# United States v. Krause (In Re Krause)

> United States Bankruptcy Court, D. Kansas · April 21, 2008 · 386 B.R. 785

URL: https://www.frixlaw.com/law-library/cases/1542150

## Case

- **Full name:** In Re Gary E. KRAUSE, Debtor. United States of America, Plaintiff, and Linda S. Parks, Trustee, Intervener, v. Gary Krause and Richard Krause, Defendants and Drake Krause and Rick Krause, Intervener
- **Court:** United States Bankruptcy Court, D. Kansas
- **Decided:** April 21, 2008
- **Citations:** 386 B.R. 785; 101 A.F.T.R.2d (RIA) 1943; 2008 Bankr. LEXIS 1151; 2008 WL 1805508
- **Precedential status:** Published
- **Opinion:** Opinion by Nugent
- **Judges:** Robert E. Nugent
- **Cited by:** 5 later opinions in the Frix Law Library

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## Opinion text

MEMORANDUM OPINION
ROBERT E. NUGENT, Chief Judge.
TABLE OF CONTENTS
I. INTRODUCTION.792
A. Nature of Case.793
B. Procedural History.793
C. The June 4, 2007 Sanctions Order.794
*791
II. FINDINGS OF FACT.795
A. Krause’s Business Ventures and Corporate Activity.795
1. Real Estate Partnerships — Section 8 Housing Projects.795
2. Barton Enhanced Oil Recovery Income Fund.796
3. Energy Associates, Inc.796
4. Federal Gasohol Corporation.796
5. Financial Investment Management Corporation.797
6. Development Associates, Inc.797
7. Drake Enterprises, Inc.798
8. PHR, L.L.C.798
9. Polo Executive Rentals.798
10. Quivira Associates.799
B. Krause and the IRS.799
1. Krause’s IRS Examinations.799
2. Krause’s Tax Court Litigation.801
3. Krause’s Tax Assessments and Federal Tax Liens.802
4. IRS Collection Summons.802
C. Krause and Teresa Briggs .802
1. Krause’s Premarital Holdings.803
2. Krause’s Antenuptial Agreement.803
3. Gary’s and Teresa’s Health..806
4. Krause’s Personal Financial Statements.807
5. Krause’s Transfers to Teresa .807
a. Mission Property.808
b. Note Receivable Assignments.808
c. Security Interests in Partnership Interests.809
d. Quivira.809
6. Krause’s Disclaimed Inheritance.809
7. Paine Webber and Merrill Lynch Accounts .810
8. Krause’s Control and Management of the PW and ML Accounts.811
D. Trusts.811
1. Creation of Krause Children Trusts (KCTs).811
2. Gary E. Krause Trust (GEKT) and Krause Irrevocable Trust (KIT).812
3. Transfers to Trusts.812
a. KCTs.812
b. GEKT .813
c. KIT.813
4. Gary’s Control over Trust Assets.813
a. Mission property.813
b. 7711 Oneida Property and Teresa’s Gift Mortgage.814
c. Wentworth Property-Section 1031 Tax Free Exchange.815
d. Gary’s Car Loan from KCT.815
e. FIMCO loan from KCT for Dream Swing Investment.816
E. Gary-Teresa 2000 Divorce .816
1. Teresa’s Allegations of Tax Fraud.817
2. Reconciliation and $170,000 Settlement.818
3. 2002 Divorce.819
F. PosL-Divorce Activity.819
1. Domination of KCT Assets.820
2. Reimbursement of FIMCO/Fed Gas for Krause Living Expenses and
Credit Card Bills.821
3. Lease of Oneida to FIMCO and Krause .821
G. IRS Collection Activity.821
1. July 2005 Collection Summons .822
2. Creation of PHR, LLC and Transfer of Oneida Property.822
3. Krause Files Bankruptcy.822
4. Government Commences this Adversary Proceeding.823
III. ANALYSIS AND CONCLUSIONS OF LAW.823
*792
A. Dischargeability of Krause’s Tax Debt Under 11 U.S.C. § 523 (a)(1)(C).824
1. Fraudulent Tax Return .824
2. Willful Evasion of Collection.827
B. KCTs as Krause’s Nominees .830
1. Krause’s Property Interest in the KCTs Under Kansas Law.832
a. Statute of Limitations.833
b. Badges of Fraud.834
c. Transfers of Life Insurance Policies.835
d. Resulting Trust Theory for Krause’s Property Interest.836
2. The KCTs as Krause’s Nominees Under Federal Law.837
a. Control Over the KCTs.837
b. Use of KCTs to Pay Personal Expenses .839
c. Relationship Between Taxpayer and KCTs.842
d. Lack of Oversight Over Taxpayer’s Actions .842
e. Lack of Consideration for Transfers.843
C. Fraudulent Transfers.843
1. The Court’s Determination of KCTs Nominee Status Renders a
Determination on the Fraudulent Transfer Claims Moot.843
2. Quivira.846
a. Facts Pertaining to Quivira.847
b. Fraudulent Transfer of Quivira Ownership Interest.849
D. Permanent Injunction.852
IV. CONCLUSION.853
I. INTRODUCTION
Just ...
follow the money
...
1
Gary E. Krause is a man who has everything and owns nothing, largely by his own design. As will be described at considerable length in this opinion, debtor and defendant Gary E. Krause has spent the last two decades taking actions intended to shield his assets from the collection efforts of the United States. Following the money over the trail of Krause’s asset manipulation is torturous. It involves numerous inter-entity and intra-family transfers that often occurred in close temporal proximity to proceedings or determinations by the IRS or the Tax Court that adversely affected Krause. At the center of these manipulations is Krause’s antenuptial agreement with his former wife, Teresa Briggs, and transfers he made to her that violate the clear terms of that agreement. The sheer number and scope of the transactions assure that these are not coincidences. And, all of Krause’s schemes had one ultimate goal: the protection of his property by placing it in the names of third parties or entities while retaining its full use and control.
Both the United States and chapter 7 trustee, Linda S. Parks sue for a determination that assets held by corporations, partnerships, and trusts associated with Krause are in fact his assets, subject to his dominion and control, and therefore subject to the legitimate claims of his principal creditor, the Internal Revenue Service.
The Court conducted a nine-day trial on the claims of the United States of America (“Government”) and the chapter 7 trustee in this multiple count adversary proceeding. The Government appeared by Hilarie E.Snyder and Thomas W. Curteman, Jr.
*793
with the United States Department of Justice, Tax Division. The chapter 7 trustee Linda Parks (“Trustee”) appeared in person and by her attorney, F. James Robinson of Hite, Fanning & Honeyman L.L.P. The interveners Drake Krause and Rick Krause (“Interveners”), Krause’s sons and trust beneficiaries, appeared by their attorney, John Val Wachtel of Klenda, Mitchell, Austerman & Zuercher, L.L.C. The defendant-debtor Gary E. Krause (“Krause” or “Gary”) appeared
pro se.
The defendant Richard Krause (“Richard”), trustee of the Krause Children Trusts (“KCT”) and Krause’s brother, appeared only as a witness and did not otherwise appear or participate at trial in defense of the plaintiffs’ claims against him as trustee.
After the close of the evidence, the Court directed the parties to submit briefs on one legal issue. The Court has now fully reviewed the evidence, including designated deposition testimony and the parties’ briefs,
2
and is ready to rule.
A.
Nature of Case
Krause owes the Government approximately $3,359,001 for federal income taxes for the years 1975, 1978-1983, 1986, 1994 and 1995.
3
Nearly all of this claim is secured by notices of federal tax lien. The Government and the Trustee seek to have the five KCTs that Krause created in the late 1980’s and 1990 declared to be Krause’s nominees, rendering KCT-held assets his property and subject to the Government’s federal tax liens. They then seek turnover of that property to the bankruptcy estate. They also seek a determination that certain property and assets held by the KCTs were fraudulently transferred to the trusts under the Statute of Elizabeth as enacted in Kansas,
4
the Kansas Uniform Fraudulent Transfer Act (“KUFTA”),
5
or 11 U.S.C. § 548 . Finally, the Government seeks to have Krause’s tax debt excepted from his discharge under 11 U.S.C. § 523 (a)(1)(C) and for entry of a permanent injunction enjoining him from transferring trust property and assets.
B.
Procedural History
Krause filed his voluntary chapter 7 petition on October 10, 2005, after he unsuccessfully attempted to quash an IRS collection summons seeking KCT records. The Government filed a petition in the United States District Court for the District of Kansas to enforce the summons.
6
Krause is licensed to practice law in Kansas but does not hold himself out as a practicing lawyer. He elected to proceed without counsel in this case since his attorney withdrew in October 2006 after the Court rejected Krause’s request to pay his attorney from potential assets.
7
Richard is Krause’s brother, a podiatrist, and is the named trustee of all of the KCTs. Richard was also initially represented by counsel but his attorney withdrew when the Court declined to permit KCT funds to be used to pay his attorney.
8
Richard has not actively participated in the proceedings since filing an answer to the adversary complaint. He remains a party defendant and the trustee of the KCTs. The Inter-veners are Gary’s two sons, Drake and Rick, who are the named beneficiaries of
*794
the KCTs. At the time of trial, Drake was a freshman in college and Rick was a senior in high school.
The Government commenced this adversary proceeding against Gary and Richard on November 1, 2005. In its complaint, the Government sought to enjoin transfers of property and assets, a declaration that the KCTs and several other entities and trusts connected to Krause — the Gary E. Krause Trust, the Krause Irrevocable Trust, Federal Gasohol Corporation (Fed Gas), Financial Investment Management Corporation (FIMCO), Drake Enterprises, Inc., and PHR, LLC — are his nominees and subject to federal tax liens, to except from discharge Krause’s tax liability pursuant to 11 U.S.C. § 523 (a)(1)(C), and to set aside alleged fraudulent transfers by Krause and have its federal tax lien attach to fraudulently transferred property.
On November 21, 2005, the Government obtained an
ex parte
temporary restraining order preventing the transfer of assets held by the above entities and trusts. • The Court conducted a two-day hearing on the preliminary injunction and the Court granted the Government’s request, effectively freezing all assets and accounts of the above entities and trusts during the pendency of this adversary.
9
Shortly thereafter, the Trustee intervened in this adversary proceeding and filed her own turnover complaint.
10
Like the Government, the Trustee alleged that the entities and trusts were Krause’s nominees and property of the bankruptcy estate subject to turnover. The Trustee also sought to avoid and preserve for the estate fraudulent transfers allegedly made by Krause into the trusts.
Approximately one year later, after Richard’s counsel withdrew and Richard ceased to participate in the proceedings, Drake and Rick were permitted to intervene to protect their purported interests as beneficiaries of the KCTs and to defend the validity of the KCTs.
11
Following a protracted and contentious discovery period, all parties filed disposi-tive motions. Krause and Interveners filed motions to dismiss and for partial summary judgment.
12
Highly summarized, they asserted that the Government lacked standing to pursue the fraudulent transfer claims and that both plaintiffs’ fraudulent transfer claims were barred by applicable statutes of limitation and repose. They also challenged the plaintiffs’ nominee claim as a “reverse piercing” claim that is not cognizable under Kansas or Tenth Circuit law. The Government and the Trustee also filed comprehensive motions for summary judgment on all their claims.
13
In three separate opinions, the Court denied all of the motions, thus leading to a trial of the claims.
14
C.
The June 4, 2007 Sanctions
Order
15
Early in the course of discovery, the Government served requests for production of documents on Krause, seeking,
inter alia,
information, communications, and records maintained by Krause on computers. When Krause failed to produce this electronic evidence, the Government and the Trustee obtained an order compelling Krause to turnover his actual computers for inspection. Upon inspection, the plaintiffs discovered that Krause had loaded and operated a wiping software program
*795
on his computers that permanently destroyed or erased electronic evidence.
This discovery led plaintiffs to move for discovery sanctions and contempt proceedings for spoliation of electronic evidence.
16
They sought entry of default judgment on all of their claims, including a determination that all of the entities and trusts at issue be deemed to be Krause’s nominees. The Court conducted a three day evidentiary hearing on the motions and then issued its sixty-one page opinion on those motions (“Sanctions Order”), finding that Krause willfully destroyed electronic evidence and assessing sanctions against him.
17
The Court also entered
partial
default judgment against Krause as a sanction for his spoliation of electronic evidence, determining that the following entities were Krause’s nominees and that the assets held by them were subject to turnover as property of the estate: Gary E. Krause Trust, Krause Irrevocable Trust, FIMCO, Fed Gas, Drake Enterprises, Inc. and PHR, LLC. The Court declined to default Krause with respect to the KCTs, leaving the Government’s and the Trustee’s nominee claims with regard to the KCTs for trial.
II. FINDINGS OF FACT
The Court makes the following findings of fact from the evidence presented at trial. Interspersed throughout these findings are the uncontroverted facts established by the summary judgment motions that were previously deemed established for purposes of trial pursuant to Fed. R.Civ.P. 56(d).
18
The Court may reference from time to time the previously defaulted entities to place in context their relationship to Krause and the events in this case as well as to demonstrate Krause’s pervasive pattern of removing his name from virtually all of his assets.
A.
Krause’s Business Ventures and Corporate Activity
Krause is a self-described entrepreneur. He has been involved in a variety of business ventures and industries including real estate development, management services, and oil and gas or energy development. Gary obtained his masters in business administration and juris doctor degrees in 1973. He obtained his Kansas law license in 1973. He began work with Garvey Industries in the 1970’s; he worked the for several years before leaving Garvey and striking out on his own in the late 1970’s. While at Garvey, Krause was involved in finding international investors for Garvey ranching and real estate development and housing enterprises. In more recent years, Krause has been involved with enterprises and individuals overseas in developing what Krause has termed an “anti-aging product.”
1. Real Estate Partnerships — Section 8 Housing Projects
Krause became aware of Section 8 real estate while employed at Garvey. When he left Garvey, Krause became involved in several Section 8 housing projects. He acknowledged that he used Section 8 housing as a tax shelter. Section 8 housing is low-income housing subsidized by the federal government’s contribution to reach market rental rates.
19
The following limit
*796
ed partnerships were Section 8 housing projects established by Krause: Liberal Commons Ltd., Norton Commons Ltd., Great Bend Duplex Housing Ltd., Hutchinson Duplex Housing Ltd., Liberal Duplex Housing Ltd., Norton Duplex Housing Ltd., and Rural Housing Associates, Inc.
2. Barton Enhanced Oil Recovery Income Fund (“Barton”)
Barton was one of a number of partnerships created in the early 1980’s by various promoters for the development of previously unprofitable oil and gas properties using new and unproven technologies. Krause was the tax matters partner for Barton and admitted that the enhanced oil recovery (EOR) partnerships were tax shelters. For the years 1981 and 1982, the IRS challenged the legitimacy of Barton’s debt structure and the tax benefits flowing to the Barton investors. This became the “test case” under the Tax Equity and Fairness Reform Act of 1985 (TEFRA) that is the subject of the Tax Court ease filed by Krause to contest the IRS’s disallowance of certain tax deductions based upon the partnership’s debts.
20
Krause’s Tax Court challenge was unsuccessful and the disallowed deductions flowing to the Barton partners forms the basis for part of Krause’s income tax liability.
3. Energy Associates, Inc. (“Energy”)
Although the record is unclear, it appears that Energy was formed in the 1970’s or early 1980’s and that Gary owned 100% of its stock. Energy was the corporate general partner of Barton. The IRS determined that Energy’s payment of Krause’s personal expenses in 1981, 1982 and 1983 constituted taxable income to Krause. This determination was one of several that were the subject of notice of tax deficiencies and unsuccessful challenge by Krause and comprises part of Krause’s income tax liability.
4.Federal Gasohol Corporation (“Fed Gas”)
Gary established Fed Gas in 1980. The original purpose of Fed Gas was a venture to convert a winery into an ethanol plant. Later on, Fed Gas was involved in the operation of an oil tanker, the MY Sillery, in the Caribbean. Fed Gas paid management fees to Financial Investment Management Corporation (“FIMCO”) for its operational and management services in connection with the tanker. Fed Gas also financed the tanker operations and held a mortgage on the tanker to secure its loan to the owner of the tanker. Gary was the sole owner of Fed Gas until 1989, when he transferred Fed Gas to the Gary E. Krause Trust for no consideration. Gary is the sole beneficiary and Richard is the trustee of that trust. Gary continued to manage Fed Gas, even after the transfer to the Gary E. Krause Trust. He is the sole signatory on the Fed Gas accounts. Fed Gas was the primary generator of Krause’s income in the 1990’s.
*797
5. Financial Investment Management Corporation (“FIMCO”)
Krause founded FIMCO in 1980 together with C. Norris Taylor with whom he had worked at Garvey Industries. At formation, Krause was the majority shareholder of FIMCO, owning 51%, or 510 shares of stock, while Taylor owned 49%, or 490 shares of stock. FIMCO largely provided financial and management services for Krause’s other entities but did not own any assets; Taylor referred to it as a “shell company” in his testimony. Taylor described FIMCO’s activities as a servicing operation for Krause’s other companies and business interests, providing accounting, tax return preparation, and operational management.
Taylor acquired an additional 4,000 shares in FIMCO in 1985, becoming its president and the owner of 90 per cent of its stock. On September 1, 1992, Krause transferred his 510 shares of FIMCO stock to Taylor thereby making Taylor the 100% owner of FIMCO. Taylor did not pay Krause any consideration for the transfer, although each share had a par value of $1. This transfer was made within 40 days after the Tax Court disallowed Barton’s and the related partnerships’ losses and accrued interest deductions,
21
and within two years after the IRS issued Gary notices of deficiency for his personal Forms 1040 for tax years 1975-1983 and 1986. Some five months after Krause’s transfer, Taylor signed a contract dated February 8, 1993 obligating him to transfer FIMCO upon his retirement to the Krause Irrevocable Trust — of which Krause is the sole beneficiary.
While Taylor was owner and president of FIMCO, Krause retained signing authority on the corporate bank account. When Taylor retired on February 5, 2001, Krause became president of FIMCO again and was the only authorized signatory on the FIMCO bank account. On September 9, 2002, Taylor transferred FIMCO to the Krause Irrevocable Trust, belatedly complying with his previous contractual obligation. The Krause Irrevocable Trust paid no consideration for that transfer. Richard, the trustee of the Krause Irrevocable Trust, provided no oversight when it acquired FIMCO. Richard testified that Gary negotiated the transaction. Since the 2002 transfer of FIMCO to the Krause Irrevocable Trust, Krause has controlled FIMCO without any oversight from Richard.
Operating under Gary’s direction, FIM-CO invested in various ventures, including Live Wire Media Partners, L.L.C. which was formed to acquire and operate a radio station. FIMCO financed part of its interest in Live Wire through a Liberian company called Overseas Trust Company.
22
FIMCO has contributed at least $215,120 to Live Wire since 2003.
23
Richard played no role in evaluating this transaction, but rather delegated the entire responsibility for this acquisition and all of FIMCO’s business dealings to Gary. FIMCO also invested in Dream Swing Machine, L.L.C., a company formed to acquire a golf swing aid. FIMCO engaged in the Dream Swing investment at a time when Gary was the president. According to Richard and Gary the KCT 1 loaned $25,000 to FIMCO to fund the investment.
6. Development Associates, Inc.
This entity holds 10-20 acres of undeveloped land in Reno County, Kansas. It was intended to be another Section 8 housing development but that never came to fruition. Gary was its sole shareholder, di
*798
rector and officer. He transferred Development Associates to the Gary E. Krause Trust on July 26, 1989 for no consideration from the trust, shortly after the IRS issued notice of examination of Gary’s 1986 personal return.
7. Drake Enterprises, Inc.
Drake Enterprises was incorporated in October 1988. Teresa Briggs (“Teresa”), Gary’s wife at the time, was its sole shareholder. Gary and Teresa are its only directors. Teresa ran her “Cookie Diet” business through Drake Enterprises for a period of time and according to Gary, Drake Enterprises owned the formula developed for the Cookie Diet. In February of 1996, Teresa conveyed the Mission property (Gary’s former residence and marital home) to Drake Enterprises, which later sold the Mission house to third parties. Gary, as president of Drake Enterprises, signed a limited power of attorney to attorney Nelson Van Fleet to enable Van Fleet to appear on behalf of Drake Enterprises in connection with the closing of the sale of the Mission property. Gary signed the 1989 federal tax return of Drake Enterprises as vice-president. Drake Enterprises no longer owns any assets.
8. PHR, LLC
In late July or early August, 2005, shortly before Richard was due to appear on August 5, 2005 to respond to the IRS Collection Summons with KCT records, Gary formed a limited liability company called PHR, LLC. Gary testified it was formed to hold title to the family’s residence on Oneida Circle (the “Oneida property”) to effectuate a Section 1031 tax free exchange with another residential property he intended to acquire (the Wentworth property).
24
On August 5, 2005, Richard signed trustee warranty deeds conveying title to the Oneida property from the KCT 1 to PHR. The deed was recorded August 11, 2005. Gary prepared the operating agreement (dated August 7, 2005) for PRH, LLC
25
using a form LLC agreement. KCT 1, 2 and 5 were listed as the members of PHR. PHR was one of the entities upon which the Court defaulted Gary in its Sanctions Order, deeming PHR to be Krause’s nominee.
9.Polo Executive Rentals (“Polo”)
Polo is the named lessor under lease agreements with Gary and FIMCO for the Oneida property.
26
Polo has no record title interest in the Oneida property. Polo owns no assets. It is a non-entity, merely being a name on the checking account into which lease payments were purportedly deposited by Gary and FIMCO. It is unclear when the account was established but the lease agreements are dated with the year 2000. Richard signed the lease agreements on behalf of Polo. Gary testified the Polo account is owned or controlled by the KCT 1.
*799
10. Quivira Associates (“Quivira”)
Quivira holds title to 145-160 acres of real property in Stafford County, Kansas where a hunting lodge is located. It was incorporated in 1986 by Richard, who is also the president. Richard and Gary use the property for hunting. In addition, the pasture ground is rented out to a tenant part of the year to run cattle.
Initially Kanzoil Corporation (100% owned by Gary) owned 4,000, shares or a one-third interest in Quivira. In 1989, Gary transferred the shares to Teresa. In 1998, Teresa transferred the shares to the Gary E. Krause Trust or the Interveners.
27
A more detailed discussion of the chain of transfers is contained later in this opinion.
28
B.
Krause and the IRS
Krause’s tax battles with the IRS began in the 1980’s when the IRS sent letters both to Krause individually indicating that it was initiating an examination of his personal tax returns and to Krause, as Barton’s tax matters partner, indicating that it was auditing Barton and other EOR partnership returns.
Marsha Waterbury, a revenue officer and 34 year employee of the IRS, explained the examination or audit process at trial as follows. First, an examination letter or audit letter is sent to the taxpayer, notifying the taxpayer that his tax return is being examined. The letter may be accompanied by a request to meet with the taxpayer and a request for additional information or documents to be brought to the meeting. After its examination and review, the IRS issues a notice of deficiency which, based upon the IRS’s review of the information and return, makes changes to the taxpayer’s return.
Once a notice of deficiency is issued, a taxpayer can respond in several ways. The taxpayer can agree with the changes and voluntarily pay the tax deficiency ending the tax dispute. The taxpayer can challenge the tax deficiency and file a petition with the United States Tax Court. If the taxpayer is unsuccessful in the Tax Court, he can appeal the Tax Court decision to the applicable Circuit Court of Appeals and from there, to the United States Supreme Court. If the taxpayer loses the tax appeals, the notice of tax deficiency stands and the taxpayer can either voluntarily pay the tax liability or suffer the IRS’s collecting the deficiency. Once the tax deficiency has been fully litigated through the courts, or no challenge to the tax deficiency is made by the taxpayer, but the tax deficiency remains unpaid, the IRS then assesses the taxes. Once the tax assessment is made, the IRS then attempts to collect the taxes from the taxpayer or the taxpayer’s property by levy or attachment. Included in the IRS’s arsenal of collection tools is the ability to file a notice of federal tax lien on all of a taxpayer’s property.
29
1. Krause’s IRS Examinations
During the period from February of 1980 to July of 1985, the IRS selected Gary’s personal Form 1040 returns for the tax years 1975 through 1983 for audit. This audit pertained to multiple tax issues, principally the deductions Gary took in connection with operating losses of his enhanced oil recovery (“EOR”) partnerships and also his alleged failure to report as
*800
income personal expenses paid by his wholly owned company Energy Associates, Inc. in years 1981, 1982 and 1983.
30
The IRS issued a notice of deficiency on October 25, 1990 increasing Krause’s tax liability by approximately $558,000 plus penalties and interest. Krause filed Tax Court case no. 1279-91, discussed below, to challenge the deficiency.
Beginning on June 28, 1983 and through 1986, the IRS notified Gary in his capacity as Barton’s tax matters partner that it was also auditing Barton’s 1982 and 1983 partnership tax returns. Additionally, on June 28, 1983, the IRS sent Gary a notice informing him that it was auditing the 1981 and 1982 tax returns for his other EOR entities, Cardinal Oil Technology Partners, Energy Associates, Inc., Caxton Oil Technology Partners, and Harrow Oil Technology Partners.
31
These audits questioned deductions taken by the partnerships for reported losses incurred by their respective enterprises stemming from their debt obligations. The IRS challenged the validity of those debt obligations. On April 11, 1986, the IRS issued a notice of administrative adjustment disallowing all partnership losses. Acting as tax matters partner, Krause filed Tax Court case no. 16425-86 (the
“Barton
Tax Case”), also discussed below, to challenge the administrative adjustment.
On April 5, 1989, the IRS advised Gary that it was also examining his 1986 personal return.
32
The scope of the examination was limited to certain Schedule C bad debt losses he claimed. The IRS challenged both the existence of a debtor-creditor relationship as well as Gary’s assertion that the debt had become worthless during the tax year. According to Gary, the bad debt losses he claimed arose from loans he made to real estate partnerships Liberal Commons, Ltd. and Norton Commons, Ltd. The result of this audit was a notice of deficiency increasing Krause’s income for 1986 by some $395,000 representing the disallowed bad debt loss and more than $3.15 million representing disallowed partnership net operating loss (NOL) car-ryforward. Krause then filed Tax Court case no. 1268-91 to challenge the bad debt findings. The NOL deficiency remained in controversy in the
Barton
Tax Case at that time.
On January 15, 1997, the IRS notified Gary that it was examining his 1994 Form 1040 and, on July 11, 1997, the IRS expanded its examination to include his 1995 Form 1040.
33
This audit resulted in upward adjustments to these returns of some $150,000 in taxes and penalties owed. These adjustments were a continuing consequence of Gary’s claiming NOL carry-forward benefits from the abusive EOR tax shelters on his 1040 returns for 1994 and 1995. Even though the
Barton
Tax Case had been resolved adversely to Gary on appeal by June of 1994, he nevertheless included these losses on both his 1994 and 1995 returns. According to Gary’s accountant, David Holste, C.P.A., these partnerships did not file their final returns until 1994 and 1995, resulting in the flow-through of income and other tax benefits from the partnerships to Gary and the other partners. Holste also stated that had he known that the Tenth Circuit had affirmed the
Barton
Tax Case on appeal, a conclusion adverse to Gary, he would have prepared Gary’s 1994 and 1995 returns differently. This audit resulted in an as
*801
sessment of some $60,725 for tax year 1994 and $239,267 for tax year 1995.
2. Krause’s Tax Court Litigation
On May 28, 1986, after the IRS disallowed deductions taken by Barton for losses allegedly incurred by the partnership, Gary petitioned the United States Tax Court (No. 16425-86) and challenged the IRS decision.
34
According to the Tax Court, the
Barton
Tax Case was the test case for over 2,000 related, pending TEFRA partnership matters. Alleged total tax deficiencies at issue in connection with this group of related cases and TEFRA partnerships were in excess of $2 billion. On July 29, 1992, the Tax Court disallowed Barton’s and the other partnerships’ losses and accrued interest deductions, stating:
In summary, presented to us in this case is a chain or multi-layered series of obligations, stacked or multiplied on top of each other via the numerous partnerships to produce debt obligations in staggering dollar amounts, using a largely undeveloped and untested product, in a highly risky, very speculative, and non arm’s-length manner in an attempt to generate significant tax deductions for investors. The transactions did not, and do not, constitute legitimate for-profit business transactions.
Losses of the partnerships are disallowed under section 188, and accrued interest deductions are disallowed due to the non-genuine nature of the underlying debt obligations.
35
The Tenth Circuit Court of Appeals affirmed the Tax Court decision in 1994, and the Supreme Court denied
certiorari
in 1995.
36
Because Barton and the other EOR ventures were structured as partnerships, the disallowance of the partnership losses flowed through to the investors in those partnerships and significantly increased the individual partners’ tax liabilities, including those of Krause.
On October 25, 1990, the IRS issued notices of deficiency to Krause personally which notified him that the IRS had determined that he had underpaid his taxes for the years 1975-1983 and 1986 by, in part, failing to report certain income paid to him by Energy Associates, by taking deductions for losses he claimed by participating in EOR partnerships such as Barton, and for disallowance of bad debt losses.
37
On January 22, 1991, Krause personally petitioned the Tax Court to challenge his 1986 deficiencies attributable to the bad debt losses disallowed by the IRS (Tax Court case no. 1268-91).
38
On that same day, Krause also petitioned the Tax Court to challenge his personal tax deficiencies for the years 1975 through 1983 (Tax Court case no. 1279-91).
39
Ten years later, in February 2001, Gary and the Commissioner settled their disputes with respect to Krause’s 1975-1983 and 1986 tax years. In accordance with the settlement, Gary agreed that he owed taxes for 1975, 1978 through 1983, and 1986.
40
With respect to the bad debt losses for the year 1986, Gary agreed to the IRS’s deficiency of $11,153.
*802
On July 13, 1999, the IRS mailed Gary a notice of deficiency for tax years 1994 and 1995, which Gary did not challenge. The IRS assessed the deficiencies for those taxes in December 1999 pursuant to a settlement that Krause believed would put the EOR matters behind him. Krause testified that when the IRS assessed the 1975 through 1986 liabilities arising from the disallowed partnership NOLs, he “gave up” because he had no way to ever repay these liabilities.
3. Krause’s Tax Assessments and Federal Tax Liens
In total, the IRS assessed federal income taxes, interest, and penalties in the following amounts and filed notices of federal tax liens in Sedgwick County, Kansas on the following dates:
Tax Year
1975 1978 1979 1980 1981 1982 1983 1986 1994 1995
Amount
$ 11,990.45 $393,919.32 $104,665.13 $178,438.54 $ 89,294.04 $711,092.52 $784,180.78 $ 40,460.99 $ 60,725.01 $239,267.18
Date Of Assessment
05/31/2001 05/31/2001 07/13/2001 07/13/2001 07/13/2001 05/31/2001 05/31/2001 07/13/2001 12/01/1999 12/01/1999
Tax Lien Filed
10/12/2001 10/12/2001 11/16/2001 11/16/2001 11/16/2001 10/12/2001 10/12/2001 11/16/2001 04/06/2001 04/06/2001
At the date of his bankruptcy petition, with interest and penalties, Gary owes the United States about $3,359,001 for tax years 1975, 1978 through 1983, 1986, 1994, and 1995.
4. IRS Collection Summons
As an IRS Revenue Officer, Marsha Waterbury’s duties include collecting unpaid taxes from taxpayers. Her duties begin after a tax assessment is made. Waterbury because responsible for the Krause account in June of 2005. She reviewed IRS records and files from the 1980’s as well as the prior revenue officer’s activity. According to Waterbury, the prior revenue officer had contact with Krause regarding his unpaid taxes, but Krause had been uncooperative. Krause has made no payments on the tax liabilities since the taxes were assessed. In the course of her review and investigation Waterbury found no assets titled in Krause’s name.
On July 8, 2005, Waterbury served a collections summons issued pursuant to 26 U.S.C. § 7602 on Richard, as trustee of the trusts, to appear before her at the IRS offices in Wichita on August 5, 2005. The summons required that he provide,
inter alia,
“all records in [his] possession” pertaining to the KCTs and the Gary E. Krause Trust.
41
Upon receiving the summons, Richard contacted Gary and asked him how to respond. Gary referred Richard to attorney Brian Grace to respond to the summons. Rather than comply with this summons, Richard, through his attorney, filed a Petition to Quash Summons in the United States District Court for the District of Kansas on July 28, 2005.
42
This action was later dismissed.
C.
Krause and Teresa Briggs
Teresa Briggs figures prominently in Krause’s asset activities. Krause met Teresa in 1982. At that time, Teresa
*803
owned and ran an advertising agency and Gary was involved in his EOR partnerships as well as a variety of other business enterprises. They were married on April 5, 1986. Because of Gary’s failed first marriage, he insisted on an antenuptial agreement. According to Gary, the attorneys worked on the terms of an antenup-tial agreement for nearly a year before the final agreement was executed by Gary and Teresa on April 4, 1986, the day before their wedding.
After they were married, Teresa worked for the Fleming Companies in advertising and marketing for a period of time. She ceased working outside the home upon the birth of her youngest son, Rick. Teresa acknowledged that she was not a “numbers” or detail person, but by all accounts was talented in marketing, advertising, and creative work. She also holds a real estate license and buys properties and refurbishes them for rent or resale. While they were married, Teresa started her Cookie Diet venture. As the name suggests, Teresa oversaw the development of a formula for a nutritional cookie and began marketing the product. The evidence suggests that Teresa conducted the Cookie Diet venture from home as she raised the children. Teresa testified that the Food and Drug Administration ultimately shut down the Cookie Diet business. Teresa also retained an interest in her family’s business, a basement/foundation repair concern. Thus, while Gary owned more property than Teresa, she did bring some property into the marriage.
1. Krause’s Premarital Holdings
Prior to his marriage to Teresa, Krause personally owned the following:
a)partnership interests in several limited partnerships, including: Cardinal Oil Technology Partners, Caxton Oil Technology Partners, Harrow Oil Technology Partners, Bishop Energy Technology Associates, Barton Enhanced Oil Production Income Fund, and Trojan Energy Technology Associates;
b) 100% of the stock of Energy Associates, Inc.;
c) 100% of the stock in Federal Gasohol Corporation;
d) 51 % of the stock or 510 shares of Financial Investment Management Corporation (“FIMCO”);
e) 100% of the stock of Development Associates, Inc., which owned real property in Reno County;
f) general partnership interests in several real estate limited partnerships, including Great Bend Duplex Housing Ltd., Hutchinson Duplex Housing Ltd., Liberal Commons Ltd., Norton Commons Ltd., Newton Associates, Liberal Duplex Housing Ltd., and Norton Duplex Housing Ltd.;
g) 100% of the stock of Rural Housing Associates, Inc.;
h) sole ownership of the real property and personal residence at 87 N. Mission Road, Wichita, Kansas; and
i) 100% of the stock in Kanzoil Corporation.
In 1986, Krause was also the president of Federal Gasohol Corporation, Energy Associates, Inc., FIMCO, and Development Associates, Inc., as well as a director of Quivira Associates.
2. Krause’s Antenuptial Agreement
43
Gary and Teresa entered into the ante-nuptial agreement (“Agreement”) on April 4, 1986. In doing so, they agreed to keep their separate property and preclude any claim that their separate property would
*804
become marital property. The Agreement recognized that Gary and Teresa had their own separate businesses, and in fact the Agreement’s introductory recitals state that “each party hereto is presently operating and conducting a business venture and
each is desirous of continuing such venture after their marriage
to each other.”
44
Under the Agreement, Teresa waived any right, title or interest in and to Gary’s assets and separate property. Those assets listed by Gary included the interests listed above: the Mission property; his interest in the real estate limited partnerships; Rural Housing Associates, Inc., Western Associates of Kansas, Inc.; his interest in the oil technology partnerships; Energy Associates, Inc.; and a note receivable from Beverly Terrace Apartments, Inc. Gary acknowledged at trial that it would have been in his best interest to list all of his assets in the Agreement but conceded that he did not. For example, he omitted his interest in FIMCO and Fed Gas. Nor did Gary disclose several notes owed to him by his companies, notes that he later assigned to Teresa. At the time the couple executed the Agreement, Gary knew that the IRS was auditing his personal tax returns as well as those of the Barton, Cardinal and Caxton oil partnerships. Indeed, Krause filed the tax court petition challenging the Barton tax deficiency in May of 1986, only a month after his marriage to Teresa.
Among the salient provisions of the Agreement was the ability to deem and treat separate property as marital property. Under paragraph 6 of the Agreement, Gary and Teresa did not consider their separate property to be held as marital property except as they might subsequently agree in a separate written agreement that referenced the Agreement. None of the transfers referenced in this opinion were documented in a manner that complied with this provision.
Paragraph 8 of the Agreement sets forth the rights of the parties upon a divorce. It provides that Teresa would receive $1,000 per month as alimony for a maximum of 120 months. Paragraph 9 addressed the property division between the parties. If Gary and Teresa remained married for a period of ten (10) years and she commenced the divorce action, Teresa would receive the greater of $50,000 or one-half of the marital assets as her property division.
45
Thus, the total amount of cash that Teresa stood to receive under the Agreement in the event of a divorce was $170,000. At all times during the marriage, Gary was to carry a $250,000 life insurance policy on his life with Teresa as the named beneficiary. In addition, if Gary died while he and Teresa had a minor child, Teresa was to inherit their principal residence.
Paragraph 12 of the Agreement required Gary to establish a Krause Children Trust upon the birth of children of the marriage; the trust was intended to be in lieu of child support in the event of a dissolution of the marriage. Specifically, the Agreement states:
A. Upon the first child being born as issue of said marriage, Gary shall commence a spendthrift trust known as the “Krause Children Trust” and placed at a bank within the City of Wichita. Said trust shall name as trustees an individual named by each of the parties and a third person named by the two designated trustees. The original corpus of the trust shall be Fifty Thousand Dollars ($50,000.00). The corpus shall be increased by Fifty Thousand Dollars ($50,000.00) upon
*805
the second child being born as issue of said marriage or upon the Fifth (5th) birthday anniversary of the first child born as issue of said marriage, whichever event first occurs.
B. In the event a third (3rd) child is born as issue of said marriage,
or upon the fifth (5th) birthday anniversary of the second (2nd) child being bom whichever first occurs,
Gary agrees to add to the corpus of said trust assets equal to Fifty Thousand Dollars ($50,000.00). Regardless of the number of children born as issue of said marriage, the contributed total of the corpus of said trust shall not exceed One Hundred Fifty Thousand Dollars ($150,000.00)
unless Gary should elect to add to said corpus.
C. The trust so established shall be a spendthrift trust with three (3) trustees, one to be named by Gary, one to be named by Teresa, and the third to be selected by the other two trustees. The corpus of the trust estate shall be invested by the trustees, along with all accumulated earnings and income therefrom. Provided, however, that in the event of termination of the contemplated marriage by divorce, ... and beginning on the date of the entry of a decree of divorce ..., the current earnings or income derived from the trust estate shall then be paid annually, or at other intervals if convenient, to Teresa for the general benefit, welfare, health and education of the child or children born of the marriage. The trust shall provide that Teresa will continue to receive the current earnings or income from the trust estate until such time as each respective child attains the age of 25 years, or dies, whichever occurs first....
D.Upon the birth of the first child born as issue of said marriage, Gary agrees that he will maintain a policy of insurance on his life in the amount of Five Hundred Thousand Dollars ($500,000.00) naming as beneficiary or beneficiaries the trustee or trustees of a testamentary trust to be created by his last will and testament which trust shall be a spendthrift trust for the general benefit, welfare, health and education of the child or children born as issue to said marriage. Said obligation to maintain life insurance under this subsection shall terminate upon the termination of the contemplated marriage by divorce
* * *
F. In the event that the children born as issue of said marriage desire higher education beyond their high school education, Gary agrees to pay for said higher education under the following terms and conditions:
iv. Said obligation will not be due until funds have been exhausted from all other resources including but not limited to the above mentioned trusts, ...
The parties hereto agree and understand that the intended purpose of establishing and creating the trust aforementioned, is to provide for the support and wellbeing of children born to Gary and Teresa’s marriage, if any, in the event Gary and Teresa should terminate their marriage by divorce ... before their children should attain the age of 25 years. Gary and Teresa acknowledge, understand and agree that all payments and income received by Teresa pursuant to said trust arrangement for the benefit of the children is in lieu of child support
*806
payments to which the custodial parent would normally be entitled pursuant to the laws of the State of Kansas. Teresa acknowledges and agrees that said trust income is deemed wholly and completely sufficient and satisfactory to her in light of her financial circumstances and station in life to allow her to adequately and sufficiently support the parties’ children therefrom....
In addition to these provisions in the Agreement, Gary orally advised Teresa that they would file separate tax returns.
Teresa and Gary had two sons. The eldest, Drake Krause, was born on May 4, 1988 and his brother, Richard (“Rick”) Krause, was born on November 28, 1989. Teresa filed for divorce in 2000 but she reconciled with Gary and the case was dismissed. Proceedings in the 2000 divorce action are discussed in more detail later in this opinion. Gary and Teresa later separated again and were ultimately divorced in November of 2002.
3. Gary’s and Teresa’s Health
Gary testified at trial that the transfers to Teresa and the KCTs were motivated in part by his concern about his health and family health history. Gary’s mother died in 1982 at age 62 of heart disease and his father, diagnosed with prostate cancer in 1985, died in June of 1990. Gary discovered he had heart abnormalities in the early 1980’s when he submitted to a medical examination in connection with an application for a life insurance policy. He has a heart arrhythmia and has had several stents inserted to alleviate blockages. According to Gary, medical tests in 1988 or 1989 detected that he had suffered a heart attack at some point previously. He undergoes an annual angiogram to monitor his heart condition. According to Teresa, Gary is an alcoholic who was abusive at times during their marriage.
Teresa endured a difficult pregnancy while carrying their second child. During that pregnancy, she and Gary underwent divorce counseling. Teresa testified that she was angered by the antenuptial agreement and by Gary’s insistence that she not work outside the home. She resented giving up her own career and was concerned for her financial security and the boys’ future should something happen to Gary, notwithstanding the provisions made for them by the antenuptial agreement.
Sometime in the early 1990’s, Teresa was diagnosed with Scleroderma. She described Scleroderma as a condition where one’s soft tissues lose their elasticity resulting in severe pain. She took pain and anti-inflammatory medications to relieve her symptoms, but soon became addicted to the prescription drugs. She suffered from depression and in March of 1998, had a mental breakdown. After her 2002 divorce from Gary, Teresa went through a withdrawal program for her prescription drug addiction. Teresa continues to treat her Scleroderma today.
Teresa’s memory of events during this period, and even today as evidenced by her testimony at trial, is poor. The Court is unsure whether her poor recall of events is attributable to memory loss resulting from her drug addiction or simply not being a “detail” person when it comes to financial matters. As the discussion of Teresa’s and Gary’s divorce battles will demonstrate, Teresa’s present trial testimony about what she understood about the couple’s financial affairs and how Gary dominated them differs greatly from the views she expressed in 2000. This, taken with the fact that she continues to reside in the same house as Gary, leads the Court to suspect that he had, by the time of this trial, exerted some influence over her. No party introduced evidence from medical witnesses regarding either Gary’s or Tere
*807
sa’s state of health during their marriage or their current medical conditions.
4. Krause’s Personal Financial Statements
Krause’s personal financial statements dated September 15, 1988 and December 31, 1988 both listed as an asset notes receivable in the amount of $90,107.
46
This receivable was comprised primarily of notes made and given to Krause by FIM-CO ($35,525.76) and Liberal Commons, Ltd. ($51,281.69). This asset remained unchanged on Krause’s statement of assets and liabilities dated June 30, 1989.
47
The Liberal Commons, Ltd. note is the same note that Krause wrote off as a bad debt on his 1986 tax return and is the same note that he transferred to Teresa in 1989 as noted below. In addition, the notes receivable listed by Krause on his June 30, 1989 financial statement omitted several other existing notes owed to Krause that he transferred to Teresa in 1989.
48
On all three financial statements, Krause listed the Mission property (his personal residence) as his asset with a value of $275,000. As noted below, Krause transferred a one-half interest in the Mission property to Teresa when he deeded the Mission property to himself and Teresa as joint tenants with right of survivor-ship in April of 1988. Teresa’s interest in the Mission property was not disclosed on any of these financial statements. Krause made yet another financial statement on December 31, 1989,
49
again listing the Mission property as his sole asset notwithstanding the prior transfer of one-half of his interest to Teresa in April of 1988 and the conveyance of his entire remaining interest in the Mission property to Teresa in November of 1989, as noted below.
While Krause admitted his financial statements were incomplete, he testified that senior vice-president Bill Foster of Union National Bank suggested to Krause that they could be less than complete. Unfortunately, the correspondence from Union National Bank requesting updated financials from Krause contains no such reference and Foster did not testify at trial. The Court finds that Krause’s explanation for his omissions is simply not credible based not only upon Krause’s own exhibits, but also the Court’s experience with lenders’ requests for financial statements.
5. Krause’s Transfers to Teresa
By 1989, Teresa knew that Gary was embroiled in litigation with the IRS. According to Gary, after the birth of his sons, he wanted Teresa to stay home and raise and care for Drake and Rick. He testified that he made the group of transfers described below to induce Teresa to stay home with the boys and provide financial security to Teresa. However, instead of making these transfers directly to the KCT as required by the antenuptial agreement, Gary began directly transferring and conveying assets to Teresa in November of 1989. Not coincidentally, only a few weeks earlier, on October 27, 1989, he had learned that his 1987 personal tax return examination concerning his claimed “bad debt loss” for a series of promissory notes he had taken from the Section 8 partnerships and other entities would be closed as “unagreed” after Krause failed to execute the forms evidencing his previous assent to the IRS’s adjustment.
50
On November 29,
*808
1989, Gary transferred all of these notes to Teresa along with security interests in the Great Bend and Hutchinson Duplex projects. On the same date, he transferred notes from Fed Gas and Kanzoil to Teresa. Also in November of 1989, he transferred all of his stock in Fed Gas to the Gary E. Krause Trust. All of these transfers to Teresa were done in writing, but none of the writings references the antenuptial agreement. All of the assets involved were assets owned by Gary prior to the marriage and, according to the antenuptial agreement, his separate property.
At trial, Gary conceded that these transfers could have been accomplished through estate planning or a will, rather than by inter vivos transfers and assignments. Gary never rescinded or tore up the ante-nuptial agreement, which suggests to this Court that its purpose was more to shelter his assets than to provide financial security for his wife and children.
a. Mission property
When Gary and Teresa married they resided in the Mission property, Gary’s separate property. Teresa had waived any interest in the property by virtue of the antenuptial agreement. On or about April 5, 1988, Gary conveyed to Teresa an interest in the Mission property; Teresa and Gary executed a quit claim deed on the Mission house naming themselves joint tenants with rights of survivorship.
51
On November 29, 1989, Gary conveyed all of his interest in the Mission house to Teresa by quit claim deed, making Teresa the sole owner of the Mission property. On January 2, 1996, Teresa transferred the Mission house to Drake Enterprises, Inc. by warranty deed.
52
On March 4, 1998, Drake Enterprises sold the Mission property to Stephen and Judy Burns. The same day, Gary executed another quit claim deed conveying any interest he may still have had in the Mission house to Drake Enterprises.
53
The proceeds from the sale of the Mission property were deposited in the Paine Webber account, described later in this opinion.
b. Note Receivable Assignments
On November 29, 1989, Krause assigned to Teresa a series of promissory notes owed to him by his companies.
54
These included a promissory note between Gary E. Krause and Fed Gas, whereby Fed Gas agreed to pay Krause $695,161.86; a promissory note between Gary E. Krause and Rural Housing Associates, whereby Rural Housing agreed to pay Krause $188, 938.94; a promissory note between Gary E. Krause and Liberal Commons Ltd., whereby Liberal Commons agreed to pay Krause $189,676.18; a promissory note between Gary E. Krause and Barton, whereby Barton agreed to pay Krause $75,000.00; and a promissory note between Gary E. Krause and Kanzoil Corp. whereby Kanzoil agreed to pay Krause $20,072.00. Krause admitted at trial that he believed the Liberal Commons note was worthless when he assigned it to Teresa and that he had previously written it off as a bad debt on his 1986 tax return.
Krause testified at his deposition that the only consideration Teresa provided for these assignments was love, devotion and
*809
the commitment to raise his two sons. At trial, Krause’s story changed somewhat in that he claimed he made these transfers to induce Teresa to quit her job and become a stay-at-home mother and raise the boys.
Additional assignments and transfers followed the November 1989 transfers. On June 27, 1990, Krause transferred to Teresa another promissory note to Gary E. Krause from Norton Commons Ltd., whereby Norton Commons agreed to pay Krause $3,276.37. On December 1, 1990, Krause transferred to Teresa a second promissory note to Gary E. Krause from Liberal Commons Ltd., whereby Liberal Commons agreed to pay Krause $37,015.44. Again, none of the above assignments made reference to the antenup-tial agreement.
As detailed below, payments on these assigned notes were made to Teresa and deposited into either the Paine Webber or Merrill Lynch money market accounts.
55
A significant portion of the funds deposited to these accounts found their way into the KCTs.
c. Security Interests in Partnership Interests
On November 29, 1989 Krause granted Teresa a security interest in his general partnership interest in two housing complexes, Great Bend Housing Duplex Ltd. and Hutchinson Duplex Housing Ltd. Krause granted these security interests even though he was not indebted to Teresa. He admitted that by granting the security interests, it clouded title to his interest in these limited partnerships. The security agreements executed by Krause also made no reference to the ante-nuptial agreement.
56
As in the case of the assigned notes, these partnerships, acting through Gary, deposited substantial sums in the Paine Webber and Merrill Lynch accounts.
d. Quivira
On November 29, 1989 Krause transferred to Teresa, his or his company Kan-zoil’s ownership interest in Quivira — which holds the hunting lodge and leases pasture acreage. Teresa could not remember any details of this transfer. In 1998 or 1999, Teresa transferred her interest in Quivira to the Gary E. Krause Trust or to her sons, as discussed more fully at pages 100-104,
infra.
6. Krause’s Disclaimed Inheritance
According to both Gary and Richard, they met with their father, Lawrence Krause, around the holidays in either 1988 or 1989. Lawrence was ill with cancer. According to Gary, during this meeting and discussion he waived an inheritance from his father, Lawrence. He also stated that his father held a power of appointment over certain testamentary trusts of Gary’s grandfather Adam and his grandmother Florence Krause. Gary directed Lawrence to direct any inheritance from the Adam and Florence trusts to the GEKT. He directed that his share of Lawrence’s estate be given to Teresa and his boys. Gary’s explanation for the waiver was that he did not need the inheritance. At one point in his testimony, Gary referred to a waiver document that his uncle George had prepared and he signed, but that document was never presented at trial.
Richard’s recollection of this family meeting varies slightly. At trial, Richard claimed that he did not know Gary had tax problems until 1992 or 1993. However, Richard had previously testified in deposition and in other hearings in this case that
*810
he and his father were well aware of Gary’s tax disputes with the IRS much earlier, in 1989. Richard testified that the disallowed Barton deductions had posed problems for both Lawrence and Richard. While Richard denied at trial that Gary’s waiver of the inheritance was motivated by his IRS problems, both the Trustee and the Government impeached Richard with prior testimony from the preliminary injunction hearing. At that hearing, Richard testified unequivocally that Gary waived his inheritance because he knew he might have to face the IRS at some point with regard to these liabilities. Having observed Richard’s demeanor on both occasions, the Court believes his prior testimony to have been truthful. Gary himself testified at trial that his tax problems were a factor in waiving his inheritance. Thus, the Court finds it more likely than not that Gary’s inheritance waiver in 1989 was motivated by his tax problems.
7. Paine Webber (PW) and Merrill Lynch (ML) Accounts
Shortly before June 1991, at Krause’s instance, and with his assistance, Teresa opened a Merrill Lynch account solely in her name with a deposit of a $150,000 check drawn on the account of Energy Associates, Gary’s wholly owned company. Teresa neither managed nor paid attention to the ML account, and Teresa did not know who funded the account.
Shortly before February 1992, Krause assisted Teresa in opening a Paine Webber account solely in her name. Gary prepared the majority of the checks written on the PW account and decided what bills were paid and when. Teresa’s only responsibility over this account was to sign the checks. Krause concedes that the handwriting on the monthly statements for the PW account is his own. Teresa left the monthly statements, deposit slips, and cancelled checks for both the PW and ML accounts at the Oneida property where Gary continued to live after their divorce in 2002.
Krause’s companies and businesses made deposits totaling $204,808 into Teresa’s ML account.
57
In addition to the $150,000 opening deposit by Energy Associates on June 29, 1991, Norton Commons and Liberal Commons made deposits of $3,276 and $11,851, respectively, on August 22, 1991. On August 27, 1991, Energy Associates made a $39,676 deposit.
Krause entities made deposits totaling $664,615.10 into Teresa’s PW Account:
58
DATE AMOUNT PAYOR
11/24/1993 $ 99,000.00 Great Bend Duplex Housing, Ltd.
11/24/1993 $ 16,000.00 Great Bend Duplex Housing, Ltd.
12/17/1993 $ 50,000.00 Hutchinson Commons
12/31/1993 $ 7,425.00 Great Bend Duplex Housing, Ltd.
12/31/1993 $ 1,200.00 Great Bend Duplex Housing, Ltd.
3/16/1994 $ 19,800.00 Great Bend Duplex Housing, Ltd.
3/16/1994 $ 9,164.31 Hutchinson Duplex Housing Ltd.
5/12/1994 $ 1,800.00 Great Bend Duplex Housing, Ltd.
5/12/1994 $ 11,137.50 Great Bend Duplex Housing, Ltd.
1/10/1995 $ 88,938.94 Rural Housing Associates
11/24/1995 $ 97,415.37 Rural Housing Associates
1/12/1996 $ 18,325.00 Norton Commons
1/16/1996 $ 18,062.00 Liberal Commons
10/11/1996 $ 14,606.85 Liberal Commons
10/11/1996 $ 12,236.00 Norton Commons
3/13/1998 $142,351.73 Drake Enterprises/Sale of Mission Home
4/23/1998 $ 23,393.00 Norton Commons
10/6/1998 $ 1,378.80 Drake Enterprises
10/15/1999 $ 18,109.09 Norton Commons
10/29/1999 $ 12,651.45 Kanzoil
12/1/1999 $ 1,539.06 Development Assoc.
These deposits represent proceeds from the sale of the Mission property and payments by the depositors on their notes assigned to Teresa in 1989. It is unclear where the depositors got the money to pay Teresa, but it is quite clear that these payments were caused or made by Gary
*811
with assets that he controlled. Teresa had no financial or other involvement with any of these entities, she did not know the source of the funds, and she did not know why these funds were deposited into her accounts.
8. Krause’s Control and Management of the PW and ML Account
While Krause and Teresa were married, the funds in the PW account were used, in part, to pay their living expenses. From time to time, Teresa would write herself checks on this account. She testified that these funds were to cover living expenses. In the course of her 2000 divorce case with Gary, she advised her attorney that Gary would only allow her to have household money if she signed five to ten blank checks on this account every month. He would then use these checks for purposes of his own. While nearly all of the PW checks are signed by Teresa, nearly all of the pay information on them is either handwritten in Gary’s hand or typed. Many checks are house payments on the Mission residence, but some are direct payments to the KCTs or to life insurance companies for premiums on Gary’s life insurance. Also paid from the PW account are deposits to the Gary E. Krause Trust and an investment in Spaghetti Jack’s, Inc.
59
Notably, on September 22, 1995, Teresa made a withdrawal of $296,675, ostensibly to purchase the Oneida house. As will be detailed later, the Oneida house was originally titled in Teresa’s name and subsequently transferred to the KCT 1.
All of the transfers out of the ML account involved transfers of money to the KCTs. All but two of the transfers into this account come from funds paid by Energy Associates and two of the Section 8 partnerships. As with the PW account, all of the deposits appear to come from assets formerly owned or controlled by Gary. And, in the case of both accounts, none of the transfers of property from Gary’s entities appear to reference the antenuptial agreement.
D.
Trusts
1. Creation of Krause Children Trusts (“KCTs”)
On December 5, 1988, while the
Barton
Tax Court case was pending and while the IRS was auditing Gary’s personal returns for 1975 through 1988 and 1986, Gary established the KCT 1 for the benefit of his eldest son, Drake, as contemplated by the antenuptial agreement.
60
On December 28, 1989, after Rick’s birth, Gary established the KCT 2 for Drake and Rick.
61
On May 18-19, 1990, Gary created the KCT 3, 4, and 5.
62
Drake and Rick were the beneficiaries of these five KCTs, and Krause’s brother, Richard, was the named trustee for all of the KCTs.
None of the KCTs had three trustees as contemplated by the antenuptial agreement. Furthermore, the Court heard no evidence that Teresa received distributions of trust income from the KCTs after her and Gary’s divorce in 2002, as the antenup-tial agreement provided. Although Gary established five KCTs, the antenuptial agreement contemplated only one KCT.
The format and terms of the KCT instruments were virtually identical. All of the KCTs were ostensibly created as inter vivos, irrevocable spendthrift trusts. Each KCT contained a provision whereby Gary, as grantor, renounced his interest in the
*812
trust property and prohibited him from using trust property to meet his legal obligations:
No part of the principal or income of any Trust established herein shall ever revert to or be used for the satisfaction of legal obligations of the Grantor. Grantor renounces for himself and his estate any interest, either vested or contingent, including any reversionary right or possibility of reverter, in the principal and income of the Trusts, and any power to determine or control, by alteration, amendment, revocation, termination, or otherwise, the beneficial enjoyment of the principal or income of the Trust.
63
Gary testified that by 1993, he had met his $150,000 funding obligation for the KCT as contemplated by the antenuptial agreement. He made a series of deposits into KCT 1, described on his own exhibits as “gift from Gary and Teresa” or “gift from Gary.”
64
These deposits continued until 1998. Some were made from the ML and PW accounts that were initially funded with assets attributable to Gary.
Article III, paragraph 3 of the KCT agreement prohibited Gary from dealing with trust property unless adequate consideration was provided; the same provision precluded Gary from borrowing money from the KCTs unless adequate interest or security was provided. Only the trustee (Gary’s brother, Richard) was authorized to direct and control the investments of the KCTs.
The trustee of the KCTs possessed all of the powers enumerated in the KCT trust agreement as well as the powers conferred under Kansas law by the Kansas Uniform Trustees’ Powers Act.
65
2. Gary E. Krause Trust (“GEKT”) and Krause Irrevocable Trust (“KIT”)
In February 1989, Krause’s father, Lawrence E. Krause, ostensibly established two trusts, the Gary E. Krause Trust (“GEKT”) and the Krause Irrevocable Trust (“KIT”). Gary is the sole beneficiary of both trusts. Richard is the trustee for both these trusts. Lawrence Krause died in June of 1990. Like the KCTs, these trusts contain spendthrift language that purports to shelter their assets and income from the beneficiary’s creditors.
3. Transfers to Trusts
a. KCTs
The following funds were transferred from one of the brokerage accounts to an account in the name of one of the KCTs:
66
KRAUSE CHILDREN’S TRUST I
DATE AMOUNT PAYOR
12/30/1993 $ 4,000 Teresa’s Paine Webber Account
3/31/1998 $60,000 Teresa’s Merrill Lynch Account
3/31/1998 $40,000 Teresa’s Merrill Lynch Account
3/31/1998 $50,000 Teresa’s Paine Webber Account
12/6/1999 $30,000 Teresa’s Paine Webber Account
KRAUSE CHILDREN’S TRUST II
DATE AMOUNT PAYOR
4/6/1998 $90,000 Teresa’s Merrill Lynch Account
4/6/1998 $50,000 Teresa’s Paine Webber Account
KRAUSE CHILDREN’S TRUST III
DATE AMOUNT PAYOR
4/6/1998 $90,000 Teresa’s Merrill Lynch Account
4/6/1998 $50,000 Teresa’s Paine Webber Account
According to Gary, he made no contributions to the KCTs after 1993 and Teresa
*813
made no contributions to the KCTs after 1998.
In addition to funds transferred from the ML and PW accounts, Krause transferred several life insurance policies to the KCTs as shown below:
Date Policy Names/Numbers Payee
July 12,1991 Prudential policy KCT 1 31889332
July 31,1991 New England n/k/a Met KCT 4 Life policies 06688112, 06615461, 08392342, 06070162, and 02526725
June 4,1991 Maccabees policy 4108- KCT 4 193
August 31, 1991 Maccabees policy 4110- KCT 2 and 925 3
July 30,1991 Maccabees policy KCT 3 21N7001592
June 8,1994 Aurora policy KCT 3 C113244399L
b. GEKT
67
Although Krause’s father ostensibly established the GEKT, Krause and not his father transferred his existing ownership interest in the entities listed below to the GEKT. On July 26, 1989, Krause transferred 100% of the stock of Development Associates. On October 31, 1989, Krause transferred 100% of the stock of Fed Gas to the GEKT.
These transfers were made after the filing of the
Barton
Tax Court case in 1986 and after the IRS notified Krause about his personal audits between 1980 and 1985. The GEKT paid no consideration for either Fed Gas or Development Associates, which still owned real property in Reno County. Richard, the trustee, has no recollection of ever negotiating on behalf of the GEKT its acquisition of Gary’s company, Fed Gas, and never asked why Gary wanted to transfer Fed Gas to the Trust. Gary exercised control over the assets of the GEKT, including the operation of Fed Gas, without any oversight by Richard, and it was Richard’s practice not to inquire about the use of the GEKT assets. The GEKT is one of the trusts previously defaulted by the Court under the Sanctions Order.
c. KIT
68
Upon his retirement, C. Norris Taylor was required to transfer his FIMCO stock (previously conveyed, to him by Gary) to the KIT. Although he retired on February 5, 2001, he did not comply with this 1993 contractual obligation until the transfer of the FIMCO stock to the KIT in September of 2002. This transfer vested KIT with a 100 per cent ownership interest in the company. The KIT paid no consideration to Taylor for his transfer of FIMCO stock. Consistent with his conduct with other trusts, Richard was not involved when the KIT acquired FIMCO even though he was the nominal trustee. Richard testified that Gary negotiated the transaction. Richard further testified that he did not know whether the FIMCO assets in the KIT had been invested wisely because Gary totally controls FIMCO without any oversight from Richard as trustee of the KIT. This control is demonstrated by Gary’s causing FIMCO to contributing hundreds of thousands of dollars to Live Wire Media Partners, LLC for an investment and acquisition of a radio station.
69
Richard played no role in evaluating this transaction, but rather delegated the entire responsibility for this acquisition and all the rest of FIMCO’s business dealings to Gary. The KIT is one of the trusts the Court previously defaulted under the Sanctions Order.
4. Gary’s Control over Trust Assets
a. Mission property
In March of 1998, approximately three years after the purchase of the Oneida home, Drake Enterprises sold the Kraus-
*814
es’ former family home at 37 N. Mission Road. The Mission property was Gary’s separate property at the time of his marriage to Teresa and was among the assets he conveyed to Teresa in November 1989 with no reference made to the antenuptial agreement and after he was fully aware that the IRS was examining several of his tax returns. In January 1996, Teresa transferred title to the Mission home to Drake Enterprises, an entity owned by her but apparently managed by Gary as president. In March of 1998, Krause, acting as president of Drake Enterprises, granted a limited power of attorney to G. Nelson Van Fleet, Esq. to close on the sale of the Mission property for Drake Enterprises. Krause signed the warranty deed as president of Drake Enterprises conveying the Mission property to the buyers, Stephen and Judy Burns. The $142,351.73 sale proceeds were deposited into Teresa’s PW account. Shortly after depositing the proceeds of this sale, on March 31, 1998, three checks for $50,000 were drawn on this account, one each made payable to the KCTs 1, 2 and 3.
70
b. 7711 Oneida Property and Teresa’s Gift Mortgage
Teresa purchased the home at 7711 Oneida in September of 1995 using $296,675 from the PW account. According to her testimony, she acquired the money to purchase 7711 Oneida from “moneys gifted to me [by Gary].” On September 22, 1995, within weeks of the closing, Teresa executed a promissory note and “mortgage” in favor of the KCT 5 on 7711 Oneida for $305,000.
71
Title to the property remained in Teresa’s name and the KCT 5, as the mortgagee, filed the mortgage of record in the Sedgwick County Register of Deeds office.
72
Teresa never received $305,000 from the KCT 5 and she never made any payments on this note or “mortgage.” At trial, Gary referred to this transaction as the “gift mortgage.”
Teresa deeded her entire interest in 7711 Oneida to the KCT 1 on February 11, 1999.
73
On February 15, 1999, Richard signed and issued a check in the amount of $64,816 from the KCT 1 account to Teresa for the Oneida property.
74
This transaction resulted in KCT 1 holding legal title to the property, subject to KCT 5’s mortgage. This mortgage has never been released. As explained later in this opinion, the Oneida property was held by the KCT 1 until August of 2005, when Richard was served with the IRS Collection Summons.
At times during 1999, the Krause family resided in California for the ostensible purpose of occupying a residence close to a special school for Drake. While the Krause family was in California, the Oneida premises remained vacant. Gary returned to Kansas in 2000, and on December 16, 2000, Polo Executive Rentals (previously referenced as merely a name on a checking account) leased the ground floor of the Oneida property to Gary for $371 per month.
75
Richard signed this lease in his individual capacity. On February 24, 2000, Polo leased the “lower level floor and kitchen common area” of the Oneida property to FIMCO for $971 per month.
76
Richard signed this lease
*815
individually and C. Norris Taylor signed for FIMCO. Rental payments, if made at all, were sporadic. Richard made no effort to enforce the terms of either lease. These leases remained in force when Gary filed his bankruptcy petition on October 10, 2005.
As noted previously, Polo does not exist as an entity separate from any of the other entities and is simply a name on a bank account. Krause drafted each of the leases. Although Krause listed Polo as a creditor on his bankruptcy schedules, this purported entity has never filed a proof of claim.
c. Wentworth Property-Section 1031 Tax Free Exchange
On May 4, 2005, Richard, as trustee of KCT 1, signed a contract to purchase real property located at 14215 E. Wentworth Ct., Wichita, Kansas (the “Wentworth property”) from James and Jonna Ellis.
77
This property abuts Crestview Country Club in an exclusive neighborhood in East Wichita and was intended to be the new home for Gary and his sons. The realtor who arranged this contract was Andrew Peressin, a close friend and confidant of Gary’s. Peressin owns a home nearby the property in question. Under the contract, KCT 1 agreed to pay the Ellises $415,000 for the home. Not coincidentally, on August 5, 2005, KCT 1 conveyed title to the Oneida property to PHR, LLC.
78
This conveyance was purportedly made to further a tax-free exchange of property under § 1031 of the Internal Revenue Code.
79
Perhaps more important is the fact that on July 8, 2005, Richard Krause had received the IRS collection summons to appear and deliver to the IRS all records pertaining to the trusts and, as will be discussed below, consulted with Gary about how to proceed. According to Peressin’s trial testimony, he agreed to handle the sale of this home to the KCT 1 for a reduced commission in order to save both Gary and the sellers some money. Peressin recommended that since the Oneida house was held in trust by KCT 1, it could be sold by the trust and its proceeds used to acquire the Went-worth house while deferring taxation on any gain on the Oneida sale. Although Richard was supposedly the decision-maker on the Wentworth purchase, Peressin appears to have had most of the discussions concerning the deal with Gary.
80
Per-essin said that Gary conferred with an individual named Wes Tenaka who is supposedly an expert in § 1031 exchanges. According to Peressin, PHR was set up to act as owner of the Oneida property and having that property held by PHR might have furthered completion of a § 1031 exchange. Peressin also testified that the sale contract would have to have been amended to reference a § 1031 transaction and that such an amendment was never made. Because there was not a party who sought to buy Oneida at this time, no tax-free exchange had yet been structured. By the time of Gary’s bankruptcy filing, the Wentworth sale had not closed and after entry of the preliminary injunction in this case in December of 2005, closing became impossible.
d. Gary’s Car Loan from KCT
In February, 2000, Krause used $13,125.18 from the KCT 1 account located
*816
at Southwest National Bank to purchase a car from Andrew Peressin for Gary’s personal use. Gary testified that he used the “wrong” trust (it should have been the GEKT) to acquire the vehicle, resulting in his needing to issue a note to KCT l.
81
Gary repaid the note with ten per cent interest, but the payments were not made regularly as a conventional car loan would have required and the loan payoff was ultimately deposited into a KCT 3 account, rather than KCT 1. In addition, Gary’s exhibit of this transaction showed that the KCT 3 held a lien on this vehicle even though the funds to purchase it came from the KCT l.
82
This transaction occurred with Richard’s knowledge and cooperation. No explanation was given why the GEKT did not simply repay KCT 1 to correct the “error” of using the wrong trust.
e. FIMCO Loan from KCT for Dream Swing Investment
In 1999, while his sons were age 10 and 11, Gary used KCT 1 assets to provide $25,000 in financing to Dream Swing Machine L.L.C., a limited liability company established by Gary and owned by FIM-CO, to market a product used to help improve a golfer’s swing. Richard did not “seek” the advice of any independent financial advisors before making the investment, instead he relied solely on Gary’s advice. C. Norris Taylor, who was at that time president of FIMCO, ran this company. FIMCO acquired the patent for the swing device from a Wichita golf instructor. Krause testified that KCT 1 loaned FIMCO $25,000 to invest in Dream Swing’s manufacture and marketing of a golf swing trainer. Under the “agreement” between KCT 1, FIMCO and Fed Gas, KCT 1 would receive an option to purchase membership equity in the LLC. FIMCO and Fed Gas each guarantied the loan. KCT 1 was repaid the loan, with interest.
83
E.
Gary-Teresa 2000 Divorce
In April of 2000, Teresa filed for divorce. The divorce case quickly became contentious with Teresa filing contempt motions for Gary’s failure to pay temporary support and motions to compel discovery to gain documents and discovery responses from Gary. Teresa subsequently moved to join the KCTs as parties in the divorce, contending that part of the trust estates contained marital property to which she was entitled. In her motion, Teresa alleged:
3. Respondent [Gary] has historically funded the Trusts [KCTs] using the following method: Respondent deposited funds obtained from an unknown source in a Merrill Lynch U.S. Treasury Money Fund or a Paine Webber Resource Management account that is marital property but is held in the name of Petitioner [Teresa]. Respondent then forced Petitioner to sign blank checks drawn on such account, which Respondent completed by making such checks payable to one or more of the Trusts in amounts of Respondent’s choosing. Respondent either handwrote or typed all information regarding the payee and the check amount on the blank checks that had been signed by Petitioner
4. ... although Respondent is not the named Trustee of the Trusts, Respondent has directed and continues to direct the distribution of funds from the Trusts by completing
*817
checks written on the Trusts’ bank accounts, which the Trustee merely signs at Respondent’s direction ... Respondent either handwrote or typed all information regarding the payee and the check amount on checks drawn on the bank accounts of one or more of the Trusts and signed by Trustee ...
5.although Respondent is not a named trustee of the Trusts, Respondent retains control over the trust assets by representing to third parties that he is a co-trustee of the Trusts ...
6.Respondent routinely borrows funds from the Trusts to pay Respondent’s personal and household expenses.
7. Respondent also withdraws funds from the Trusts for his personal use by directing the trustee of the Trusts to make distributions to Petitioner’s and Respondent’s minor children and to Respondent’s personal friends; such funds are then given to Respondent, who uses them to pay his personal and household expenses ...
84
The domestic court granted the motion to join the KCTs as parties in August of 2000.
85
During the pendency of the divorce, Teresa made a number of allegations against Gary relative to the KCTs and tax fraud, both in pleadings filed with the court and in communications with her divorce attorney. The contents of Teresa’s divorce attorney’s file were admitted into evidence. Those pleadings and papers, prepared contemporaneously, paint a very different picture during this time period than did Teresa’s testimony at trial seven years later.
1. Teresa’s Allegations of Tax Fraud
In completing the client questionnaire for her divorce attorney, Teresa was unable to provide information concerning Gary’s finances or income. She did indicate that he was a recovering alcoholic and was verbally and physically abusive.
86
Consistent with the motion to join the KCTs, Teresa asserted in correspondence with her divorce attorney that she was signing blank checks on the PW and ML accounts and Gary was supplying the remaining information. In correspondence dated May 24, 2000 Teresa wrote:
This account [Paine Webber] was in my name and my husband used it to pass money through.
Each month he made me sign 5 to 10 blank checks before he gave me a check for groceries and household expenses. He heard me mension [sic] once that I could prove I had no knowledge of where the money went because my signature was on the line but his handwriting filled in the checks. After this, he typed all checks ...
Today, he is using this same system by having his brother — Trustee of Krause Children’s Trust — sign blank checks.
87
Teresa wrote on an example of one of the checks made payable to Gary:
Steve [her divorce attorney], I have been signing blank checks on this account since 1992.... This is how I believe $ tranfered [sic] to Children’s Trust.
88
*818
I had to sign blank checks each month before Gary would give me the household money. At first he handwrote checks, then after I mensioned [sic] this fact on the phone, within a week checks were all blank and he typed them in later. I had
no knowledge
money was being funneled into the Trust Acct through me.
89
During the pendency of the divorce, Teresa alleged that Gary had hidden assets in offshore accounts and threatened to report Gary to the IRS. Several veiled references to reporting Gary to the IRS are reflected in the divorce file.
90
At one point in April of 2000, Gary dared Teresa to contact the IRS and supplied her a note with the IRS contact information.
91
On August 30, 2000 (the day after the domestic court hearing on the motion to join the KCTs) Teresa finally contacted the IRS indicating that “she wants to inform on ex and all the offshore money he has, like over a million.”
92
The contact was recorded in the IRS’s database and was noted as having “fraud potential.” No evidence was presented that Teresa had any further communications with the IRS regarding Gary after late August of 2000, and she has not voluntarily cooperated with the IRS since that time, perhaps because of the divorce “settlement” discussed below.
2. Reconciliation and $170,000 Settlement
In early October 2000, after the domestic court joined the KCTs in the divorce, Gary prepared a divorce settlement agreement and presented it directly to Teresa via e-mail, notwithstanding the fact that both were represented by counsel.
93
Under this proposed agreement, Gary offered to pay Teresa $170,000 as a property settlement in exchange for Teresa’s dismissal of the KCTs from the divorce case. At the time of this agreement, Gary had no liquid assets with which to fund the $170,000 property settlement. The Court notes, too, that $170,000 is the exact amount of money to which Teresa would have been entitled under the antenuptial agreement.
94
It is clear, notwithstanding Gary’s denials at trial, that the intention behind making the reconciliation agreement was to secure the dismissal of the KCTs from the divorce action.
Gary accomplished this settlement in the following roundabout manner.
95
On January 31, 2001, Fed Gas (wholly owned by the GEKT and effectively controlled by Gary) paid $170,000 to Teresa, supposedly to repay a promissory note held by her.
96
At trial, the Trustee adeptly linked this payment to Gary’s proposed $170,000 property settlement obligation to Teresa and proved that it was funded by the buyout of Fed Gas’s interest in the tanker, MV Sillery, completed with the help of accomplices in Switzerland. Gary is acquainted with a money manager/attorney in Switzerland, Urs Kallen, who was associated with an entity called Brayford Investments, Ltd, a British Virgin Islands company. Both Brayford and Fed Gas
*819
had provided financing or capital infusions to Caribbean Oil and Supply Co. (COSCO), and a British Virgin Islands company, the successor operator of the Sillery (flagged in Belize). Fed Gas had also loaned money to Trafalgar Marine, Ltd., a Nevis company and the owner of the Sillery, provided financing to Caribbean Atlantic Petro Co. (CAPCO), another British Virgin Islands company and the previous operator of the tanker, and provided management services. In November of 2000, while the divorce action was pending, and after Gary’s October 5, 2000 e-mail to Teresa containing the proposed “Divorce Settlement Agreement” providing for the $170,000 settlement, Fed Gas entered into an agreement with Overseas Trust, a Liberian company, by which Overseas agreed to pay all obligations owed by Trafalgar, CAPCO and COSCO to Fed Gas in exchange for Fed Gas selling its stock in COSCO to Brayford, Fed Gas releasing its mortgage on the tanker, and Overseas paying additional consideration of $430,000 over 3 years to Fed Gas as “consulting fees.”
97
Overseas Trust Company is run by another Swiss lawyer, Urs Trepp, who was a colleague and classmate of Urs Hal-len. On January 29, 2001, CAPCO wired $336,515 to Fed Gas’ account.
98
The general ledger for Fed Gas shows that the next day, January 30, Fed Gas issued a $170,000 check to Teresa.
99
Thereafter, on May 31, 2001, the state court entered an order dismissing the KCTs from the divorce case, with prejudice.
100
Teresa then allowed the divorce case to be dismissed for lack of prosecution on June 25, 2001.
Gary strenuously denied the existence of any connection between CAPCO’s January 29 wire and the payment to Teresa, but the Court finds the coalescence of these circumstances too compelling to overlook. It is apparent that this series of transactions was executed for the sole purpose of securing the dismissal of the trusts from the Krause divorce case and in a manner consistent with Gary’s habit of using other entities to pay his debts and expenses.
3. 2002 Divorce
Teresa’s and Gary’s reconciliation did not last. She testified that she and Gary separated again in 2001 and she again filed for divorce in 2002. In November of 2002, Gary sought an emergency divorce citing stress and his heart condition.
101
The domestic court granted the emergency divorce. No provisions were made in that case for child support, alimony or maintenance.
F.
Post-Divorce Activity
From the time of the 2002 divorce until the date of the bankruptcy, FIMCO (which is owned by the KIT) and Fed Gas (which is owned by the GEKT) paid Gary’s family’s personal and home expenses, including phone, electricity, utilities, insurance, country club membership, medical expenses, computers, and lawn care. For example, in April 2005, FIMCO “purchased” automobiles for Krause’s sons, Drake and Rick. The automobile titles identify the owner of each automobile as FIMCO. Gary lived in the Oneida home from 1995 until September 2007 except for a brief period of time when he resided in California and the house was temporarily vacant. During this twelve year period, Teresa, then KCT 1, and finally PHR, LLC held legal title to the Oneida property. Gary paid no regular rent to the owners of the Oneida property, except for a brief period in 2000 or
*820
2001 when he had his lease with Polo discussed previously. Even after his divorce in 2002 and continuing through his bankruptcy, Gary continued to live rent-free in the Oneida home.
Krause did not report the living expenses contributed by FIMCO or Fed Gas as income on his federal income tax returns. He reported no wages or salary for the years 1998-2004. In fact, for the five years preceding his bankruptcy, 1999-2004, Gary reported no taxable income on his federal tax return.
102
During this same period, Gary reported minimal income from his businesses and partnerships and those years of positive income were offset by net operating losses. After the year 2000 Gary held no personal bank account until 2006, after he filed bankruptcy.
103
1. Domination of KCT Assets
Although he made some minor investment decisions regarding certificates of deposits, Richard was an essentially passive trustee for the KCTs, and told Gary that he wanted it that way. Richard was unaware of who contributed money to the trusts or the sources of that money, describing his conduct as “stick your head in the sand and then you don’t know what is going on.” Richard does no accounting on behalf of the trusts and testified that he keeps no ledgers or records beyond aggregating bank statements in binders. He keeps no computer records of the trust activity. Richard simply receives the bank statements and forwards copies of them to Gary.
Whenever Gary needed a check from the KCT accounts, Richard would “grab the checkbook out, I sign it and I take it to Gary and I say, fill it out. I don’t have to look at it.” Gary then completed the payee information and amount and distributed the check to the appropriate party. Richard never objected to, or disagreed with, Gary about expenditures of any of the KCT funds. He did not exercise independent oversight over how the trusts’ funds were spent. Gary, not Richard, told Richard whom to pay and when. Gary selected the private schools that Drake and Rick attended even though the KCTs paid the tuition charges.
Richard did make investments in certificates of deposits and recommended the purchase of gold coins, but Gary initiated the KCT funding of FIMCO’s investment in Dream Swing. Gary initiated the financing of his personal car with KCT funds. Either Gary or C.N. Taylor, but never Richard, prepared the annual tax returns for all of the trusts. Richard never reviewed the trusts’ tax returns for accuracy, but he did sign them.
In addition, in January of 1991, Gary opened an account, the Merrill Lynch Government Fund Account, using $50,000 funds from the KCT 1 Union National Bank account.
104
The Merrill Lynch account identified Gary as co-trustee of the KCT 1: “GARY E. & RICHARD D. KRAUSE TTEE [Trustees] FBO KRAUSE CHILDREN’S TRUST #1 DTD 12-5-88”
105
when at no time was Gary ever a “co-trustee” of any of the KCTs. Gary had signatory authority on this Merrill Lynch account.
106
The account statements were sent to the Sutton Place address in Wichita where Gary maintained his business office. Richard was wholly unaware of this account until
*821
the preliminary injunction hearing in December of 2005.
Perhaps most telling to the Court with respect to the degree of control exercised by Gary over the KCTs are Exhibits 795, 796 and 797 introduced by Gary at trial. These exhibits purport to be a summary or spreadsheet of the cumulative transactions in each bank account held by KCT 1, 2 and 3. Gary prepared these exhibits in the fall of 2006 in connection with this litigation. Richard did not assist in the preparation of the exhibits. Gary supplied the source and description or purpose of the listed transactions. It was obvious to the Court from Richard’s testimony about these exhibits at trial that he had little or no personal knowledge or recollection of the recorded transactions. Richard admitted that he would have been unable to describe the debits and credits without use of the exhibits prepared by Gary. Richard did not independently verify the information recorded on the exhibits by Gary.
2. Reimbursement of FIMCO/Fed Gas for Krause Living Expenses and Credit Card Bills
Between November 2004 and August 2005, Richard signed six checks from the KCT 1 bank account that Gary drafted and made payable to Fed Gas, nominally owned by the GEKT of which Gary Krause was the sole beneficiary; those checks were in the amounts of $8,920.12, $5,058.73, $2,831.62, $2,282.42, $6,288.43, and $14,700.00.
107
At his deposition, Richard did not know why these checks were paid to Fed Gas, and admitted that he did not exercise much independent oversight on how the money from KCT 1 was spent. At trial, Richard testified that the checks were used to reimburse Fed Gas for Drake and Rick’s expenses and other living expenses.
Prior to these checks reimbursing Fed Gas, FIMCO paid Gary’s living expenses, including utilities, insurance, credit card bills, Crestview Country Club bills, phone bills, housecleaning or maid service, and trash service.
108
3. Lease of Oneida to FIMCO and Krause
As noted above, Gary claims that he and FIMCO “lease” space at 7711 Oneida from Polo Executive Rentals; however, Polo does not exist as an entity separate from any of the other entities and is simply a name on a bank account. Gary drafted the leases, which Richard signed. Neither Gary nor FIMCO paid rent to Polo on a regular basis, and Richard never enforced the terms of the lease agreements. And, although Gary listed Polo as a creditor, this purported entity never filed a proof of claim. Gary lived at the Oneida house for a twelve year period, mostly rent free.
G.
IRS Collection Activity
Despite huge tax debts and little or no taxable income on his 1998 through 2004 tax returns, Krause continued to financially support his family. Teresa did not work outside the home after 1990 and suffered from scleroderma, a debilitating medical condition, so the family’s financial support did not come from her. Additionally, Krause’s sons, born in 1988 and 1989 are both full-time students, and, until this year, both were minors, so the family’s financial support did not come from them. Despite subpoenaing banks (including Bank of America, Commerce Bank, and Intrust Bank) and requesting personal bank account records from Gary, the United States received no evidence that Krause had maintained a single personal bank ac
*822
counts from 1986 through 2005, despite Gary’s protestations to the contrary.
1. July 2005 Collection Summons
As discussed
supra,
on July 8, 2005, IRS Revenue Officer Waterbury served a collections summons on Richard, as trustee, to appear at the IRS offices in Wichita on August 5, 2005 and provide,
inter alia,
all records in his possession pertaining to the GEKT and the KCTs.
109
2. Creation of PHR, LLC and Transfer of Oneida Property
Approximately one week after filing the petition to quash the IRS collection summons, on August 5, 2005, Richard signed a deed conveying 7711 Oneida from KCT 1 to a newly formed company named PHR, LLC.
110
The Operating Agreement for PHR, LLC was signed two days later, on August 7, 2005.
111
The members of PHR were KCT 1, 2 and 5. Richard left all the details of the PHR transaction to Gary. As noted above, Gary attempts to “explain” this transfer by contending that it was necessary to get the property out of the trust to effectuate a tax-free exchange for the Wentworth property. The Court previously defaulted PHR under its Sanctions Order.
3. Krause Files Bankruptcy
On October 10, 2005, less than two weeks after the Government sought to enforce the IRS collection summons, Gary sought relief from the IRS summons by filing his chapter 7 bankruptcy petition. By the time he filed bankruptcy, Krause had transferred nearly all of his premarital holdings, including his Mission home, Development Associates, Inc. (which held real property in Reno County), Fed Gas, FIM-CO, and his or Kanzoil Corporation’s interest in Quivira Associates (which held the hunting lodge in Stafford County). Those Krause entities that were not transferred, or encumbered, were essentially defunct.
According to the schedules and statement of financial affairs filed by Krause, he received an income of approximately $5,500 for the first nine months of 2005 but the source of that income was not identified in question 1 of the Statement of Financial Affairs. On question 2, Krause represented that he held or controlled two vehicles, one owned by Drake Enterprises, Inc. (a 1990 Mazda Miata) and one owned by FIMCO (a 2006 Jeep Grand Cherokee). On question 18, Krause identified several businesses in which he was currently involved: Norton Commons, Ltd.; Liberal Commons, Ltd.; Rural Housing Associates, Inc.; Barton Limited Partnership; FIMCO; and Fed Gas. On Schedule A, Krause states he owns no real property. On Schedule B, Krause listed no bank accounts and no vehicles. He did identify his ownership interests in Norton Commons, Liberal Commons, Rural Housing Associates and Barton as well as his beneficial interest in the GEKT and the KIT. Other than creditors IRS and Kansas Department of Revenue, Krause’s other debts included several minor medical expense claims, his guarantee obligation on Norton Commons estimated at $120,000, and Polio [sic] Executive Rentals/KCT # 1 for his residential lease of 7711 Oneida in the amount of $21,518. On Schedule I, Krause listed his occupation as a self-employed entrepreneur with no monthly income. He represented that his living expenses were paid with distributions from the GEKT. Krause declared monthly expenses of $2,171 on Schedule J.
Krause amended Schedule B on November 23, 2005 to add his working interest in
*823
an oil and gas lease in Stafford County. He amended no other schedules until August 23, 2007, after the Sanctions Order was issued defaulting and declaring PHR, LLC (owner of 7711 Oneida) to be his nominee. At that point, he amended Schedule C and filed a provisional claim of homestead exemption with respect to the 7711 Oneida property,
112
it on the date Krause filed his bankruptcy petition.
4. Government Commences this Adversary Proceeding
The Government filed the instant adversary proceeding on November 1, 2005. The Court granted the Government’s application for a preliminary injunction on December 2, 2005. Since that time, the funds and assets in the KCTs have been frozen, preventing their transfer, distribution, or exchange.
During the pendency of this case, Krause’s personal and financial situation has changed. Following the Sanctions Order, Krause was evicted from the 7711 Oneida property and the property was turned over to his bankruptcy trustee in September of 2007. He now resides with his two sons at 9302 Shannon Way Circle, an affluent neighborhood in east Wichita. His ex-wife Teresa occupies the basement of this rental property. According to Gary, Teresa located this rental property when she returned from Arizona in 2006, and she has lived at this address since that time. Gary stated that he pays full rent. Teresa testified at trial that she had lived in the Shannon Way basement for about three months. She indicated that the rent was $2,500 per month. There is no written lease, and other than identifying the landlord as a retired dentist, Teresa could not identify the landlord. In late summer or fall of 2006, Krause began receiving $8,000 per month as a consulting fee from Omnimedica, a Swiss entity with whom he has collaborated on the anti-aging project.
III. ANALYSIS AND CONCLUSIONS OF LAW
Before addressing the merits of the plaintiffs’ claims, brief comment about the credibility of the principal trial witnesses is in order. In the factual findings, the Court assessed Teresa Briggs’ credibility and recall of events at trial as poor, whether attributable to memory loss, to her not being a detail person, or to some
form
of influence exerted over her to cause her to dramatically change her trial testimony when compared with information she provided during her 2000 divorce. Teresa gave no reasonable explanation why she continues to reside in the same house with Gary, albeit in the basement, seven years after their bitter first divorce proceeding and allegations of Gary’s abuse during their marriage. The quality of her recollection, combined with the Court’s suspicion that she remains under Krause’s influence, significantly devalues the weight this Court elects to give to her trial testimony.
Richard Krause testified at length about the administration of the KCTs. Little of that testimony, however, was based upon his personal knowledge. Much of his testimony regarding the KCTs, which was elicited by Gary, came from his reading from exhibits prepared by Gary or from the trust instruments themselves. In addition, some of Richard’s trial testimony contradicted his earlier deposition testimony. Having heard Richard testify at previous hearings concerning some of these same matters, it was clear that Richard had been “coached” on his new-found knowledge regarding some of these same events. The Court discounts much of Richard’s trial testimony as incredible.
This brings us to Gary. The Court credits Gary for his intellect and shrewdness,
*824
but very little for his honesty. After hearing only parts of this saga in pretrial matters, the Court was eager to hear Gary’s explanations for the transfers and transactions at issue. Very little was explained. Gary’s explanations and justifications of the manner in which he conducts his financial affairs beggar belief.
Having commented on the evidence and the reliability of Krause’s key witnesses, the Court now turns to the legal claims of the Government and the Trustee.
A.
Dischargeability of Krause’s Tax Debt Under 11 U.S.C. § 523 (a)(1)(C).
The Government first seeks a determination that Krause’s substantial income tax debt should be excepted from discharge under § 523(a)(1)(C) of the Bankruptcy Code. That subsection excepts from discharge any debt which is a tax (1) with respect to which the debtor made a fraudulent return; or (2) which the debtor has willfully attempted to evade or defeat in any manner.
113
The Government has the burden of proving by a preponderance of the evidence that Krause’s tax debt should be excepted from discharge.
114
The Government asserts that it has proven both prongs of § 523(a)(1)(C) in this case.
1. Fraudulent Tax Returns
As noted in the Court’s ruling on the Government’s motion for summary judgment on this claim, there are no Tenth Circuit cases addressing the fraudulent return prong of § 523(a)(1)(C) but there are cases from other circuits. The legal principles and standards emanating from those cases are recited here. The elements of a fraudulent return are (1) knowledge of the falsehood of the return; (2) an intent to evade taxes; and (3) an underpayment of the taxes.
115
In general, courts considering whether a return is fraudulent under the discharge exception of § 523(a)(1)(C) apply the same standards as determining whether to impose the civil fraud penalty under § 6663 of the Internal Revenue Code.
116
The courts have identified certain activities by the taxpayer as “badges of fraud” from which to infer or circumstantially prove fraudulent intent. Those badges include; (1) understatement of income on a consistent basis; (2) failure to maintain adequate records; (3) failure to file tax returns; (4) implausible or inconsistent behavior by the taxpayer; (5) concealing assets; (6) failure to cooperate with taxing authorities; and (7) unreported income from an illegal activity.
117
With these legal principles, the Court now turns to Krause’s tax returns in question. It is not readily apparent which returns the Government contends were fraudulent and therefore the Court collectively examines all of the returns that generated Krause’s income tax liability.
118
As
*825
discussed below, some of the badges of fraud are present but some are not.
This Court has the benefit of the Tax Court’s opinion in Krause’s challenge to the deductions disallowed by the IRS with respect to the enhanced oil recovery partnerships and the resultant tax liability flowing to the partners.
119
This opinion relates to Krause’s returns for tax years 1975-1983. As noted previously, the audit of Krause’s returns for these years pertained to multiple tax issues, some of which related to deductions he took in connection with operating losses of his enhanced oil recovery partnerships, but also included the failure to report as income, personal expenses paid by his wholly owned company Energy Associates, Inc. in years 1981,1982 and 1988. The Tax Court findings, as summarized in this Court’s summary judgment ruling,
120
noted that the partnerships’ debt was structured in a manner to guarantee the greatest possible tax benefits to the investors (deductions and operating losses) without any legitimate profit motive. In upholding the IRS determination of the tax deficiencies and penalties, the Tax Court declined to enhance Krause’s taxes for negligence or intentional disregard of regulations, as it could have done under 26 U.S.C. § 6653 . While it is apparent from the Tax Court’s opinion that the businesses in which Krause was involved, and that generated his massive tax debt, were likely shams devised without any profit motive, no actual fraud is attributed to him, nor is it asserted that the returns he filed as tax matters partner were false per se.
121
The Court cannot conclude that the Government met its burden of proof that all of Krause’s returns for years 1975 and 1978 through 1983 were fraudulent. While he obviously claimed deductions that the IRS disallowed in connection with the oil recovery partnerships and sought to maximize his tax benefits from participation in the partnerships, the Court can discern no evidence that he acted with the requisite fraudulent intent.
122
The disallowed deductions resulted in additional income and an attendant tax liability, but there was no proof that Krause recognized the impropriety of the claimed deductions during the years they were taken.
123
It was not until the
Barton
test case was adjudicated that the improper deductions were determined. However, Krause did fail to report as income personal expenses paid by his corporation for three consecutive years in 1981, 1982 and 1983. This is the type of unreported income the courts view with disfavor and provides some evidence of the first badge of fraud.
124
The
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Government did not, however, elicit directly from Krause that he understood at that time that he needed to report these paid personal expenses as income.
125
None of the unreported income was attributable to an illegal activity by Krause, and therefore, the seventh badge of fraud is not present. Nor are the second, third, or fourth badges of fraud present. There was abundant evidence of the fifth and sixth badges of fraud. Krause employed a pervasive scheme to transfer assets out of his name, individually, and used his companies, his wife, and the trusts to fund his lifestyle and his family’s living expenses.
126
He failed to cooperate with the IRS in that he directed his brother’s course of action to quash the IRS’s collection summons, resisted the Government’s discovery of assets in this adversary proceeding, and affirmatively spoiled electronic evidence during the pendency of the adversary.
127
Although it is a close question, the Court concludes that the Government has not proven by a preponderance of the evidence that the returns for 1975, 1978, 1979, 1980, 1981, 1982, and 1983 were fraudulent.
This brings us to Krause’s tax return for the year 1986 and the challenge to his bad debt losses claimed with respect to his real estate partnerships Liberal Commons, Ltd. and Norton Commons, Ltd. These notes were assigned to Teresa on November 29, 1989 soon after Krause received notice that his 1986 tax return was being adjusted. The Government questions Krause’s claiming the notes receivable as bad debt in 1986, but then transferring them to Teresa in 1989. Although Krause also challenged the IRS’s deficiency and petitioned the Tax Court, this tax liability was resolved by agreement, along with the 1975-1983 tax years. Krause ultimately agreed to the amount of deficiency determined by the IRS with respect to his 1986 return. It does not appear that the 1986 return involved any unreported income as the 1981, 1982 and 1983 returns did.
Krause testified that the notes receivable he initially claimed were uncollectible later turned out to be partially collectible as a result of his participation in a settlement of class action litigation with the federal government over these Section 8 housing projects. Indeed, as noted above, Teresa received substantial payments on these notes after 1989. What the Court did not hear, however, is that Krause knew or believed the debts were actually collectible at the time he claimed them as uncol-lectible and deducted them as bad debt losses. The lack of this evidence negates the first badge of fraud — that he knew the return was false when it was filed. The fact that he ultimately settled with the IRS and conceded the IRS’s position, does not, of itself, establish that he knew the return was false.
The best evidence on the first badge of fraud may be the fact that Krause later assigned (in 1989) the Liberal Commons and Norton Commons notes to his wife.
128
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Assuming these were the same debts referenced on the 1986 return, this suggests either that Krause believed the debt was collectible some three years later or that Krause knew the notes were worthless when he assigned them to his wife. The Government has not proven that Krause knew the debts were collectible when he filed his 1986 tax return. The Court concludes from its review of the above badges that the same badges are present for the 1986 return as the previously analyzed returns but they are not enough for the Court to find the 1986 return was fraudulent. It is, however, a close question.
Finally, the Court addresses Krause’s tax returns for the years 1994 and 1995. The tax liabilities resulting from these returns are attributable to Krause’s net operating loss deductions carried forward from the EOR partnerships. The Court concludes that these years’ returns stand on a different footing. Krause had received the
Barton
Tax Court decision (in 1992) and the Tenth Circuit Court of Appeals decision affirming the Tax Court (in 1994) before he filed his 1994 and 1995 returns. Thus, he was clearly on notice that the deductions for his partnership investments were improper and were being disallowed. Nevertheless, he continued to claim these deductions. The evidence at trial demonstrated that Krause did not inform his CPA David Holste of the adverse Tax Court decision, and Mr. Holste testified that he would have prepared these returns differently had he known of the adverse tax court ruling. Given the presence of these additional badges of fraud, the Court concludes that Krause’s 1994 and 1995 returns were fraudulent and that the tax liability associated with these years should be excepted from discharge.
2. Willful Evasion of Collection
The Court next considers the willful evasion prong of § 523(a)(1)(C). It does so in light of the fresh start policy of the bankruptcy laws. The willful evasion discharge exception contains both a conduct element and a mental state requirement.
129
The conduct element is satisfied by a showing that debtor engaged in affirmative acts to avoid payment or collection of taxes, either through commission or omission.
130
Unlike the fraudulent return exception to discharge, the willful evasion exception does not require proof that the debtor acted with fraudulent intent.
131
Rather, a debtor’s actions are willful if they are done “voluntarily, consciously or knowingly, and intentionally,” a less stringent standard than fraud.
132
Dalton v. I.R.S.
133
is the leading Tenth Circuit authority on this exception. There, the Court of Appeals held that more than non-payment of one’s taxes is required to establish a willful evasion.
134
It also held that concealment of assets to avoid payment or collection of taxes may constitute a willful evasion.
135
Dalton
quoted with
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approval the following passage from
Spies v. United States,
interpreting the similar phrase “a willful attempt
in any manner
to evade or defeat” found in the Internal Revenue Code:
Congress did not define or limit the methods by which a willful attempt to defeat and evade might be accomplished and perhaps did not define lest its effort to do so result in some unexpected limitation. Nor would we by definition constrict the scope of the Congressional provision that it may be accomplished “in any manner.” By way of illustration, and not by way of limitation, we would think affirmative willful attempt may be inferred from conduct such as keeping a double set of books, making false entries or alterations, or false invoices or documents, destruction of books or records, concealment of assets or covering up sources of income, handling of one’s affairs to avoid making the records usual in transactions of the kind, and any conduct, the likely effect of which would be to mislead or to conceal.
136
The
Dalton
court concluded that the transfer of property by debtor to his wife with knowledge of a pending tax investigation constituted a concealment of assets and a willful evasion of a tax within the meaning of § 523(a)(1)(C).
137
The evidence presented at trial demonstrates that Krause engaged in multiple affirmative acts to conceal his assets and avoid payment or collection of taxes.
138
He transferred his companies (Development Associates, Inc., Fed Gas and FIM-CO) to trusts while he continued to run their businesses. He used Fed Gas and FIMCO to pay his personal and family living expenses. His companies held title to his vehicles. He transferred notes owed to him by his companies to his wife and ran payments on those notes through accounts set up in his wife’s name (ML and PW accounts) but controlled by him.
139
He opted to keep no bank or other financial accounts or real property in his own name, lest the IRS find and levy against these accounts or property. And, all of these transfers occurred with no consideration and at a time when Krause was embroiled in tax litigation with the IRS.
140
He transferred his Mission home to his wife, notwithstanding the antenuptial agreement, and then had their next home (7711 Oneida), which was purchased with the funds paid on supposedly worthless promissory notes, titled in only his wife’s name. Teresa later transferred the home to the KCT 1 which, in turn, conveyed it to PHR, LLC on the eve of bankruptcy and after the IRS had served its collection summons on the KCTs.
141
Krause lived in
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the Oneida home rent-free, even after his divorce, for all but a brief period of time. The Court could regurgitate other conduct by Krause that corroborates his intent to avoid payment or collection, but the picture is crystal clear.
142
Beginning in 1989, Krause “arranged” his assets so that they would be held by his wife or trusts and beyond the reach of the IRS and its federal tax liens.
143
Even though title was held by others or transferred to his wife or the trusts, Krause retained control over them, and personally benefitted from the assets.
144
In addition, the evidence is overwhelming that Krause acted voluntarily, consciously, knowingly and intentionally.
145
While Krause suggests that he observed the formalities required for his companies and the trusts, which he clearly learned how to do from his legal training, it does not negate the fact that his transfers and conduct were voluntary, knowing and intentional. As the Tenth Circuit noted in
Dalton:
To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liability would seriously impair the effective administration of the tax policies of Congress.
146
The Court is also mindful of Krause’s variously stated motives for his conduct. He contends that he transferred property to his wife out of love and affection and to induce her to stay home and raise their then young boys. He also claims these transfers were done to protect his wife and family were he or Teresa to succumb to their respective health problems. But those transfers ran directly counter to his and his wife’s stated intent in the executed antenuptial agreement and that agreement was never rescinded. He retained control over property that he transferred to Teresa. For example, there was no plausible reason to establish separate accounts in his wife’s name to receive note payments on notes that Krause assigned to his wife. He could have just as easily made those note payments to her personal bank account. No lucid explanation or motive for his wife’s execution of a so-called “gift mortgage” on the Oneida property has ever been given by Krause or his ex-wife. His ex-wife couldn’t even describe the
*830
transaction or its purpose, let alone provide a legitimate non-tax evasion motive. No consideration exchanged hands for the mortgage. Krause even ignored provisions of the antenuptial agreement in the creation and funding of the KCTs. While the initial establishment of two trusts may have been made pursuant to the antenup-tial agreement for the benefit of the children, it is apparent that the KCTs also served the dual purpose of “parking” Krause’s assets out of sight and reach of the IRS. Further, the manner in which the KCTs were administered belies any claim that Krause had no control over them. If health concerns drove these transfers, Krause could as easily have transferred the property himself to a trust specifically designed to protect the children or made a will for that purpose. Instead, he chose a labyrinthine disposition of assets that had the additional benefit of stymying his principal creditor, the IRS, for nearly two decades.
Based upon the quality, if not the sheer quantity, of evidence presented by the Government, the Court is left with the inescapable conclusion that Krause engaged in a long-term and pervasive pattern of conduct of willfully evading the payment or collection of his income tax liability. He is not the honest but unfortunate debtor who is entitled to bankruptcy relief. The entirety of Krause’s income tax liability should be excepted from discharge as a willful evasion under § 523(a)(1)(C).
B.
KCTs as Krause’s Nominees
This brings the Court to the crux of the trial — whether the KCTs should be declared to be Gary Krause’s nominees, subjecting them to turnover of their assets as property of the bankruptcy estate, to which the Government’s federal tax liens attach.
Throughout these proceedings the Government and the Trustee have relied upon
United States v. Dawes
147
in support of their nominee claim. In that case, the United States District Court for the District of Kansas recognized and applied the nominee theory in a federal tax lien case.
148
The District Court held that trusts in which the taxpayers had transferred their property were nominees of the taxpayers and the property held by the trusts were subject to federal tax liens. The District Court applied five factors to determine whether a trust serves as a taxpayer’s nominee:
1) the taxpayer’s control over the nominee and its assets; 2) the use of trust funds to pay taxpayer’s personal expenses; 3) the relationship between the taxpayer and the nominee;

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1542150. Public record. Not legal advice.