, deprives him of anticipated profits, or subjects him to unexpected losses. He must not expect that a judicial tribunal will degrade itself by an exertion of its power, by shifting the loss from one to the other; or to equalize the benefits of burdens which may have resulted by the violation of every principle of morals and of laws". Id.
INTERNAL REVENUE CODE
IRC § 2043 provides, in relevant part, as follows:
"(a) IN GENERAL
If any one of the transfers, or powers enumerated and described in sections 2035 to 2038, inclusive, and section 2041 is made, created, exercised, or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value at the time of death of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent".
As set forth by the United States Supreme Court in Commissioner v Estate of Church, 355 US 632, 69 S Ct 322, 93 L Ed 288(1949):
" . . . an estate tax cannot be avoided by any trust transfer except by a bona fide transfer in which the settlor, absolutely, unequivocably, irrevocably, and without possible reservations, parts with all of his possession and all of his enjoyment of the transferred property. After such transfer has been made, the settlor must be left with no present legal title in the property, no possible revisionary interest in that title,and no right to possess or to enjoy the property then or thereafter. In other words, such a transfer must be immediate and out and out . . . ." .
In that same decision, the Supreme Court both opined that the term "(a)n adequate and full consideration in money or money's worth" is essentially the same whether applied to estate or gift tax and differed from such term as interpreted under common law. Thus, the Supreme Court defined the statutory mandate as requiring "(t)he kind of consideration which in an arm's length business transaction provides the transferor of property with the full value thereof". Id.
The United States Court of Federal Claims set forth in Estate of Musgrove v United States, 33 Fed Cl 657 (1995) , in determining whether in intra- family transfer constituted a gift as follows:
"Although the presumption in an intrafamily transfer is that the
transfer between related parties is a gift , . . ., the presumption that an intrafamily transaction is gratuitous may be rebutted by an affirmative showing that there existed at the time of the transaction a real expectation of repayment and intent to enforce the collection of indebtedness". . . . In order to overcome the presumption that a transfer from a father to a son is gratuitous, the proof offered to accomplish it must be certain, definite, and convincing, and leave no reasonable doubt as to the intention of the parties".
IRC § 2036 provides, in pertinent part, as follows:
"The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer(except in a case of a bona fide sale for and adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life . . . .". (internal quotations omitted).
The Second Circuit Court of Appeals has held that promissory note does not exist nor change the nature of a transaction for gift or estate tax purposes under the above quoted sections of the Internal Revenue Code, where there is an implied agreement among family members that the grantor will not make a demand on the obligation and that the notes were not intended to be enforced. Maxwell v Commissioner, 3 F 3d 5910 (2d Cir 1993). As stated:
"(w)here, as here, there is an implied agreement between the parties that the grantee would never be called upon to make any payment to the grantor, as, in fact, actually occurred, the note given by the grantee had no value at all". (internal quotations omitted). Id. at 596.
This is not an easy determination for the Court. The College Defendants have made a prima face showing of entitlement to Summary Judgment, dismissing all actions before the Court. While each of the parties makes the assertion that the others have been involved in serious wrongdoing, under the principles set forth above, it simply does not matter. It is irrelevant whether the College Defendants have standing to make this motion, if the extensive admissions by the Plaintiffs, Stanley Cohen himself and the former attorney who created the documents that are at the heart of this entire dispute are found to be what, in fact, occurred. Under the relevant Tax Code provisions, if these allegations are indeed proved to be correct, the Trust and the FLP may either have been created or performed in violation of the Tax Code, whether or not the parties understood the implications of their willing and knowing acts. It matters not whether the persons behind these motions are the creator of the instruments, his agents (meaning the College Board itself), or the purported settlors and beneficiaries thereof. It matters less whether they participated in innocently or with full knowledge. The instruments under which they currently are acting all may violate federal law, based on their admissions, the statements of former counsel (whose opinion is based not on speculation but upon alleged admissions by the Settlors of the Trust and limited partners of the FLP) and their signatures on documents provided to the federal taxing authorities.
Upon the shifting of the burden as required by law, Janet Cohen Kaplan and David Cohen have now averred that questions of fact exist, precluding Summary Judgment. While, to some degree these statements appear to contradict the numerous statements referred to in the papers of the College Defendants, the Court is obligated to provide those parties with the opportunity to present what they believe the facts to be. The Court also notes the College movant participated in this transaction and cannot itself escape its participation in making payments that were required to be made by the settlors of the Trust and limited partners of the FLP. Thus, while the College Defendants have made a case for prima face entitlement to Summary Judgment dismissing Janet Cohen Kaplan's and David Cohen's actions against them, the Cohen children have submitted purported facts which preclude the Court at this juncture from granting the motions. David Cohen has also submitted the affidavit of an attorney/CPA in support of his opposition to the College's motion for Summary Judgment. Such opinion contradicts Hochberg's statements and sets forth that the instruments are legal and cannot be set aside just because taxes are due. The parties must address their sworn statements regarding the purpose of the promissory notes, the fact that they were an inextricable segment of the estate plan, and that fact that the Trust, while perhaps lawful in concept, may have resulted in making settlors three persons who provided no consideration for their positions, and may have resulted in the ownership of multi million dollars worth of real property with the payment of gift tax on only $1 million dollars. The case law cited by the College Defendants, with which this Court agrees, does not find that these kinds of discrepancies result in a mere requirement to pay taxes owed; but, rather, seem to dictate, the result requested herein.
Therefore, although the Court finds that the papers submitted by the Cohen children, upon the shifting of the burden, have raised issues of fact precluding summary judgment, there are certain legal issues raised in opposition to the current motions which this Court believes must still be addressed. The doctrines set forth by the United States Supreme Court and the New York Court of Appeals do not permit this Court to avoid these motions on certain of the objections raised on behalf of David Cohen and Janet Cohen Kaplan. The Court agrees with the College Defendants that it must not participate in enforcement of agreements which violate federal and State law either in their inception or in their execution. In so holding, this Court does not state and indeed is in no position to state which of these parties would be to blame legally or otherwise should this Court ultimately find that what the College professes actually occurred. However, what it cannot do under such a scenario is become an active participant in the enforcement of the agreements nor in equalizing the parties' positions. Indeed, the Court believes that no party ultimately would gain from the granting of these motions. While the College may believe, as set forth in its reply papers, that it would then become the settlor of the Trust, such may not be true if the Trust was an illegal instrument. While the children may believe that Stanley Cohen and his desire to disinherit his children is at the core of these motions, the allegations set forth by the College regarding his actions may well subject him to more than civil liability. The dismissal of these cases would likewise not resolve the ultimate rights of the Cohen children to their mother and fathers' estates. These questions would remain open, but what would occur should it be found that the College's allegations are correct is a rejection of the parties' attempt to make the Court an arbiter of purported criminality and a participant in the scheme. This will not pass.
It is very clear that the parties' requested relief in all three actions must be analyzed against the context that when dealing with tax matters, form must yield to substance, meaning, not what the parties purported to have done, but what they actually did, which is determinative of tax liability. In Morsman v Commissioner, 90 F 2d 18 (8th Cir 1937) the Court held: "(s)ubstance and not form should control in the application of tax laws. When a taxpayer thus boldly proclaims that his intent, at least in part, in attempting to create a trust is to evade taxes, the court should examine the forms used by him for the accomplishment of his purpose with particular care; and, if his ingenuity fails at any point, the court should not lend him its aid by resolving doubts in his favor". Id.
The Trust in this Court's opinion will not be enforced if it is found to have been a mechanism of avoidance of gift or estate tax as required by IRC § 2036 by effecting a transfer without a bona fide sale for any consideration in money or money's worth. The FLP likewise will not be enforced by the Court if it is found to be violation of IRC§ 2043 (a) by providing a mechanism to gift property without payment of gift tax by execution of promissory notes to the beneficiaries that were not to be repaid by their own income and were misrepresented to the IRS, during an audit through transfer from the College to the beneficiaries, and to the general partner. The Court of Appeals has so specifically stated in Maxwell v Commissioner, supra. Neither lack of standing, wrongdoing on the part of the movants, agency of a purported major wrongdoing by the movant's principal, laches nor pre-motion opinions by former tax counsel, who now recants provide, the Court with the ability to ignore what is presented in such context. In addition, the clear dictates of the United States Supreme Court in Bartle v Nutt, supra and the New York Court of Appeals in Kirschner v KMPG LLC. supra , preclude the Court from being "particeps" with the Cohens in the adjustments of the Trust if those were criminal acts.
Moreover based on the above, the Court disagrees with counsel for Janet Cohen Kaplan with regard to its ability to search the entire record in all three of the actions before it. Indeed, Janet Cohen Kaplan herself benefits from this ability since only David Cohen presented this Court with an affidavit from a CPA, setting forth his opinion that the instruments were created and executed in a lawful manner. Each and every claim in all three actions before the Court is based on the identical Trust and FLP.
Accordingly, based upon the above, the motions by the College Defendants for Summary Judgment, dismissing the complaints of the parties herein are denied. The cross-motions for sanctions are likewise denied as the issues rased are far from frivolous. The Court notes, in addition, that the while it may determine in the context of these actions, the questions raised, that the ultimate arbiter of the tax liability issues is really the Internal Revenue Service. If any of the parties hereto are truly interested in resolving these issues, they should refer them to the proper authorities.
This constitutes the DECISION and ORDER of the Court.
Dated: January 5, 2012
Riverhead, New York
EMILY PINES
J.S.C.