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Prompt Staffing, Inc. v. United States
Citation: 321 F. Supp. 3d 1157Docket: Case No 5:17-cv-00542-SVW-JEM; 2:17-cv-01696-SVW-JEM
Court: District Court, C.D. California; May 8, 2018; Federal District Court
Joseph Byrne operated a network of temporary staffing agencies to evade IRS tax liabilities over two decades. He controlled multiple corporate entities while keeping his name off the documents, using women as figureheads who he convinced to act as sole shareholders. This allowed Byrne to make critical business decisions and siphon corporate funds for personal use, effectively shielding his assets from creditors, particularly the IRS. Each time creditors pursued Byrne, he would shift operations to a new agency, leaving creditors with corporations lacking assets. By 2017, the IRS had over $1.5 million in tax liens against him. The IRS identified several staffing agencies as Byrne's nominees and levied their bank accounts to satisfy the tax liens. The agencies contested the levies, claiming they were independent entities and that their individual shareholders, Argelia Quezada and Edith Uribe, were the true owners. However, the Court determined that Byrne was the de facto owner of these agencies, ruling that the stock issued to Uribe and Quezada was a fraudulent attempt to conceal his ownership. Consequently, the Court held that the agencies were indeed Byrne's nominees and alter egos, affirming that the IRS's levies were proper. Joseph Byrne, an Irish national, has been involved in the temporary staffing industry since the early 1990s, notably as the sole proprietor of Contract Personnel Service from 1998 to 2001, which incurred significant employment tax liabilities for which he was personally liable. In 2011, the IRS sought to reduce his outstanding tax assessments to judgment, resulting in a court ruling that found Byrne indebted to the United States for over $1.5 million in taxes. Several corporate entities are relevant to this case, with only Prompt Staffing, Inc., 24 HR Personnel, Inc., 24 Hour Staffing, Inc., and TSC Staffing, Inc. serving as plaintiffs. Other companies, including S.C. Staffing, Inc. and TSC Staffing Solutions, Inc., were part of Byrne's operations but are not plaintiffs. S.C. Staffing, established in 2002, had Byrne as its key officer until 2003 when Argelia Quezada took control, later transferring ownership to Carina Galvez, who operated the company until its Chapter 7 bankruptcy in 2010. TSC Staffing Solutions, also formed in 2002, initially had Byrne as its sole director, but he later transferred ownership to Quezada without compensation. Despite this transfer, Byrne was still listed as a director in a 2005 filing. Courtesy Staffing, formed in 2004, initially lacked a clear owner but was soon taken over by Quezada, who became its sole shareholder. Ownership of Courtesy shifted to Galvez in 2008, with significant asset transfers occurring, including the movement of its most profitable Gardena location to TSC Solutions and later to 24 Hour Staffing, all without compensation. These clients generated approximately $20 million in annual revenue. In 2011, Courtesy began facing financial difficulties due to rising workers' compensation claims. AIG sued Courtesy in early 2014, leading to the levying of Courtesy's bank accounts and prompting Courtesy to file for Chapter 7 bankruptcy shortly thereafter. 24 Hour Staffing, Inc., formed on August 30, 2010, in California, had Quezada as its President, CEO, Secretary, CFO, and sole director. In 2010, Quezada transferred customers from TSC Solutions to 24 Hour Staffing, which was dissolved on June 19, 2017. Prompt Staffing, Inc. and Ultimate Personnel, Inc., both established on February 11, 2011, had Uribe as their sole shareholder and officer, with Uribe taking some of Courtesy's customers to Prompt without consideration. Prompt initially operated under the name Courtesy, and in 2014, Ultimate Personnel became 24 Hour Personnel Services, Inc. 24 HR Personnel was formed on April 28, 2014, by Uribe, who took over Ultimate Personnel's operations. TSC Staffing, Inc. was formed on June 17, 2015, in Texas, with Quezada listed as its director and filed a "Consent to Use of Similar Name" with TSC Staffing Solutions. TSC Staffing obtained clients from TSC Staffing Solutions without consideration and had its charter forfeited in Texas on January 27, 2017, later applying for reinstatement. I Am World Missions, founded by Byrne, has Uribe as a signatory on its Bank of America account. Open Arms Community Church, a charitable organization in Ireland, received significant payments from I Am World Missions and other corporations from 2011 to 2016. Jobsmetro.net, Inc., created on September 7, 2011, in California, had Uribe as CEO and dissolved on June 8, 2017. Litigation involving Byrne, Quezada, and the IRS occurred in 2011 in Texas regarding TSC Staffing Solutions, which filed a quiet title lawsuit against the United States for two properties. The United States filed a counterclaim against Plaintiff Quezada to foreclose on nominee liens associated with two real properties, asserting they were held for the benefit of Byrne. A third-party complaint was also filed against Byrne to collect unpaid Contract Personnel Service tax liabilities, which Byrne subsequently stipulated to, agreeing to a judgment amount of $1,574,410.08. The Northern District of Texas later ruled that the properties were owned by Quezada and Sara Byrne as nominees for Byrne, leading to the foreclosure of the IRS's liens. The properties were sold, with proceeds of $322,039.69 applied to Byrne’s tax debts. In the current litigation, IRS Officer C. Fox levied the bank accounts of several staffing companies, resulting in significant sums being collected: $166,252.08 from 24 Hour Staffing, $98,583.41 and $1,579.38 from 24 HR Personnel, $66,502.50 and $28,193.53 from Prompt Staffing, and $275,105.30 from TSC Staffing. Plaintiffs, including these staffing companies and individuals Uribe and Quezada, filed a complaint against the United States, claiming the IRS wrongfully levied their accounts to satisfy Byrne's tax liabilities, contesting their status as nominees or alter egos of Byrne. The Court found the testimony of the Plaintiffs' witnesses, including Byrne, Uribe, and Quezada, to be untruthful, while the testimony of defense witnesses, particularly Galvez and Tracy Ocampo, was deemed credible. Evidence presented indicated that the Plaintiff corporations operated as "sister companies," sharing resources and management, with Galvez testifying about the interconnected operations and the strategizing around business structures to evade tax liabilities. Galvez confirmed the use of Courtesy's Workers' Compensation policy by Prompt and testified about customer transfers and the creation of a new company, Ultimate Personnel, to circumvent a previous levy. The Court concluded that the Plaintiff companies functioned collectively rather than as independent entities. The Court determined that the Plaintiffs operated as sister companies, sharing resources and employees, which facilitated asset transfers and the evasion of creditor liabilities. It was found that Byrne established these entities and used them as a façade to conceal assets due to tax obligations. Evidence supporting this included email correspondences among employees, ATM withdrawals by Byrne, and financial transactions associated with sham charities. Emails revealed that Byrne, referenced as "JB" or "Joe," maintained control over the companies, despite others holding ownership titles. Key findings from the emails indicated that Byrne communicated indirectly through individuals like Uribe and Quezada, who acted as intermediaries. Specific email instances highlighted Byrne's direct influence on operational decisions, such as requests for information and instructions regarding employee visibility and project approvals. From 2011 to 2015, Byrne withdrew $72,303 in cash from Prompt's Bank of America account, with most transactions being $500 each. While Byrne claimed these withdrawals were for company projects, evidence suggested that credit and debit cards received by Prompt were routinely destroyed, indicating a lack of transparency in financial handling. Uribe asserted that only the numbers linked to the ATM cards were retained for payments and that no physical cards existed. She admitted to checking her companies' bank statements daily but only reviewed the bottom line, failing to notice frequent $500 ATM withdrawals. The Court found both Uribe and Byrne's testimonies untrustworthy, particularly given the evident frequency of withdrawals. Contrastingly, Galvez testified that Byrne regularly withdrew $500 from Courtesy's account using an ATM debit card and consistently checked all sister company bank accounts, confirming daily withdrawals. Galvez stated that the ATM pin codes were uniform across companies and that new cards were directly handed to Byrne, who had unrestricted access to them. The Court concluded that Byrne utilized these withdrawals for personal gain rather than company needs, with no justification for the repeated amounts. Additionally, evidence revealed that Sandra Herrera maintained a spreadsheet with bank account details and ATM card information as instructed by Byrne, which was used by employees for fund transfers. From 2013 to 2014, the Plaintiffs collectively donated $299,003 to the I Am World Missions charity, which subsequently transferred $233,600 to Open Arms Community Church. Quezada also directly donated $13,743 from 24 Hour Staffing’s account to the church. Byrne denied receiving personal payments related to the charity, but a defense witness testified to making truck payments to the I Am World Missions account on Byrne’s direction, supported by evidence of checks labeled "truck payment." Ultimately, the Court characterized the charitable contributions as fraudulent and fabricated. Byrne directed the Plaintiffs, Uribe and Quezada, to make donations to charities to hide assets from the IRS. The Court found it implausible that these two Hispanic women, with no ties to Ireland outside of their relationship with Byrne, would donate significant amounts to a Christian charity that would subsequently send funds to a church in Ireland. Neither Plaintiff provided a credible justification for these donations, leading the Court to conclude that they were made at Byrne's instruction for his benefit. The Court examined checks sent from corporate accounts to Quezada, noting that references to "JB" and "Joe" in the memo lines referred to Byrne. Despite Plaintiffs' claims that Byrne did not control these accounts, the Court determined that the checks, including a $1,200 check to Quezada and a $2,000 donation to Salmeron, were issued at Byrne's discretion, indicating he was the true owner. Furthermore, Byrne utilized multiple corporations to shield assets from the IRS, with Uribe and Quezada holding nominal titles. The corporate structure analysis illustrated that Byrne retained de facto ownership throughout. The Court referenced the alter ego and nominee doctrines, which prevent debtors from evading liability by transferring property to another entity while maintaining ownership, allowing the law to treat the debtor as the actual owner for liability purposes. The nominee doctrine evaluates whether a taxpayer treats a property as their own and enjoys the benefits of ownership, despite another entity holding legal title. This is distinct from the alter ego doctrine, which assesses the relationship between the taxpayer and the entity holding title to determine if the taxpayer retains benefits of ownership. Both doctrines require separate analyses, applying federal and state common law where state law establishes property rights and federal law imposes consequences on those rights. When a tax lien is attached to a property, courts follow a two-step analysis: first, they ascertain the taxpayer's rights under state law, and second, they determine if those rights qualify as property under federal tax lien laws. Federal tax liens extend beyond real property to encompass all taxpayer property, including that held by third parties as nominees or alter egos. The IRS may levy accounts of corporate entities if they are deemed nominees or alter egos of a taxpayer. Under 26 U.S.C. § 7426(a)(1), individuals claiming wrongful levy must demonstrate their interest in the property and that the levy was wrongful, which occurs if the delinquent taxpayer has no interest in the property. The Ninth Circuit does not evaluate the IRS's actions specifically but focuses on property ownership based on available facts. In wrongful levy cases, plaintiffs bear the burden of proving their title to the property, after which the government must establish a nexus between the taxpayer and the property by a preponderance of the evidence. The United States can establish a taxpayer's liability by demonstrating that a third-party trust or entity acts as the taxpayer's alter ego or nominee concerning owed taxes and penalties. The burden ultimately lies with the plaintiffs to prove that the property in question does not belong to the taxpayer, showing that no reasonable juror could determine otherwise. A nominee is defined as someone holding legal title to property for another's benefit. The Ninth Circuit outlines a six-factor test for assessing nominee status under California law, which includes: (1) lack of consideration for property transfers, (2) anticipation of litigation when properties were transferred, (3) close relationships between transferors and nominees, (4) failure to record conveyances, (5) retention of possession by the transferor, and (6) continued enjoyment of property benefits by the transferor. All factors must be considered collectively to determine if the taxpayer exercised substantial control over the property. In this case, numerous property transfers were made without consideration, particularly involving a company named Courtesy. Although Quezada was the sole shareholder, Byrne was found to be the de facto owner. Significant transfers in 2008 included Quezada transferring stock and a profitable location to Galvez, and later operating it under a different business name. Additionally, Uribe left Courtesy to form her own company, taking customers without any compensation. Historical transfers also involved Byrne establishing a corporation in Texas and transferring it to Quezada without consideration. Notably, when the plaintiffs anticipated a judgment against Courtesy, they transferred its customers to Uribe's new companies to shield assets from potential liabilities, leaving Courtesy without revenue and ultimately leading to its bankruptcy in 2014. In 2015, Quezada established TSC Staffing in Texas, which filed a consent for a similar name with TSC Solutions and assumed its operations in anticipation of litigation. Quezada and Byrne share a long-standing professional and personal relationship, having known each other for 17 years since Quezada's employment at another staffing agency. Their relationship involved significant interactions, including Quezada's involvement with many of Byrne's business ventures, personal financial transactions, and donations to Byrne's charities. Quezada purchased two homes in Texas for Byrne, one in the name of Byrne’s niece and another in her own name for their visits, both of which were later determined to be under Byrne's de facto ownership. Uribe also has a relationship with Byrne dating back to 2008, with the court finding Byrne as the true owner of the companies operated by Uribe and Quezada, who only held bare title to the corporations. The evidence indicated Byrne retained control over the corporations’ operations and assets, directing decisions and managing payroll. Byrne operated through employees, as he did not maintain an email account, and used them to relay messages and approvals. He had access to all corporate bank accounts and frequently withdrew funds for personal use, undermining any claims of separation from the corporations he controlled. Byrne orchestrated the transfer of funds from the Plaintiffs to charities that were inaccessible to his creditors, specifically routing money from the Plaintiffs to I Am World Missions and then to Open Arms Community Church in Ireland. To mitigate liability, Byrne had Rangel make payments to I Am World Missions instead of doing so himself. Byrne's control over the Plaintiff corporations enabled him to access and manipulate their assets without incurring tax liabilities, allowing him to transfer assets in anticipation of litigation, thereby keeping his companies operational. He withdrew funds or redirected them through various methods, maintaining monetary benefits while avoiding liability. The nominee analysis reveals that Byrne exercised significant control over the Plaintiff corporations' accounts, effectively treating them as his own. He made key decisions, directed employees, controlled bank accounts, and shuffled substantial amounts of money for personal gain, contradicting the Plaintiffs’ claim that Byrne was merely a consultant who exceeded his authority. This usage of the Plaintiffs as nominees insulated him from tax obligations, establishing him as the true owner. Under the alter ego theory, the Court evaluates if Byrne is the alter ego of the Plaintiff corporations, which requires determining if there is a unity of interest and ownership. California law necessitates proving two key elements: a unity of interest and ownership between the individual and corporation, and that treating the corporation's actions as separate would result in inequity. Factors to assess unity include the commingling of funds, unauthorized use of corporate assets, representation of personal liability for corporate debts, lack of formal corporate records, and the use of the corporation as a conduit for personal business. In Johnson v. Serenity Transportation, Inc., the court evaluated the unity of interest between the plaintiff corporations and Byrne, determining that multiple factors indicated Byrne's dominance and control. Byrne exerted control over all aspects of the corporations, approving significant corporate decisions, overseeing financial transactions, and directing employees on various operational matters. Evidence demonstrated that he had access to all corporate bank accounts and engaged in personal financial activities using company funds, such as issuing checks for personal donations. Byrne also concealed his ownership to shield his assets from the IRS, with Uribe and Quezada holding legal title without exercising true ownership rights; their roles resembled those of employees. Additionally, Byrne communicated through employees rather than maintaining direct contact. The court noted Byrne's manipulation of funds, including funneling significant amounts through various entities to support his preferred charities. Lastly, the court observed a pattern of commingling funds among the plaintiff corporations, exemplified by the transfer of assets and customer accounts between different companies. This evidence collectively supported the conclusion of Byrne's control and the lack of independent corporate identities. Uribe's actions significantly harmed Courtesy by transferring its customers to Prompt and Ultimate Personnel during legal troubles linked to the AIG levy, leading to Courtesy's bankruptcy while retaining clients within Byrne's conglomerate. Plaintiffs pooled funds for monthly donations to I Am World Missions and Open Arms Community Church, and between 2011 and 2015, Courtesy issued checks to Prompt ranging from $10,000 to $20,000. Despite being separate entities, the sister companies operated interdependently, sharing employees and resources, with Byrne exerting overarching control. Byrne misappropriated corporate assets, treating them as personal property. He allegedly withdrew $72,303 from Prompt’s account using a debit card that Uribe and Quezada claimed did not exist. Byrne made frequent withdrawals and wrote multiple checks from TSC Staffing's account for personal donations and bonuses. In February 2016, he transferred $13,000 from Prompt to his personal account without justification, using these funds to settle personal tax obligations. The alter ego doctrine is invoked to protect creditors against individuals misusing the corporate structure to avoid liabilities. This doctrine allows for reverse veil-piercing when a corporation is used in bad faith to evade taxes, allowing creditors to reclaim owed amounts. Courts may disregard corporate entities to prevent fraud or injustice. Byrne, who historically used various corporations to dodge creditors, cultivated a façade of non-ownership while controlling the companies. The situation necessitates an equitable remedy to address these improprieties. Byrne is found to be using the Plaintiff corporations as alter egos to evade tax obligations, which would constitute injustice. The IRS has the authority to pierce the corporate veil of such entities to access assets associated with a taxpayer’s outstanding debts. Federal tax liens can encumber the property of a taxpayer's alter ego, and the IRS may levy these assets for collection purposes. The Ninth Circuit has affirmed that creditors can pierce the veil of "dummy" corporations operated by their owners for personal interests. The application of the alter ego doctrine involves both federal and state law, with state law establishing property rights and federal law determining the consequences attached to those rights. The Court has previously applied California's alter ego analysis, concluding that Byrne has a property interest in the accounts targeted by the IRS. While Plaintiffs argue that reverse veil-piercing is a state law matter and not recognized under California law, the Court asserts that the viability of this theory is grounded in federal law. No California Supreme Court precedent addresses this issue, leading the Court to consider California Court of Appeals decisions. In Postal Instant Press, Inc. v. Kaswa Corporation, it was ruled that a creditor cannot pierce the corporate veil to compel a corporation to settle a shareholder's debts; however, reverse veil-piercing by the IRS in federal tax cases is permitted. The Court notes that this interpretation is supported by multiple courts, including the Ninth Circuit. The United States has utilized a reverse piercing theory to recover a taxpayer's delinquent tax liabilities from the taxpayer's alter ego business entities, as established in several cases, including *Brownfield Inv. Corp. N.V. v. United States* and *Towe Antique Ford Foundation v. I.R.S.*. Courts recognize reverse piercing as a well-established method in federal tax matters, aimed at preventing fraud and ensuring the collection of overdue federal taxes. Under *Postal Instant Press*, reverse veil-piercing is encouraged in federal tax cases, allowing the IRS to levy the accounts of Joseph Byrne’s alter ego corporations under both state and federal law. The IRS correctly levied bank accounts of several corporations, including 24 Hour Staffing and TSC Staffing, which are directly tied to Byrne. Evidence indicates that Byrne is the sole director of multiple TSC Solutions corporations. Circuit courts consistently affirm that state law governs the nominee and alter ego doctrines, rejecting the idea that federal common law should apply. Various cases, such as *Fourth Inv. LP v. United States* and *911 Mgmt. LLC v. United States*, illustrate that the IRS can levy corporate accounts deemed nominees of taxpayers. The courts apply state property law to assess the alter ego status of corporations relative to the taxpayer's obligations. The Court recognizes that some property transfers lack sufficient facts to determine if consideration was paid, noting these cases are exceptions rather than the rule. When property transfers are part of a scheme to evade liability, the existence of consideration in some transfers is insufficient to affect ownership interests. Quezada became a director of TSC Solutions around 2002-2003, later taking over Courtesy and operating its profitable Gardena office under TSC Solutions and subsequently 24 Hour Staffing. Plaintiffs reference federal case U.S. v. Boyce, which ruled that reverse veil-piercing is not recognized under California law, a position influenced by the case Postal Instant Press. However, plaintiffs misinterpret Boyce, as it overlooked a crucial footnote that excluded federal tax lien cases from its scope and failed to acknowledge the alter ego doctrine's purpose, which is to protect creditors from individuals misusing the corporate structure. The Court emphasizes that allowing California law to impede federal tax lien availability as equitable relief would not serve justice, particularly given the bad faith involved in the corporate structure's use.