IRS Could Foreclose Tax Liens on Property Held by Taxpayers Nominee

A district court has held that a trust to which the taxpayer transferred his residence was the taxpayer’s nominee, and that therefore IRS’s right to foreclose on property subject to a federal tax lien extended to that residence.

The court also ruled on the timeliness of IRS’s foreclosure action and held that the taxpayer’s argument that he never received a notice of deficiency was overcome by the fact that he promptly petitioned the court. A nominee is a person or entity who “holds bare legal title to property for the benefit of another”. In determining nominee status, the court considers the following non-exhaustive factors:

  • Whether the nominee paid adequate consideration for the property;
  • Whether the property of the taxpayer was placed in the name of the nominee in anticipation of collection activity;
  • Whether there is a close relationship between transferor and the nominee;
  • Whether the transfer was recorded;
  • Whether the transferor continues to possess the property;
  • Whether the transferor retains enjoyment of the benefits of the transferred property. (Oxford Capital v. U.S., (CA 5 2000) 85 AFTR 2d 2000-1840)

Description of the Case

The taxpayers, Mr. and Mrs. Balice, had unpaid tax liabilities for many tax years including ’94, 2003, 2007 and 2008. In 2008 and 2012, Mr. Balice brought suit in Tax Court with respect to the ’94 and 2003 liabilities, respectively, and the Tax Court found in favor of IRS with respect to those years.

The Balices had owned and lived in property on Maple Avenue in Metuchen, New Jersey. In Aug. of ’94, the Balices, saddled with outstanding federal income tax and other liabilities, attended a seminar that instructed attendees on how to create trusts to obtain tax benefits. Thereafter, on Aug. 28, ’94, the Balices executed a quitclaim deed purporting to transfer title of the Maple Avenue property to the Rosewater Trust (“Rosewater”). The Balices did not receive consideration for the transfer. Mrs. Balice was Rosewater’s trustee.

The Balices had owned and lived in property on Maple Avenue in Metuchen, New Jersey. In Aug. of ’94, the Balices, saddled with outstanding federal income tax and other liabilities, attended a seminar that instructed attendees on how to create trusts to obtain tax benefits. Thereafter, on Aug. 28, ’94, the Balices executed a quitclaim deed purporting to transfer title of the Maple Avenue property to the Rosewater Trust (“Rosewater”). The Balices did not receive consideration for the transfer. Mrs. Balice was Rosewater’s trustee. The Balices opened a checking account in Rosewater’s name. The Balices exercised complete control over the checking account; all deposits into the account were from the Balices. All statements for the Rosewater checking account went to the Balices’ home address.

Following transfer to Rosewater, the Balices continued to live in and exercise control over the Maple Avenue property. At one of the Tax Court trials, Mrs. Balice admitted that Rosewater was fictitious and set up to hold title to and protect the Maple Avenue property from federal tax and other liabilities. In 2014, IRS filed the current action, against the Balices and Amboy Bank, which held the mortgage on the Maple Avenue property, to reduce to judgment Mr. Balice’s 2007 and 2008 tax liabilities and to foreclose on the Maple Avenue property. Court rejects taxpayer’s notice of deficiency argument. Mr. Balice argued that the Tax Court’s orders should be set aside because the Balices never received notices of deficiency.

The court here rejected this argument. The court said that it was entirely implausible that Mr. Balice never received a notice of deficiency and yet challenged IRS’s assessment in Tax Court. “It follows that there is no prejudice. Any procedural defect that may have existed in IRS’s service of the notice of deficiency did not deprive Balice of a full and fair opportunity to litigate the merits of his deficiency.” IRS could foreclose on Rosewater because it was a nominee. Citing the Supreme Court in G. M. Leasing Corp., (S Ct 1977) 39 AFTR 2d 77-475, the court said that IRS’s foreclosure right under Code Sec. 7403(a) extends to property held by a taxpayer’s nominee.

And, it held that Rosewater was Mr. Balice’s nominee. It said that IRS’s evidence established that five out of six factors supported the nominee theory. The exception was factor four; failure to record a conveyance. The Balices did record a quitclaim deed conveying the Maple Avenue property to Rosewater. Nevertheless, it said, considering the substantial, undisputed evidence supporting the other five factors, factor four was not dispositive. The Third Circuit and its constituent courts have arrived at the same conclusion when faced with this balance of factors. See, e.g., Patras, (DC NJ 2012) 111 AFTR 2d 2013-315 (“Although the conveyance to [the nominee] was recorded, this factor is not dispositive given the substantial evidence supporting the other factors”).