Iantosca et al v. Benistar Administrative Services, Inc et al

Filing 376

Judge Nathaniel M. Gorton: ORDER entered. MEMORANDUM AND ORDER: "In accordance with the foregoing Memorandum, 1) Plaintiffs' motion to strike and for sanctions (DocketNo. 291 ) is DENIED; 2) Defendants' motions to strike (Docket Nos. 349 and 356 )are DENIED;3) the motions for summary judgment with respect to Plaintiffs' First Amended Complaint filed by Benistar Admin Services, Inc. (Docket No. 276 ), Benistar 419 Plan Services, Inc. (Docket No. 278 ), Step Plan Service s, Inc. (Docket No. 280 ) and Daniel Carpenter (Docket No. 284 ) are DENIED; 4) the motion for summary judgment with respect to Plaintiffs First Amended Complaint filed by Molly Carpenter (Docket No. 282 ) is ALLOWED; 5) the motions for summary j udgment with respect to the government's tax lien claim filed by Benistar Admin Services, Inc. (Docket No. 333 ), Benistar 419 Plan Services, Inc. (Docket No. 334 ) and the remaining defendants (Docket No. 335 ) are all DENIED; and 6) the government's motion for partial summary judgment against Benistar Admin Services, Inc. and Benistar 419 Plan Services, Inc. (Docket No. 332 ) is, with respect to the Benistar Plan's status as a listed transaction from February 28, 20 00 to January 20, 2006 and the defendants' qualification as organizers and/or sellers within the meaning of the superceded law, ALLOWED; but is, with respect to the defendants'qualification as material advisors and the issue of reasonable cause, DENIED. So ordered."(Moore, Kellyann)

United States District Court
District of Massachusetts
________________________________
JOSEPH J. IANTOSCA and DAVID A. )
IANTOSCA, as guardians of Joseph )
Iantosca Sr. and as Trustees of )
the Faxon Heights Apartments
)
Realty Trust and Fern Realty
)
Civil Action No.
Trust, BELRIDGE CORPORATION,
)
08-11785-NMG
GAIL A. CAHALY, JEFFREY M.
)
JOHNSTON, BELLEMORE ASSOCIATES, )
LLC, and MASSACHUSETTS LUMBER
)
COMPANY, INC.,
)
Plaintiffs,
)
)
v.
)
)
BENISTAR ADMIN SERVICES, INC.,
)
DANIEL CARPENTER, MOLLY
)
CARPENTER, BENISTAR PROPERTY
)
EXCHANGE TRUST COMPANY, INC.,
)
BENISTAR LTD., BENISTAR EMPLOYER )
SERVICES TRUST CORPORATION,
)
CARPENTER FINANCIAL GROUP, LLC, )
STEP PLAN SERVICE INC., BENISTAR )
INSURANCE GROUP, INC., and
)
BENISTAR 419 PLAN SERVICES INC., )
Defendants,
)
TRAVELERS INSURANCE COMPANY and )
CERTAIN UNDERWRITERS AT LLOYD’S, )
)
LONDON,
)
Reach and Apply
)
Defendants.
________________________________ )
)
CERTAIN UNDERWRITERS AT LLOYD’S, )
)
LONDON and All Participating
)
Insurers and Syndicates,
Third-Party Plaintiff, )
)
)
v.
)
)
WAYNE H. BURSEY,
Third-Party Defendant. )
________________________________ )
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MEMORANDUM & ORDER
GORTON, J.
In an effort to recover on a multimillion dollar judgment
obtained in Massachusetts state court, plaintiffs have sued to
reach and apply the defendants interest in a settlement arising
from litigation in Pennsylvania.

The United States has

intervened to enforce federal tax liens assessed against two of
the defendants.
I.

Background
Plaintiffs are judgment creditors of several of the

defendants in an aggregate of $33 million, only $15.3 million of
which has been paid.

That judgment (“the Cahaly Judgment”) is

the result of an action in the Massachusetts Superior Court
Department for Suffolk County (“the Cahaly Litigation”) in which
it was held that several of the defendants improperly invested
plaintiffs’ escrowed funds.
Defendants Benistar Property Exchange Trust Company, Daniel
Carpenter, Molly Carpenter, Benistar Admin Services, Inc.
(“BASI”), Benistar Ltd., Benistar Employer Services Trust
Corporation and Carpenter Financial Group, LLC (together “the
Cahaly Defendants”) were parties to the Cahaly Litigation and are
liable under the resulting judgment.

Not all of those parties

were originally named in the Cahaly Litigation but, in September,
2003, the state court “pierced the corporate veil” and extended
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liability to additional entities owned by Daniel and Molly
Carpenter.

The remaining defendants in this case, Benistar

Insurance Group, Benistar 419 Plan Services, Inc. (“Benistar
419") and Step Plan Services Inc. (“Step Plan”) (together “the
New Defendants”), were not parties to the Cahaly Litigation.
Plaintiffs allege that 1) certain of the defendants are
entitled to $4.5 million in settlement proceeds from litigation
they initiated in Pennsylvania (“the Pennsylvania Settlement”)
and 2) Travelers Insurance Company (“Travelers”) and Certain
Underwriters of Lloyd’s, London (“Certain Underwriters”)
(together “the Reach and Apply Defendants”) are poised to deliver
those proceeds to the defendants.

Pursuant to M.G.L. c. 214,

§ 3(6), plaintiffs seek to reach and apply all defendants’
interests in those proceeds to satisfy the Cahaly Judgment.
The Pennsylvania Settlement arises out of an action brought
by the New Defendants, Wayne Bursey (“Bursey”) and BASI against
John Koresko (“Koresko”) and several entities he owned.

Only one

defendant, BASI, is nominally both a judgment debtor in the
Cahaly Litigation and a plaintiff in the Pennsylvania litigation,
and defendants assert that the Pennsylvania Settlement will be
paid only to Step Plan.1

1

Defendants initially asserted
payee of the Pennsylvania Settlement
explanation, contended that the sole
They now have reverted back to their
Plan is the sole payee.
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that Step Plan was the sole
proceeds but then, without
payee was Benistar 419.
original claim that Step

Defendants contend that, because Step Plan was not a party
to the Cahaly Litigation, the plaintiffs cannot reach and apply
its right to the Pennsylvania Settlement in order to enforce the
Cahaly Judgment.

Plaintiffs respond that the Pennsylvania

Settlement may, however, be reached and applied because
defendants have abused and are abusing the corporate form and/or
have fraudulently conveyed their interests in the Pennsylvania
Settlement in order to avoid having to satisfy the Cahaly
Judgment.
This Court, after determining that the plaintiffs would
likely succeed on the merits of their reach and apply claim,
entered a preliminary injunction barring the Reach and Apply
Defendants from distributing any of the settlement proceeds to
the defendants.

The injunction was imposed in November, 2008 for

a six-month period subject to extension for good cause shown,
and, upon motion from the plaintiffs, was subsequently extended
“until further order of this Court”.

Step Plan and Benistar 419

appealed the preliminary injunction to the First Circuit Court of
Appeals and were denied relief.

See Iantosca v. Step Plan

Services, Inc., 604 F.3d 24, 34 (1st Cir. 2010) (affirming
allowance of preliminary injunction).
In a further twist and turn, the Court allowed the
government’s motion to intervene in the case in February, 2011.
The government seeks to enforce two federal tax liens, for $1.12

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million dollars each, that it has filed against BASI and Benistar
419 with the Town of Simsbury, Connecticut.

The government

alleges that the liens attach to any proceeds to which those
entities are entitled as a result of the Pennsylvania Settlement
and have priority over plaintiffs’ claims.
This action is scheduled to proceed to a jury trial in this
Session on Monday, March 26, 2012.

Currently before the Court

are 1) defendants’ motions for summary judgment with respect to
both the plaintiffs’ and the government’s claims, 2) the
government’s motion for partial summary judgment on the issue of
tax liability, 3) two motions to strike filed by the defendants
and 4) a motion to strike and for sanctions filed by the
plaintiffs.
II.

Analysis
A.

Legal Standard

The role of summary judgment is “to pierce the pleadings and
to assess the proof in order to see whether there is a genuine
need for trial.”

Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822

(1st Cir. 1991).

The burden is on the moving party to show,

through the pleadings, discovery and affidavits, “that there is
no genuine issue as to any material fact and that the moving
party is entitled to judgment as a matter of law.”

Fed. R. Civ.

P. 56(c).
A fact is material if it “might affect the outcome of the

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suit under the governing law.”
477 U.S. 242, 248 (1986).

Anderson v. Liberty Lobby, Inc.,

“Factual disputes that are irrelevant

or unnecessary will not be counted.”

Id.

A genuine issue of

material fact exists where the evidence with respect to the
material fact in dispute “is such that a reasonable jury could
return a verdict for the nonmoving party.”

Id.

Once the moving party has satisfied its burden, the burden
shifts to the non-moving party to set forth specific facts
showing that there is a genuine, triable issue.
Catrett, 477 U.S. 317, 324 (1986).

Celotex Corp. v.

The Court must view the

entire record in the light most favorable to the non-moving party
and indulge all reasonable inferences in that party’s favor.
O’Connor v. Steeves, 994 F.2d 905, 907 (1st Cir. 1993).

Summary

judgment is appropriate if, after viewing the record in the nonmoving party’s favor, the Court determines that no genuine issue
of material fact exists and that the moving party is entitled to
judgment as a matter of law.
B.

Motions to Strike and for Sanctions

There are currently three motions to strike pending: one
motion to strike and for sanctions filed by the plaintiffs with
respect to portions of the motions for summary judgment filed on
behalf of Daniel and Molly Carpenter and two motions to strike
filed by the defendants with respect to portions of the
government’s motion for summary judgment.

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The Court will deny

the motions to strike but will consider the facts alleged in each
motion for summary judgment only to the extent that they are
undisputed and based upon personal knowledge.

The Court

concludes that government’s motion for summary judgment is
supported by properly submitted evidence.
C.

Defendants’ Motions for Summary Judgment with respect
to Plaintiffs’ Claims
1.

BASI, Benistar 419, Daniel Carpenter and Step Plan

The motions for summary judgment filed by BASI, Benistar 419
and Daniel Carpenter simply re-assert several arguments already
raised and rejected by this Court and do not offer any additional
undisputed evidence in support thereof.

Those motions will

therefore be denied.
First, this Court has already rejected defendants’ arguments
that proceeds of the Pennsylvania Settlement cannot be reached
and applied because they are payable solely to entities not
nominally subject to the Cahaly Judgment.

There is sufficient

evidence in the record from which a reasonable jury could
determine that the defendants are abusing the corporate form
and/or have engaged in fraudulent transfers in order to avoid the
Cahaly Judgment.

If plaintiffs prove such abuse or fraud, the

proceeds from the Pennsylvania Settlement may be reached and
applied in satisfaction of their judgment.

Thus, to the extent

that defendants’ motions for summary judgment are based on such
arguments, they are without merit.
-7-

Second, this Court has already rejected defendants’ res
judicata and collateral estoppel arguments based on the state
court’s dismissal of plaintiffs’ claims against certain “Jane Doe
Affiliates and Subsidiaries of Benistar Defendants and Jane Doe
Entities controlled by Daniel Carpenter.”

In their opposition to

the preliminary injunction, defendants asserted (as they do now)
that the Cahaly Judgment precluded any recovery from the New
Defendants because the New Defendants qualify as “Jane Does”.
The Court disagreed and entered the preliminary injunction.
It concluded that the Cahaly Judgment was not intended to
foreclose prospectively plaintiffs’ ability to enforce that
judgment against an entity later determined to be an alter ego of
the Cahaly Defendants.

Nonetheless, the Court conceded that it

was “reluctant to over-interpret state court judgments” and thus,
as a condition of the continued validity of the preliminary
injunction, required plaintiffs to seek clarification of the
Cahaly Judgment from the Massachusetts Superior Court for Suffolk
County.

Plaintiffs did so and their motion for clarification was

decided in May, 2010.

Massachusetts Superior Court Judge Stephen

E. Neel held that the interpretations and analyses of this Court
(and of the First Circuit on appeal) were consistent with his
understanding of the Cahaly Judgment and that there was no
persuasive reason to conclude otherwise.

Thus, to the extent

that defendants’ motions for summary judgment are based on such

-8-

arguments previously raised and rejected, they are without merit.
Third, Step Plan’s contends, without legal or factual
support, that the Pennsylvania Settlement is property which may
not be reached and applied because 1) the Cahaly Judgment is not
final and 2) the settlement is “simply a payment to be made in
the future” to Step Plan under an “executory contract” among the
defendants.

First, the Cahaly Judgment, which was affirmed by

the Massachusetts Supreme Judicial Court in 2008, is final.
Second, an executory contract is one in which the contracting
parties owe one another ongoing duties of performance.

Where all

elements of performance have been accomplished leaving only an
obligation to pay money, there is no executory contract.
of Dunes Casino Hotel, 63 B.R. 939, 948 (D.N.J. 1986).

Matter
Step

Plan’s arguments with respect to executory contracts are thus
singularly unavailing and do not support its motion for summary
judgment.
2.

Molly Carpenter

The undisputed facts demonstrate that the Massachusetts
Superior Court has deemed Molly Carpenter’s liability for $3.87
million under the Cahaly Judgment to be fully satisfied.

Because

she is no longer indebted to the plaintiffs, her motion for
summary judgment will be allowed.

Plaintiffs’ concerns that

defendants will re-assign the proceeds from the Pennsylvania
Settlement to her are ill-founded because those proceeds are

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subject, until further order of the Court, to the preliminary
injunction entered on November 21, 2008.
D.

Cross-Motions for Summary Judgment with respect to the
Government’s Complaint in Intervention

The government has moved to intervene in this case to
enforce identical $1.12 million federal tax liens assessed
against BASI and Benistar 419.

The government alleges that the

liens may be enforced against the interests of those entities in
the Pennsylvania Settlement.
The tax penalties which underlie the liens were assessed for
the respective failures of BASI and Benistar 419 to provide the
IRS with investor lists which the government contends each entity
was required to maintain from February 28, 2000 to at least
January 20, 2006.

It is undisputed that, in January, 2006, the

IRS requested BASI and Benistar 419 to produce investor lists and
that, to date, each entity has failed to do so.

The primary

disagreement between the parties is whether BASI and Benistar 419
were, in fact, statutorily required to maintain such lists.
The government contends that they were so required and
accordingly moves for partial summary judgment that the tax liens
are valid.2

BASI and Benistar 419, however, assert that they

2

Genuine issues of fact that would remain to be proved at
trial, so the government contends, are that 1) the tax liens
attach to the defendants’ right to proceeds from the Pennsylvania
Settlement and 2) the liens have priority over plaintiffs’
claims.
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were never so required and move for summary judgment that the tax
liens are invalid.

Furthermore, they argue, they are entitled to

summary judgment because 1) they had reasonable cause to believe
they were not subject to the list requirement and associated
penalties and 2) even if the tax liens are valid, the penalty
assessed against them is excessive and the government’s action
violates their right to due process.
1.

Origin of the Government’s Liens

On January 20, 2006, the IRS sent BASI and Benistar 419
written requests to produce each list they were obligated to
maintain pursuant to 26 U.S.C. § 6112 (“the 2006 list requests”).
In response, BASI and Benistar 419 sent to the IRS typed, and
unsigned, sheets of paper containing the statements “Not Liable,
Not a Material Advisor,” and “N/A”.
In August, 2009, the IRS notified BASI and Benistar 419 that
it had assessed a $1.12 million tax penalty against each of them
for failing to provide the requested lists (“the 2009 lien
notices”).

The notice explained that the penalty was calculated

based on $10,000 per day for 112 days (from February 18, 2006 to
June 9, 2006) and referred to a “year/period end” of December 31,
2002.
In August, 2010, the IRS sent BASI and Benistar 419 notice
of 1) its intent to levy on the tax penalties and 2) its filing
of federal tax liens against each entity for $ 1.12 million with

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the Town of Simsbury, Connecticut.

Shortly thereafter, BASI and

Benistar 419 timely requested Collection Due Process (“CDP”)
hearings with respect to the government’s lien and intent to
levy.

To date, a CDP hearing has not been scheduled and both

penalties remain unpaid.
2.

Overview of the Relevant Statutory and Regulatory
Provisions

During all times relevant to this action, the Tax Code has
required certain taxpayers to maintain investor lists with
respect to “reportable” or “listed” transactions and penalized
those who fail to make such lists available to the IRS upon
written request.

Because the statute and regulations thereunder

have evolved over time, however, an overview of the applicable
provisions is in order.
Prior to the enactment of the American Jobs Creation Act of
2004 (“2004 Jobs Act”), Pub. L. No. 108-357, 118 Stat. 1418
(codified at 26 U.S.C. § 1 et seq.), the list maintenance rules
required “sellers” and “organizers” of a “potentially abusive tax
shelter” to maintain a list identifying each person who purchased
an interest in the tax shelter.
(amended 2004).

26 U.S.C. § 6112(a) (2002)

A “potentially abusive tax shelter” was defined

to include 1) any tax shelter for which registration is required
under § 6111 and 2) any other entity, investment plan or
arrangement which is specified in the regulations as having a
potential for tax avoidance or evasion.
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Id. § 6112(b).

The

organizer or seller was required to make the list available for
inspection upon written request from the IRS.

Id. § 6112(c).

Failure to comply with the list maintenance requirement subjected
a taxpayer to a penalty of $50 per name omitted from the list
with a maximum penalty of $100,000 per year.

Id. § 6708.

Congress, citing the refusal of some tax shelter promoters
to provide the IRS with investor lists when requested, decided
that the penalty was not meaningful and more effective tools for
curbing the use of abusive tax avoidance transactions were
needed.

H.R. REP . NO. 108-548(I), at 271-72 (2004).

Thus, since

the enactment of the 2004 Jobs Act, heftier and more timesensitive penalties attach to a taxpayer’s failure to maintain
and provide the IRS with requested investor lists.

Any person

required to maintain investor lists with respect to reportable
transactions, and who receives a written request from the IRS but
fails to make the lists available in 20 business days, may be
assessed a $10,000 penalty for each day of failure after the 20th
business day.

26 U.S.C. § 6708(a)(1) (2010).

No penalty is to

be imposed, however, if the failure to produce the lists is due
to “reasonable cause”.3

Id. § 6708(a)(2).

Other provisions of the 2004 Jobs Act alter the definition
of which taxpayers are subject to the list maintenance

3

In no event is a failure to maintain a required list to be
considered reasonable cause for failing to make the list
available to the IRS. H.R. REP . NO . 108-548, at 272 n.273.
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requirement and reportable transactions.

The person required to

maintain lists is referred to as a “material advisor”.
§ 6112(a).

26 U.S.C.

A material advisor is defined as any person who

1) provides any material aid, assistance or advice with respect
to organizing, managing, promoting, selling, implementing,
insuring or carrying out any reportable transaction and 2)
directly or indirectly derives gross income for the advice or
assistance in excess of an established threshold amount or such
other amount as may be prescribed by the Secretary.
§ 6111(b)(1).

Id.

The established threshold amount is $50,000 in the

case of a “reportable transaction” where substantially all of the
tax benefits are provided to natural persons and $250,000 in any
other case.

Id.

For “listed transactions”, however, the

regulations provide that the threshold amounts are reduced from
$50,000 to $10,000 and from $250,000 to $25,000.

26 C.F.R.

§ 301.6111-3.
A “reportable transaction” is any transaction with respect
to which information must be included with the taxpayer’s return
because the IRS has determined, under the regulations prescribed
under § 6111, that the transaction is of the kind that has the
potential for tax avoidance or evasion.

Id. § 6707A(c)(1).

A

“listed” transaction is a kind of reportable transaction that is
the same as or is substantially similar to a transaction that has
been specifically identified by the IRS as a tax avoidance

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transaction.

Id. § 6707A(c)(2).

The requirement that a material advisor maintain an investor
list applies to transactions with respect to which material aid,
assistance or advice is provided after the date of enactment of
the 2004 Jobs Act, and the enhanced penalty for failing to
maintain investor lists applies to requests made after the date
of enactment.
3.

H.R. REP . NO . 108-548, at 272.
Defendants’ Liability under the List Maintenance
Requirement

Daniel Carpenter designed and implemented the Benistar 419
Plan (“the Plan”), which was crafted to be a multiple employer
welfare benefit trust providing pre-retirement life insurance to
covered employees.

Benistar 419 is the sponsor of the Plan and

BASI is its administrator.
BASI and Benistar 419 were subject to the list maintenance
requirement, and thus liable for failing to provide the lists
upon request from the IRS, if, at the relevant times between 2000
and 2006, 1) the Plan qualified as a “potentially abusive tax
shelter” or a “reportable” or “listed” transaction, 2) BASI and
Benistar 419 qualified as “organizers” and/or “sellers” or
“material advisors” and 3) their failure to provide the lists
requested was not excusable for “reasonable cause”.
a.

Potentially Abusive Tax Shelter and
Reportable/Listed Transactions

Under the Tax Code during all times relevant to the instant

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proceeding, whether under the rubric of a “potentially abusive
tax shelter” or a “reportable” or “listed” transaction, any
transaction that was specified in the regulations as having a
potential for tax avoidance triggered the list maintenance
requirement.

One such tax avoidance transaction identified by

the regulations since the year 2000 is a transaction
“substantially similar” to that described in Notice 95-34.

See

IRS, Notice 2000-15, “Listed Transactions”, 2000-12 I.R.B. 826
(Mar. 20, 2000); IRS, Notice 95-34, “Tax Problems Raised by
Certain Trust Arrangement Seeking to Qualify for Exemption from
Section 419", 1995-23 I.R.B. 10 (June 5, 1995).

Notice 95-34

describes the characteristics of certain trust arrangements that
falsely purport to qualify as multiple employer welfare benefit
funds exempt from Sections 419 and 419A.

Those sections impose

strict limits on the amount of tax-deductible prefunding
permitted for contributions to a welfare benefit fund.
The government contends that the Plan administered by
Benistar 419 and BASI is substantially similar to the transaction
described in Notice 95-34 and thus triggers the list maintenance
requirement.

Its position derives substantial support from a

decision of the U.S. Tax Court in which that Court deemed the
Plan to be a listed transaction after determining it obtained
similar kinds of tax benefits and was factually similar to the
transaction described in Notice 95-34.

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See McGehee Family

Clinic, P.A. v. Comm’r of Internal Revenue, Nos. 15646-08, 1564708, 2010 WL 3583386, at *4 (U.S. Tax Court Sept. 15, 2010).
Benistar 419 does not set forth specific facts to dispute
that contention but instead argues that 1) the government cannot
prove the Plan meets various requirements of a “tax shelter”
listed in former § 6111 and 2) prior to November, 2009,
disclosure of a transaction “substantially similar” to a “listed
transaction” was not required.
Neither contention is tenable.

First, the government need

not prove the Plan meets the definition in superceded § 6111 if
it is able to demonstrate that the alternative definition of a
“potentially abusive tax shelter” under superceded § 6112 is met.
The latter specifically includes plans of the kind the Secretary
determines by regulations as having a potential for tax
avoidance.

Second, transactions that were substantially similar

to listed transactions have required disclosure since 2000.

The

relevant regulations effective in 2000 provided that, for
purposes of the list requirement, a tax shelter includes
any transaction a significant purpose of the structure of
which is the avoidance or evasion of Federal income taxes
within the meaning of ... § 301.6111-2T(b).
26 C.F.R. § 301.6112-1T, A-4 (2000).

Under § 301.6111-2T(b), the

avoidance or evasion of taxes was considered a significant
purpose of the structure of the transaction if the transaction
was

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the same as or substantially similar to one of the types
of transactions that the [IRS] has determined to be a tax
avoidance
transaction
and
identified
by
notice,
regulation, or other form of published guidance as a
listed transaction for purposes of section 6111.
Thereafter, beginning in 2003, a potentially abusive tax
shelter for purposes of the list maintenance requirement was
explicitly defined as a transaction that has a potential for tax
avoidance or evasion, including any listed transaction.
C.F.R. § 301.6112-1 (2003).

26

A listed transaction was then

defined, as it is now, as a transaction which is the same as or
substantially similar to a transaction that has been specifically
identified by the IRS as a tax avoidance transaction.
Because defendants’ contentions regarding the government’s
burden and the history of the disclosure requirement are without
merit, and because they have offered no specific facts rebutting
the government’s evidence that the Plan is “substantially
similar” to the tax avoidance transaction described in Notice 9534, the Court concludes that, as a matter of law, the Plan
prompted the list maintenance requirement during the relevant
period.
b.

Organizers/Sellers and Material Advisors

Even though the Plan was a listed transaction, BASI and
Benistar 419 also must be shown to have qualified as 1)
“organizers” and/or “sellers” or 2) “material advisors” at the
relevant times between 2000 and 2006 in order to be liable under

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the list maintenance requirement.
The government contends that BASI and Benistar 419 were
“organizers” and/or “sellers” within the meaning of the Tax Code
prior to the enactment of the 2004 Jobs Act, and thereafter were
“material advisors” within the meaning of the current law.
BASI and Benistar 419 do not address whether they ever
qualified as organizers and/or sellers under the prior law
because they contend the government only seeks to hold them
liable as “material advisors”.

Seizing upon this mistaken

interpretation of the government’s claim, defendants argue that
the liens fail because the government cannot prove that 1) BASI
ever made a “tax statement” or 2) Benistar 419 directly or
indirectly derived gross income for its advice or assistance in
excess of the established threshold amount.

Such proof is

required to prove that either entity was a “material advisor”.
The government clearly seeks to hold the defendants liable
as organizers and/or sellers of a potentially abusive tax
shelter, and the current list disclosure requirement applies to
1) any person required to maintain a list under current
§ 6112(a), i.e., "material advisors" with respect to a
"reportable" or "listed" transaction, and 2) any person who was
required to maintain a list under superceded § 6112(a), i.e.,
"organizers" and "sellers" of a "potentially abusive tax
shelter".

26 U.S.C. § 6112(b).

Because neither defendant has

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offered any rebuttal to the government’s evidence that they
qualified as organizers and/or sellers under superceded § 6112,
there is no material dispute that they did so qualify.
The Court also rejects BASI’s contention that it cannot be
held liable as a material advisor based upon the doctrines of
claim and/or issue preclusion due to a previous ruling in a
related case by United States District Judge Janet C. Hall in the
District of Connecticut.

See Benistar Admin Services, Inc. v.

United States of America, No. 10-1320 (Telephonic Ruling, Mar.
31, 2011).

In that case, BASI contested the legality of the

government’s tax lien and moved to enjoin its enforcement.

Judge

Hall denied the motion for injunctive relief and, in so doing,
rejected several of the legal arguments BASI and Benistar 419
raise again here in their motions for summary judgment.
Judge Hall also noted, however, that the government had
orally conceded that BASI had never made a tax statement.

Based

upon that concession and the record then before her, Judge Hall
held that the government could not establish that BASI was
subject to the list maintenance requirement between 2003 and
2006, the period during which the regulations required an entity
to make a tax statement in order to be required to maintain
investor lists.

Nonetheless, she denied BASI’s motion after

concluding that BASI could be shown to qualify as an “organizer”
of a “potentially abusive tax shelter” at some point between 2000

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and 2003 and thus be found liable for failure to provide
requested lists during that period.

Ultimately, the Connecticut

action was decided in the government’s favor.
The holding in the Connecticut case does not somehow
foreclose the government from proving, in the instant action,
that BASI was subject to the list maintenance requirement between
2003 and 2006.

First, the doctrine of claim and issue preclusion

apply only where there has been a final judgment on the merits.
Grella v. Salem Five Cent Savings Bank, 42 F.3d 26, 30 (1st Cir.
1994).

Dicta in a ruling on a motion for a preliminary

injunction hardly qualifies.

Second, the government’s concession

was for purposes of that hearing and does not bind it in this
proceeding.

It will be treated as an ordinary (rather than a

judicial) admission which can be contradicted by other evidence.
See Gonzalez v. Walgreens Co., 918 F.2d 303, 305 (1st Cir. 1990);
Fidelity & Deposit Co. of Md. v. Hudson United Bank, 653 F.2d
766, 777 (3d Cir. 1981).
Finally, the government has offered substantial evidence to
support its contention that BASI and Benistar 419 qualify as
“material advisors” within the meaning of the current law.

As

discussed above, a taxpayer is a material advisor if he
1) provides any material aid, assistance or advice with respect
to organizing, managing, promoting, selling, implementing,
insuring or carrying out any reportable transaction and

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2) directly or indirectly derives gross income for the advice or
assistance in excess of an established threshold amount.

The

first prong requires proof that the subject taxpayer made a “tax
statement”, defined as:
any statement ... oral or written, that relates to a tax
aspect of a transaction that causes the transaction to be
a reportable transaction.
26 C.F.R. § 301.6111-3.

Under the second prong,

all fees for a tax strategy or for services for advice
(whether or not tax advice) or for the implementation of
a reportable transaction are taken into account.
Id.

All of the surrounding facts and circumstances must be

scrutinized when determining whether “consideration received in
connection with a reportable transaction constitutes gross income
derived directly or indirectly for aid, assistance, or advice.”
Id.
Here, the government has proffered deposition testimony,
company agreements, and financial and promotional documents from
which a jury could infer that both prongs of the definition have
been satisfied, including that BASI made a tax statement and that
Benistar 419 received income in excess of the threshold amount.
In light of the Court’s conclusion that the Plan qualified as a
“listed transaction”, the government here need only establish
that BASI and Benistar 419 derived income in excess of the lower
threshold amounts.
Nevertheless, the government’s evidence and supporting

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arguments are ambiguous with respect to which agreements were in
fact operative at any given time, which statements were made when
and what compensation was in fact rendered for material aid,
assistance or advice.

The government will therefore be compelled

to resolve such ambiguities and prove that the respective
applicable standards were met to the satisfaction of the jury.
c.

Reasonable Cause

Section 6708 of Title 26 of the United States Code provides
that no penalty for failure to disclose a required client list
shall be imposed on a day that the taxpayer can prove reasonable
cause for failure to disclose.

Thus, if the failure of BASI and

Benistar 419 to provide the requested lists was due to reasonable
cause, the penalty assessed against them is invalid.
BASI and Benistar contend that the record demonstrates the
requisite reasonable cause and thus the tax penalties are
invalid.

Their proof consists of 1) a letter, dated December 19,

2003, from Attorney John H. Reid, III, opining that Benistar 419
is not subject to the list maintenance requirement (“the Reid
opinion letter”) and 2) the inclusion of a reference to a
“year/end period” of 2002 in the 2006 list requests and the 2009
lien notices.
That evidence falls woefully short of the requisite
reasonable cause.

First, Benistar 419 has established only that

the Reid opinion letter exists.

It has offered no evidence that

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it actually relied on that letter, let alone that any actual
reliance was reasonable under all the surrounding facts and
circumstances.

As the government points out, the evidence

suggests instead that the defendants made a calculated decision
not to provide an investor list to the IRS under any
circumstances.

For example, Daniel Carpenter testified that

the only thing that we have never turned over to the
service and we maintain that we will never turn over to
the service are the names of the participants and the
names of the participating employers.
Furthermore, Wayne Bursey, an officer of Benistar 419, wrote in a
letter to Plan participants in 2005 that Benistar 419 had been
able to fend off “improper and illegal inquiry” from the IRS into
the names of Plan participants and further vowed that it would
“never surrender the names of [its] Participating Employers or
Plan Participants.”
Second, although BASI and Benistar 419 contend that the
year/period reference indicates that the penalties arise entirely
from defendants’ actions in 2002, the government responds that
the date is simply a placeholder for administrative purposes and
refers only to the calendar year during which the investigation
was opened.

BASI and Benistar 419 have not shown that it was

reasonable for them to interpret the request as requiring them to
produce only those investor lists they were required to maintain
in 2002, especially considering the fact that Daniel Carpenter is
a lawyer with experience in tax law.
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In any event, and more

germanely, neither defendant has established that it was not
required to maintain investor lists in 2002.
Thus, defendants’ motions for summary judgment on the
grounds of reasonable cause fail.

Nonetheless, construing the

record in the light most favorable to the defendants for purposes
of the government’s motion for partial summary judgment, the
Court concludes that there is a genuine issue of material fact
with respect to the reasonable reliance and/or interpretation of
the government’s 2006 requests as applying only to the tax year
2002.

Thus, summary judgment will be withheld from either side

on the issue of reasonable cause.
In summary, the Court concludes that the Plan was a listed
transaction and that the defendants qualified as “organizers”
and/or “sellers” within the meaning of the superceded law.

There

remains a genuine issue of material fact for the jury, however,
with respect to whether 1) defendants qualified as “material
advisors” and 2) their failure to provide lists was excusable for
reasonable cause.

Accordingly, the defendants’ motions for

summary judgment will be denied and the government’s motion for
partial summary judgment will be allowed, in part, and denied, in
part.
4.

The Remaining Arguments of BASI and Benistar 419

Finally, for the reasons discussed below, defendants’
remaining arguments concerning due process and the amount of the

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penalties assessed against them do not entitle them to summary
judgment.
a.

Penalties Assessed

BASI and Benistar 419 contend that, even if they were liable
to maintain investor lists, the penalty assessed against them is
excessive because any failure on their part to provide required
lists prior to enactment of the 2004 Jobs Act should have been
calculated based on the penalty applicable during that period.
As discussed above, the current penalty is $10,000 per day
commencing 20 business days after a taxpayer’s failure to deliver
requested client lists whereas the former penalty was $50 per day
with a maximum penalty of $100,000 each year.
The Court concludes that this defense fails as a matter of
law and thus cannot support either defendant’s motion for summary
judgment.

The current penalty applies where a person required to

maintain a list under § 6112(a) fails to make such list available
to the IRS in accordance with § 6112(b).

A written request for

disclosure under § 6112(b) requires any person who is required to
maintain a list under § 6112(a), or who was required to maintain
a list under that section “as in effect before the enactment of
the American Jobs Creation Act of 2004", to make such list
available for inspection.

The clause “as in effect before the

enactment of the American Jobs Creation Act of 2004" was
specifically added in 2005, see Golf Opportunity Zone Act of

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2005, Pub. L. No. 109-135, § 403(z), and was intended to clarify
that
the penalty under section 6708 for failing to comply with
the section 6112 list maintenance requirements applies to
both (1) material advisors with respect to reportable
transactions under present-law section 6112, and (2)
organizers and sellers of potentially abusive tax
shelters under prior-law section 6112.
JOINT COMM.

ON

TAXATION , “Technical Explanation of the Revenue

Provisions on H.R. 4440", at 87-88 (Dec. 16, 2005).

Thus, the

current penalty is intended to apply to a taxpayer who fails to
comply with a request for disclosure made after the enactment of
the 2004 Jobs Act, regardless of whether that taxpayer was
required to maintain such a list pursuant to the current or
former versions of § 6112(a).
Moreover, such an interpretation does not, as defendants
contend, result in an impermissible retroactive application of
the penalty.

The House Committee Report clearly states that “the

provision imposing a penalty for failing to maintain investor
lists applies to requests made after the date of enactment.”
H.R. REP. NO. 108-548(I), at 271-72 (2004) (emphasis added).

The

tax penalties were thus assessed against BASI and Benistar 419
for their failure to comply with the 2006 list request.

Each

entity was on notice, at least as of 2005, that the current,
heightened penalties would attach to unreasonable refusals to
disclose required lists upon request from the IRS and that
in no event is a failure to maintain a required list to
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be considered reasonable cause for failing to make the
list available to the IRS.
Id. at 272 n.273.
As United States District Judge Hall observed when rejecting
the same argument in the Connecticut action,
Even if the company had elected not to create and
maintain lists prior to 2004, in light of the lower
statutory penalties, ... nothing on the record [suggests]
that [BASI] couldn’t have created and maintained the
required list starting in 2004, even lists going back to
2000, once it was on notice of heightened penalties for
failure to produce such a list upon request and thus
avoid the penalty for failure to produce the lists in
2006.
Benistar Admin Services, Inc., supra.

This Court agrees with

that rationale and concludes that it was appropriate for the
government to calculate the penalty assessment pursuant to the
current statute.
b.

Due process

Defendants contend that the government, in initiating this
action, has violated its statutory obligation under 26 U.S.C.
§ 6330(e)(1) to suspend “levy actions” while a Collection Due
Process (“CDP”) hearing is pending.

That statute provides that

if a [CDP] hearing is requested ... the levy actions
which are the subject of the requested hearing ... shall
be suspended for the period during which such hearing,
and appeals therein, are pending.
Defendants fail to appreciate, however, the fact that the Tax
Code provides the government with two distinct means by which to
collect delinquent taxes: 1) pursuant to § 7403, it may institute

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a lien-foreclosure suit in federal court and 2) pursuant to
§ 6331, it may collect by administrative levy.

United States v.

Nat’l Bank of Commerce, 472 U.S. 713, 720 (1985).

“The levy is a

provisional remedy and typically does not require any judicial
intervention.”

Id.

(internal quotation omitted).

It is defined

as including “the power of distraint and seizure by any means.”
26 U.S.C. §§ 6331(b), 7701(a)(21).
Clearly, a request for a CDP hearing requires only that the
government suspend levy actions, not lien-foreclosure actions in
which a defendant has a full opportunity to contest the merits of
the underlying assessment.

Indeed, the treasury regulations

promulgated under 26 U.S.C. § 6330 specifically provide that,
when a CDP hearing is pending, the government “may take other
non-levy collection actions such as initiating judicial
proceedings to collect the tax shown on the CDP Notice ....”

26

C.F.R. § 301.6330-1(g)(2); see also 26 U.S.C. § 6502(a).
The Court therefore concludes that the government’s action
fully comports with the requirements of due process and that the
defendants’ due process argument fails as a matter of law.

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ORDER
In accordance with the foregoing Memorandum,
1)

Plaintiffs’ motion to strike and for sanctions (Docket
No. 291) is DENIED;

2)

Defendants’ motions to strike (Docket Nos. 349 and 356)
are DENIED;

3)

the motions for summary judgment with respect to
Plaintiffs’ First Amended Complaint filed by Benistar
Admin Services, Inc. (Docket No. 276), Benistar 419
Plan Services, Inc. (Docket No. 278), Step Plan
Services, Inc. (Docket No. 280) and Daniel Carpenter
(Docket No. 284) are DENIED;

4)

the motion for summary judgment with respect to
Plaintiffs’ First Amended Complaint filed by Molly
Carpenter (Docket No. 282) is ALLOWED;

5)

the motions for summary judgment with respect to the
government’s tax lien claim filed by Benistar Admin
Services, Inc. (Docket No. 333), Benistar 419 Plan
Services, Inc. (Docket No. 334) and the remaining
defendants (Docket No. 335) are all DENIED; and

6)

the government’s motion for partial summary judgment
against Benistar Admin Services, Inc. and Benistar 419
Plan Services, Inc. (Docket No. 332) is, with respect
to the Benistar Plan’s status as a listed transaction
from February 28, 2000 to January 20, 2006 and the
defendants’ qualification as “organizers” and/or
“sellers” within the meaning of the superceded law,
ALLOWED; but is, with respect to the defendants’
qualification as “material advisors” and the issue of
reasonable cause, DENIED.

So ordered.
/s/ Nathaniel M. Gorton
Nathaniel M. Gorton
United States District Judge
Dated February 17, 2011

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