Primer on Third Party Liability and the Foreclosure of the Federal Tax Lien

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Loraine Peters
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1 Primer on Third Party Liability and the Foreclosure of the Federal Tax Lien Michael A. Lampert, Michael A. Lampert, P.A., West Palm Beach, Florida Michelle M. Robles, Senior Attorney, Office of Chief Counsel IRS, Miami Vivian N. Rodriguez, Senior Attorney, Office of Chief Counsel IRS, Miami 1

2 Alter Ego Alter ego is a person or entity legally distinct from the taxpayer but is so intermixed with the taxpayer that their affairs and assets are not readily separable. Unity of interest and ownership between a corporation and an individual/shareholder. Separateness has ceased to exist. Failure to disregard the fiction would result in injustice fundamental unfairness 2

3 Who can be an alter ego? Corporations and Partnerships -Today s Child Learning Center, Inc. v. United States, 40 F. Supp.2d 268, (E.D. Pa. 1998); Ross Controls, Inc. v. United States, 160 B.R. 527, 532 (E.D. Pa. 1993); Ross Controls, Inc. v. United States, 164 B.R. 721, 726 (E.D. Pa. 1994); Grant Investment Fund v. IRS, No , 1993 WL (9 th Cir. Jul. 19, 1993) Trusts -United States v. Scherping, 187 F.3d 796, (8 th Cir. 1999), cert. denied, 528 U.S (2000); F.P.P. Enterprises v. United States, 830 F.2d 114, (8 th Cir. 1987) Individuals - Lemaster v.united States, 891 F.2d 115, , (6 th Cir. 1989) 3

4 Successor Liability Doctrine & Continuation Doctrine (corporation to corporation) The second corporation continues the business or performs the same functions of the taxpayer; The taxpayer s employees become the employees of the second corporation; and The taxpayer and the second company are owned by the same individual. The successor liability doctrine does not require evidence of such a direct sale of assets from the predecessor to the successor for there to be a transfer of assets between the two corporations. The fact that the entirety of the predecessor s assets were not transferred to the successor does not render the mere continuation doctrine inapplicable. 4

5 Indicia of Alter Ego Use of corporate assets or employees for personal rather than corporate business - Loving Saviour Church v. United States, 556 F. Supp. 688, 692 (D. S.D. 1983), aff d, 728 F. 2d 1085 (8 th Cir. 1984) (per curiam) The taxpayer is a shareholder, director, or officer of the corporation, or otherwise exerts substantial control over the corporation. Grant Investment Fund v. IRS, No , 1993 WL (9th Cir. Jul. 19, 1993) The corporation has only one shareholder or is closely held by a member of a family. Commingling of corporate funds with shareholders funds - Century Hotels v. United States, 952 F.2d 107 (5 th Cir. 1992) 5

6 Indicia of Alter Ego (continued) Inadequate capitalization relative to its reasonable anticipated risks of business. Unsecured interest-free loans between the corporation and the shareholder. Incomplete corporate organization, e.g. failure to issue stock, pay state taxes, file articles of incorporation, payment of dividends, etc. Failure to follow corporate formalities, such as holding regular meetings of the directors or maintaining minutes. Incorporation is used for fraudulent purposes or to mask illegal activities. 6

7 Nominee A nominee is one who holds bare legal title for the benefit of another. Scoville v. United States, 250 F.3d 1198, 1202 (8th Cir. 2001); Holman v. United States, 505 F.3d 1060 (10th Cir. 2007) Taxpayer/debtor does not transfer of beneficial interest, dominion and control to the third party May or may not transfer legal title Determination of the true beneficial or equitable ownership of property at issue. 7

8 Who can be a nominee? Corporations and Partnership -Shades Ridge Holding Co., Inc. v. United States, 888 F.2d 725 (11 th Cir. 1989); United States v. Klimek, 952 F. Supp. 1100, 1113 (E.D. Pa. 1997); United States v. Bell, 27 F. Supp.2d 1191, 1195 (E.D. Cal. 1998) Trusts - United States v. Marsh, 114 F. Supp.2d 1036, 1043 (D. Haw. 2000); Allen Family Trust v. United States, 558 F. Supp. 152 (D. Kan. 1982) Other individuals -United States v. Williams, 581 F. Supp. 756, 758 (N.D. Ga. 1982), aff d, 729 F.2d 1340 (11 th Cir. 1984) (per curiam) 8

9 Indicia of Nominee The taxpayer provided the funds or guaranteed the financing for the purchase of the property The taxpayer pays all of the expenses of the property, e.g., utility bills, property taxes, and mortgage payments. Keeney v. Smith(In re Keeney), 227 F.3d 679 (6 th Cir. 2000) The nominee paid no consideration or inadequate consideration for the property. Nobel v. Morchesky, 697 F.2d 97, 103 (3 rd Cir. 1982). There is a close relationship between the taxpayer and the nominee. The conveyance was not recorded. United States v. Reed, 168 F. Supp.2d 1266, (D. Utah 2001) (citing United States v. Bell, 27 F. Supp.2d 1191, 1195 (E.D. Cal. 1998); Porta-John of America v. United States, 4 F. Supp.2d 688, 701 (E.D. Mich. 1998). 9

10 Indicia of Nominee (continued) The taxpayer retains possession of or dominion and control over property. Richards v. United States(In re Richards), 231 B.R. 571 (E.D. Pa. 1999) The property is placed in the name of the nominee in anticipation of liability on the part of the taxpayer or a lawsuit against the taxpayer. The taxpayer uses or enjoys the benefits of the property after title passed to the nominee. The taxpayer takes deductions relating to the property The taxpayer receives income such as rent or dividends from the property The taxpayer is listed as the owner on financial documents relating to the property, e.g., the taxpayer lists the property as his orher own on a loan application 10

11 Collecting From Nominee or Alter Ego Requires Counsel review -The separateness is disregarded to reach the assets of the taxpayer for a taxpayer s liability - Shades Ridge Holding Co. v. United States, 888 F.2d 725 (11 th Cir. 1989); Oxford Capital Corp. v. United States, 211 F.3d 280 (5 th Cir. 2000). Filing of Notice of Federal Tax Lien Puts public on notice of government s interest in property Levies against nominee or alter ego property 11

12 Nominee or Alter Ego -Remedies Nominee/Alter-ego/transferees not entitled to CDP notice or hearing; Third parties may seek CAP appeal, reconsideration, and TAS help May request lien discharge by posting bond Sue to contest value of the taxpayer s interest I.R.C. 7426(a)(4) Wrongful Levy suit or quiet title action I.R.C. 7426(a)(1) and 28 U.S.C Application for return/release of property - I.R.C. 6343(b) 12

13 Collecting From Nominee or Alter Ego Foreclosure versus Seizure United States District Court bring suit to clear title IRS cannot give clear title on seizure and sale. Therefore, the sale will not realize as much proceeds. A judicial foreclosure will clear title and ensure the maximum proceeds. Foreclosures are particularly advisable when have competing lien or security interests in property 13

14 Foreclosure of the Federal Tax Lien 14

15 U.S. Plaintiff Taxpayer o Reduce Assessment to Judgment o Foreclosure of Lien o Personal Residence Seizure o Enforce Levy o Erroneous Refund o Writ/Injunction/Receivership Third Parties and Property o Fraudulent Conveyance o Lien Foreclosure by Sale o Enforce Levy o Erroneous Refund o Declaratory Judgment o Writ/Injunction/Receivership U.S. Defendant o Injunction o Failure to Release Lien o Wrongful Collection o Attorneys Fees o Counterclaims (Refund Suits) o Injunction o Lien Foreclosure by Sale o Wrongful Levy o Quiet Title o Interpleader 15

16 Statutory Authority The general authority for the US to commence a court action for the collection or recovery of taxes is provided for by I.R.C The jurisdiction of US district courts to hear collection suits is established by I.R.C. 7402(a). 16

17 Judicial Sale 28 U.S.C Waiver of Sovereign Immunity: Foreclosures Quiet Title Actions Partitions Condemnations Interpleaders 17

18 Venue of Actions 28 U.S.C. 1391(b) and 1396 Venue place where suit is tried A civil action for the collection of federal taxes may be brought in the district: where the liability accrued, of the taxpayer s residence, where the return was filed, or for purposes of a lien foreclosure suit, where the property is located. 18

19 Impact of Statute of LimitationsI.R.C. 6502(a) The failure to timely assess or to commence a suit for the collection of taxes assessed within the period of limitations can defeat a judicial action. Burden of proving that assessment or collection suit is untimely is generally on the taxpayer, unless the US is acting in reliance on an exception to the normal SOL 19

20 Suits to Reduce Claim to Judgment Purpose is to prevent the SOLs for collection from running where collection cannot be accomplished by administrative methods All administrative remedies available must have been exhausted or their use would be ineffective Lien may be extended by reducing the tax assessment to judgment. DOJ files a suit asking the court to reduce the assessment to judgment. The life a federal judgment is indefinite. United States v. Hodes, 355 F.2d 746 (2d Cir. 1966) 20

21 Effect of Judgment on Tax Lien and Levy The lien continues until the underlying liability is satisfied or becomes unenforceable by reason of lapse of time Right to foreclose is still available Allows the government to continue to levy beyond the normal collection period and until the tax liability or judgment is satisfied or becomes unenforceable 21

22 Post-Judgment Liens There should be two types of liens appearing of record Certified abstracts of judgments NFTL A certified abstract of the judgment of the US should normally be recorded in the counties where the taxpayer has real property. The recorded abstract accords certain lien rights accruing under federal provisions for judgment liens, and also constitutes evidence of the extended statutory period for collection. 28 U.S.C

23 Foreclosure of Federal Tax Lien There is a specific, presently available source of collection If the property subject to the FTL is not sufficient to satisfy the entire tax liability, the DOJ will often also request a judgment against the taxpayer Statutory Authority per I.R.C Taxpayer has no right to redeem his property after court ordered foreclosure of the federal tax lien 23

24 Situations where IRS may deem lien foreclosure appropriate There are other encumbrances on the property There is a cloud on title, or title is contested by 3 rd party Unpaid federal tax lien is against only one of several co-owners of real property and the sale of undivided partial interest is unfeasible A business is to be sold as a going concern Government wants cash surrender value of a taxpayer s insurance policy 24

25 Intervention I.R.C provides that if the U.S. is not a party, it may intervene in such action or suit to assert any federal tax lien arising on any property that is the subject of such action or suit. If intervention is denied, it will not have any effect on the FTL 25

26 Discharge -Generally Local law controls whether junior tax lien is discharged If the NFTL is recorded pursuant to local law, the US must be named as a party for a lien to be discharged. See I.R.C. 7425(a)(2). Foreclosing party must seek judicial sale If lien being foreclosed is junior to NFTL, then NFTL is NOTdischarged unless the US agrees otherwise. 26

27 Effect of Judicial Sale on Junior NFTL Properly Named Not Named NFTL Filed discharged not discharged NFTL Unfiled discharged discharged 27

28 The End Thank You 28

Fraudulent Conveyances, Alter Egos, Nominees and Other IRS Remedies

Fraudulent Conveyances, Alter Egos, Nominees and Other IRS Remedies All audio is streamed through your computer speakers. There will be several attendance verification questions during the LIVE webinar