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TAX TRENDS

rental income from the property to pay regarding their tax liabilities for the 1989 sanctions. The Garavaglias then asked
personal expenses, and that none of the and 1990 tax years in Tax Court could the Supreme Court to hear their case, but
Village Mall’s funds were distributed to not contest the tax liabilities again in a it declined to do so.
VSHPHH’s beneficiaries. refund suit in district court in 2018. Despite these decisions against them,
Applying the Patras test, the court the Garavaglias continued their quest
came to the same conclusions for each Background in the courts to avoid paying their tax
factor as it had in the analysis of Pachava. Charles and Mary Ann Garavaglia were liabilities for 1989 and 1990. They later
As the Village Mall property had been a married couple. Charles was convicted brought a Bivens claim in district court
transferred for $1 and the transfer took of mail fraud and filing false tax returns against the United States, the IRS, and
place after Shant lost his Tax Court case, in the 1990s. As part of his convictions, unknown IRS agents. In that claim, they
the first two factors of the test were met, he was obligated to pay certain income alleged that they had needed the boxes
while the fourth was not because the taxes that were past due to the govern- of records earlier destroyed to defend ef-
transfer had been recorded. The third ment, and the plea agreement in his case fectively against the notice of deficiency
factor was met because Shant and Nina specified that he remained liable for any in their Tax Court case and that the
were co-trustees at the time of the trans- additional taxes that the government IRS’s destruction of the records therefore
fer of the Village Mall property, Nina was might find that he owed. During the violated their due-process rights. The
later the sole trustee after Shant resigned investigation of his and his company’s district court dismissed the complaint
as trustee, and Shant’s children were misdeeds, the IRS seized over 100 boxes against all parties, and a court of appeals
the beneficiaries of the trust. The fifth of documents and did not return them. affirmed its decision. However, in the
and sixth factors were met for the same In December 2000, the IRS audited proceedings, it came to light that 15 of
reasons the court cited in support of its the Garavaglias for the 1989 and 1990 the boxes of records the IRS said had
conclusion that Shant had control of the tax years. In September 2002, however, been destroyed still existed.
property. As with Pachava, having found it informed the couple that there would This relit the fire under the Gara-
five of the six Patras factors weighed in be no change to their 1989 and 1990 tax vaglias, who in 2017 filed a Freedom of
favor of a nominee finding, the court held liabilities. Having apparently finished its Information Act (FOIA) suit to compel
that VSHPHH was a nominee of Shant audit of those years, the IRS informed production by the IRS of the rediscov-
and, therefore, the tax liens against Shant the Garavaglias that it was going to ered boxes of records. The IRS agreed to
attached to the Village Mall property. destroy the records that had been seized produce the documents. The Garavaglias
during the earlier criminal investiga- filed a second FOIA request in 2018 for
Reflections tion of Charles if they did not come any records related to the audit of their
Besides arguing that the Patras test pick them up. The Garavaglias’ lawyer 1989 and 1990 tax years and any ad-
was not met, Pachava argued that the received about 25 boxes of the records at ditional boxes of their financial records
IRS’s claims fell under the New Jersey this time. that had not been disclosed but were still
Fraudulent Transfer Act, which has a While it had seemed the IRS was in IRS possession, which resulted in a
four-year statute of limitation and that done with the Garavaglias for 1989 and similar agreement with the IRS.
the nominee lien was barred by the run- 1990, it was not. It did not formally Having had some success on the doc-
ning of that four-year limitation period. close the audit, and, in 2006, the IRS ument production front, the Garavaglias
Pachava also, curiously, argued that the informed the Garavaglias that they owed decided to take another dip in the 1989
IRS’s alter ego claim failed. However, the significant deficiencies for those years. and 1990 tax liability pool. In 2019, they
court noted that the IRS did not bring The Garavaglias took the IRS to Tax filed amended returns for 1989 and 1990,
any claims under the New Jersey Fraudu- Court over its determination, but, unfor- seeking refunds of $603,515 for tax year
lent Transfer Act or regarding alter ego tunately for them, the court affirmed the 1989 and $637,639 for 1990. The IRS
liability. Therefore, the court rejected IRS’s findings. did not respond to the amended returns.
these arguments. The Garavaglias appealed the Tax Consequently, the Garavaglias filed a
Hovnanian, No. 3:18-cv-15099 (D.N.J. Court’s decision to the Sixth Circuit. refund suit in district court.
12/27/22) Besides contesting the deficiencies, the In lieu of an answer to the Garava-
Garavaglias asked the court for spoliation glias’ complaint in the suit, the IRS filed
Old tax liabilities cannot sanctions for its earlier destruction of a motion to dismiss. The IRS argued
be relitigated documents. The court affirmed the Tax that the case must be dismissed for lack
Married taxpayers who had already Court’s deficiency judgment and rejected of subject matter jurisdiction under Rule
challenged the IRS’s determinations the Garavaglias’ claim for spoliation 12(b)(1) of the Federal Rules of Civil

64 March 2023 The Tax Adviser