Venture Capitalist Challenges IRS Jeopardy Assessment and Levy

KEVIN KALKHOVEN,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF CALIFORNIA

COMPLAINT AND PETITION FOR JUDICIAL REVIEW OF JEOPARDY ASSESSMENT AND JEOPARDY LEVY PURSUANT TO 26 U.S.C. § 7429

Expedited Time Limits Apply By Statute — See Accompanying Notice

Plaintiff Kevin Kalkhoven, by and through his attorneys, for his Complaint and Petition (the “Petition”) against the Defendant, United States of America, alleges and states as follows:

NATURE OF THE ACTION

1. This civil action is filed by Plaintiff Kevin Kalkhoven pursuant to 26 U.S.C. § 7429(b),¹ seeking this Court's de novo review of a jeopardy assessment initiated against him, and jeopardy levies implemented pursuant to the assessment, by the Internal Revenue Service (“IRS”), starting on or about July 6, 2021. The jeopardy assessment is described more completely below and will be referred to in this Petition as the “Assessment.” Mr. Kalkhoven seeks to have the Assessment abated in full, to bar the IRS from any future action to enforce the Assessment or to levy against any property pursuant to it, and to have the many items of property improperly seized or frozen by the IRS restored to their rightful owners — owners that, as described below, are not in all cases Mr. Kalkhoven.

2. Owing to the extraordinary and draconian nature of the Assessment and associated levies, Section 7429 requires this Court to determine, within 20 days after commencement of this proceeding, whether or not the making of the Assessment is reasonable under the circumstances and whether or not the levies are reasonable under the circumstances. Section 7429(b)(3).

3. As the statute contemplates, Mr. Kalkhoven timely sought administrative review of the Assessment by IRS Appeals, in the hope that any meaningful examination of the circumstances and initial Assessment determination, which was largely based on factual inaccuracies and faulty reasoning, would resolve the matter. And despite the rather high-emergency nature of the financial condition the Assessment has imposed on Mr. Kalkhoven, he delayed exercising his right to judicial review when IRS Appeals contacted his counsel to arrange an administrative hearing. That hearing was held August 10, 2021.

4. But the IRS Appeals hearing provided no such meaningful review of the Assessment. Even as the IRS Appeals panel (a) recognized that Mr. Kalkhoven had provided evidence in his administrative protest to the Assessment (the “Protest”) and presentation to Appeals that explained, contradicted, and/or disproved facts included as support for the Assessment, and (b) deemed the Assessment to be “unprecedented,” IRS Appeals declined to consider any evidence presented by Mr. Kalkhoven. Instead, contrary to applicable regulations, IRS Appeals determined that the Assessment “was reasonable” when it was made based solely on the information the IRS said it knew at that time — and upheld the Assessment on that basis. Compare 26 C.F.R. § 301.7429-2 (requiring IRS Appeals in an administrative review to “take into account not only information available at the time the assessment or jeopardy levy is made but also information which subsequently becomes available” (emphasis added)). The IRS's administrative appeals process thus amounted to a sham, and Mr. Kalkhoven accordingly requests the assistance of this Honorable Court.

THE CHALLENGED ASSESSMENT AND LEVIES

5. On or about July 6, 2021, the IRS issued (i) a Notice of Jeopardy Assessment and Rights to Appeal (“Assessment Notice”), with an accompanying Jeopardy Recommendation Report (“Assessment Report”) (collectively included in the definition of “Assessment”) and (ii) a Notice of Jeopardy Levy and Right of Appeal (“Levy Notice”). By a separate submission, Mr. Kalkhoven is seeking leave to file the Assessment Notice, the Assessment Report (including certain exhibits to it), and the Levy Notice under seal owing to the considerable amount of highly confidential, personal and personal identifying information included in them.

6. The Assessment concerns a potential tax liability that relates to the tax treatment of a transaction on Mr. Kalkhoven's 2000 and 2001 tax returns (the “BCPTI Transaction”) that, despite the passage of more than two decades, has not been fully adjudicated. The BCPTI Transaction was a so-called Son of Boss tax shelter, and its tax treatment is the subject of on-going and incomplete proceedings in the U.S. Tax Court. Prior to the Assessment, the IRS had not issued an assessment of any potential tax liability of Mr. Kalkhoven for these years. The Assessment asserts a potential tax liability of more than $300 million.

7. A jeopardy assessment is an “extraordinary measure, contemplated to be used sparingly” that the IRS may employ in very limited circumstances to prevent the concealment of assets from the IRS, tax evasion, and similar wrongful acts by a taxpayer engaged in what is generally criminal misconduct to avoid the payment of tax. See Lindholm v. United States, 808 F. Supp. 3, 4 (D.D.C. 1992) (citing George F. Harding Museum v. United States, 674 F. Supp. 1323, 1326 (N.D. Ill. 1987)). Because of the extreme nature of a jeopardy assessment — which deprives a taxpayer of the customary ability to contest a tax liability in U.S. Tax Court before paying — the IRS bears the burden of proving the conditions that purportedly justify a jeopardy assessment and more generally the reasonableness of the IRS's actions. Section 7429(g)(1).

8. A jeopardy assessment is meant to be reserved as an emergency response to the sudden appearance of specific conditions that do not remotely exist in Mr. Kalkhoven's case. The Assessment itself purports to be based on the grounds that Mr. Kalkhoven was concealing assets. See Assessment Report at 9. That conclusion is unsupported by many of the factual assertions in the Assessment — for example, the use of business entities to hold assets or investments. The Assessment is also based on numerous critical factual errors and incorrect and unsupported assumptions — factual assertions that conflict with information known or readily knowable to the IRS.

9. For example, the IRS team that prepared the Assessment included Katrine Shelton, an IRS attorney who was involved in the August 2013 U.S. Tax Court trial concerning the BCPTI Transaction, during which Mr. Kalkhoven and others testified as to a number of matters relevant to the Assessment Report. Nonetheless, the Assessment Report includes factual allegations that directly conflict with that testimony — testimony that the IRS never attempted to challenge or rebut. With respect to other factual assertions in the Assessment, the true facts are apparent from the face of Mr. Kalkhoven's personal tax returns, which have been forthright and accurate — disclosures that the IRS has never challenged for any reason. Yet the IRS ignored these facts and essentially invented a narrative to support the Assessment.

10. The prime feature of that narrative was that Mr. Kalkhoven was, all of a sudden after two decades, attempting to sell homes he purportedly owned in Colorado, Florida, and California in an effort to conceal assets and shield them from the IRS's reach. See Assessment Notice at 2. As described in detail below, these assertions of concealment by the IRS are simply untrue, and are largely rebutted upon review of Mr. Kalkhoven's returns and other readily available evidence (including in some instances complete versions of documents that the IRS appended in incomplete form as exhibits to the Assessment Report). Yet the transactions have been used by the IRS as a basis to seize or freeze millions of dollars of assets — including assets that do not even belong to Mr. Kalkhoven.

11. In reality, not one of the matters cited in the Assessment as a basis for the IRS action reflects an intent to dissipate or conceal assets from the IRS. On the contrary, the assets at issue (and, where applicable, their disposition) have been consistently and faithfully disclosed on Mr. Kalkhoven's personal tax returns — tax returns that have been prepared throughout the last quarter-century by Ernst & Young LLP (“E&Y”), one of the nation's so-called Big Four accounting firms. The IRS assertion that Mr. Kalkhoven has attempted to conceal assets when much of what is contained in the Assessment Report relies on the robust disclosures from Mr. Kalkhoven's own tax returns is per se unreasonable under the case law. See e.g., Fumo v. United States, No. 13-cv-3313, 2014 WL 2547797, at *1, *21-34 (E.D. Pa. June 5, 2014) (abating a jeopardy assessment where the taxpayer's monetary and real estate transfers were easily traceable by the IRS using public records and information provided to it). As detailed below, the IRS has no substantial basis for its assertion that Mr. Kalkhoven has acted to conceal assets from the IRS. That fact, coupled with the IRS's failure to conduct adequate investigation into key facts it purports support the Assessment, render the Assessment unreasonable. See Burd v. U.S., 774 F. Supp. 903, 906 (D.N.J. 1991) (abating jeopardy assessment based on uncorroborated statement that IRS could have determined was false had it only conducted a “simple investigation”). Indeed, the fact that the IRS based the Assessment on factual errors it could have corrected by considering evidence presented by Mr. Kalkhoven, by itself, demonstrates that the Assessment is not reasonable under the circumstances and should be abated.

12. So thin was the IRS's inquiry prior to instigating the Assessment, that one cannot help questioning the good faith of the IRS employees involved. Indeed, the IRS failed even to comply with its own procedures in issuing the Assessment. According to its own procedures, the IRS “examiner must . . . [d]evelop the facts to support the jeopardy” prior to making a jeopardy assessment, Internal Revenue Manual 4.15.1.9, and, as a part of that development, “[t]he examiner will . . . [i]nterview the taxpayer,” Internal Revenue Manual 4.15.1.9.2. This interview must be conducted pre-assessment “to afford the taxpayer an opportunity to explain their situation and to obtain as much information as possible.” Internal Revenue Manual 4.15.1.9.2.1. The IRS conducted no such interview here — just one example of the IRS's failure to take reasonable steps to investigate the actual facts.

13. Underscoring how extreme a remedy a jeopardy assessment is, the IRS's procedures also require that a proposed jeopardy assessment be approved by no fewer than nine separate individuals at the IRS prior to being made. Internal Revenue Manual 4.15.1.7.5(3). “Each review must be meaningful.” Id. According to the Form 2644 provided by the IRS to support that the proper approval process was followed, (i) names and signatures for only two of the individuals appear on the form (the remainder either being missing or inexplicably redacted) and (ii) at least five of the individuals gave their approval, if at all, on the same day — which was the very same day that their approval was requested in the first place.²

14. What's more, the IRS's overreach has not been limited to assets owned by Mr. Kalkhoven. Rather, the IRS has also frozen or seized assets that Mr. Kalkhoven does not own. This includes separate-property bank and brokerage accounts belonging to Mr. Kalkhoven's wife, Kimberly (“Kimm”). Mr. Kalkhoven and Kimm were not married until December 2013. Any tax obligation arising from BCPTI is Mr. Kalkhoven's sole and separate responsibility. The IRS's levies even included an account held jointly by Kimm and her son (from a prior marriage) Benjamin (“Ben”) — an account that held a mere $4500 that Ben used to pay his living expenses at college. The funds held in Kimm's and Ben's accounts do not belong to Mr. Kalkhoven.

15. Additional assets seized belong to a trust, the Lillehammer Trust (“Lillehammer”) described below. Mr. Kalkhoven settled Lillehammer well before any IRS audit or other proceedings relating to the BCPTI Transaction. Mr. Kalkhoven is not the trustee of Lillehammer, and he is but one of five living beneficiaries. Again as detailed below, property held by Lillehammer is property that Mr. Kalkhoven neither owns nor controls.

16. The IRS had and has no basis for placing a levy on these assets, particularly on a jeopardy basis. Not only is the tax dispute over the BCPTI transaction ongoing, without a proper assessment of tax that may result, but the IRS has initiated no proceedings necessary to determine a legal and factual basis for the IRS's disregard of the actual ownership of the assets.

PRIOR ADMINISTRATIVE REVIEW

17. Mr. Kalkhoven attempted to pursue administrative relief from the Assessment by submitting an Appeal of Notice of Jeopardy Assessment to the IRS on July 15, 2021 (the “Protest”). Again, Mr. Kalkhoven is separately seeking leave to file the Protest and certain exhibits to it under seal owing to the highly confidential and personal identifying information that they include. The Protest discusses many of the factual errors underlying the Assessment, as well as the legal insufficiency of the IRS's basis for instituting the Assessment.

18. Per the IRS's own procedures, IRS Appeals was supposed to have considered Mr. Kalkhoven's Protest no later than August 2, 2021. Internal Revenue Manual 4.15.1.10.4.1.4. It did not. IRS Appeals contacted counsel to Mr. Kalkhoven on July 28, 2021, and asserted that the earliest date that a hearing could reasonably be scheduled was August 10, 2021. As Mr. Kalkhoven had assumed that IRS Appeals would actually discharge its mandate to examine the reasonableness of the Assessment under all of the facts and circumstances, and as Mr. Kalkhoven (for the reasons set out below) believed that IRS Appeals would consider the evidence presented in his Protest as showing both a failure of the IRS to investigate the facts, and rational explanations for what the IRS had assumed or asserted were improper acts, he decided to proceed with IRS Appeals despite the eight-day delay.

19. In fact, on August 10, IRS Appeals rejected Mr. Kalkhoven's Protest. While several of the Appeals Officers acknowledged that the Assessment was “unprecedented,” the panel stated that it had no responsibility to consider any new facts presented in Mr. Kalkhoven's Protest or at the Appeals hearing. Instead, the panel announced that it would look solely at what IRS Exam said it knew at the time it prepared its Assessment Report and declined to even look at documentary evidence that Mr. Kalkhoven's counsel offered to present. In the process, the IRS Appeals panel acknowledged that this Court's review would and should include evidence not known to the IRS until after the Assessment was made. See Fumo v. United States, 2014 WL 2547797, at *21-34. Nonetheless, IRS Appeals abdicated its substantive review responsibility under Section 7429(b)(3) (requiring jeopardy assessment to be reasonable “under the circumstances”), and, after refusing even to consider any of the evidence or explanations from Mr. Kalkhoven, declined to abate the Assessment. See also 26 C.F.R. § 301.7429-2 (requiring IRS Appeals in an administrative review to “take into account not only information available at the time the assessment or jeopardy levy is made but also information which subsequently becomes available” (emphasis added)); Internal Revenue Manual 4.15.1.10.4.1.4(2); Burd, 774 F. Supp. at 907-09 (assessment based on factual errors the IRS could have corrected by considering evidence presented by the taxpayer by itself demonstrates that the assessment is not reasonable under the circumstances and should be abated); Hirschhorn v. United States, 662 F. Supp. 887, 891-92 (S.D.N.Y. 1987) (assessment was unreasonable because the IRS failed to investigate potentially significant information of which it was made aware at the IRS Appeals hearing).

20. The IRS Appeals panel notified Mr. Kalkhoven of its decision that the Assessment “was reasonable” by letter dated August 11, 2021, a true and correct copy of which is attached to this Petition as Exhibit A. As such, pursuant to Section 7429(b)(1)(b), this matter is ripe for judicial review, and review by this Court is de novo in nature. Fumo, 2014 WL 2547797, at *16 (citation omitted).

21. In particular, this Court must determine whether the Assessment is reasonable given the totality of the facts and circumstances in this case. See Burd v. United States, 774 F. Supp. 903, 906 (D.N.J. 1991). A jeopardy assessment is not reasonable when either (a) it is based on information the IRS has failed to investigate, or (b) there is a rational explanation for the taxpayer's actions. Id.; Fumo v. United States, 113 AFTR 2d 2014-2422 (E.D. Pa. 2014). As we detail below, the Assessment is not reasonable applying either prong of the Burd test.

PARTIES

22. Plaintiff Kevin Kalkhoven is a citizen of the United States of America and the taxpayer against whom the Assessment was and is directed. He currently resides within the Eastern District of California, at 2368 Overlook Place in Truckee, California. Mr. Kalkhoven currently lives as a guest of his daughter while he is undergoing treatment for malignant prostate cancer in California.

23. Defendant is the United States of America.

24. The Internal Revenue Service (“IRS”) is an agency within the executive branch of Defendant United States of America and, at all times relevant to this Complaint, has sole and exclusive authority for collecting revenue on behalf of the United States of America.

JURISDICTION

25. This Court has jurisdiction over the subject of this action based on 26 U.S.C. § 7429(b)(2)(A) and 28 U.S.C. § 1346(e).

26. Judicial review is specifically permitted in this action under 26 U.S.C. § 7429(b) because Mr. Kalkhoven has sufficiently exhausted his administrative remedies:

VENUE

27. Venue is appropriate in this Court pursuant to 26 U.S.C. § 7429 and 28 U.S.C. § 1402(a)(1) because it is the judicial district in which Mr. Kalkhoven currently resides.

28. The proper intradistrict venue for this action is Sacramento pursuant to E.D. Cal. Local Rule 120(d) because Mr. Kalkhoven's current residence is in Placer County.

FACTUAL BACKGROUND

29. Mr. Kalkhoven is 77 years old. For many years, he was the Chief Executive Officer of a company called JDS Uniphase Corporation (“JDSU”), a telecommunications company that was a leader in technological innovation in the 1990s. Based in Silicon Valley, JDSU was an innovative developer of cutting edge laser-based telecommunications and networking equipment that literally enabled the Internet. JDSU's technological success and rapid growth made its common stock one of the best performing stocks on the NASDAQ National Market through the decade of the 1990s.

30. JDSU's outside auditing firm was E&Y. Because of his work with E&Y while he was JDSU's CEO, Mr. Kalkhoven trusted E&Y and its apparent ethics and integrity — both traits that Mr. Kalkhoven values highly. He retained E&Y to largely run his personal financial life. From the late 1990s forward, E&Y partner James Cox was Mr. Kalkhoven's primary contact at E&Y, up through Mr. Cox's retirement from E&Y in 2012, and thereafter continued to advise Mr. Kalkhoven until Mr. Cox died in 2019.

31. In May 2000, Mr. Kalkhoven retired from JDS Uniphase, and subsequently sold a substantial portion of is JDSU stock. Since his retirement, Mr. Kalkhoven started a venture capital fund with a number of co-investors and has pursued numerous other business opportunities and investments. He also pursued his long-held interests in motorsports and aviation. This has included acquiring, again with co-venturers, the Champ Car racing circuit (which subsequently merged with the Indy Car racing circuit), a racing team that ultimately won the Indianapolis 500, and his piloting of private jet aircraft.

32. In 2018, Mr. Kalkhoven was diagnosed with malignant prostate cancer. For the past several years, he has been undergoing various tests, procedures, and treatments for this condition with physicians from the University of California San Francisco (“UCSF”) medical center. As detailed below, Mr. Kalkhoven and his wife sold their home in Sarasota, Florida and moved back to California to facilitate Mr. Kalkhoven's access to his medical team.

MR. KALKHOVEN'S RELATIONSHIP WITH E&Y

33. From the late 1990s, Mr. Kalkhoven relied heavily on E&Y to manage his wealth, investments and business ventures. Mr. Kalkhoven has relied on E&Y for a range of services related to his day-to-day financial situation and operations. Services performed by E&Y have included accounting services, investment planning and advice, and tax planning and preparation services, again dating back to years before Mr. Kalkhoven's retirement in 2000.

34. Mr. Kalkhoven was a successful business executive at JDSU, but he is not a financial expert. Given the complexity of his financial life, Mr. Kalkhoven's reliance on E&Y was nearly total. This was particularly so as it related to tax matters, about which Mr. Kalkhoven knew relatively little. Indeed, the complexity of Mr. Kalkhoven's financial life was in large part a function of guidance from and actions by E&Y. For example, E&Y, and Mr. Cox in particular, recommended how Mr. Kalkhoven should hold his assets, often setting up limited liability entities or partnerships to hold assets or operate various investments. This structure made it easier for friends and colleagues to co-invest with Mr. Kalkhoven in certain ventures, segregated his various investments, and provided a degree of asset protection given Mr. Kalkhoven's involvement in high-risk activities such as private aviation and motorsports.

35. In light of the liability risks associated with racing and flying jet planes, Mr. Cox and an attorney with whom E&Y worked also advised Mr. Kalkhoven to establish Lillehammer. On their advice, Mr. Kalkhoven settled Lillehammer, initially as a Cook Islands trust, in 2000. Subsequently, Lillehammer was merged with a different Isle of Man trust, with Lillehammer being the surviving entity but relocated to the Isle of Man. There was no tax-related reason for establishing Lillehammer. Indeed, as Lillehammer was established as a foreign “grantor trust,” all Lillehammer transactions with tax implications flow through to Mr. Kalkhoven's personal tax return, and have been reflected on his tax returns consistently since Lillehammer was settled more than two decades ago. Contributions to Lillehammer and the trust's holdings were reported to the IRS each year as required, on Forms 3520 and 3520A.

36. With his focus on his venture capital fund and racing endeavors, Mr. Kalkhoven trusted E&Y with most everything else, and generally followed E&Y's recommendations. Given the breadth of Mr. Kalkhoven's business interests, Mr. Kalkhoven's tax returns have been (and remain) very complex, with the returns often running well over 200 pages.

37. The Assessment Report's assertions of concealment would lead a reasonable person to think assets or transactions were not disclosed in these returns. The opposite is true. There has been an extraordinary amount of disclosure reflected on Mr. Kalkhoven's tax returns — disclosures concerning the many investments and investment entities that he holds, and disclosure about assets held by Lillehammer. The IRS has never challenged the adequacy of these disclosures. On the contrary, the Assessment relies on these very disclosures to craft its internally inconsistent narrative — stating on one hand that Mr. Kalkhoven has attempted to conceal assets by operating his various businesses interests through special-purpose entities and by settling Lillehammer as a foreign trust, while on the other hand necessarily admitting that it is aware of those facts because Mr. Kalkhoven has consistently disclosed them in his tax returns for more than two decades.

THE BCPTI TRANSACTION AND DISPUTE WITH THE IRS

38. Shortly after his retirement from JDSU, Mr. Kalkhoven sold a substantial portion of his JDSU stock. Facing a potentially large tax bill, E&Y, through Mr. Cox and others, advised Mr. Kalkhoven to invest in BCPTI. E&Y, including Mr. Cox, and tax attorneys that E&Y recommended to him, assured Mr. Kalkhoven that BCPTI was a legal, tax-advantaged transaction. Mr. Kalkhoven chose to invest in BCPTI. All of Mr. Kalkhoven's partnerships that participated in the BCPTI Transaction were registered with the IRS as tax shelters, and Mr. Kalkhoven voluntarily disclosed his participation in the BCPTI Transaction to the IRS before any audit began.

39. With an audit that began in 2004, the IRS challenged the tax treatment of the BCPTI Transaction. Subsequent proceedings involving BCPTI began in the U.S. Tax Court in 2008. A week-long bench trial occurred more than five years later, in August 2013, before Judge Diane Kroupa. Before making a decision, Judge Kroupa unexpectedly retired. The matter was reassigned, and a new Tax Court judge, Judge Mark Holmes, rejected positions taken by the entities that had invested in BCPTI. In late March 2021, the U.S. Court of Appeals for the District of Columbia Circuit affirmed Judge Holmes' decision. With the Court of Appeals' decision, proceedings are now expected involving the investment partnerships that invested in BCPTI, including three in which Mr. Kalkhoven (and others) had interests — which is to say that proceedings concerning any tax ultimately owing by Mr. Kalkhoven (and others who indirectly invested in BCPTI) have not resolved. A number of the adjustments underlying the Assessment have not been adjudicated, including the assertion of penalties that the IRS mentions for the first time in the Assessment. Mr. Kalkhoven also has meritorious arguments that the amount of interest — according to the Assessment now an amount far larger than the tax at issue — is excessive.

40. Prior to the Assessment, the IRS never sought penalties against Mr. Kalkhoven for the 2000 and 2001 tax years for the BCPTI transactions. It did not because Mr. Kalkhoven had made no effort to hide, and indeed forthrightly and affirmatively disclosed, the BCPTI Transaction.

41. In addition, as the IRS's audit of and court proceedings involving the BCPTI Transaction progressed, Mr. Kalkhoven placed a significant sum of money on deposit with the IRS to reduce his exposure to interest charges on any potential tax liability. Mr. Kalkhoven's deposits with the IRS totaled more than $116 million. Although Mr. Kalkhoven had a right to request the return of all or a portion of these deposits at any time, he has never made such a request.

42. On or about July 6, 2021, the IRS notified Mr. Kalkhoven that it had initiated the Assessment for alleged taxes, penalties, and interest owed for the taxable years 2000 and 2001. Even considering the millions of dollars Mr. Kalkhoven has on deposit with the IRS, the IRS alleges that Mr. Kalkhoven owes a substantial additional amount in tax. The IRS has either seized or frozen millions of dollars of Mr. Kalkhoven's assets.

THE ASSESSMENT AND ATTENDANT LEVIES WERE UNREASONABLE

43. Mr. Kalkhoven has consistently complied with the U.S. tax laws. For the past quarter-century, including all years ultimately at issue with the Assessment, Mr. Kalkhoven's returns were prepared by E&Y, which was under express direction from Mr. Kalkhoven to prepare his returns in an ethical, legal, and accurate manner. Mr. Kalkhoven has always paid his properly assessed taxes in the past.

44. A jeopardy assessment is an extreme measure typically used by the Treasury Department to ensure that it can immediately collect revenue from criminals who pose a high risk of evading the law or concealing assets. Here, the sole stated basis for the Assessment is that Mr. Kalkhoven is allegedly concealing assets. See Assessment Report at 9.

45. In particular, the Assessment Report asserts that Mr. Kalkhoven was — apparently all of a sudden, nearly 20 years after the filing of the tax returns that are the subject of the underlying tax dispute — attempting to hide assets from the government. The IRS points only to:

46. To prevail, the IRS must prove that the Assessment is reasonable under the circumstances, and based on the grounds set forth in the Assessment Report. The IRS may not rely on new or different grounds to justify the Assessment; this would render the statutorily-required notice provided to Mr. Kalkhoven insufficient and entitle him to an abatement in any event. Section 7429(a)(1)(B); Hirschhorn, 662 F. Supp. at 892.

A. The Assessment Is Based on Irrelevant Assertions as well as Numerous Factual Inaccuracies and Omissions

47. None of the grounds asserted in the Assessment Report can support the Assessment. Each is either legally insufficient as a basis for a jeopardy assessment or it is a factually inaccurate assertion by the IRS.

48. Tax Shelter Participation. Participation in a tax-shelter transaction is not a legally cognizable basis for instituting a jeopardy assessment. See 26 C.F.R. § 301.6861-1(a) (as relevant here, by cross-reference to 26 C.F.R. § 1.6851-1(a)(1), permitting a jeopardy assessment only where the taxpayer is “designing quickly to place his, her, or its property beyond the reach of the Government”). Participation in a tax-shelter transaction cannot support the Assessment.

49. Holding Assets Through Entities. Holding assets through separate entities is not a legally cognizable basis for instituting a jeopardy assessment. See 26 C.F.R. § 301.6861-1(a). Indeed, there is nothing remotely unlawful about holding assets through separate entities, and the practice is not even unusual. See Lindholm v. United States, 808 F. Supp. at 4-7. The most cursory review of Mr. Kalkhoven's tax returns over the past 20 years makes clear that he has held many of his assets through special-purpose entities; this simply is not a new fact, and the Assessment nowhere attempts to explain why this fact is suddenly significant, or why it suggests that Mr. Kalkhoven is supposedly engaged in an effort to conceal assets or to remove assets from the United States using these entities. Holding assets through entities suggests nothing furtive, particularly where, as here, the entities were utilized to facilitate co-investment by multiple persons, to segregate assets and investments with entirely different purposes and investor groups, and for asset protection in the context of Mr. Kalkhoven's involvement with hazardous activities that carried with them substantial liability risks. To the extent that the entities that Mr. Kalkhoven either held or invested in had transactions with tax significance, these transactions were consistently and forthrightly disclosed on Mr. Kalkhoven's tax returns. Indeed, the existence of the entities themselves was disclosed on Mr. Kalkhoven's tax returns as required by law. Prior to the Assessment, the IRS had never contended otherwise.

50. The fact that Mr. Kalkhoven held assets through special-purpose entities, often with co-investors, was a subject of testimony by Mr. Kalkhoven, his co-venturer Dan Pettit, and Mr. Cox, at the August 2013 BCPTI trial, attended by Ms. Shelton, who was an attorney on the IRS trial team. The matter arose in connection with testimony that Mr. Kalkhoven relied extensively on E&Y and Mr. Cox and their advice on most every aspect of his financial life, including the use of entities to hold many of his assets. The IRS never presented contrary evidence or challenged that testimony. Yet in providing assistance to the IRS team that assembled the Assessment, Ms. Shelton ignored this evidence from the trial and permitted the IRS to insert innuendo of nefarious conduct by Mr. Kalkhoven because many of his assets are, legally and properly, held by special-purpose entities.

51. As noted, Mr. Kalkhoven consistently disclosed his investments through entities on his tax returns. Mr. Kalkhoven's three most recently filed tax returns (for 2017, 2018, and 2019) are exhibits to the Assessment Report. The returns are each more than 200 pages and include asset disclosures of all kinds. See Assessment Report Exs. 14, 15 & 16. His returns dating back to 2000, all of which were prepared by tax experts at E&Y, are all voluminous and similarly forthcoming with disclosures. Significantly, the Assessment Report alleges that only a single entity (Overlook Holdings LLC) was not properly disclosed on Mr. Kalkhoven's tax returns — as addressed below in Paragraph 57, that entity was not disclosed because neither Mr. Kalkhoven nor any entity he held nor any trust that he settled owned it.

52. Offshore Assets. Again, there is nothing illegal, improper or particularly unusual about holding assets offshore. But in fact, aside from a bank account that he inherited from his mother, a former British subject who died in 2019, Mr. Kalkhoven does not have any “assets, cash, and stock offshore,” and the IRS does not point to any.

53. Presumably, the IRS's reference to offshore assets is a reference to Lillehammer. Mr. Kalkhoven does not own or control Lillehammer. As noted above, Mr. Kalkhoven is the settlor and a beneficiary of Lillehammer. Other beneficiaries include Kimm, Mr. Kalkhoven's daughter Kirsty, and Kirsty's two minor children (Mr. Kalkhoven's grandchildren). (Mr. Kalkhoven's mother and stepfather had also been beneficiaries of Lillehammer; however, they both died in 2019.)

54. Mr. Kalkhoven settled Lillehammer on the advice of counsel and his financial advisors at E&Y in October 2000 — that is, years before the IRS questioned the tax treatment of the BCPTI Transaction. The existence, magnitude, and assets held by Lillehammer are not, and never have been, a secret from the IRS. Because it is a foreign trust with U.S. beneficiaries, it is treated as a “grantor trust,” — meaning that all Lillehammer transactions that have tax implications, including additions to the trust, flow through to Mr. Kalkhoven's personal income tax returns. And as exemplified by the tax returns appended to the Assessment Report, Mr. Kalkhoven has reported Lillehammer transactions including asset transfers with tax implications on his personal returns, including on IRS Forms 3520 and 3520A, every year since Lillehammer was created. The IRS has never questioned the completeness or accuracy of these disclosures about Lillehammer or suggested that Lillehammer was anything but a bona fide trust. And it is: Lillehammer is governed by a detailed trust document, and it is run by both an independent institutional trustee and an independent institutional trust protector both located in the Isle of Man, as required by Isle of Man law and under the jurisdiction of the Isle of Man courts. Assets contributed to or acquired by Lillehammer are the property of Lillehammer, not of Mr. Kalkhoven.

55. Sale of Properties. The Assessment Report points to Mr. Kalkhoven's purported sale of three “homes” — in Colorado, Florida, and California — as supposedly reflecting quick action by Mr. Kalkhoven to conceal assets or send them offshore. The factual allegations or assumptions in the Assessment Report are demonstrably false.

B. Rational Explanations Exist for the Transactions Cited in the Assessment Report

56. As Paragraph 55 and its subparts reflect, there was nothing quick about the property sales cited in the Assessment Report. And there was nothing about the sales that had anything whatsoever to do with the BCPTI litigation or the Court of Appeals' decision in that case.

57. As for the Assessment's assertion that Mr. Kalkhoven owns the Truckee, California, property where he is current residing, that also is incorrect. Mr. Kalkhoven is staying as a guest of his daughter at 2368 Overlook Place (the “Overlook Property”) while he continues his cancer treatments. The Overlook Property is owned by Overlook Holdings LLC (“Overlook”). But Mr. Kalkhoven holds no interest in Overlook, and neither does any entity or trust in which he has an interest. This is why there is no Schedule C concerning Overlook on his personal tax returns. Overlook is in fact owned 100% by a separate Isle of Man Trust settled by Kirsty Kalkhoven (the “Kirsty Trust”). Kirsty and her children are the beneficiaries of that trust. Mr. Kalkhoven has no interest or role in the Kirsty Trust; he is not a settlor, trustee, protector, or beneficiary. In any case, that Mr. Kalkhoven is currently residing at the Overlook Property cannot reflect concealment on his part; he uses that address freely, and the IRS in fact addressed the Assessment to him at that address.

58. The IRS's assertion that Mr. Kalkhoven is holding an airplane in the name of an offshore entity is also false. At one time, Mr. Kalkhoven had used aircraft owned or leased by an offshore entity. When Mr. Kalkhoven owned his racing team, the logistics of transporting his team to different racing venues around the world each week were difficult, and private aircraft facilitated this. But when he and his co-investor dismantled his racing team in early 2017, this need evaporated. Mr. Kalkhoven does not own or lease any private aircraft currently and has not for at least four years now; neither do any of the entities Mr. Kalkhoven controls; and neither does Lillehammer.

59. The only other specific assertion included in the Assessment Report concerns a brokerage account held by KOK Sheridan Way Investments LLC (“KOK”), an entity owned by Mr. Kalkhoven. The IRS points to a failure to report income from a brokerage account in 2019 as supposed evidence of an effort by Mr. Kalkhoven to conceal assets. It is not. In fact, the issue reflects nothing more than an innocent mistake by Mr. Kalkhoven's bookkeeper.

60. To begin, the fact that the IRS points only to a single instance of allegedly unreported income over the 20-year space of Mr. Kalkhoven's highly detailed and complex tax returns is telling in itself. Indeed, in the context of Mr. Kalkhoven's very complex financial life, the absence of other misreporting of income suggests Mr. Kalkhoven's high degree of compliance with his tax-reporting obligations.

61. This singular instance concerns a brokerage account opened by KOK with Interactive Brokers Group in mid-December 2019. The account was tied to Mr. Kalkhoven's social security number — a fact inconsistent with any effort on his part to conceal the asset. In the last two weeks of 2019, there was approximately $195,000 of realized gain from certain trades in that account. In early 2020, Mr. Kalkhoven's personal bookkeeper was in the process of gathering tax-reporting documents, which in turn she provided to E&Y so that it could prepare Mr. Kalkhoven's 2019 personal income tax returns. At that time, the bookkeeper had not received a Form 1099 from Interactive Brokers Group. To ensure information was timely provided to E&Y, she instead reviewed a year-end account statement (the “Year-End Statement”) from Interactive Brokers Group. When she did, she made an honest mistake: she misinterpreted the Year-End Statement as reflecting only unrealized gain in the account, and she accordingly prepared financial statements for KOK that reported the increased value in the Interactive Brokers Group account as consisting only of unrealized gain. E&Y subsequently relied on the financial statement reflecting this error when it prepared Mr. Kalkhoven's 2019 tax returns. There was no concealment or intent to underreport income (though inclusion of the income would not have resulted in Mr. Kalkhoven owing any tax for 2019 in any event). Perhaps most significantly, Mr. Kalkhoven had no knowledge of the matter and would not have had any such knowledge as his bookkeeper is the person who tracks tax-information reporting documents.

62. The IRS's conclusion that Mr. Kalkhoven concealed assets or tried to move them beyond the reach of the government is false, supported only by innuendo, assumptions, and assertions. The supposed “facts” relied upon by the IRS to support the Assessment Report conflict with information apparent from Mr. Kalkhoven's tax returns, or with information that could easily have been verified with public records, with Mr. Kalkhoven directly or through his counsel, or otherwise. As a result, the factual assertions by the IRS are insufficient to support the Assessment. The IRS's conclusion that Mr. Kalkhoven acted to conceal or dissipate assets is unsupported, and thus there is no reasonable basis for the IRS's extreme measure of instituting the Assessment.

THE IRS WRONGFULLY LEVIED AGAINST ASSETS THAT MR. KALKHOVEN DID NOT OWN

63. As of the date of this Complaint the IRS has seized assets belonging to Mr. Kalkhoven's wife, Kimm, and her son, Ben.

64. Mr. Kalkhoven and Kimm married in December 2013, more than a decade after the tax returns that underlie the Assessment were filed. Since their marriage, Mr. Kalkhoven and Kimm have continued to file separate tax returns. The potential tax liabilities at issue in the Assessment are solely Mr. Kalkhoven's.

65. The IRS also levied on bank accounts held by Ben jointly with Kimm. Like Kimm, Ben had and has nothing to do with any actual or potential tax liabilities of Mr. Kalkhoven.

66. In addition to accounts held by Kimm and Ben, the IRS also seized an account owned by St. Moritz. That account held a portion of the proceeds from the sale of the Serenity Property — money that had been earmarked by the trustee of Lillehammer for the winding up of St. Moritz after the sale of the Serenity Property, which had been its primary asset.

67. Upon information and belief, the IRS was aware that certain accounts from which it seized assets did not belong to Mr. Kalkhoven. Ignoring this information, the IRS levied on and seized the property in these accounts anyway. There was no reasonable basis for the IRS to do so.

CLAIM FOR RELIEF

68. Mr. Kalkhoven incorporates Paragraphs 1 through 67, inclusive as if restated here.

69. As set forth above, the Assessment is based on legal errors, factual errors and erroneous assumptions of fact, including as to matters that the IRS knew or, with the exercise of reasonable investigation (including review of the very documents it appended to the Assessment Report and of Mr. Kalkhoven's tax returns for the last 20 years), should have known. By itself, this fact rendered the Assessment unreasonable. The Assessment and associated levies on property are, therefore, improper, illegal and invalid.

70. As set forth above, reasonable explanations exist for the matters that the IRS cites as support for the Assessment, including explanations the IRS could and would have known had it performed a reasonable investigation, either pre- or post-Assessment — including, for example, a pre-Assessment interview with Mr. Kalkhoven that IRS policy requires but that was not performed here. By itself, this fact rendered the Assessment unreasonable. The Assessment and associated levies on the property are, therefore, improper, illegal and invalid.

71. The government cannot meet its burden of proof, as set forth in Section 7429(g), to establish that the Assessment and levies are reasonable under all of the attendant facts and circumstances.

72. The Assessment should be abated in full, any assets levied pursuant to the Assessment should be released, and all assets seized or frozen by the IRS pursuant to the Assessment should be restored to their rightful owners, free from any IRS liens or encumbrances.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff Kevin Kalkhoven prays that this Court:

Dated: August 12, 2021

VINSON & ELKINS LLP

By: Michael L. Charlson

Attorney for Plaintiff
KEVIN KALKHOVEN