Bahamas' Trust Settlor Made To Produce Documents By IRS

by Glen Shapiro, LawAndTax-News.com, New York

08 September 2004

A Dallas, Texas court has ordered that the settlor of a Bahamas trust, John Eulich, should pay a fine of US$5,000 a day until he complies with a court order to supply trust documents to the Internal Revenue Service. After 30 days, the daily fine will increase to US$10,000.

When the IRS served a formal request for documents from the trust, Mr Eulich refused to provide the documents and claimed that he had no control over the trust and had exhausted his powers to try to get the documents. Judge Sam A Lindsay of the District Court disagreed, holding that the Settlor could still attempt to get the documents from the trust by appointing new administrators and by filing a lawsuit in the Bahamas. At any rate, the Court stated, it was not going to recognize the Settlor’s “impossibility defense” because the impossibility was self-created, i.e., the Settlor’s own drafting caused the impossibility.

The IRS is investigating Eulich and his wife, Virginia, for the tax years of 1995, 1995 and 1997, and as part of its investigation, sought documents relating to the Bahamian trust, the Mona Elizabeth Mallion Settlement Trust No. 16 and to various corporations controlled by the Trust. To that end, the IRS issued formal document requests and summonses seeking the information.

The Eulichs gave their 'impossibility' defence in 1999, filing an action to quash the document requests relating to the Trust, and the Government subsequently filed counterclaims seeking to enforce the summonses. In 2002 a Magistrate Judge recommended enforcement of the IRS's requests, but both the Eulichs and the government objected to various terms of the Judge's ruling. In a Court of Appeal hearing in 2003, the judge excluded Virginia Eulich from the action, but affirmed the enforcement order against John Eulich.

On June 27, 2003, the Government filed a Motion to Hold Petitioner in Contempt of the Court's 2002 Order of Enforcement, and after a hearing on March 12, 2004, the Magistrate Judge recommended that the court hold Eulich in civil contempt of court, imposing a fine of US$1,500 a day pending production of the documents. Once again, both parties objected to the findings.

The judge at the latest hearing (18th August) imposed the larger fine in response to the government's objection on the grounds that the trust's assets of between US$70m and US$100m were or could be generating up to $14,000 in interest a day. The judgement contains a detailed and highly interesting discussion of various aspects of Eulich's efforts - or otherwise- to comply with the terms of the IRS's requests, by no means entirely in the government's favour.

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