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Monday, August 19, 2019

Government accuses Tillery of trying to avoid taxes on K-Mart FCA settlement proceeds

By Record News | Nov 14, 2017

EAST ST. LOUIS – After months of secrecy about a settlement that Stephen Tillery of St. Louis reached on a claim that K-Mart cheated the government, the government accuses him of trying to dodge taxes on the proceeds. 

Assistant U.S. Attorney Gerald Burke opposed Tillery’s motion for a “qualified settlement fund” on Nov. 9, writing that he sought to use it a tax avoidance vehicle.

“Internal Revenue Code expressly provides that nothing in any provision of law shall be construed in a manner whereby an escrow account, settlement fund, or similar fund is not subject to current income tax,” Burke wrote. 

He wrote that while Tillery didn’t file a declaratory judgment action or action seeking relief from taxation, that’s what he sought.

“A taxpayer may not bring a judicial action seeking redress for a tax controversy unless directly authorized by law,” he wrote. 

He wrote that the Declaratory Judgment Act, which expressly includes matters with respect to federal taxes, does not permit a relator to seek a court’s assistance for a ruling on what a trust ostensibly created under Treasury regulations. 

The relator of the government’s claim, Carl Ireland of Ohio, entered the action this year as guardian of original plaintiff James Garbe. 

Garbe sued K-Mart in 2012, claiming it charged customers with insurance higher prices than customers who paid out of pocket. 

District Judge Nancy Rosenstengel denied summary judgment to K-Mart, and Seventh Circuit appellate judges mostly affirmed her last year. 

They found she went too far in finding that K-Mart pharmacy benefit managers and plan sponsors were employees of the United States. 

The action returned to Rosenstengel, who set trial this August. 

Parties tried mediation this January, without result. 

At a hearing in April, K-Mart counsel Catherine O’Neil of Atlanta told Rosenstengel that K-Mart supplied information regarding its financial position, “which your honor might know from the papers is not the best.”

“Part of K-Mart’s argument in the course of its settlement discussions was that we just simply don’t have the money to pay a large judgment,” O’Neil said. 

“It will force us into bankruptcy.” 

O’Neil said the mediator proposed a number and the parties agreed to it. 

She said the difficulty became that K-Mart requested to pay the amount over time, and that plaintiffs weren’t willing to take installment payments. 

“That has left us, your honor, where we still don’t have a settlement,” O’Neil said. 

She said she hoped to prevail on the government as the real party in interest to move forward with a settlement. 

Tillery said, “The only way that any number close to what was discussed at the mediator’s proposal was even being considered was with a payment structure that was the usual or typical means of paying. 

“That is, you offer up the money you’ve agreed to pay. 

“The case is not settled. It is going to settle when K-Mart sees that they have to pay or they have to face music in this case.” 

O’Neil said, “K-Mart explored very carefully, and in close consultation with its bankruptcy counsel, opportunities and ways that we could secure those future payments and we had hoped we would be able to do that.” 

She said that with concerns about making transfers in close proximity to a potential bankruptcy, they were unable to come up with properties that had sufficient value to secure future payments. 

“The difficulty for the company is being able to make a large up front payment and still maintain operations and not put a hundred thousand employees out of work the next day,” O’Neil said. 

Tillery said, “Your honor, it is Amazon that’s doing that, not this case.” 

In August, Rosenstengel vacated the trial date, stayed all deadlines, and began holding weekly conferences by telephone. 

The minutes she posted for each conference provided no detail. 

No one filed anything from Aug. 8 to Nov. 3, when Tillery associate Robert King moved to establish a qualified settlement fund. 

King wrote that K-Mart didn’t object to it. 

He wrote that K-Mart would make a payment in the near future and two more on the anniversaries of the first one. 

He wrote that Ireland could recognize more than $2 million in income in 2017, on which he would owe substantial taxes, only to have the payment set aside in 2018. 

“The offsetting loss would not, however, occur and thus could not be recognized until the 2018 tax year,” he wrote. 

He wrote that with a qualified settlement fund, K-Mart could make an initial payment without Ireland or his counsel immediately recognizing the income, which would give Ireland time to resolve liens against Garbe’s estate, such as a substantial Medicaid lien.

He wrote that it would give Ireland time to determine the best means of distributing his substantial recovery in ways that serve Garbe’s interests.

Assistant U.S. attorney Burke replied that any concerns about consequences of a hypothetical bankruptcy case had nothing to do with the claims in the case. 

He wrote that there was no dispute about the amounts K-Mart should pay to states and the federal government; that there was no controversy concerning the releases K-Mart would receive in exchange for payments and that there was no dispute about the amount of Ireland’s share or his attorney’s fees. 

He also wrote that Ireland could wait for payment until 90 days after K-Mart pays the states and the federal governments, so that no payments could be clawed back. 

He wrote that Ireland could agree to receive shares in January of the years following K-Mart’s payments. 

Rosenstengel held a phone conference on Nov. 13, and set another on Nov. 20.  

USA Today reported in March that K-Mart lacked enough money to stock shelves, and Fortune magazine speculated about a K-Mart bankruptcy in July.    

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