Arthur Dalton, Jr. and Beverly Dalton v. Commissioner , 2008 T.C. Memo. 165 ( 2008 )

T.C. Memo. 2008-165UNITED STATES TAX COURT
ARTHUR DALTON, JR. AND BEVERLY DALTON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23510-06L. Filed July 7, 2008.
Ralph A. Dyer, for petitioners.
Michael R. Fiore, for respondent.
MEMORANDUM OPINION
WELLS, Judge: This case is before the Court on respondent’s
motion for summary judgment pursuant to Rule 121.1 The instant
proceeding arises from a petition for judicial review filed in
1
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.
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response to identical Notices of Determination Concerning
Collection Actions(s) Under Section 6320 and/or 6330 issued
separately to each petitioner. The issue to be decided is
whether it was an abuse of discretion by respondent’s Office of
Appeals to reject an offer-in-compromise from petitioners because
of an alleged nominee interest in a trust.
Background
The facts set forth below are based upon examination of the
pleadings, moving papers, responses, and attachments.
Petitioners are husband and wife (hereinafter referred to
individually as Mr. Dalton Jr. and Mrs. Dalton) who resided in
Maine at the time of filing the petition. Before late 1997
petitioners lived and worked in Massachusetts; however, the
instant case centers on three parcels of improved real property
located off Johnson Hill Road in Poland, Maine (hereinafter
referred to individually as lot 3, lot 4, and lot 5, respectively,
and collectively as lots 3, 4, and 5, or 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 to lot 3 was
recorded on December 1, 1980. In connection with the latter
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transaction petitioners obtained a bank loan which was secured by
a mortgage on lot 3. The mortgage was likewise recorded on
December 1, 1980.
By deed dated January 13, 1983, petitioners conveyed lot 3
and lot 4 to Mr. Dalton Jr.’s father, Arthur Dalton, Sr. (Mr.
Dalton Sr.).2 The deed recited that the transfer was made for
consideration of $1 and subject to the existing mortgage.
Petitioners and Mr. Dalton Sr. executed a notarized assignment and
assumption agreement dated April 1, 1983, reflecting the foregoing
transaction and Mr. Dalton Sr.’s assumption of the existing
mortgage. The underlying deed was recorded on May 2, 1983, and
the Assignment and Assumption Agreement was recorded on August 16,
1985.
Mr. Dalton Sr. acquired lot 5 by deed dated September 24,
1984. The deed to lot 5 and a concomitant mortgage from Mr.
Dalton Sr. in favor of the seller were recorded on October 23,
1984.
Creation of J & J Trust
On April 11, 1985, Mr. Dalton Sr. created the J & J Trust.
The underlying trust agreement named Mr. Dalton Sr. as grantor and
trustee and designated his two grandsons, i.e., petitioners’
2
Although petitioners refer to this conveyance as occurring
during April of 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 pending motion.
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sons Jonathan and Jeremy Dalton, as the beneficiaries. The trust
agreement provided that Mr. Dalton Jr. would have the power to
designate and appoint a successor trustee. Either petitioner
could be a trustee. By deeds likewise dated April 11, 1985,
Mr. Dalton Sr. transferred title to lots 3, 4, and 5 to himself as
trustee of the J & J 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 was
recited. The three deeds were recorded on August 16, 1985.
Use of Lots 3, 4, and 5
As previously noted, before late 1997 petitioners lived and
worked in Massachusetts. From 1983 through 1990 petitioners
operated in Massachusetts a successful equipment business that
they sold in 1991. A significant portion of the sale price was
deferred, and the buyer defaulted and ceased making payments
sometime during 1992 or 1993. Petitioners thereafter started a
building demolition business, Challenger Construction Corp.,
working primarily for one or two developers in eastern
Massachusetts. An apparently related corporation, A & M Crane
Service, Inc., also seems to have been involved in the business,
but the exact nature of the relationship is unclear and
petitioners do not necessarily make a distinction between the two.
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Also during the early 1990s, petitioners’ son Jonathan began
a boat and jet-ski rental business in St. Martin, French West
Indies. The business was destroyed by a hurricane during the fall
of 1993. Jonathan thereafter became a Navy Seal and from that
time used the address of the Poland property as his domicile.
Jeremy chose a career as an emergency medical technician and
resided in Massachusetts, but he also made regular use of the
Poland property.
On September 18, 1993, Mr. Dalton Sr., as trustee of the
J & J Trust, and Mrs. Dalton 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 contractual provisions
recited that the mortgagor, inter alia, promised to “lawfully own
the Property”. Throughout the administrative and judicial
processes pertaining to this case, petitioners have maintained and
explained that Mrs. Dalton signed the mortgage as a concession to
and at the request of the bank, on account of concerns with
respect to Mr. Dalton Sr.’s advanced age. The funds were
apparently employed by Mr. Dalton Sr. as trustee to assist
Jonathan, his grandson and a trust beneficiary, with the Caribbean
rental business and/or its aftermath.
There is a house (the residence) on the Poland property which
was initially used as the summer home of Mr. Dalton Sr. and his
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wife Beatrice Dalton (Mrs. Dalton Sr.) and later became their
retirement home.3 Petitioners and their sons visited Mr. Dalton
Jr.’s parents and the Poland property. According to petitioners,
the Poland property and attendant 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 business in Massachusetts
suffered a reversal. Mr. Dalton Jr. underestimated the cost of
performing a large job employing a significant number of people.
At the same time, the developer/customer on the project
encountered financial difficulty and defaulted on progress
payments. Petitioners’ corporation(s) failed to pay withholding
taxes while awaiting payment, using remaining funds in an effort
to keep employees together and complete the job. The
developer/customer, however, filed for bankruptcy, and
petitioners’ corporations were unable to continue business or to
pay obligations. Petitioners “lost almost everything” in the
collapse when a third-party lender made a claim on a guaranty by
petitioners of a working capital loan to Challenger Construction
Corp. The claim was settled through the sale of petitioners’ home
3
The record on this point is less than entirely clear, but
for purposes of this motion for summary judgment, facts are
viewed in favor of the nonmoving party. See infra I.A.
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in Massachusetts, a sale from which all net proceeds were paid to
creditors.
After losing their home in Massachusetts petitioners began
living in the residence, sharing occupancy with Mr. Dalton Jr.’s
parents. 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 Challenger Construction Corp. and A & M Crane
Service, Inc., 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 and to care at the residence
for Mrs. Dalton Sr., who suffered from advanced dementia and
Alzheimer’s disease, until she entered an assisted living facility
in 2004. By a document dated June 8, 2000, Mr. Dalton Jr.
appointed Mrs. Dalton’s brother Robert Pray as successor trustee
of the J & J Trust, and Mr. Pray formally accepted that
appointment. Mr. Pray resides in Texas. Mr. Pray continued the
oral living arrangement that petitioners had with the J & J Trust
for the Poland property.
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Administrative Proceedings
Meanwhile, on or about December 9, 1999, petitioners
submitted to the IRS an offer-in-compromise of $5,000 with respect
to, inter alia, the trust fund recovery penalties referenced
above. That offer was under consideration until rejected by
letter dated August 30, 2001, on the principal ground that an
acceptable offer would need to include an alter ego interest in
the property of the J & J Trust, for a total offer of at least
$240,576. Throughout the process, petitioners sought to supply
information and documentation regarding income, expenses, serious
health conditions, and lack of employability, and they disputed
IRS conclusions with regard to the J & J Trust.
By early to mid-2001, Mr. Dalton Jr. and Mr. Pray had become
aware that the J & J Trust had not since its formation filed
Federal income tax returns. At that time they met with
petitioners’ certified public accountant, Thomas B. Anthony, to
raise the issue of the J & J Trust’s tax returns. After looking
into the matter, Mr. Anthony prepared Forms 1041, U.S. Income Tax
Return for Estates and Trusts, for the J & J Trust for taxable
years 1997 through 2000, a practice that has continued for
succeeding years. The returns were filed during or around October
of 2001, reporting the rental income from petitioners and various
trust expenses.
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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 commenced, and ongoing
communications ensued, including an Appeals hearing on October 23,
2002, with respect to the substance of petitioners’ claims.
However, in a letter dated March 6, 2003, the IRS Office of
Appeals provided written notice that petitioners’ offer-in-
compromise matter had to be closed. The letter explained that
review of administrative files had revealed that petitioners’
protest requesting an Appeals hearing had not been filed timely.
The matter was effectively 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. The balance due at
that time exceeded $400,000. 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 is in his mid 60's. He is totally disabled
as a result of workplace injuries suffered over time and
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resulting arthritis. Mr. Dalton has suffered cardiac
problems and has undergone open chest by-pass surgery.
Mr. Dalton has limited employment options and has been
unable to work since 2000. Mrs. Dalton is in her mid-
60's. Until recently, Mrs. Dalton has been the
caretaker for Mr. Daltons [sic] elderly mother who
suffers from senile dementia and other health problems.
Mrs. Dalton 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 hearing process was
conducted through an ongoing exchange of correspondence and
telephone calls extending until late September of 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 held by the J & J Trust should be
attributed to petitioners under a nominee theory, as the
financial information and documentation petitioners supplied
reflected their otherwise very limited resources. 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 J & J 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,
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on the basis of their use of funds for mortgage payments, taxes,
and other property expenses.
During consideration of their case petitioners suggested the
filing of a $10,000 offer-in-compromise, on the basis of the
amount that they believed they could borrow from their sons. No
such offer was submitted, however, after Appeals personnel advised
that because the amount would not be acceptable, filing on the
basis of that amount would be “futile”, given the trust interest.
On October 24, 2006, the IRS Office of Appeals issued to each
petitioner the separate Notice of Determination Concerning
Collection Action(s) Under Section 6320 and/or 6330 underlying
this proceeding. In those notices the IRS sustained levy action
on the ground that no acceptable collection alternatives had been
submitted. Attachments 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.
No mention was made of the lien tracing theory.
Discussion
I. General Rules
A. Summary Judgment
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
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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 and 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, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965(7th Cir. 1994). Facts are viewed in the light most favorable to
the nonmoving party. Id. However, where a motion for summary
judgment properly has been made and supported, the opposing party
may not rest upon mere allegations or denials contained in that
party’s pleadings but must by affidavits or otherwise set forth
specific facts showing that there is a genuine issue for trial.
Rule 121(d).
B. Collection Actions
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
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person be provided with at least 30 days’ prior written notice of
the Commissioner’s intent to levy before collection may proceed.
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
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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.4 In considering any relief from
the Commissioner’s determination to which the person may be
entitled, this Court has established the following standard of
review:
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).]
C. Offers-in-Compromise
Section 7122(a), as pertinent here, authorizes the
Commissioner to compromise any civil case arising under the
internal revenue laws. Regulations promulgated under section 7122
set forth three grounds for compromise of a liability: (1) Doubt
as to liability, (2) doubt as to collectibility, or (3) promotion
of effective tax administration. Sec. 301.7122-1(b), Proced. &
Admin. Regs. With respect to the third-listed ground, a
4
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.
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compromise may be entered to promote effective tax administration
where: (1)(a) Collection of the full liability would cause
economic hardship; or (b) exceptional circumstances exist such
that collection of the full liability would undermine public
confidence that the tax laws are being administered in a
fair and equitable manner; and (2) compromise will not undermine
compliance by taxpayers with the tax laws. Sec. 301.7122-1(b)(3),
Proced. & Admin. Regs.
D. Nominee Principles
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, 528 U.S. 49, 56
(1999) (quoting United States v. Natl. Bank of Commerce, 472 U.S.
713, 719-720 (1985)). Such a lien or levy reaches, inter alia, to
property held by a third party if that third party is holding the
property as a nominee or alter ego of the delinquent person.
G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-351 (1977);
Holman v. United States, 505 F.3d 1060, 1065 (10th Cir. 2007);
Spotts v. United States, 429 F.3d 248, 251 (6th Cir. 2005).
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However, because the Federal levy statute “‘creates no
property rights but merely attaches consequences, federally
defined, to rights created under state law’”, applicability of
nominee principles to support levy turns on a two-part inquiry.
United States v. Natl. Bank of Commerce, supra at 722 (quoting
United States v. Bess, 357 U.S. 51, 55 (1958)); see also Drye v.
United States, supra at 58 (“We look initially to state law to
determine what rights the * * * [person] has in the property the
Government seeks to reach, then to federal law to determine
whether the taxpayer’s state-delineated rights qualify as
‘property’ or ‘rights to property’ within the compass of the
federal tax lien legislation.”); Holman v. Commissioner, supra at
1067; Spotts v. United States, supra at 251.
The first question is whether under State law the person held
an interest or rights in the property sought to be reached.
Holman v. Commissioner, supra at 1067-1068; Spotts v. United
States, supra at 251; May v. A Parcel of Land, 458 F. Supp. 2d
1324, 1334-1335 (S.D. Ala. 2006), affd. sub nom. May v. United
States, 100 AFTR 2d 2007-6602, 2007-2 USTC par. 50,799 (11th Cir.
2007); United States v. Krause, 386 Bankr. 785, 831 (Bankr. D.
Kan. 2008). Upon an affirmative answer, the evaluation proceeds
to the second question of whether the IRS may reach the interest
under Federal nominee principles. Holman v. Commissioner, supra
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at 1067-1068; Spotts v. United States, supra at 251; May v. A
Parcel of Land, supra at 1334-1335; United States v. Krause, supra
at 831.
For purposes of the second inquiry, a relatively well-defined
body of Federal common law has evolved. Case
jurisprudence has established a series of factors considered in
determining whether an existing beneficial interest in property is
reachable to satisfy Federal tax liabilities under the theory that
the property is held by a nominee of the delinquent
taxpayer. Commonly cited criteria include: (1) Whether no
consideration or inadequate consideration was paid by the nominee
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
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case of a trust, trust assets were used to pay the taxpayer’s
personal expenses. E.g., Holman v. Commissioner, supra at 1065
n.1; Spotts v. United States, supra at 253 n.2; Loving Saviour
Church v. United States, 728 F.2d 1085, 1086 (8th Cir. 1984);
May v. A Parcel of Land, supra at 1338; United States v. Dawes,
344 F. Supp. 2d 715, 721 (D. Kan. 2004), affd. 161 Fed. Appx. 742(10th Cir. 2005); United States v. Krause, supra at 831. In
examining the delineated 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.
With respect to the first inquiry, i.e., the State law
question, recent cases have clarified the centrality of finding a
State law interest as a condition precedent. Holman v.
Commissioner, 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
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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 upon the
jurisdiction and particular facts involved. Examples include
resulting trust doctrines, constructive trust principles,
fraudulent conveyance standards, and concepts drawn from State
jurisprudence on piercing the corporate veil. See, e.g., Holman
v. Commissioner, supra at 1068 (and cases cited thereat); Spotts
v. United States, supra at 252-253; Criner v. Commissioner, T.C.
Memo. 2003-328; United States v. Evseroff, 92 AFTR 2d 2003-6987
(E.D.N.Y. 2003) (and cases cited therein); United States v.
Krause, supra at 831 (and cases cited thereat).
II. Analysis
Petitioners have not at any time throughout the
administrative or judicial proceedings attempted to challenge
their underlying tax liabilities; i.e., the trust fund recovery
penalties. Accordingly, we decide respondent’s motion for summary
judgment on the basis of whether respondent, as the
moving party, has proved that respondent’s Office of Appeals did
not abuse its discretion in determining to proceed with collection
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and failing to accept petitioners’ offer-in-compromise because it
did not take into account a nominee interest allegedly
held by petitioners. Action constitutes an abuse of discretion
where the action is arbitrary, capricious, or without sound basis
in fact or law. Olsen v. United States, 414 F.3d 144, 150 (1st
Cir. 2005); Woodral v. Commissioner, 112 T.C. 19, 23 (1999).
Thus, resolution of the instant motion will turn on whether, as a
matter of law, respondent has proved that respondent’s Office of
Appeals did not abuse its discretion in determining that
petitioners held a nominee interest in the J & J Trust and in
determining that the value of the Poland property must be
incorporated in any offer-in-compromise. Before turning to that
question, however, the Court will briefly address two preliminary
matters raised by the parties’ submissions.
First, although those submissions are not well developed on
the point, the parties appear to advance conflicting views with
respect to the contours of the proper record for review and which
party is attempting to exceed the bounds of the record. The basis
for the Court’s ruling below, however, renders it unnecessary to
probe any such claims at this juncture.
Similarly, in the instant motion, respondent asserts two
alternative grounds for determining that any offer-in-compromise
would need to incorporate the value of the Poland property.
Respondent advances the nominee theory at some length, then
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briefly resurrects the lien tracing theory. Nonetheless, the
record of the hearing in respondent’s Office of Appeals, however
construed, would seem to suggest that the alternative lien tracing
theory was not pursued by respondent’s Office of Appeals and did
not form a basis for the discretion exercised in upholding the
collection action. Entries in respondent’s Office of Appeals case
activity records chronicle the deliberative process transpiring
after receipt of the advisory opinion from the IRS Office of Chief
Counsel and note that after review of the opinion and “independent
review of the facts”, the reviewing officer “would concur that
there is a nominee issue”. The notes then go on to discuss the
nominee factors and the manner in which the officer’s conclusions
on the nominee issue were communicated to petitioners’
representative. In stark contrast stands the situation with
respect to the lien tracing theory. The advisory opinion stated,
concerning the lien tracing approach, that a transferee lien would
exist against the real estate “to the extent of the mortgage
payments and other expenses paid by the Taxpayers.” Yet the
record is devoid of any indication that respondent’s Office of
Appeals attempted to quantify those payments or the resultant
equity as a basis for deeming $10,000 an insufficient offer, as
well as any meaningful analysis of other legal requirements for
the lien tracing approach. The notices of determination and
attachments are similarly silent as to any lien tracing theory but
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state that “thorough, independent analysis of the facts and
circumstances as presented reveals that there is a nominee
relationship that exists and that the equity in said real estate
needs to be considered”, with the discussions following that
statement highlighting the nominee factors. Consequently, on the
present record, respondent’s Office of Appeals would seem never to
have carried out the requisite analysis that would support
application of lien tracing and may have exercised any discretion
in that connection to decline pursuit of the tracing approach.
Regardless, however, of what transpired administratively, it is
sufficient for the purposes of the instant motion to note that the
facts pertaining to the lien tracing theory have not been
developed to a point where we could grant summary judgment for
respondent in that respect. Accordingly, we return to our
discussion of the nominee issue.
In moving for summary judgment respondent argues that the
administrative record “not only completely discloses all of the
factors that * * * [respondent’s Office of Appeals] considered in
making * * * [its] determination but also confirms that * * * [it]
did not omit any relevant factor required to make such
determination.” Respondent then sets forth the factors derived
from Federal caselaw for evaluating nominee status and summarizes
the findings of respondent’s Office of Appeals with respect to
those criteria. The underlying record of the hearing at
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respondent’s Office of Appeals supports that respondent’s
determinations were based on application of the Federal nominee
factors.
While we do not disagree with respondent’s premise that the
Federal inquiry is a critical component in a nominee analysis, we
are unable to agree with respondent’s determinations because it
appears that respondent failed to make the State law inquiry.
There is no indication in the record that respondent’s Office of
Appeals made any attempt to assess the preliminary requisite that
petitioners have an interest in the Poland property under State
law. Maine law is nowhere mentioned in the determinations by
respondent’s Appeals officer.
Hence, we are unable to conclude, on the basis of the instant
record, that respondent’s Office of Appeals committed no
abuse of discretion in determining that petitioners held an
interest in the Maine property reachable by respondent under a
nominee theory. In general, courts hold that an abuse of
discretion occurs if a decisionmaker’s ruling is based on an
erroneous view of the law. See, e.g., Cooter & Gell v. Hartmarx
Corp., 496 U.S. 384, 402 (1990); Abrams v. Interco, Inc., 719
F.2d 23, 28 (2d Cir. 1983); Freije v. Commissioner, 125 T.C. 14,
36-37 (2005); Kendricks v. Commissioner, 124 T.C. 69, 75 (2005);
Swanson v. Commissioner, 121 T.C. 111, 119 (2003). As previously
observed by this Court in the section 6330 context: “Whether
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characterized as a review for abuse of discretion or as a
consideration ‘de novo’ (of a question of law), we must reject
erroneous views of the law.” Kendricks v. Commissioner, supra
at 75.
With respect to the instant motion, the record fails to
establish that respondent’s Office of Appeals applied or even
considered the correct standard in evaluating petitioners’
interest in the Maine property. We are unable to conclude, on the
basis of the instant record, whether respondent made the requisite
State law inquiry in order to reach respondent’s determinations
that petitioners held a nominee interest in the Poland property.
On the basis of the foregoing, respondent’s motion for
summary judgment will be denied. We will remand the instant case
to respondent’s Office of Appeals in order for that office to
create a proper record as to whether asserting an interest in the
Poland property is proper, taking into account both a State law
inquiry and a Federal factors analysis.
To reflect the foregoing,
An appropriate order
denying respondent’s motion and
remanding the case will be
issued.