Diamond Mogul estate found liable for more than $55 million in income taxes

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In 2018, the US Department of Justice filed lawsuits worth more than $61 million against the two children of deceased diamond tycoon and real estate dealer Chaim Lax. The DOJ alleged that Moshe Lax, his sister Zlaty Schwartz and their father made complex fake transactions to fraudulently evade taxes. The taxes at issue in the case included both income taxes and inheritance taxes. Last month, the court issued a decision dealing with some of these claims.

Fraudulent transactions

According to the DOJ complaint, in May 2007, following a cancer diagnosis, Lax transferred ownership of a holding company he controlled, which held assets of at least $41 million, to Lax. Family Trust, with Moshe and Zlaty as trustees.

The transfer was made in exchange for a self-cancelable installment note (SCIN) with a face value of $40.75 million, a debt that would and did expire upon Chaim’s death in November 2008. The SCIN provided for the trust to make semi-annual payments. of $3,887,360 on debt directly to Chaim. The government alleges two payments were due under the SCIN prior to Chaim’s death, but the trust has not made any of the payments.

The government alleges that the timing of the SCIN transaction in relation to Chaim’s terminal diagnosis and the fact that the installment payments due thereunder were never made prove that the transfer was a fraudulent transaction intended solely to avoid tax liabilities before Chaim’s death and the estate tax that would accrue after his death.

The complaint further alleges that after Chaim’s death, Moshe and other defendants also executed a scheme involving an assignment for the benefit of creditors under New York State law, under which Moshe renamed the entity holding his father’s assets and transferred the business assets out of the renamed entity. , using assignment for the benefit of creditors to escape both its creditors and its taxes.

decision

On March 31, Judge I. Leo Glasser of the United States District Court for the Eastern District of New York ruled in favor of the government on the income tax claims owed by the deceased for the tax years 2002, 2003, 2004, 2006 and 2007. , granting summary judgment for $55.1 million plus accrued interest.

Regarding inheritance tax, however, the court found that a form signed by the wife of Schwartz’s late father, Chaim Lax, was not a binding agreement with the Internal Revenue Service, even though she had signed a Form 890, “Waiver of Valuation Restrictions”. and Collection of Deficiency and Acceptance of Overassess – Estate, Gift and Generation-Skipping Transfer Tax,” in 2012, consenting to the assessment of over $4.4 million in federal estate tax.

In addition to estate liability, the question of whether Zlaty and Moshe should be held personally liable for their participation in the transactions intended to house the assets remains unresolved. Criminal charges against the siblings also remain a possibility. During his deposition, Moshe, who represented himself in the case, asserted his Fifth Amendment privilege against self-incrimination in response to nearly every question, leading the government to file a motion to compel a second deposition, citing his broad invocation of privilege.

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