Applying a five-part test, a district court upholds IRS liens against property nominally owned by the taxpayer’s wife.
The District Court for the Northern District of Illinois invalidated a husband’s quitclaim deed that purportedly transferred ownership of the marital residence to his spouse. The husband, Jack L. Stone, had unpaid federal tax liabilities, and the government was seeking enforcement of tax liens against him. The court held that the wife, Linda K. Stone, held the husband’s interest in the property as his nominee. Accordingly, the tax liens attached to the husband’s interest in the property.
Facts: In 2011, the government filed two notices of federal tax lien for unpaid federal tax liabilities against a residential property, listing Linda Stone, nominee of Jack Stone, as the taxpayer. Linda Stone sued in district court seeking to quiet title and establish sole claim to the property, thereby invalidating the tax liens. The government filed a counterclaim seeking to enforce the tax liens pursuant to Sec. 7403.
The Stones married in 1975, purchased a principal residence as joint tenants in 1977, and had resided there ever since. In 1992, Jack Stone executed a quitclaim deed conveying his interest in the property to Linda Stone in exchange for $10 “and other good and valuable consideration.” Jack Stone testified that one reason for the quitclaim deed was to satisfy debts he owed his wife. The court, however, found little credible evidence of such debts at the time. Although both the Stones testified that the quitclaim deed was not made to shield the property from Jack Stone’s creditors, the court concluded otherwise. Also significant to the court was Jack Stone’s behavior after the quitclaim deed was filed. He continued to live in the residence with his wife, to whom he did not pay rent; he paid the mortgage, property tax, and insurance on the property; and he exercised control and domain over it and held himself out as its owner.
Issues: The court had to decide whether Linda Stone held her interest in the couple’s marital residence as a nominee for her husband, Jack Stone, or if he had validly transferred his interest in the property to her by the quitclaim deed in 1992. If Jack Stone had transferred his interest to her, the IRS’s liens on the property would not be valid.
The Supreme Court has interpreted Sec. 6321 to extend tax liens to all property of a taxpayer, including that held by a third-party nominee (G.M. Leasing Corp., 429 U.S. 338 (1977)). Whether a titleholder is indeed a nominee depends on the facts and circumstances. The district court applied a five-part standard that examines whether:
- A close personal relationship exists between the nominee and transferor;
- Adequate consideration was paid;
- The property was transferred in anticipation of collection activity;
- The conveyance was recorded; and
- The transferor continues to exercise control over the property.
Holding: The court entered judgment in favor of the government and against Linda Stone, finding that four of the five factors weighed strongly in favor of the government. The only factor favoring Linda Stone’s argument, that the quitclaim deed was recorded, was considered the least meaningful factor. The court therefore concluded that Linda Stone held her husband’s interest in the property as his nominee, making the tax liens on the property valid.
By Mark A. McCoon, CPA, Ph.D., assistant
professor, University of Wisconsin–Superior.