## Facts

- Gary Krause accumulated substantial federal income tax liabilities after disputes over deductions and tax-shelter activities; the IRS calculated roughly $3.5 million owed for multiple tax years.
- Krause filed Chapter 7 bankruptcy in 2005, asserted he had no meaningful assets, and sought to discharge federal tax debts.
- The IRS brought an adversary proceeding asserting the taxes were nondischargeable and that Krause had shifted assets to related entities and trusts while retaining control and benefits.
- Two entities were central: Drake Enterprises (purportedly selling a “diet cookie”) and PHR, LLC (primarily holding title to the family residence); the bankruptcy court found they functioned to hold and conceal Krause’s assets.
- During discovery, Krause intentionally erased computer hard drives containing the companies’ records despite court orders; after an evidentiary hearing, the bankruptcy court sanctioned him by treating Drake and PHR as his nominees/alter egos and ordering turnover as estate property.
- Krause also transferred money and insurance policies to “children’s trusts” for his adult sons without consideration after IRS scrutiny began, while continuing to use trust assets for personal expenses (e.g., country club costs, vehicles, and living expenses).
- The bankruptcy court held (1) Drake and PHR were Krause’s nominees/alter egos and (2) the trust transfers were fraudulent conveyances, leaving those assets subject to federal tax liens; the district court affirmed.

## Issues

1. Whether the bankruptcy court abused its discretion in imposing discovery sanctions deeming Drake Enterprises and PHR to be Krause’s nominees/alter egos and thus property of the bankruptcy estate subject to IRS collection.
2. Whether the bankruptcy court erred in finding Krause’s transfers to the children’s trusts were fraudulent conveyances, permitting the IRS’s tax liens to attach to the trust assets despite the trusts’ formal ownership and the sons’ asserted interests.

## Decision

- The Tenth Circuit affirmed.
- The court upheld sanctions treating Drake Enterprises and PHR as Krause’s nominees/alter egos based on spoliation and the entities’ lack of meaningful separateness from Krause.
- The court upheld the fraudulent transfer determination as supported by multiple badges of fraud, including insider transfers, lack of consideration, and Krause’s continued control and personal use of the assets.
- The court agreed that the IRS’s liens could reach the assets because, in substance, the property remained attributable to Krause.

## Legal Principles

- A bankruptcy court may impose strong discovery sanctions, including deeming facts established, when a party intentionally destroys materially relevant evidence in violation of court orders.
- For federal tax lien purposes, courts may look past formal title to determine whether the taxpayer retains beneficial ownership and control; assets held by a “nominee” or “alter ego” may be treated as the taxpayer’s property.
- Transfers made to insiders without consideration, in the face of creditor pressure, with retention of control and benefits, support a finding of fraudulent conveyance and do not defeat preexisting federal tax liens.
- Under 26 U.S.C. § 6321, federal tax liens attach broadly to the taxpayer’s “property and rights to property,” as determined by substance rather than labels.

## Conclusion

The Tenth Circuit held that Krause could not use closely controlled entities and family trusts to shield assets from federal tax liens, and it affirmed both the bankruptcy court’s spoliation-based sanctions deeming related entities to be Krause’s nominees/alter egos and the finding that his trust transfers were fraudulent conveyances subject to IRS collection.


In re Krause, 637 F.3d 1160 (10th Cir. 2011)