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United States v. Cohen

United States District Court, C.D. Illinois, Springfield Division

March 8, 2013

UNITED STATES OF AMERICA, Plaintiff,
v.
IRVING COHEN, THE WINDSOR ORGANIZATION, INC., and 3-B STORES, INC., Defendants

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For United States of America, Plaintiff: Sean Beaty, LEAD ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Tax Division, Washington, DC.

Irving Cohen, Defendant, Pro se, Boca Raton, FL.

For The Windsor Organization, Inc., Defendant: Jason TH Germeraad, Pamela E Hart, R Stephen Scott, SCOTT & SCOTT PC, Springfield, IL.

For 3-B Stores, Inc., Defendant: Thomas W Moss, BICKES WILSON MOSS & GIBSON, Decatur, IL.

OPINION

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Richard Mills, United States District Judge.

The Complaint in this case was filed on December 2, 2008, but its origins date to the early 1980s.

The bench trial in this case took nine days, heard from twelve witnesses, and the record amounts to thousands of pages.

Judgment for the United States.

I. INTRODUCTION

This is an action for foreclosure of federal tax liens, wherein the Court has jurisdiction pursuant to 28 U.S.C. § § 1340 and 1345 and 26 U.S.C. § § 7401 and 7403. Venue is proper in this Court pursuant to 28 U.S.C. § 1396 because the real property which is the subject of this suit is located in Sangamon County, Illinois 62702.

In this action, Plaintiff United States of America seeks to obtain a determination that Defendant The Windsor Organization, Inc. (Windsor II), a Nevada Corporation incorporated on February 8, 2002, is holding certain property as the nominee or alter ego of Defendant Irving Cohen, and to foreclose upon the property located at 719 (also known as 709) West Jefferson, Springfield, Sangamon County, Illinois 62702. The United States seeks to apply the proceeds of the sale of the property in partial satisfaction of Cohen's outstanding tax debt.

The Parties have stipulated and agreed as follows:

1. That the real estate which is the subject matter of this proceeding is commonly known as 719 (also known as 709) West Jefferson, Springfield, Sangamon County, Illinois, 62702 and is legally described as set forth on Exhibit " A" attached to Joint Exhibit 166 (" the Springfield Property" or " the Property" ).

2. That 3-B Stores, Inc. is a Delaware Corporation authorized to do business in the State of Illinois with its principal place of business at 2809 North Main Street, Decatur, Macon County, Illinois, 62526.

3. That on or about May 19, 2005, 3-B Stores, Inc. conveyed its interest in the

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Property to Windsor II. The special warranty deed was filed as document number 2005R19832 with the Sangamon County Recorder of Deeds on May 19, 2005.

4. That 3-B Stores, Inc. is the owner of a mortgage lien against the Property, said mortgage being dated May 3, 2005 and having been recorded on May 19, 2005 in the office of the Recorder of Deeds of Sangamon County, Illinois, as document number 2005R19833 (the Mortgage).

5. That the Mortgage secures a note in the principal amount of $500,000 evidencing indebtedness of Windsor II to 3-B Stores, Inc. (the Note).

6. That the current outstanding balance secured by said mortgage is $145,787.26.

7. That in the event the Court finds that Windsor II holds ownership and title to the Property merely as a nominee for Irving Cohen, the Court should further find that the interest of 3-B Stores, Inc. arising from its Note and Mortgage is prior to, and superior to, the Government's lien against the Property arising by virtue of the April 30, 1999 judgment and the tax liens recorded on May 23, 2008.

II. FINDINGS OF FACT [1]

A. Tax assessment against Irving Cohen

The IRS assessed penalties under I.R.C. § 6700 for the years 1982 and 1983 against Irving Cohen in the amount of $3,687,000 on June 23, 1986. In July 1986, Cohen brought suit for refund of a portion of the penalty assessed. On April 30, 1999, the United States obtained a judgment against Cohen for I.R.C. § 6700 penalties totaling $2,921,508, plus interest accruing from June 23, 1986, the date of the I.R.C. § 6700 penalty assessment. On May 23, 2008, the IRS filed notices of federal tax lien for I.R.C. § 6700 penalties for years 1982 and 1983 with the Register of Deeds for Sangamon County, Illinois, against Irving Cohen (as document number 2008R21012) and against Windsor II as alter ego, nominee and/or transferee of Cohen (as document number 2008 R21013). As of June 28, 2011, Cohen's outstanding balance owed for the 1982 I.R.C. § 6700 penalty and interest was $1,138,980.91. As of June 28, 2011, Cohen's outstanding balance for the 1983 I.R.C. § 6700 penalty and interest was $3,185, 325.47.

On May 2, 2008, Irving Cohen contacted the IRS directly when the Service re-filed the notice of the lien against him. On November 4, 2008, Herman Schwartzman, Cohen's friend and lawyer, petitioned the IRS to have the IRS liens against Windsor II released. See Joint Ex. 214.

B. Windsor Holding Corporation and Windsor I

Windsor Realty and Management Corp. was incorporated in Nevada on May 4, 1981. Irving Cohen was listed as President and Director of Windsor Realty and Management Corp. on the company's incorporation paperwork. On August 3, 1981, Windsor Realty and Management Corp. changed its name to Windsor Holding Corp. Cohen was listed as the president of Windsor Holding Corp. between 1981 and 1989 on the company's annual list of officers and directors filed with the State of Nevada. On May 15, 1990, Windsor Holding Corp. filed its list of officers and directors with the State of Nevada, on which it listed Mark Virag as President. Windsor Realty and Management Corp., now known as Windsor Holding Corporation, owns all the outstanding stock of The

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Windsor Organization, Inc. (" Windsor I" ). Cohen and Windsor II allege it is contested whether the three Lillian Rosen Trusts own all the capital stock of Windsor Holding Corp., the sole shareholder of Windsor I.

Windsor I was also incorporated in Nevada on May 4, 1981. Irving Cohen was listed as President and Director of Windsor I on the company's incorporation paperwork. On April 30, 1982, Windsor I filed its list of officers and directors with the State of Nevada, on which it listed Stanley Levine as President, Treasurer, and Director. On April 25, 1983, Windsor I filed its annual list of officers and directors with the State of Nevada, listing Irving Cohen as President, Treasurer and Director.

Irving Cohen was listed as President of Windsor I between 1983 and 1989 on the company's annual list of officers and directors filed with the State of Nevada. Mark Virag was listed as President of Windsor I from 1990 through 1993 on the company's list of officers and directors filed with the State of Nevada. On October 16, 1991, Irving Cohen signed the Environmental Disclosure Document for Transfer of Real Property as " Managing Agent" of Windsor I. Cohen holds himself as the current President of Windsor I. The agreement between Windsor I and Windsor II for the transfer of the Property to Windsor II was not reduced to writing.

The United States alleges that neither Windsor I nor Windsor II exists apart from Irving Cohen. According to the United States, Cohen makes every decision, signs every contract, and pulls every string. Cohen and Windsor II dispute the assertion as to Windsor II. They further claim that it is contested as to whether he took actions with regard to the Property as the Trustee of the three Lillian Rosen Trusts. Thus, they allege that any close relationship between Windsor II and Cohen is as a fiduciary for a third party.

C. Windsor I's purchase of the Property

The purpose of Windsor I was to go into the real estate business. In furtherance thereof, Irving Cohen and Stan Levine decided that Windsor I should purchase the Property from National Super Markets, Inc., and accept a lease back for the Property's rental. Cohen found the Property on behalf of Windsor I in 1981. Cohen and Levine were involved in the negotiation over the purchase price and lease back of the Property. Cohen had a role in negotiating the mortgage that Windsor I took on the Property. He was a signatory on Windsor I's bank account. Cohen and Levine signed checks for anything related to Windsor I's operations.

The 1981 Collateral Assignment of Lessee's Interest in Lease, Document No. 881093, required notices to Windsor I to be sent to Irving Cohen's attention and to the law firm of Sonnenschein, Carlin, Nath & Rosenthal, in Chicago, Illinois. The Settlement and Deed-in-Lieu Agreement dated February 2002 between American National Bank and Trust Company of Chicago, as Trustee of Trust No. 53586, Windsor Income Properties partnership as borrower and Windsor I as Lender, required notices to Windsor I to be sent to Irving Cohen with copy to its attorneys at the Sonnenschein firm in Chicago.

D. Windsor Income Properties

Windsor Income Properties was created as a New York limited partnership specifically to buy and operate the Property from Windsor I and to provide a return on investments to its partners. Irving Cohen negotiated the sale between Windsor I and Windsor Income Properties on behalf of Windsor I. Cohen also negotiated the

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mortgage payment plan between the two companies on behalf of Windsor I. The December 10, 1981, Junior Collateral Assignment of Lessee's Interests in Lease, Document No. 890221, required notices to Windsor Income Properties to be sent to Paul Belloff, general partner of Barrister's Associates, which was the general partner of Windsor Income Properties. From December 1981 through 2001, during the time period Windsor Income Properties operated the Property, Irving Cohen had no involvement in the day-to-day operations of the Property. Windsor Income Properties was offered to investors as " Real Estate designed to yield substantial immediate income and tax benefits." See Joint Ex. 22.

The Offering Memorandum entitled " Windsor Income Properties Private Placement Memorandum" indicated that a purchase of a partnership interest involved a high degree of risk and the description of the tax consequences of investment were based on legal counsel's interpretation of the Internal Revenue Code, regulations and case law. It further said that the investment was available to investors whose net worth was at least $250,000 (exclusive of home, furnishings, and autos) and who anticipated income during the year which would be subject to fifty percent federal income tax.

The General Partner of Windsor Income Properties was Barrister Associates. See Joint Ex. 21. Irving Cohen testified that he was not a partner in either entity. [2] See Tr. 283-284; Gov't Ex. 405, at 36. Windsor Income Properties' 2001 federal tax return shows both Geoffrey Townsend, Ltd. and Barrister Associates were partners in Windsor Income Properties. See Joint Ex. 24, at 32, 35.

In correspondence to The DESCO Group, agent for Schnuck's Market, Inc., Robert Gold authorized Irving Cohen, who represented the mortgagee on the Property, to act on behalf of Windsor Income Properties related to negotiations concerning Schnuck's lease of the Property and its payment of real estate taxes for the Property in 2001. On October 15, 2001, Barrister's Associates, general partner of Windsor Income Properties, sent the limited partners of Windsor Income Properties notice regarding the status of the Property and search for a new lessee or purchaser after Schnuck's termination of its lease. After Schnuck's elected to terminate its lease, Windsor Income Properties hired a broker, Harry Stern, to sell the Property. In correspondence to Harry Stern dated October 22, 2001, Robert Gold, on behalf of Windsor Income Properties, rejected as too low a $1,000,000 offer to purchase the Property tendered by Blackstone Group.

On May 2, 2002, Robert Fernandez of the Sonnenschein law firm sent Robert Gold a letter enclosing two copies of the Settlement Agreement for Gold's signature and a Direction to Convey and Letter of Direction required to be executed to authorize the Trustee of the Illinois Land Trust to issue a Trustee's Deed and execute the Settlement Agreement. The letter lists Irving Cohen and Scott A. Linquist, Esq., as receiving copies of the letter.

When Irving Cohen, agent for the mortgagee, Windsor I, was notified that Windsor Income Properties could no longer sustain the operation of the Property, Cohen became actively involved with the Property. He spoke with local people, including Harry Stern, regarding their opinions on possible tenants. Cohen contacted banks regarding borrowing money on the vacant building. He also contacted potential investors.

E. Windsor II

Windsor II was incorporated in the State of Nevada on February 8, 2002. On

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February 12, 2002, Irving Cohen wrote Asset Protection Group, Inc. a letter, in which he asked to have William Reed arrange for a federal ID number for Windsor II " in addition to his serving as sole officer and director at this time." On July 31, 2003, Windsor II filed its Application for Authority to Transact Business in Illinois with the Sangamon County Recorder, wherein it stated that it began to transact business in Illinois on January 2, 2003.

Irving Cohen acted as President and Managing Director of Windsor. See Joint Ex. 68, 69, 72, 77, 79. Cohen, acting on behalf of Windsor II, hired Harry Stern as the property manager and negotiated Stern's pay as an independent contractor. Stern reported to Cohen regarding matters relating to the Springfield Property until July 25, 2008, when he began reporting to Robert Gold. Stern handled management and day-to-day operations of the Property from 2002 through the present date. Until 2007, Cohen was the only person from Windsor II with whom Stern dealt. Windsor II did not have any employees until Robert Gold assumed the presidency on July 1, 2008.

Irving Cohen, acting on behalf of Windsor II, retained Greg Kienzler to appraise the Property on behalf of Windsor II for the purpose of appealing the Sangamon County, Illinois real estate assessment on the Property. In correspondence to Cohen and Windsor II dated October 21, 2004, Kienzler valued the Property at $1,000,000 as of September 22, 2004, based on his Summary Appraisal Report which noted the tenant vacancy, the division of lots held in title and other lots held by lease with the improvements spanning both, and the declining neighborhood. The information contained in the appraisal report was specific to the needs of the client and for the intended use stated in the report which was to appeal the real estate tax assessment.

At Irving Cohen's request, Kienzler attended the Sangamon County Real Estate Property Tax Appeal Hearing on behalf of Windsor II. The Board adopted Kienzler's valuation of $1,000,000 for the Property. On November 22, 2004, Kienzler submitted his invoice to Cohen on behalf of Windsor II for Kienzler's time preparing for his testimony before the Sangamon County Real Estate Board of Review. See Joint Ex. 90. Kienzler charged Windsor II $4,700 for the preparation of the Appraisal Report and preparation for and testimony before the property tax appeal board.

On October 15, 2002, Irving Cohen, acting on behalf of Windsor II, signed as its President a contract with Springfield Area Wide Charities d/b/a Avenue Thrift Shop. In correspondence dated November 22, 2002 from Evan Lloyd Associates, Inc. to Harry Stern, architect Timothy Smith recommended awarding the project to remodel Springfield Area Wide Charities d/b/a Avenue Thrift Shop to Evans Construction. On January 31, 2003, Don Evans of Evans Construction sent Cohen and Windsor II four copies of the contract for the remodel of the Avenue Thrift Shop for review and signature, on behalf of Windsor II, to be returned to Evans Construction for distribution to Tim Smith and Harry Stern. On March 3, 2003, Irving Cohen, as President of Windsor II, signed an agreement with Evans Construction Co.

On March 3, 2003, Irving Cohen, as President of Windsor II, approved deductions to the contract price for tenant improvements. Windsor II paid Evans Construction $394,584.04 for the Avenue Thrift Shop remodel with checks issued from Windsor II's Bank of America checking account. On February 7, 2008, Irving Cohen sent Judy Smith, President of Avenue Thrift Shop, a letter regarding discussions to amend Windsor II's lease with Avenue

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Thrift. Cohen signed the letter as " Managing Director" of Windsor II.

Irving Cohen negotiated a lease with Harbor Freight Tools USA, Inc. (Harbor Freight) on behalf of Windsor II. On March 13, 2003, Irving Cohen signed a Certificate Confirming Lease Commence Date with Harbor Freight. Cohen signed the Certificate as " Managing Director" of Windsor II, but signed the lease with Harbor Freight as " President." On May 2, 2003, Cohen spoke with Don ...


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