A U.S. Tax Court judge ruled on May 2 that an IRS official did not abuse her discretion when she rejected an offer by Norman Hinerfeld of Larchmont to settle a $550,000 tax liability for $12,720.
The IRS rejected the offer because it did not include the value of his Larchmont house in determining how much he could pay.
Hinerfeld had transferred the house to his wife, Ruth, for $10 in 2003. Nearly three years later, the IRS assessed him for unpaid employment taxes by Thermacon Industries from 2002 to 2004.
Hinerfeld did not dispute the tax liability, but he argued that he had resigned as Thermacon chairman in 2003 and did not know about the tax issue until 2006.
The property at the center of the dispute is on Oak Lane at Delancey Cove, Long Island Sound, including a 6,091-square-foot house with six bedrooms on a 1.8-acre lot.
Hinerfeld bought it for $185,000 in 1968, according to Westchester property records. Today it is valued at more than $4.1 million on the tax roll.
An IRS settlement officer originally recommended acceptance of Hinerfeld’s settlement offer. But an official who reviewed the case discovered that Hinerfeld and his wife were defendants in a federal lawsuit in New Jersey, in which they were accused of fraudulently transferring Thermacon assets to a company owned by Ruth and their children. That left Thermacon unable to pay its creditors.
The IRS rejected Hinerfeld’s offer and concluded that Ruth Hinerfeld held title to the Larchmont property as her husband’s nominee and not as the actual owner. That meant that Norman Hinerfeld had sufficient assets to satisfy the tax liability.
He petitioned tax court, arguing that the settlement officer had abused her discretion.
The conclusion that Ruth Hinerfeld was her husband’s nominee, Senior Judge James S. Halpern ruled, “was not only reasonable but correct.”
The record does not establish that she paid any consideration for the house, he said.
Ruth had admitted at trial that she acquired the house to shield it from creditors. That was three years before the IRS assessment.
But under IRS rules, “the relevant question is not whether the transfer … was motivated by a desire to avoid the particular tax liability,” Halpern stated, “but simply whether the transfer was made to protect the property from liabilities.”
There is plenty of evidence, he said, that the transfer was “related to his (Norman Hinerfeld’s) and Thermacon’s financial difficulties.”
He continued to live in the house and pay some of the expenses, and there is no evidence, Halpern said, that the transfer “significantly affected his possession or enjoyment of the property.”
The IRS settlement officer, Halpern concluded, “did not abuse her discretion in rejecting an OIC (offer) that did not reflect the value of that property.”