Motion to quash writ of execution denied

A trust beneficiary had an equitable and legal interest in trust property, thereby allowing the government to levy upon the property in satisfaction of outstanding estate tax liabilities, a district court determined.

Facts: Omar Firestone, executor for the estate of Ghaida M. Firestone, was notified by the IRS on Jan. 17, 2012, that the estate was selected for an audit. On April 16, 2013, the IRS informed Firestone that it had recomputed the estate’s tax liability to be $1,869,254, including interest and penalties.

A month after receiving the recomputed amount, Firestone, as Settlor, created the Firestone Irrevocable Cello Trust, purportedly transferring a cello to the entity. Firestone also served as the sole trustee for the trust. The government asserted that it was unclear whether the cello had been transferred to the trust, since “the Trust agreement provided by Mr. Robert Cauer,” the broker for the cello, “to the government in 2017 does not include a ‘Schedule A’ that identifies the property contained in the Trust.” A different copy of the trust agreement provided in 2021 contained a Schedule A, but nothing was listed on it. The 2021 copy of the trust agreement did include an appraisal amount for an “aged cello,” which was significantly less than the appraisal submitted into evidence.

A year later, the estate agreed to the additional tax liability, which Firestone failed to pay (Firestone, No. 8283-14 (T.C. 4/14/14)). After taking several steps to collect the estate tax due, the IRS commenced an action against Omar Firestone to reduce the unpaid estate tax to judgment and foreclose on certain real property (Estate of Firestone, No. C19-0003 (S.D. Cal. 1/2/19)). In 2021, the district court entered judgment, including statutory accruals and interest, against Firestone for more than $2.5 million (Estate of Firestone, No. C19-0003 (S.D. Cal. 3/4/21)).

Almost a year later, as part of an ex parte application for a writ of execution, the IRS was authorized to seize “a fine Italian violincello or cello circa 1816s.”

Firestone moved to quash the writ of execution, claiming that the IRS’s action was barred by the statute of limitation pursuant to 28 U.S.C. Section 3306(b) (1) and that the cello was “not his personal property.” However, Firestone provided no support or legal authority for his arguments.

Issues: The Federal Debt Collection Procedures Act (FDCPA) establishes standards and procedures on the collection of debt owed to the United States. One available remedy is a writ of execution under 28 U.S.C. §3203(a), which provides, “All property in which the judgment debtor has a substantial nonexempt interest shall be subject to levy pursuant to a writ of execution.”

“Property” is broadly defined under the FDCPA to include “any present or future interest, whether legal or equitable, in real, personal (including choses in actions), or mixed property, tangible or intangible, vested or contingent, wherever located and however held (including community property and property held in trust (including spendthrift and pension trusts))” (28 U.S.C. §3002(12)). In National Bank of Commerce, 472 U.S. 713 (1985), the Supreme Court stated that this broad language “reveals on its face that Congress meant to reach every interest in property that a taxpayer might have” to satisfy a judgment. There are a few narrow exceptions to this definition, but Firestone did not claim any of them.

The IRS first claimed that Firestone did not have standing to challenge the writ of execution. It also contended that Firestone disclaimed the cello by stating it was not his property. However, the IRS also disputed his claim that the cello was not his property since he maintained a life estate interest in it.

The court stated that if Firestone did not have a substantial interest in the cello, then the government would not be entitled to a writ of execution. Lacking evidence to the contrary, the court assumed that the cello was transferred to the trust, since it was unclear whether the lack of a Schedule A, as part of the trust agreement in 2017, was an inadvertent mistake. Therefore, it addressed the statute of limitation and whether Firestone had an interest in the cello such that the IRS could issue a writ of execution.

As for the statute of limitation, Firestone contended that the current action was subject to the six-year statute of the FDCPA (28 U.S.C. §3306(b) (1) ), which applies to transfers that are “fraudulent” and done “with actual intent to hinder, delay, or defraud a creditor” (28 U. S.C. §3304(b)(1)(A)). The government contended that since this was an action to collect tax, the 10-year statute of limitation in the Internal Revenue Code applied (Sec. 6502(a)(1)).

Both parties missed the mark, the court held. This case did not involve a “fraudulent transfer claim” or an action to collect taxes under the IRC; it involved a writ of execution to collect debt, which the FDCPA provides no time limit for (Gianelli, 543 F.3d 1178 (9th Cir. 2008)).

The court then considered whether Firestone had property rights in the cello that were property for purposes of the FDCPA (i.e., whether he had a substantial interest in the cello). The important consideration in determining whether a property right falls within the FDCPA is the “breadth of the control the taxpayer could exercise over the property” (Harris, 854 F.3d 1053 (9th Cir. 2017)). The FDCPA does not create property rights; rather, it only attaches federally defined consequences to rights created under state law (Craft, 535 U.S. 274 (2002)). Since the trust was created in California, and the agreement stated that the laws of California govern the instrument, the court applied California law. Thus, to hold a substantial interest in property, the court found that under 28 U.S.C. Section 3002(12), Firestone must hold an equitable and legal interest in personal property that is held in trust under California law.

In California, “trust beneficiaries hold ‘the equitable estate or beneficial interest in’ property held in trust and are ‘regarded as the real owner[s] of [that] property,’ ” the court stated, citing Steinhart v. County of Los Angeles, 223 P.3d 57 (Cal. 2010), and Harris, 854 F.3d 1053 (9th Cir. 2017). Moreover, an individual cannot set up a trust to protect their property rights from creditors (In re Schneider’s Estate, 296 P.2d 45 (Cal. Dist. Ct. App. 1956); see also Cal. Prob. Code §15304(a)).

The court found that, according to the trust agreement, Firestone was a beneficiary of the trust because he had a life estate interest in the cello. Nonetheless, Firestone claimed that Cauer, the cello broker, was the property’s true owner and that the trust was created to compensate him for the loss of a sales commission. As proof of this, he attached to his motion an unsworn email from Cauer stating that he was a beneficiary in the trust.

At no time, however, did Cauer assert an interest in the trust, even claiming at his deposition that the property’s true owner was Firestone, as the person responsible for repairs, insurance, and other costs. Firestone also did not provide any legal documentation showing that title to the cello was transferred to Cauer. In addition, one month after learning of the audit, Firestone as sole settlor transferred title to the Firestone Irrevocable Cello Trust, making himself the lifetime beneficiary. Based on these facts, the court held that Firestone held an equitable interest in the cello.

Legal title to property in a trust is held by the trustee, and Firestone was the sole trustee of the trust (Stoltenberg v. Newman, 101 Cal. Rptr. 3d 606 (Cal. Ct. App 2009)). Therefore, Firestone, as sole settlor of the trust, effectively transferred the cello to himself as trustee, the court stated. As trustee, he gave himself the “power to partition, allot, and distribute” the trust assets. Since he was the only trustee, the court held that he also held a legal interest in the cello.

Holding: Since the government had standing to bring the action and the writ was not barred by the statute of limitation, the court denied Firestone’s motion to quash the writ, holding that he still had an equitable and legal interest in the cello.

■ Firestone, No. 2-22-cv-01201-TL (W.D. Wash. 6/12/23)

— John McKinley is a professor of the practice in accounting and taxation in the SC Johnson College of Business; Matthew Geiszler is a lecturer in accounting in the Brooks School of Public Policy; and Olivia Larson is a student in the School of Industrial and Labor Relations, all at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.