Lead Opinion
This сase is before the Court on petitioners’ motion for summary judgment pursuant to Rule 121.
Background
The facts set forth below are based upon examination of the pleadings, moving papers, responses, and attachments filed in the instant case. The facts are set forth in our prior opinion in the instant case, Dalton v. Commissioner,
Petitioners Arthur Dalton, Jr. (Mr. Dalton Jr.), and Beverly Dalton (Mrs. Dalton Jr.) are husband and wife who resided in Maine at the time of filing the petition. The instant case centers on three parcels of real property located near Johnson Hill Road in Poland, Maine (hereinafter referred to individually as lot 3, lot 4, and lot 5, respectively, and collectively as the Poland property).
Acquisition of Lots 3, 4, and 5
By deed dated November 25, 1977, petitioners purchased lot 4, and the deed to lot 4 was recorded with the appropriate county registry on November 28, 1977. Similarly, by deed dated November 24, 1980, petitioners purchased lot 3, and the deed tо lot 3 was recorded on December 1, 1980. In connection with the latter transaction petitioners obtained a bank loan secured by a mortgage on lot 3 which was recorded on December 1, 1980.
Mr. Dalton Sr. acquired lot 5 by deed dated September 24, 1984, and executed a mortgage in favor of the seller. The deed and mortgage were recorded on October 23, 1984.
Creation of J & J Trust
On April 11, 1985, Mr. Dalton Sr. created the J & J Trust (trust), naming himself as trustee and designating his two grandsons, i.e., petitioners’ sons Jonathan Dalton and Jeremy Dalton, as the beneficiaries. According to the terms of the trust, the trustee may pay to Jonathan and Jeremy Dalton a portion of the net income, and/or the principal of the trust, as the trustee deems appropriate, for their health, support, education, maintenance, and comfort. The trust terminates upon the death of the last remaining of Mr. Dalton Sr., Mr. Dalton Jr., and Mrs. Dalton Jr., with the remaining рrincipal being divided equally between Jonathan and Jeremy Dalton, or their then-living issue.
By deeds also dated April 11, 1985, Mr. Dalton Sr. transferred title to lots 3, 4, and 5 to himself as trustee of the trust. The deed with respect to lot 3 stated that the premises were conveyed subject to the 1980 mortgage given by petitioners and assumed by Mr. Dalton Sr. pursuant to the 1983 assignment and assumption agreement. No other consideration
Use of Lots 3, 4, and 5
Jonathan Dalton works as a Navy Seal, living in Virginia but using the address of the Poland property as his domicile. Jeremy Dalton works as an emergency medical technician in Massachusetts but makes regular use of the Poland property.
On September 18, 1993, Mr. Dalton Sr., as trustee of the trust, and Mrs. Dalton Jr. executed a $50,000 mortgage in favor of Key Bank of Maine, secured by lots 3 and 4. A $50,000 home equity line of credit, i.e., loan, was thereby obtained. Both individuals signed as “mortgagor”, and provisions of the mortgage recited that the mortgagor, inter alia, promised to “lawfully own the Property”. Throughout the administrative and judicial processes pertaining to the instant case, petitioners have maintained and explained that Mrs. Dalton Jr. signed the mortgage as a concession to and at the request of the bank on account of concеrns regarding Mr. Dalton Sr.’s advanced age. The funds were employed by Mr. Dalton Sr. as trustee to assist Jonathan Dalton, his grandson and a trust beneficiary, with a boat and jet-ski rental business in St. Martin, French West Indies, that was destroyed by a hurricane in the fall of 1993. Since at least 2000, Key Bank of Maine has reported the mortgage interest on the 1993 loan as being paid by Mr. Dalton Jr.
There is a house (the residence) on the Poland property which became the retirement home of Mr. Dalton Sr. and his wife Beatrice Dalton (Mrs. Dalton Sr.). Petitioners and their sons visited Mr. and Mrs. Dalton Sr. and the Poland property. According to petitioners, the Poland property and related mortgages were maintained and supported before mid-1997 by Mr. Dalton Sr. and by contributions from family members, including petitioners, and the trust maintained a separate bank account for such funds.
During 1996 petitioners’ demolition businesses, operated by one or more corporations, suffered reversals and failed to
After losing their home in Massachusetts, petitioners began living in the residence, sharing occupancy with Mr. and Mrs. Dalton Sr. The joint living arrangement was an oral agreement requiring petitioners to manage and maintain the Poland property, pay rent to cover overhead expenses such as mortgage debt service and property taxes, and pay directly their costs of occupancy.
On August 11 and September 29, 1997, the Internal Revenue Service (irs) recorded assessments against petitioners for trust fund recovery penalties pursuant to section 6672 with respect to employment taxes of petitioners’ corporations for the June 30 and September 30, 1996, tax periods, respectively. Those assessments totaled $262,163.42.
On September 13, 1999, Mr. Dalton Sr. died. Petitioners continued to live in the residence with Mrs. Dalton Sr. and to care for Mrs. Dalton Sr., who suffered from advanced dementia and Alzheimer’s disease, until she entered an assisted living facility during 2004. By a document dated June 8, 2000, Mr. Dalton Jr. appointed Mrs. Dalton Jr.’s brother Robert Pray (Mr. Pray), who resides in Texas, as successor trustee of the trust, and Mr. Pray formally accepted that appointment. Mr. Pray continued the oral living arrangement that petitioners had with the trust for the Poland property. Since his appointment as trustee, Mr. Pray has held meetings with petitioners three to four times a year setting rent and planning maintenance, has ensured the timely filing of tax returns, and has annually visited the property to ensure that the assets are being protected.
Administrative Proceedings
On or about December 9, 1999, petitioners submitted to the IRS an offer-in-compromise of $5,000 with respect to the trust fund recovery penalties referenced above. That offer
By early to mid-2001, Mr. Dalton Jr. and Mr. Pray had become aware that, since its formation, the trust had not filed Federal income tax returns. At that time, they met with petitioners’ certified public accountant (C.P.A.) who prepared Forms 1041, U.S. Income Tax Return for Estates and Trusts, for the trust for tax years 1997 through 2000, a practice that has continued for succeeding years.
By letter dated October 1, 2001, petitioners submitted a formal protest of the August 30, 2001, denial of their offer-in-compromise, requesting reconsideration by the IRS Office of Appeals. The requested review was rejected in a letter dated March 6, 2003, that explained that review of administrative files had revealed that petitioners’ protest requesting an Appeals hearing had not been filed timely. The matter was effeсtively dismissed, thereby allowing further collection activity, as appropriate.
On July 2 and 6, 2004, the IRS issued separately to each petitioner a Final Notice of Intent To Levy and Notice of Your Right to a Hearing pertaining to the previously assessed trust fund recovery penalties and accrued interest which exceeded $400,000 at that time. In response, petitioners submitted a Form 12153, Request for a Collection Due Process Hearing, expressing their disagreement. An extensive attachment chronicled the history of petitioners’ personal circumstances and tax matters, summarizing their present situation as follows:
Since 1996, the taxpayers have been in contact with the IRS regarding the satisfaction of this obligation. Mr. Dalton [Jr.] is in his mid 60’s. He is totally disabled as a result of workplace injuries suffered over time and resulting arthritis. Mr. Dalton [Jr.] has suffered cardiac problems and hasundergone open chest by-pass surgery. Mr. Dalton [Jr.] has limited employment options and has been unable to work since 2000. Mrs. Dalton [Jr.] is in her mid-60’s. Until recently, Mrs. Dalton [Jr.] has been the caretaker for Mr. Daltons [sic] [Jr.’s] elderly mother who suffers from senile dementia and other health problems. Mrs. Dalton [Jr.] has been and remains unemployable. The Daltons have not made enough money in any year since 1999 to require the filing of federal tax returns. There is no possibility that they will ever be able to pay the accumulated tax obligation.
The IRS Office of Appeals collection process was cоnducted through an ongoing exchange of correspondence and telephone calls extending until late September 2006. Petitioners’ objective throughout the process was to establish their entitlement to an offer-in-compromise premised on their circumstances of financial hardship. The proceeding centered on whether the Poland property should be attributed to petitioners under a “nominee” theory. During the process, an advisory opinion was sought and obtained from the IRS Office of Chief Counsel on the applicability of alter ego or nominee principles to petitioners’ situation. That opinion considered various factors derived from Federal caselaw and concluded that a nominee relationship did exist between petitioners and the trust. The document also included a paragraph opining that a reachable interest in trust real estate could be asserted against petitioners under a “lien tracing theory,” on the basis of their use of funds for mortgage payments, taxes, and other property expenses.
On October 24, 2006, the IRS Office of Appeals issued to each petitioner a separate Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330 underlying the instant proceeding. In those notices, the IRS sustained the levy action on the ground that no acceptable collection alternatives had been submitted. Attaсhments to the notices focused on and explained the determinations in terms of the need for any collection alternative to incorporate equity in real estate held by a trust with respect to which petitioners stood in a nominee relationship.
On November 16, 2006, petitioners filed a petition in this Court seeking judicial review of the proposed levy action.
On July 6, 2007, respondent filed a motion for summary judgment on all issues stating that the Appeals Office did not abuse its discretion in determining that a nominee relationship existed between petitioners and the trust and sustaining the levy action. On August 29, 2007, petitioners filed an objection to respondent’s motion for summary judgment.
On July 7, 2008, we issued our prior opinion denying respondent’s motion for summary judgment and remanding the case to respondent’s Office of Appeals to consider whether respondent’s assertion of a nominee interest in the Poland property is proper, taking into account both a State law and a Federal factors analysis.
Ms. Russo, the settlement officer who conducted petitioners’ original collection due process hearing, held a supplemental hearing with petitioners. Petitioners provided Ms. Russo with additional information regarding their interest in the Poland property. Ms. Russo offered petitioners an opportunity to submit a new offer-in-compromise, and petitioners declined that offer. Ms. Russo then referred the case to respondent’s District Counsel’s office for analysis on whether petitioners have an interest in the Poland property under Maine law.
The District Counsel’s office performed an analysis of the issues presented and determined that Maine does not have developed law regarding nominee ownership. The District Counsel’s office then concluded that, under Federal nominee factors, the trust is petitioners’ nominee.
On December 1, 2008, Ms. Russo mailed each petitioner a separate Supplemental Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330 (supplemental notice of determination). In the supplemental notice of determination, Ms. Russo concluded that Maine law was
Discussion
As a threshold matter to our analysis, we note that petitioners contest our jurisdiction. Petitioners contend that we cannot enter a decision which would affect the ownership interests of the trust because neither the trust nor the trustee is a party to the current suit.
This Court is a court of limited jurisdiction, and we may exercise judgment only to the extent authorized by Congress. Naftel v. Commissioner,
Regulations promulgated under section 6330 state that known nominees or persons holding property of the taxpayer are not entitled to a collection due process or equivalent hearing. Sec. 301.6330-1(b)(2), Q&A-B5, Proced. & Admin. Regs. Individuals not entitled to a section 6330 review are entitled to other forms of review, including reconsideration by the IRS office collecting the tax, assistance from the National Taxpayer Advocate, or an administrative hearing before the Appeals Office under the Collection Appeals Program. Id. Any determination resulting from such reviews, however, is not subject to judicial review. Id. The taxpayer for whom a nominee, transferee, or alter ego is holding property is entitled to a hearing under section 6330. Sec. 301.6330-1(b)(3), Example, Proced. & Admin. Regs. Failure to provide a taxpayer with notice of the filing of a levy will serve as a basis for dismissal. See sec. 6330(a)(1); Kennedy v. Commissioner,
Petitioners are correct that we cannot enter a decision affecting the trust because the trust is not a party to this proceeding.
We next consider whether respondent abused his discretion in the supplemental notice of determination by rejecting petitioners’ offer-in-compromise on the basis that it did not include a nominee interest in the Poland property. To do so, we must decide the following issues: (1) Whether petitioners have an interest in the Poland property under Maine law; and (2) whether petitioners have an interest in the Poland property under a Federal nominee factors analysis.
Rule 121(a) allows a party to move “for a summary adjudication in the moving party’s favor upon all or any part of the legal issues in controversy.” Rule 121(b) directs that a decision on such a motion shall be rendered “if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, together with the affidavits, if any, show that there is no genuine issue as to any material fact аnd that a decision may be rendered as a matter of law.”
The moving party bears the burden of demonstrating that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law. Sundstrand Corp. v. Commissioner,
The parties appear to agree that all of the evidence that the parties wish the Court to consider is in the record and that no material facts are in dispute.
As a general rule, section 6331(a) authorizes the Commissioner to levy upon all property and rights to property of a person where there exists a failure on the part of such person to pay any tax liability within 10 days after notice and demand for payment. Sections 6331(d) and 6330 set forth procedures generally applicable to afford protections for persons in such levy situations. Section 6331(d) establishes the requirement that the person be provided with at least 30 days’ prior written notice of the Commissioner’s intent to levy before collection may proсeed. Section 6330(a) forbids collection by levy until the person has received notice of the opportunity for administrative review of the matter in the form of a hearing before the IRS Office of Appeals. Section 6330(b) grants a person who makes such a request the right to a fair hearing before an impartial Appeals officer.
Section 6330(c) addresses the matters to be considered at the hearing:
SEC. 6330(c). Matters Considered at Hearing. — In the case of any hearing conducted under this section—
(1) Requirement of investigation. — The appeals officer shall at the hearing obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.
(2) Issues at hearing.—
(A) In GENERAL. — The person may raise at the hearing any relevant issue relating to the unpaid tax or the proposed levy, including—
(i) appropriate spousal defenses;
(ii) challenges to the appropriateness of collection actions; and
(iii) offers of collection alternatives, which may include the posting of a bond, the substitution of other assets, an installment agreement, or an offer-in-compromise.
(B) Underlying liability. — The person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.
Once the Appeals officer has issued a determination regarding the disputed collection action, section 6330(d) allows the person to seek review in the Tax Court.
where the validity of the underlying tax liability is properly at issue, the Court will review the matter on a de novo basis. However, where the validity of the underlying tax liability is not properly at issue, the Court will review the Commissioner’s administrative determination for abuse of discretion. [Sego v. Commissioner,114 T.C. 604 , 610 (2000).]
Petitioners have not contested respondent’s determination of their underlying liability. Accordingly, we deem that issue conceded.
As noted above, section 6331(a) generally authorizes collection of tax by levy against “all property and rights to property” belonging to a person liable for the tax or on which there is a lien for the payment of such tax. It is well settled that the foregoing provision “ ‘is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.’” Drye v. United States,
The first question is whether, under State law, the person held an interest or rights in the property sought to be reached. Holman v. United States, supra at 1067—1068; Spotts v. United States, supra at 251; May v. A Parcel of Land,
With respect to the State law question, recent cases have clarified the centrality of finding a State law interest as a condition precedent. Holman v. United States, supra at 1067, 1070 (vacating and remanding a case seeking to enforce a nominee tax lien for the IRS first to establish that the person held a beneficial interest in the property under State law); Spotts v. United States, supra at 251, 253-254 (vacating and remanding a grant of summary judgment for the IRS in a case seeking removal of a nominee lien because the lower court did not first consider whether the person had a beneficial interest under State law); May v. A Parcel of Land, supra at 1334-1335; United States v. Krause, supra at 831. In that connection, various theories have been used to support the existence of an interest under State law, depending
Where State law is undeveloped as to the issue of nominee ownership, Federal courts have relied on a relatively well-defined body of Federal common law. Caselaw jurisprudence has established a series of factors to consider in determining whether a taxpayer has an existing beneficial interest in property that is reachable for purposes of satisfying Federal tax liabilities under the theory that the property is held by a nominee of the delinquent taxpayer. Commonly cited criteria include: (1) Whether the nominee paid no consideration or inadequate consideration for the property and/or whether the taxpayer expended personal funds for the nominee’s acquisition; (2) whether property was placed in the nominee’s name in anticipation of a suit or the occurrence of liabilities; (3) whether a close personal or family relationship existed between the taxpayer and the nominee; (4) whether the conveyance of the property was recorded; (5) whether the taxpayer retained possession of, continued to enjoy the benefits of, and/or otherwise treated as his or her own the transferred property; (6) whether the taxpayer after the transfer paid costs related to maintenance of the property (such as insurance, tax, or mortgage payments); (7) whether, in the case of a trust, there were sufficient internal controls in place with respect to the management of the trust; and (8) whether, in the case of a trust, trust assets were used to pay the taxpayer’s personal expenses. E.g., Holman v. United States, supra at 1065 n.1; Spotts v. United States, supra at 253 n.2; Loving Saviour Church v. United States,
As stated above, pursuant to our prior opinion, we remanded the instant case to respondent’s Appeals Office to consider Maine law as well as a Federal factors analysis.
We next consider Maine law. As stated above, a taxpayer must have an interest in property under State law in order for the IRS to properly levy on the property pursuant to section 6331. Respondent contends that Maine law is silent with regard to the nominee doctrine.
In Maine the existence of a contract is a question of fact to be determined by the finder of fact. Sullivan v. Porter,
A contract exists if the parties mutually assent to be bound by all its material terms, the assent is either expressly or impliedly manifested in the contract, and the contract is sufficiently definite to enable the court to ascertain its exact meaning and fix exactly the legal liabilities * * *
The essential terms for a contract to sell land include the identification of the property, the parties to the sale, the purchase price, the amount of downpayment, and the financing. Id. The Maine statute of frauds requires a contract for the sale of land to be in writing, signed by the party to be charged. Me. Rev. Stat. Ann. tit. 33, sec. 51(4) (1999). In a contract for the sale of land, the consideration does not need to be expressed in the contract. Id. Additionally, the transfer of title requires a manual transfer of a deed and an intent to pass title between a grantor and a grantee. Estate of Deschenes,
In arguing that petitioners retained a nominee ownership interest in lots 3 and 4 under Federal common law, respondent contends that petitioners retained an interest because, among оther things, they paid the purchase money. As stated above, petitioners originally purchased lots 3 and 4. Lot 3 was secured by a mortgage. There is no mention of a mortgage or other encumbrance on lot 4. Accordingly, we will assume that petitioners purchased lot 4 without a loan, or other debt obligation. Following the contribution of the Poland property to the trust, the mortgages on lot 3 and lot 5 were maintained by Mr. Dalton Sr., with contributions from Mr. Dalton Jr. and other family members. During 1997 petitioners moved into the residence on the Poland property and subsequently paid rent that covered overhead expenses, including mortgage expenses, property taxes, and utilities, and their costs of occupancy.
A resulting trust arises by implication of law when the purchase money is paid by one person out of his own money, and the land is conveyed to another. * * * It may be paid for him by the trustee. * * * The trust arises from the circumstance that the money of the real purchaser, and not of the grantee in the deed, formed the consideration of the purchase. * * *
Murphy v. United States, 83 aftr 2d 99-1167, at 99—1170 (D. Me. 1999); Wood v. Le Goff,
The funds for the purchase of lot 3 were furnished by petitioners, and we conclude that the transfer of lot 3 was intended as a gift to Mr. Dalton Sr. The mortgage payments on lot 4 were paid by petitioners, and we conclude that the payments were a gift to Mr. Dalton Sr. each time petitioners paid the mortgage. As Mr. Dalton Sr. is Mr. Dalton Jr.’s father, their familial relationship makes it probable that petitioners would make a gift of the property to Mr. Dalton Sr., as opposed to a resulting trust in Mr. Dalton Jr.’s favor for lots 3 and 4. We conclude from the record that the transfers were gifts to Mr. Dalton Sr. See Wood v. LeGoff, supra at 470 (“It does not matter in this case whether a consideration passed for the deed given * * *. If no consideration [passed,] the conveyance was a gift”). Our conclusion is in
Respondent cites Cody v. United States,
Maine law could also, under certain circumstances, set aside the transfer of lots 3 and 4 under the law of fraudulent conveyances. See Me. Rev. Stat. Ann. tit. 14, secs. 3571-3582 (2003); see also Scoville v. United States,
A. With actual intent to hinder, delay or defraud any creditor of the debtor; or
B. Without receiving a reasonably equivalent value in exchange for the transfer or obligations and the debtor:
(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(2) Intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as the debts became due.
[Me. Rev. Stat. Ann. tit. 14, sec. 3575(1).16 ]
A. The transfer or obligation was to an insider;
B. The debtor retained possession or control of the property transferred after the transfer;
C. The transfer or obligation was disclosed or concealed;
D. Before the transfer was made or obligation was incurred, the debtor sued or was threatened with suit;
E. The transfer was of substantially all of the debtor’s assets;
F. The debtor absconded;
G. The debtor removed or concealed assets;
H. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
I. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
J. The transfer occurred shortly before or shortly after a substantial debt was incurred; and
K. The debtor transferred the essential assets of the business to a lienor who had transferred the assets to an insider of the debtor.
[Id. sec. 3575(2).]
Subsection (1)(B)(1) allows future creditors to recover when a transfer for inadequate value leaves the debtor’s business inadequately capitalized. Id. sec. 3575, Me. cmt. 2. Subsection (1)(B)(2) does not require proof of fraudulent intent, but it does require proof that the debtor intended to incur debts beyond his ability to pay or reasonably should have believed that he would incur such debts. Id. Me. cmt. 3.
We concluded above that the transfer of lots 3 and 4 was a gift to Mr. Dalton Sr. The deeds showing the transfer of lots 3 and 4 were recorded within 4 months after the transfer. At that time, petitioners had not been sued or threatened with suit, and there is no evidence that the
Additionally, we conclude on the basis of the record that, at the time of the transfer, petitioners did not intend to incur debts beyond their ability to pay. Indeed, the Federal income tax liability in question accrued 13 years after the transfer of lots 3 and 4. On the basis of the record, we hold that petitioners did not fraudulently convey lots 3 and 4.
Following the acquisition of lots 3 and 4, Mr. Dalton Sr. acquired lot 5 on September 24, 1984, from an unrelated third party. The deed to lot 5 and a mortgage in favor of the seller were recorded on October 23, 1984. Petitioners did not control lot 5 before it was transferred to the trust. Moreover, lot 5 was not included in the 1993 mortgage agreement in which Mrs. Dalton Jr. indicated that she was a joint owner with Mr. Dalton Sr. of lots 3 and 4. We assume, for purposes of the instant motion, that petitioners paid for lot 5 and, as with lots 3 and 4, that petitioners made a gift to Mr. Dalton Sr. of lot 5 when it was transferred to him. See Greenberg v. Greenberg,
Mr. Dalton Sr. contributed the Poland property to the trust on April 11, 1985.
A. The settlor has capacity to create a trust
B. the settlor indicates an intention to create the trust
C. the trust has a definite beneficiary * * *
* * * * * * *
D. the trustee has duties to perform; and
E. the same person is not the sole trustee and sole beneficiary.
Id. sec. 402; Estate of Fournier,
The three deeds effecting the transfer of lots 3, 4, and 5 to the trust were transferred on April 11, 1985, and recorded on August 16, 1985. Mr. Dalton Sr. unequivocally indicated his intention to create a trust by a deed conveying the land to himself as trustee for the benefit of his grandsons, and by memorializing his intent in the trust agreement. Mr. Dalton Sr.’s duties as trustee included maintaining the trust corpus for the benefit of his grandsons. Additionally, Mr. Dalton Sr. is nоt a beneficiary of the trust. Accordingly, we conclude that Mr. Dalton Sr. created a valid express trust pursuant to the Maine Uniform Trust Code.
Under the trust agreement, petitioners do not have any right to any of the corpus of the validly created trust; they are not express or implied beneficiaries of the trust. Mr. Dalton Jr. became the trustee of the trust before the appointment of Mr. Pray as trustee.
We now consider the Federal factors in our analysis. As we stated in our prior opinion, when State law is undeveloped
In examining the above-stated factors, the overarching issue is whether and to what degree the person generally exercises control over the nominee and assets held thereby. E.g., May v. A Parcel of Land, supra at 1338 (and cases cited thereat). As phrased in one recent case: “The ultimate inquiry is whether the * * * [person] has engaged in a legal fiction by placing legal title to property in the hands of a third party while actually retaining some or all of the benefits of true ownership.” Holman v. United States, supra at 1065. No one factor is decisive in the cases involving the nominee theory. Turk v. IRS,
Courts also must be cognizant of letting a close relationship take precedence over all of the other factors. However, а close relationship between grantor and grantee does not necessarily make the grantee the grantor’s nominee. Turk v. IRS, supra at 1168. Courts also must be aware of taxpayers’ legitimate decisions regarding title to the property. Spotts v. United States, supra at 253 n.2.
A close relationship did exist between petitioners and Mr. Dalton Sr.; Mr. Dalton Sr. was the father of Mr. Dalton Jr. Mr. Dalton Jr. served as the contractor for the expansion of the home on the Poland property and paid some of the bills. Several courts have warned against allowing the close-relationship factor to overinfluence the Federal factors analysis. See United States v. Swan,
The transfers of the Poland property to Mr. Dalton Sr. and then to the trust were properly recorded. Lots 3 and 4 were transferred by deed to Mr. Dalton Sr. on January 13, 1983, and the deed was recorded May 2, 1983. The deed by which Mr. Dalton Sr. acquired lot 5 was dated September 24, 1984, and recorded on October 23, 1984. The assignment and assumption agreement was signed on April 1, 1983, and was recorded on August 16, 1985. Respondent points to the delay
Petitioners’ treatment of the Poland property raises concerns that they have treated it as their own. Petitioners live at the residence, pay for maintenance of the residence, and have no written lease regarding their living arrangement. The Forms 1098 issued by Key Bank regarding the mortgage on lots 3 and 4 list petitioners as the owners. Mrs. Dalton Jr. listed herself as an owner of lots 3 and 4 when she cosigned the 1993 loan from Key Bank for Mr. Dalton Sr. Mr. Dalton Jr. served as trustee of the trust and listed himself as owner of the Poland property for building permits obtained in 1989, 1990, and 2003. Additionally, respondent contends that petitioners unsuccessfully attempted to claim a homestead exemption for the Poland property.
Notwithstanding the foregoing concerns, we note that, as to petitioners’ residing at the residence, they did not move there until 1997, a year after the trust fund tax liability
As to the 1993 loan and the associated Form 1098 statements from Key Bank of Maine, Mrs. Dalton Jr.’s affidavit states that she signed the mortgage at the request of the lender who knew that the Poland property was owned by the trust but was concerned about the trustee’s age. The mortgage was recorded in 1993, approximately 3 years before the tax liability in issue arose. Moreover, the proceeds of the mortgage were used to assist Jonathan Dalton, a trust beneficiary, with his Caribbean rental business.
The record on internal controls of the trust is similarly unclear. Mr. Dalton Jr. became trustee upon the death of Mr. Dalton Sr. Mr. Dаlton Jr. also had the power to appoint the successor trustee upon the death of Mr. Dalton Sr. Mrs. Dalton Jr.’s brother, Mr. Pray, became trustee in early 2000.
Several factors suggest a respect for internal controls. The appointment of Mr. Pray shows a respect for trust formalities. Indeed, the trust had a trustee other than petitioners during most of its existence. Mr. Dalton Jr.’s time as trustee does not create a nominee interest merely because a trustee holds legal title, as opposed to a beneficial interest. See, e.g., Drye v. United States,
As to breaches of fiduciary duty by the trustee, failure to abide by the terms of a trust by а trustee does not render the trust invalid. Instead, the trustee potentially could be in breach of his fiduciary duty and liable for damages caused by the breach. See Me. Stat. Ann. tit. 18-B, sec. 1001; see also United States v. Greer,
Considering all of the facts and circumstances surrounding the Poland property, we conclude that petitioners’ treatment of the trust property is insufficient to create a nominee interest. The trust was validly created, pursuant to Maine law. All of the transfers of the Poland property occurred and were recorded at least 10 years before the liability in question arose. It was not until after the liability arose that petitioners moved to the Poland property, and during part of that time the trustee, Mr. Dalton Sr., lived at the Poland property. Mr. Dalton Sr., acting as trustee, could oversee the Poland property and act to protect it. Any failure by the trustee in his fiduciary duties potentially could create a liability between the trustee and the beneficiaries. However, the trust would still be in effect. See 2 Restatement, Trusts 3d, sec. 64 (2003). Moreover, since Mr. Dalton Sr.’s death, Mr. Pray has served as trustee. During this time Mr. Pray has held meetings with petitioners three to four times a year setting rent and planning maintenance, has ensured the timely filing of tax returns, and has annually visited the property to ensure that the assets are being protected. Finally, petitioners have paid rent to the trust. On the basis of our consideration of the Federal factors analysis, we conclude that petitioners do not have a nominee interest in the Poland property.
The cases that respondent cites in his response to petitioners’ motion for summary judgment and in his supplemental motion for summary judgment for an application of a Federal factors analysis involve either an antecedent tax debt, impending tax troubles, or fraudulent conveyances. See Shades Ridge Holding Co. v. United States,
Respondent also cites Hill v. United States,
The undisputed facts of the instant case are similar to the facts in Hill. Petitioners’ payment of their costs of occupancy, maintenance, mortgage debt service, and property taxes are rental payments to the trust in exchange for living in the residence. Additionally, petitioners’ labor provided for the additions to the residence provided low-cost construction for the trust as in Hill, and similarly may be viewed as gifts to the trust. Finally, as we concluded above, it would be improper to impose a resulting trust on the Poland property, as the transfer of lots 3 and 4, and the purchase price of lot 5, were gifts to Mr. Dalton Sr. Therefore, we find our conclusions in the instant case consistent with Hill.
On the basis of the foregoing, we hold that the trust is not petitioners’ nominee under the Federal factors analysis.
Consequently, we hold that respondent’s determination to proceed with the levy was an abuse of discretion because respondent rejected petitioners’ offer-in-compromise on the basis that it did not include a nominee interest in the Poland property.
We have considered all of the issues raised by the parties, and, to the extent they are not discussed herein, we conclude that they are without merit, unnecessary to reach, or moot. To reflect the foregoing,
An appropriate order and decision will be entered for petitioners.
Notes
Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure.
On July 6, 2007, respondent filed his original motion for summary judgment. Respondent’s motion was denied on July 8, 2008.
Although petitioners refer to this conveyance as occurring during April 1983, the copy of the notarized deed in the record is dated Jan. 13, 1983. The discrepancy is not further elucidated in the record but, in any event, has no material impact on the Court’s analysis of the instant motion.
Petitioners claimed that the transfer was exempt from real estate transfer tax. Me. Rev. Stat. Ann. tit. 36, sec. 4641 — C (1990) allows for real estate transfers between parent and child to be exempt from real estate transfer taxation if the transfer is made without actual consideration.
Mortgage interest payments are reported on Form 1098, Mortgage Interest Statement.
In the Aug. 30, 2001, letter, respondent’s revenue officer referred to petitioners’ interest in the Poland property as an “alter ego” interest. However, in his motions for summary judgment, respondent refers to petitioners’ interest as a nominee interest. Accordingly, we need not address whether petitioners’ have an “alter ego” intеrest in the Poland property.
Although the lien tracing theory appeared in subsequent correspondence before the filing of the instant case, respondent no longer pursues such a theory.
The trust is not a party to the instant case. It is unclear from the record why the trust’s Notice of Federal Tax Lien Filing — Nominee or Alter-Ego did not include Mrs. Dalton Jr.
The District Counsel’s office also concluded that petitioners had an interest in the Poland property under a hen tracing theory, and, at the very least, a transferee lien exists against the Poland property based upon the enrichment of the property to the extent of mortgage payments and other expenses paid by petitioners.
We note that, on Apr. 7, 2007, respondent filed a Notice of Federal Tax Lien Filing — Nominee or Alter-Ego, against the trust, but that notice was not filed until after the petition in this case was filed. That lien is not before the Court in this proceeding.
The U.S. Court of Appeals for the First Circuit, the court to which an appeal of the instant case would lie, has held that judicial review of nonliability issues under sec. 6330(d) is limited to the administrative record. See Murphy v. Commissioner,
The Pension Protection Act of 2006, Pub. L. 109-280, sec. 855, 120 Stat. 1019, amended sec. 6330(d)(1) to provide that for determinations made after Oct. 16, 2006, the Tax Court has jurisdiction to review the Commissioner’s collection activity regardless of the type of underlying tax involved.
Keefer v. Keefer, No. Civ.A. RE-03-001,
“designated to act for another as his representative in a rather limited sense. It is used sometimes to signify an agent or trustee. It has no connotation, however, other than that of acting for another, in representation of another, or as the grantee of another.”
However, in that case, the court was discussing nominee principles pursuant to California law. See Keefer v. Keefer, supra at *6.
Maine courts have held that, where the transfer is to a spouse or from a parent to a child, a gift is presumed. See Greenberg v. Greenberg,
Maine law allows both present and future creditors to set aside fraudulent conveyances. Me. Rev. Stat. Ann. tit. 14, secs. 3571-3582 (2003).
Respondent does not contend that the transfers in 1983 were fraudulent as to other creditors.
Me. Rev. Stat. Ann. tit. 14, sec. 3575(1) applies not only to transfers made but also to obligations incurred by a debtor.
Me. Rev. Stat. Ann. tit. 14, sec. 3576 applies only to present creditors of the debtor. According to Me. Rev. Stat. Ann. tit. 14, sec. 3576(2):
A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.
However, we do not evaluate the transfers in the instant case as transfers to an insider pursuant to Me. Rev. Stat. Ann. tit. 14, sec. 3576(2), because respondent was a future creditor at the time of the transfer.
Petitioners’ gift of funds for lot 5 to Mr. Dalton Sr. is subject to a fraudulent conveyance analysis similar to that of the transfers of lots 3 and 4. The record does not show that as a result of the gift of lot 5 petitioners concealed assets, were insolvent, or intended to incur debts beyond their ability to pay. Similarly, we conclude that petitioners’ gift of funds for the purchase of lot 5 was not a fraudulent conveyance.
Analysis under the law of fraudulent conveyances is not applicable to Mr. Dalton Sr.’s contribution of the Poland property to the trust. See Me. Rev. Stat. Ann. tit. 14, sec. 3575 (“if the debtor made the transfer”).
Maine adopted the Uniform Trust Code in 2003 with an effective date of July 1, 2005. Me. Rev. Stat. Ann. tit. 18-B, sec. 1103 (Supp. 2009). The Maine Uniform Trust Code applies to all trusts created on, after, or before July 1, 2005, and all judicial proceedings concerning trusts commenced after July 1, 2005. Me. Rev. Stat. Ann. tit. 18-B, sec. 1104 (Supp. 2009). Pursuant to the Trust Agreement, Maine law is the governing law. As the instant proceeding is one commenced after July 1, 2005, regarding a Maine express trust, the Maine Uniform Trust Code applies.
Per the trust agreement, Mr. Dalton Jr. became trustee upon Mr. Dalton Sr.’s death. Respondent contends that Mr. Pray was appointed trustee during 2001, while petitioners contend that Mr. Pray was appointed trustee during 1999. According to Mr. Pra/s affidavit, he was appointed trustee during 2000 and this was formalized in writing on June 8, 2000. We conclude on the basis of Mr. Fray’s affidavit that he was appointed trustee during early 2000.
Mr. Fray’s affidavit was attached to petitioners’ objection to respondent’s original motion for summary judgment. In our prior opinion, we declined to rule on that motion and, instead, remanded the instant case to respondent’s Office of Appeals to consider Maine law and a Federal factors analysis. At that point, the affidavit became part of the administrative record and is properly before us now.
We do not believe that Maine law is undeveloped on the nominee theory. Indeed, our analysis above is based upon the analysis we believe Maine courts would undertake to determine whether petitioners held a nominee interest. However, as this issue is less than clear, we will also consider the Federal factors analysis in reaching our conclusion.
We note that respondent does not contest that the deeds were delivered and recorded.
According to respondent, Mrs. Dalton Jr. requested a homestead exemption for the Poland property because petitioners have paid the real estate taxes. According to Ms. Russo, the assessor denied Mrs. Dalton Jr.’s request bеcause the Poland property was the property of the trust.
We note that Mr. Dalton Sr. died on Sept. 13, 1999. Mrs. Dalton Sr. suffered from advanced dementia and Alzheimer’s disease and was moved from the residence to an assisted living facility in 2004.
Art. II of the trust agreement allows Mr. Dalton Sr. to use portions of the net income and/ or principal of the trust for the health, support, education, maintenance, and comfort of the beneficiaries.
In their attachment to Form 12153, filed during 2004, petitioners claimed not to have made enough money since 1999 to require the filing of a Federal income tax return.
This appointment as trustee was formalized in writing in June 2000.
Respondent also cites United States v. Engels, 89 aftr 2d 2002-898,
In Dean v. United States, supra at 1164, the court also applied State law, which it determined was consistent with a Federal factors analysis.
In Richards v. United States, 231 Bankr. 571 (E.D. Penn. 1999), the court held that where a valid trust is not respected by the parties, for Federal tax purposes a nominee relationship may exist. However, in Richards the bankrupt served as the trustee of the property, represented to third parties that the property was his own instead of belonging to the trust, and did not respect trust formalities. In the instant case, we conclude that the trust was validly formed before the tax liability arose, petitioners respected the trust, and a third-party trustee has overseen trust assets for most of the time the trust has been in existence. Ultimately, we conclude that a nominee relationship did not exist. Therefore, we find Richards distinguishable.
Because we hold respondent’s determination to proceed with the levy on the Poland property was an abuse of discretion, we need not consider petitioners’ argument that respondent disregarded our order to create a proper record and instead conducted a de novo review of the grounds for asserting a nominee ownership while taking into account both Maine law and a Federal factors analysis. We also decline to address petitioners’ argument that pursuant to Me. Rev. Stat. Ann. tit. 14, sec. 752 (2003), respondent is barred by the 6-year period of limitations on civil actions to question the legitimacy of the transfers from petitioners to Mr. Dalton Sr. and the trust.