A federal court has ordered that the settlor of a Bahamas trust, John Eulich, should pay a fine of $5000 a day until he complies with a court order to supply trust documents to the IRS. After 30 days, the daily fine will increase to $10,000.

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

The IRS is investigating Eulich and his wife, Virginia, for tax years of 1995, 1996 and 1997. Also, as part of its investigation, the IRS sought documents relating to the Bahamian trust, the Mona Elizabeth Mallion Settlement Trust No.16 and to various corporations controlled by the Trust. To that end, the IRS issued formal document requests and summonses seeking the information.

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

In June 2003, the government filed a Motion to Hold Petitioner in Contempt of the Court’s 2002 Order of Enforcement and, after a hearing in March 2004, the Magistrate Judge recommended that the court hold Eulich in civil contempt of court, imposing a fine of $5000 a day pending production of the documents. Once again, both parties objected to the judge.

The judge at the latest hearing imposed the large fine in response to the government’s objection on the grounds that the trust’s assets of $70 - $100 million could be generating up to $14,000 in interest a day.

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