Opinion
Civil No. 1:02-CV-77J.
January 28, 2005
MEMORANDUM OPINION AND ORDER
FACTUAL AND PROCEDURAL HISTORY
Donna M. Holman filed her complaint against the United States of America on June 13, 2002, civil no. 1:02-CV-77, in an effort to quiet title to certain real property and enjoin tax collection against her by the United States government. The quiet title action seeks to remove two nominee tax liens that purportedly attach to a parcel of real property informally known as 177 West 1500 North, Centerville, Utah 84014 (the "subject property"). The subject property is titled in the names of plaintiff Donna M. Holman ("Mrs. Holman") and counterclaim defendant Hyrum W. Smith ("Mr. Smith"). The United States of America ("United States") answered Mrs. Holman's complaint and counterclaimed against Mrs. Holman and Mr. Smith, asserting that each of them holds title to the subject property as nominees for the benefit of Mrs. Holman's husband, Kenneth T. Holman (hereinafter "Mr. Holman"), and that Mr. Holman is the real owner of the property regardless of what the record title shows. The United States brought a separate action against Mr. Holman seeking judgment for his tax liabilities. ( See Complaint, filed 06/19/2002, civil no. 1:02-CV-80, (dkt. no. 1).) On October 11, 2002, the action against Mr. Holman was consolidated with this action under civil no. 1:02-CV-70. ( See Order, dated 10/11/2002 (dkt. no. 11).) On March 9, 2004, this Court granted judgment against Mr. Holman, in the sum of $820,833.13, plus interest. ( See Order, dated 3/9/2004 (dkt. no. 59).)
The property is formally described as:
All of LOT 8 and West 1.5 feet of LOT 7, SMOOT FARM ESTATES SUBDIVISION, PLAT "A," a subdivision of part of Section 6, Township 2 North, Range 1 East, Salt Lake Meridian, in the City of Centerville, according to the official plat thereof. The covenant of warranty herein contained shall not be effective as to the South 2.66 feet of said property, which is Quit-Claimed only.
On December 6, 2004, Mrs. Holman filed her trial brief ("Pl.'s Trial Brief") (dkt. no. 68). On the same day, the United States filed it's trial brief ("U.S. Trial Brief") dated 12/6/2004 (dkt. no. 69). The matter was tried before the court on December 10, 2004. ( See Minute Entry, dated 12/10/2004 (dkt. no. 70).) Thomas N. Thompson appeared on behalf of plaintiff and counterclaim defendant, Mrs. Holman. Anton L. Janik appeared on behalf of the defendant and counterclaim plaintiff, the United States. D. Williams Ronnow appeared on behalf of counterclaim defendant, Mr. Smith. At trial, after Mrs. Holman rested her case-in-chief, the United States moved to dismiss plaintiff's complaint (labeled as a motion for a "directed verdict") and the Court reserved upon the motion. Following closing arguments, the Court took the entire matter under advisement. ( See Minute Entry, dated 12/10/2004 (dkt. no. 70).)
DISCUSSION
Mrs. Holman claims that the only remaining issue for determination by the Court is whether she holds any interest in the subject property for the benefit of her husband, Mr. Holman. ( See Pl's Trial Brief, at 2.) On or about April 15, 2002, two Notices of Federal Tax Lien were filed against the subject property with the County Recorder of Davis County claiming Donna M. Holman and Hyrum W. Smith were nominees and/or transferees of Kenneth T. Holman of the subject property.
Mrs. Holman argues that she and Mr. Smith own the subject property, each has a one-half undivided interest, and the IRS nominee tax liens against her and Mr. Smith cannot and should not attach to the subject property and should be removed. The United States claims that Mrs. Holman and Mr. Smith hold title to the subject property as nominees for Mr. Holman, that the nominee federal tax liens attach to Mr. Holman's interest and ought to be foreclosed, and the subject property sold in accordance with 26 U.S.C. § 7403 and 28 U.S.C. § 2001 (2000).
Mrs. Holman and Mr. Smith are "record owners" and hold title to the property as tenants in common.
Title 26 of the United States Code, Section 7403 describes an action to enforce lien or to subject property to payment of tax in pertinent part:
(a) Filing. — In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability. . . .
(b) Parties. — All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.
(c) Adjudication and decree. — The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein . . . and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property. . . .26 U.S.C.A. § 7403 (2002) (emphasis added).
The Tenth Circuit has interpreted Section 7403 as conferring flexibility and broad discretion upon the courts in fashioning a remedy thereunder. As the term "may" in subsection (c) implies, this discretion and flexibility extends to the decision whether or not to order foreclosure once the validity of the lien has been established. United States v. Eaves, 499 F.2d 869, 871 (10th Cir. 1974).
I. Kenneth T. Holman's Interest in the Subject Property
The bedrock question is whether Mr. Holman has an interest in the property. There are five factors which support a finding that a person holds real property as a "nominee" of another. See United States v. Reed, 168 F.Supp.2d 1266, 1269 (D. Utah 2001): (i) the taxpayer exercises dominion and control over the property while the property is in the nominee's name; (ii) the nominee paid little or no consideration for the property; (iii) the taxpayer placed the property in the nominee's name in anticipation of a liability or lawsuit; (iv) a close relationship exists between the taxpayer and the nominee; and (v) the taxpayer continues to enjoy the benefits of the property while the property is in the nominee's name.
A. Hyrum Smith Holds Record Title to the Subject Property Solely As A Nominee of Kenneth T. Holman.
Mr. Smith testified at trial that while his name appears on the record title, he claims no interest in the subject property, and considers that he has not had an interest in that property since its initial transfer to the Holmans in 1991, subject to the then existing mortgage. Mr. Smith testified that he agreed to join Mrs. Holman on the Quit-Claim Deed and Deed of Trust concerning the subject property in order to comply with the provisions of his mortgage company request and to assist the Holmans in their efforts to refinance the subject property. Mrs. Holman was financially unable to qualify individually for a new mortgage loan, and Mr. Holman was unable to qualify for a mortgage loan due to tax liens and a poor credit rating. Mr. Smith testified that all of the negotiations and discussion regarding transfers, financing, and subsequent refinancing of the subject property took place between him and Mr. Holman, that he never had any such discussions with Mrs. Holman, and that he does not recall anything other than rare social interactions with Mrs. Holman. On October 19, 1993, Mrs. Holman executed a Quit-Claim Deed transferring the subject property to herself and Mr. Smith. On that same day, Mrs. Holman and Mr. Smith executed a Deed of Trust to secure a promissory note signed by Mrs. Holman and Mr. Smith to the new mortgage company to pay off the old mortgage.
Mr. Smith has made no payment of the new mortgage loan nor any other expense connected with the purchase or upkeep of the subject property.
Notably, on August 14, 2003, both the United States and Mr. Smith signed and filed a stipulated request for judgment that Hyrum W. Smith owned title to the subject property solely as a nominee for Kenneth T. Holman. (Stipulation for Entry of Judgment, filed 08/14/2003 (dkt. no. 36).)
These relevant facts demonstrate that Mr. Smith is a record title holder merely as a nominee for Mr. Holman and thus Mr. Holman has at least a one-half undivided interest in the subject property.
B. Donna Holman Owns a One-Half Undivided Interest in the Subject Property.
The Utah legislature recognized the inequitable position of a wife at common law and in 1898 enacted the Married Woman's Act. See Rev. Stat. of Utah 1898, §§ 1198 to 1207, now found at Ut. Code Ann. §§ 30-2-1 to -10 (1998). The Married Woman's Act relieved a married woman of the disabilities of coverture and granted her status equal to that of an unmarried woman. W.W. Clyde v. Dyess, 126 F.2d 719, 722 (10th Cir. 1942). The 1998 versions of Utah Code Section 30-2-1 mirrors Art. XXII, § 2 of the Utah Constitution which found its origin in territorial laws, as well as the Constitution of 1896 upon statehood.
Real and personal estate of every female acquired before marriage, and all property to which she may afterwards become entitled by purchase, gift, grant, inheritance, bequest or devise, shall be and remain the estate and property of such female, and shall not be liable for the debts, obligations or engagements of her husband, and may be conveyed, devised or bequeathed by her as if she were unmarried.
Ut. Code Ann. § 30-2-1, Art. XXII, § 2 (1998) (emphasis added). However, Laws 1997, ch. 222, § 1 repealed Ut. Code Ann. § 30-2-1 effective January 1, 1999, conditioned on the repeal of Utah Constitution, Article XXII, Section 2, as proposed by Laws 1997, H.J.R. 8 § 1. The Resolution was passed by the Legislature and approved by the electorate. The constitutional provision and the statute no longer exist which, in the minds of some, suggests the property rights of married women may once again be vulnerable. Here, however, the United States pursues a theory of nominee liability against Mrs. Holman.
See Ut. Code Ann. § 30-2-1, and Art. XXII, § 2 (Supp. 2004).
The United States argues that the evidence demonstrated the five factors required for nominee status. Generally, (i) Mr. Holman exercises dominion and control over the property while the property is in Mrs. Holman's name; (ii) Mrs. Holman paid little or no monetary payments on for the property; (iii) Mr. Holman placed the property in Mrs. Holman's name in anticipation of a liability or lawsuit; (iv) a close relationship exists between Mr. and Mrs. Holman; and (v) Mr. Holman continues to enjoy the benefits of the property while the property is in Mrs. Holman's name.
Specifically, Mr. Holman provided the vast majority of the funds used to pay the mortgage and household expenses, while Mrs. Holman had little or no personal income; Mr. Holman paid household expenses through Mrs. Holman either by writing a check from his account to his wife's account, or by directly depositing his wages into her account which funds Mrs. Holman would then use to pay on the mortgage and pay household expenses; Mr. Holman received the benefit of the mortgage interest deduction by claiming the interest paid on the mortgage against the Holman's joint income, which for 9 of the 11 years consisted of Mr. Holman's earnings; Mr. Holman paid $12,797.94 in closing costs for the 1993 refinancing of the subject property's mortgage; Mr. Holman received the benefit of other transactions based in part on his acknowledgment of the subject property as his asset. Mrs. Holman undertook to pay the existing mortgage for the subject property at its initial transfer; Mr. Holman provided Mr. Smith with a rent-free apartment in a building owned by a corporation in which Mr. Holman was the sole shareholder.
Bonnie Melendez, an officer for the Internal Revenue Service testified that it is the ordinary practice of the IRS, if they suspect that a nontaxpayer is using a nominee to escape forfeiture of property, to serve a form summons on the utilities companies servicing that property to release to the IRS the name on the utilities bill. In this case, according to Melendez, the IRS suspected a nominee situation, and on January 2, 2002, the IRS served a form summons on the utilities company Pacificorp servicing the subject property. Pacificorp released that Kenneth T. Holman's name was the name listed on the utilities bill. ( See Defendant's Exhibit Y.)
However, in United States v. Reed, the five factors considered by the courts regarding nominee status must be present in a specific "context," namely:
Property transferred from a delinquent taxpayer to a nominee is subject to the collection of the taxpayer's tax liability. G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51 (1977).Reed, 168 F.Supp.2d 1268 (emphasis added). Thus, although the evidence may support the aforementioned five factors, it is the "context" of a transfer of the subject property from Mr. Holman to Mrs. Holman which has not occurred. Mr. Smith, not Mr. Holman transferred the subject property to Mrs. Holman in 1991. Mrs. Holman transferred by quit-claim to herself and Mr. Smith to perfect refinancing in 1993. And it was at this point that Mr. Smith was Mr. Holman's nominee. Mrs. Holman could hold property in her name even if payments on that property were made by her husband by way of gift, or in consideration of love and affection, or by way of his legal duty of support. Mr. Smith, as nominee, qualifies for neither.
The Court finds that Mr. and Mrs. Holman own the subject property as tenants in common each with a one-half undivided interest in the whole. Sale of the subject property must be limited to Mr. Holman's undivided one-half interest in the whole. See generally U.S. v. Eaves, 499 F.2d 869 (10th Cir. 1974). As against the United States, title is quieted as to Mrs. Holman's undivided one-half interest.
The Utah Uniform Probate Code states that a wife has an inchoate interest in her husband's interest in realty, namely, one-third in value of all the legal or equitable estates in real property possessed by the husband at any time during the marriage, and to which the wife made no relinquishment of her rights, should she survive him. Ut. Code Ann. § 75-2-202 (Supp. 2004).
Where a taxpayer and wife held property as tenants in common, federal tax lien could be enforced by sale of property and retention by government of only that portion of proceeds attributable to taxpayer's interest. See U.S. v. Kocher, 329 F. Supp. 1079 (S.D.N.Y. 1971).
II. The United States' Request for Foreclosure
The United States counterclaimed that the nominee federal tax lien attached to Mr. Holman's interest ought to be foreclosed, and the subject property sold in accordance with 26 U.S.C. § 7403 and 28 U.S.C. § 2001 (2000). Such would ordinarily be granted. However, it appears to the Court that Part (b) of Section 7403 may not have been complied with. See 26 U.S.C. § 7403(b) (2000). There is obviously a security interest held by the new mortgage lender for the 1993 refinancing and there may be other interests of record. The best the Court can do at this point is to declare the interest of Mr. Holman and deny the motion to foreclose, leaving for another day the question of foreclosure.
IT IS HEREBY ORDERED that Hyrum Smith holds record title to a one-half undivided interest in the real property located at 177 West 1500 North, Centerville, Utah 84014 solely as a nominee for Kenneth T. Holman, who is the actual and beneficial owner thereof.
IT IS FURTHER ORDERED that the United States' Motion for a "Directed Verdict" is DENIED.
IT IS FURTHER ORDERED that Donna Holman's request for declaratory relief is GRANTED IN PART in that she is the owner as tenant in common to a one-half undivided interest in the subject property.
IT IS FURTHER ORDERED that the United States request to foreclose on the nominee lien against Donna Holman is DENIED.
IT IS FURTHER ORDERED that the United States request to foreclose on the nominee lien on the subject property beneficially owned by Kenneth T. Holman is DENIED at this time subject to further action by the United States pursuant to Title 26 of the United States Code Section 7403(b) (2000).
Let judgment be entered accordingly.