Several earlier post have discussed the scope of the federal tax lien and the priority of the federal tax lien vis a vis other lien claimants. One recent post talked about the lien foreclosure suit and the distinction between that suit and a levy. This post addresses another corner of the federal tax lien that comes into play when the taxpayer seeks to keep assets outside the reach of the federal tax lien – the nominee lien.
The term nominee lien does not appear in the Internal Revenue Code. As a consequence no regulations explain how to file such a lien, when such a lien is perfected, when it is improperly filed, what it reaches, etc. The nominee lien generally calls upon common law principles. It should be used by the IRS as a placeholder to prevent further transfer or encumbrance of property alleged to be subject to the federal tax lien and should not, in my view, be used in a similar fashion to the federal tax lien as a waiting tool. By this I mean, that the filing of the nominee lien should be followed almost immediately by the filing of a suit to foreclose the federal tax lien. The same is not true of the filing of the “regular” notice of federal tax lien. The nominee lien puts the name of someone other than the taxpayer out there as someone who owes or has some obligation to the IRS. This should not occur without an almost immediate plan of action.
The nominee lien differs from the regular notice of federal tax lien in that it encumbers specific property. While many people inaccurately describe the notice of federal tax lien as a lien against someone’s house or real property, it is simply the making public of a general lien that attaches to all of a taxpayer’s property and rights to property. The federal tax lien attaches to everything a taxpayer owns and not simply their real property.
In contrast a nominee lien attaches to specific property allegedly being held for the taxpayer by a third party. A correctly filed nominee lien should specifically state the property to which it attaches. It frequently is a lien on someone’s house or a specific piece of real property although it could be a lien on almost anything. When the IRS files a nominee lien it uses the same form it uses to file a regular notice of federal tax lien but it types onto that form not only the name of the third party allegedly holding a taxpayer’s property but also a description of the specific property that is the subject of the nominee lien and the fact that the notice is a notice of nominee lien.
The IRS should file a nominee lien if it determines that the taxpayer has transferred property to someone else who is holding it as the nominal owner while the taxpayer continues to enjoy the property. The IRS should not file a nominee lien if the transfer to the nominal owner occurred after the assessment of the tax because the federal tax lien will continue to attach to the property in the hands of the nominee since the nominee did not take the property as a purchaser under 6323(h)(6). In the situation of a transfer after the federal tax lien arises the IRS may want to record something to alert persons dealing with the transferee that the federal tax lien extends to the property but a nominee lien is not needed since the IRS could file the notice of federal tax lien against the taxpayer showing the assessment date or bring a lien foreclosure suit at any time.
If the transfer of the property to the nominee occurs prior to the assessment of the tax, the federal tax lien arguably does not extend to the property. In that situation a nominee lien alerts the world that the IRS believes the federal tax lien does extend to the property but should make clear to the world that the individual named in the nominee lien does not have a general obligation to the IRS but only has a contest with the IRS regarding the specific property mentioned in the nominee lien. Still, that distinction can be lost on credit reporting agencies and a nominee lien can do serious harm to someone’s credit rating and general ability to borrow. For that reason, it should be followed shortly by a suit to foreclose the lien so that the matter can be relatively quickly resolved.
Two recent cases provide guidance on how the IRS will pursue its interest after filing a nominee lien. The Powell case demonstrates a very straightforward application of the nominee lien and the Sabby case shows its messier side.
Mr. Powell was a tax protestor who apparently did not believe his own tax protestor arguments or who perhaps had a wife who did not believe them. He managed to accumulate over $500,000 in tax liabilities for the years 1999-2003. During those years he did not file returns but he did incorporate Texore Investment Club, Inc. in Nevada on April 15, 2002 (interesting date of incorporation under the circumstances.) The sole shareholder of the corporation was his wife and it held their home in Senatobia, Mississippi. Naturally, they continued to live in the house and to pay the bills on the house. To all appearances, the house was owned by them as a couple until several years later when they moved out of state and began renting the house. The IRS eventually made assessments against Mr. Powell and later filed notices of federal tax lien against both him and Texore. The lien filed against Texore names it as the nominee/alter ego/transferee of Mr. Powell. This blog will only focus on the nominee aspect of that lien.
The IRS filed a motion for summary judgment. The Court looked at prior cases on nominee lien and stated the applicable factors: “(a)[n]o consideration or inadequate consideration paid by the nominee; (b) [p]roperty placed in the name of the nominee in anticipation of a suit or occurrence of liabilities while the transferor continues to exercise control over the property; (c) [c]lose relationship between transferor and the nominee, (d) [f]ailure to record conveyance; (e) [r]etention of possession by the transferor; and (f) [c]ontinued enjoyment by the transferor of benefits of the transferred property.” With very little effort, the court found that Texore was the nominee of the taxpayer allowing the IRS to foreclose its lien on the property and sell it free and clear. This case represents a very normal, plain vanilla type of nominee case where the taxpayer seeks to place property beyond the reach of the federal tax lien but does so in a manner that invites challenge.
It does cost the IRS and the Department of Justice a fair amount of time and trouble to mount the legal challenge to such a transfer. For that reason, such a tactic might work if very few dollars were involved but will never work if challenged. Use of this tactic coupled with the failure to file returns, opens the individual to significantly greater criminal exposure than exists by the simple failure to file a return and provides a relatively clear demonstration that the tax protest activities were not done in good faith. It is an all-around bad idea by the taxpayer but does slow down IRS collection efforts because of the need to clean up the title prior to selling it. I suspect, with nothing specific to point to for this opinion, that a tactic like this also makes it much more likely that the IRS would seize and sell a personal residence that might otherwise go untouched after the changes to the law in 1998. A tactic like this will also make it more difficult for the individual to obtain an offer in compromise since it puts the IRS on high alert for hidden assets.
The Sabby case presents a more sophisticated nominee situation although at the end of the day the court also allows the IRS to foreclose its lien and sell the property free and clear. Mr. Sabby owed the IRS even more than Mr. Powell – over $700,000. Another thing about nominee cases is the amount owed. The more you owe, generally speaking, the more attention and resources the IRS will put to the case. Of course, the more you owe the more you may need to hide your interest in assets because of the greater attention. Mr. Sabby purchased property with someone who appears to have been his girlfriend. Only she was listed on the mortgage and the title from the outset apparently because he was engaged in illegal activity and he knew he did not want his name on the title so he could avoid forfeiture and other attachments. He contributed to the purchase and to the upkeep and apparently lived in the property.
Mr. Sabby was caught and convicted for federal crimes associated with gambling and sent to prison for 30 months. His girlfriend went to prison for five months. They took out a mortgage on the property during the criminal proceedings to get money to pay certain debts. At some point after release they split up and her name remained on the property but she moved out and he stayed. He testified that she “did not transfer the property to him because of his tax liability with the IRS.” A friend loaned him over $200,000 which he used to pay off the first mortgage and the interest of his former girlfriend in the property.
Eventually, the IRS filed a notice of federal tax lien against Mr. Sabby. With a liability of this size, I would expect the notice to be filed almost immediately after assessment. The assessment date is not disclosed in the case but the case leaves the impression the notice of federal tax lien was not filed on the heels of the assessment. Then the IRS did something that makes me scratch my head. It contacted the former girlfriend and told her it would file a nominee lien if she did not quitclaim the deed to Mr. Sabby. Instead of quitclaiming the deed to Mr. Sabby, she quitclaimed it to a corporation owned by the individual who loaned money to Mr. Sabby.
While it was nice of the IRS to give Mr. Sabby’s girlfriend a chance to clean up the title, the friendly gesture opened the door to further cloud the title. The point of the nominee lien should be to tie up the property to avoid further clouds. I would not have been so nice. The next five pages of the opinion are spent unwinding the interests in the property before ending up with the conclusion that Mr. Sabby really owned the property at the time of the transfer to the corporation before concluding that the IRS could foreclose its lien. The result was predictable even if the path here became much messier than the rather straightforward path in the Powell case.
These cases demonstrate the use of the nominee lien to encumber property while the underlying lien interests get sorted out in court and continue to demonstrate the power of the federal tax lien. I was a bit surprised by the tipping of the hand in the Sabby case because lien cases often require speed over strength and the action here gave the parties time to potentially encumber the property in a manner that could have damaged the interest of the IRS had they chosen to mortgage the property rather than to transfer it to someone not putting up new money.