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Nominees

Posted on July 30, 2021

Several years ago I wrote a post providing a general explanation of nominee liens in discussing two decisions.  Christine wrote an excellent post on a case that had an income tax twist to the nominee situation, but she also expanded my discussion of the nominee lien doctrine.  The case of United States v. Simones, No. 1:20-cv-0079 (D. N.M. 2021) provides a look at nominee lien cases from the perspective of the nominee rather than the person creating the purported nominee situation.  The Simones case is short, yet it still provides an important point for those the IRS tags as nominees.

Nominee liens occur when the IRS believes that a taxpayer has transferred property to a third person(s) in an effort to prevent the IRS from collecting the tax from the transferred property. The person allegedly holding the property for the taxpayer is the nominee. A nominee case will exist because a revenue officer assigned to the taxpayer’s account believes the taxpayer has transferred the property but retained an ownership interest. The revenue officer will prepare a case and send it to Chief Counsel for approval before being allowed to file the nominee lien. Some cases provide a clear picture of nominee status, such as when a taxpayer transfers property but continues to reside there, pay the mortgage, utilities, etc., and some will be much less clear.

The opinion is quite brief and does not provide background information concerning the tax debt or the creation of the nominee situation. The information presented does not allow a reader to draw conclusions regarding the likely or appropriate final outcome here. It explains that the taxpayer owes $276,283.56 and that the IRS asserts that the taxpayer fraudulently transferred property to the Ancient of Days Trust. The case involves an effort by the nominees to extract themselves from a suit brought by the IRS. The IRS sued to reduce the liability to judgment against the taxpayer and the trust; to obtain a judgment that the trust holds title to property as a nominee of the taxpayer which property is encumbered by the federal tax lien; and to set aside the conveyances of property from the taxpayer to the defendants as a fraudulent conveyance.

When the IRS brings a suit of this type it almost always has a count seeking to reduce the liability to judgment.  Doing so takes little additional effort and provides the IRS with much more time to collect the tax liabilities.  See the discussion of the benefits to the IRS of obtaining a judgment here.  This part of the case does not involve the nominees except to the extent that the IRS seeks a judgment against the trust.

The second reason the IRS brings this suit is to set aside the record title of the property showing that the trust is the record owner. This is a natural part of any nominee suit.

The third part of the suit seeks to set aside the conveyance of property to the nominees and to the trust. Two of the three nominees challenge the suit against them, arguing that the court lacks subject matter jurisdiction and that the IRS lacks authority to assert claims against them. The court disposes of their argument in two sentences:

[F]ederal district courts have original jurisdiction over “any civil action arising under any Act of Congress providing for internal revenue,” 28 U.S.C. § 1340, as well as “all civil actions, suits or proceedings commenced by the United States,” 28 U.S.C. § 1345. Moreover, this court has jurisdiction to issue orders and render judgments “as may be necessary or appropriate for the enforcement of the internal revenue laws.” 26 U.S.C. § 7402(a).

It does not take the court much effort to let the nominees know that the IRS does indeed have a right to bring an action against them. That does not mean that it will win and prove that they are nominees of the taxpayer, but that on the basic issue of the authority of the IRS to initiate the action there is little to discuss or debate.

The opinion does not discuss it, but prior to the filing of this suit, the IRS almost certainly filed nominee liens against the individuals it has named as nominees in the suit. It did this to tie up the property while it works to clean up the title so it can be sold for the highest price. The nominee lien, unlike the regular federal tax lien, will list the specific property covered by the nominee lien and will not attach to all of the property owned by the nominees. Nonetheless, it will cause the nominees to have to explain the lien to anyone from whom they seek to borrow. They will also need to explain the existence of the suit itself. Serving as a nominee for someone seeking to make a fraudulent transfer does not come without downsides. Frequently, the friends or relatives who agree to serve as a nominee fail to appreciate the potential costs of that action.

Lavar Taylor has discussed in prior posts, two of which are found here and here, the inability of nominees to avail themselves of collection due process.  This means that unless an individual targeted by the IRS as a nominee can convince the IRS informally that they are not nominees, they face the likelihood of being named in a suit such as this and forced to litigate in order to prove they are not serving as nominees.  They have no formal path to an administrative decision.  Because all nominee liens require approval by Chief Counsel, alleged nominees with a good legal argument seeking to avoid getting caught up in litigation might seek a conference with the attorney in Chief Counsel’s office who approved the nominee lien in an effort to convince that person that nominee status does not exist and to provide information that the revenue officer making the nominee referral to Chief Counsel may have failed to provide.

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