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Taxpayer Fends Off Nominee Lien Challenge at Summary Judgment Stage

Posted on June 25, 2020

Court decisions on nominee liens occur infrequently and taxpayer victories in such cases occur quite rarely. So, the decision in Dombrowski v. United States, No. 3:18-cv-11615 (E.D. Mich. 2020) provides a glimpse at what it takes to remove a nominee lien from a third party’s property. We have previously discussed nominee liens here and here. The procedural posture of this case has the court ruling on cross motions for summary judgment. Because the court does not resolve the case on these motions, a second post on this case remains a possibility if the case goes to trial. The rarity of this type of case makes discussion of the outcome of the summary judgment motions worthwhile.

As is true in any nominee case, the person seeking to remove the nominee lien intertwined her life and her finances with someone owing substantial tax liabilities. As you read the facts in this case you might ask yourself why someone would entangle their finances with someone who has this many problems with the IRS (and usually others), but the test for whether a nominee holding exist do not test for rational financial decisions but for real, as opposed to fake or apparent, financial actions. Here, the plaintiff convinces the court of the possibility of real financial consequences she has suffered.

Ms. Dombrowski has lived with Mr. Matheson since 2006 though they have never married. She lent him $171,000 in 2006 with funds pulled from her retirement account. He promised to pay her back within months and gave a promissory note for 100% interest. At approximately the same time her brother loaned Mr. Matheson almost the same amount on the same terms. Later that year she loaned Mr. Matheson another $50,000. The opinion does not say why she would do this.

The following year Mr. Matheson gave checks to Ms. Dombrowski and her brother to pay off the loan to each but asked them not to cash the checks. They continued to loan Mr. Matheson money. Meanwhile, Mr. Matheson ran up a tax debt to the IRS which now stands at over $3 million.

In 2013 Mr. Matheson defaulted on the mortgage on the property where he resided with Ms. Dombrowski. On June 25, 2013, Mr. Matheson transferred $220,000 to Ms. Dombrowski and $80,000 to her brother. She and her brother claim these payments were partial repayment of the previously loaned money. The brother gave the money he received to Ms. Dombrowski on June 27, 2013. On July 10, 2013 she purchased a house for $229,900 and the house was deeded in her name. Mr. Matheson has essentially lived with her since the house was purchased. In 2017 the IRS filed a nominee lien on the house taking the position that Ms. Dombrowski held the house as the nominee of Mr. Matheson.

Unlike the federal tax lien which the IRS files in the name of the taxpayer and not against specific property, a nominee lien names the taxpayer, the nominee and the specific property subject to the nominee lien. Also unlike the federal tax lien which many collection employees may file without supervisor or Chief Counsel approval, the filing of a nominee lien requires specific approval from Chief Counsel’s Office. Without knowing more than the brief facts recounted by the court and detailed above, it is easy to understand why the attorney reviewing this case would approve the nominee lien, though the existence of a valid loan could provide the basis for the transfer from the taxpayer to Ms. Dombroski. The goal of the nominee lien is to preserve lien priority and not to resolve title. Additionally, unlike the filing of the notice of federal tax lien, the filing of a nominee lien does not, according to the IRS, provide the nominee with the opportunity for a Collection Due Process hearing. Guest blogger Lavar Taylor discussed this issue in a five part series. Ms. Dombrowski brought this suit to quiet title and remove the nominee lien.

The IRS argued that Mr. Matheson’s transfer of $300,000 to Ms. Dombrowski and her brother in 2013 at a time when he owed the IRS over ten times that amount provided three bases for the IRS to pursue the property in order to collect on the outstanding liability owed to it. First, the IRS argues that the transfer violates Michigan’s Uniform Voidable Transfers Act. Second, it argues that the court could impose a resulting trust, and third it argues that the lien is proper because she held the property as a nominee for Mr. Matheson.

To prove a violation of the Michigan voidable transfers law the IRS must prove four elements: 1) transfer to an insider; 2) transfer made to pay an antecedent debt; 3) that Matheson was insolvent at the time of transfer; and 4) the recipient had reasonable cause to believe Matheson was insolvent. Ms. Dombrowski first argued that the IRS action was time barred, but the court turned away this argument finding that even though the IRS was relying on a state cause of action, the federal statute of limitations applies. She admitted three of the four elements of the statute but contested that she was an insider. In declining to grant summary judgment to the IRS, the court determines that a jury must decide the question of fact regarding her insider status. So, the IRS loses its effort to end the case on this basis.

Next, the court turns to the argument that the property is subject to a resulting trust.

A trust arises in favor of a debtor’s creditors when the debtor pays for property subsequently titled under a third-party’s name. Id.; see Advance Dry Wall Co., 218 N.W.2d at 868 (“[The] statute would create an equitable interest in [purchased] land in favor of [a] . . . creditor since the valuable consideration for the land was paid for by [the debtor] but the title was taken exclusively in the names of [third-parties].”). Such a transaction creates a presumption of fraudulent intent, and it is the third-party’s responsibility to produce evidence to rebut it. Mich. Comp. Laws § 555.8

Ms. Dombrowski logically argues that she bought the property with funds paid to her in repayment of prior loans and not with money owned by Mr. Matheson. The court walks through the arguments available to each side on this issue before deciding that a jury must resolve this issue given the competing facts.

Lastly, the court addresses the nominee theory. Given its decision regarding the first two theories, one might be tempted to predict where this issue will end, but the case takes a twist based on the legal theory upon which the IRS relied for proving the nominee theory.

Drawing on federal revenue caselaw that “the [IRS] may collect the tax debts of a taxpayer from the assets of his nominee, instrumentality, or alter ego,” the court in Porta-John analyzed the corporate relationships under a theory of nominee liability. Id. at 700 (citing G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51 (1977); Lemaster v. United States, 891 F.2d 115 (6th Cir. 1989)). The court relied on no Michigan law for its determination. Id. at 701. It relied upon opinions from the Northern District of New York, the District of Montana, and the Second Circuit, to set the following standard for nominee liability:

In order to establish that property is held by a nominee, the [c]ourt must consider six factors: (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee’s name in anticipation of a lawsuit or other liability while the transferor remains in control of the property; (3) whether there is a close relationship between the nominee and the transferor; (4) whether they failed to record the conveyance; (5) whether the transferor retains possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property.

It’s not often a leading case in a tax issue is named Porta-John. The court declined to follow the reasoning in the Porta-John case, because no Michigan case had cited to it and the 6th Circuit had not determined it applied. Because state law controls the property interest and because the state law had not yet adopted the theory set out in the Porta-John case, the court here would not apply the law of that case to find a nominee situation.

The Sixth Circuit mentioned that some courts have applied the Porta-John factors when evaluating questions of alter-ego liability. Id. at 253 n.2. Nonetheless, the Spotts court noted that “federal courts have looked to the decisions of other courts for guidance” only when “a forum state does not have clear law on the issue.” Id. at 253. The court held that a state did have “clear law” where it allowed the IRS to enforce its rights to tax debts through a constructive trust on third-party property. Id. Further, the court cautioned, even in cases where law outside the forum state can be used, “rigid adherence to [the Porta-John] factors may not be appropriate for every case.” Id. at 253 n.2. The unique facts of a case may not fit well within Porta-John’s factors, such as when the alleged nominee is a spouse, and courts may disregard Porta-John as needed. Id….

Michigan has “clear law” on alter-ego liability. Spotts, 429 F.3d at 253. Because Porta-John’s nominee theory is not derived from Michigan state law, summary judgment in favor of Plaintiff will be granted. Nat. Bank of Comm., 472 U.S. at 722; Fed. R. Civ. P. 56(a). There are no factual issues, and as a matter of law, Defendant’s Porta-John argument fails. Fed. R. Civ. P. 56(a).

So, the case moves forward on the first two theories, but the government’s Porta-John theory will have to wait for another day. The IRS can raise this theory again on appeal if it loses the other issues. It’s hard to say who will win because the case turns on facts not yet fully developed. Ms. Dombrowski is a loser in some respects because she must expend time and effort to defend the property from taking. Even if she ultimately wins, it will be a costly victory for her. Similarly, for the IRS, clearing title to get to this property which will only satisfy a small portion of the overall liability is proving costly. This is what happens when a title is clouded.

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