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United States v. Kimball

United States District Court, D. Maine

June 24, 2016

UNITED STATES OF AMERICA, Plaintiff
v.
JOHN H. KIMBALL, JR., and KIMBALL FAMILY REALTY TRUST, Defendants

          DECISION AND ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

          D. Brock Hornby United States District Judge.

         In this federal tax lawsuit, the United States seeks two forms of relief: (1) To reduce to judgment unpaid taxes, penalties and interest that it says the individual taxpayer defendant John H. Kimball, Jr. owes the Internal Revenue Service (Count One); (2) To enforce federal tax liens for those amounts against a trust of which the defendant Kimball previously was trustee (Count Two). I Grant the United States's motion for summary judgment on Count One and Deny it on Count Two.[1]

         Count One: The Individual's Tax Liabilities

         On Count One, the United States has presented "Certificates of Assessments, Payments and Other Specified Matters" for each of the tax years in question, for Kimball's personal income taxes (2001-2004, 2007-2010) and for employment taxes related to his law practice (2008-2011) for a total tax liability in the amount of $1, 090, 700.05. (ECF No. 41). Kimball has not contested the amounts due, saying only that he "is unaware of whether or when tax assessments were made and unaware of the correct amount of tax liability owed, " and that he is "aware that [he] has received some notices of assessments but is unaware of whether the Plaintiff's notices so describe[d] in its Statement of Facts are accurate, complete, or the assessments which [he] has received." Opp'n at 6-7 (ECF No. 42). That is insufficient to resist the United States's motion for summary judgment on Count One. The First Circuit cases are clear that these Certificates "are ‘presumptive proof of a valid assessment.' This presumption places the burden of proof on [the defendant] to show that the IRS's determination is invalid." Stuart v. United States, 337 F.3d 31, 35 (1st Cir. 2003) (quoting Geiselman v. United States, 961 F.2d 1, 6 (1st Cir. 1992); Lefebvre v. Commissioner of Internal Revenue, 830 F.2d 417, 419 n.3 (1st Cir. 1987) ("It has long been the law, in this circuit and elsewhere, that the Commissioner's deficiency determination is presumed correct, and, in seeking a redetermination, the taxpayer bears the burden of proof and persuasion to show otherwise.").

         In the absence of any affirmative showing by Kimball that the IRS determination is invalid, the United States's motion for summary judgment is Granted on Count One. The United States is entitled to judgment as a matter of law for unpaid taxes and penalties in the amount of $1, 090, 700.05, interest, and other statutory additions accruing from and after March 11, 2016.[2]

         Count Two: Tax Liens Against the Trust

         In 1989, Kimball, a Massachusetts resident, established under the laws of Maine the Kimball Family Realty Trust. Kimball Family Realty Trust (Family Trust) at ¶ 12 (ECF No. 42, Ex. 3). He named himself as Trustee and his five children as beneficiaries. Id. at ¶ 12; Schedule of Beneficiaries (ECF No. 42, Ex. 4); Son's Dep. at 20 (ECF No. 44, Ex. 7).[3] The purpose of establishing the Family Trust was to buy a ski condominium for his children: "I wanted to try to get something for the kids that they would enjoy a continued benefit for. So, I bought it full with the intention of me not owning it." Kimball Dep. at 22 (ECF No. 44, Ex. 1). As the original Trustee, Kimball had the power to alter or amend the trust. Family Trust at ¶ 7.[4] But if he actually revoked it in whole or in part, the Family Trust document provided that the portion to which the revocation was applicable must go to the beneficiaries, not to Kimball. Id.[5] Kimball then funded the Family Trust and, with the money he provided, the Family Trust purchased a ski condominium at Mt. Abram, Maine, all in 1989. Son's Dep. at 15-16. At the time, Kimball did not have any tax liability.[6] Kimball and his wife separated in approximately 1991. Id. at 13. In August of 1993, [7] Kimball resigned as Trustee in favor of his sister, a lawyer who has done a lot of trust work. Id. at 12-13. The Family Trust by its terms thereupon became irrevocable.[8] Over the years, Kimball personally paid the condominium expenses, (utilities, taxes, insurance, condo fees), which were modest. Son's Dep. at 15, 25.[9] The Family Trust did not have a bank account. Id. at 19. While the children were young and without driver's licenses, Kimball drove them to the ski condominium for family vacation time. Id. at 19, 32.[10] Kimball did not use (or very rarely used) the ski condominium in the absence of his children, and he never rented it to others to generate income. Id. at 17.[11] Kimball has not visited the ski condominium since 2000-2001. Id. at 18.

         In 2010, the United States filed notices of federal tax liens against the Family Trust's ski condo in the Oxford County Registry of Deeds. Statement of Material Facts at ¶ 6 (ECF No. 41).[12] Those liens arose only upon the dates of the IRS assessments. Id. at ¶ 7.[13] The earliest such assessment is December 26, 2006. Id. at ¶ 1.[14] Kimball and his wife divorced in 2012, and according to the eldest son she died that year. Son's Dep. at 13, 18. The children, now all adults, have their own keys to the condo. Id. at 18.[15] Kimball "does not use the Property as a vacation home, never resided there, does not control it, and has not been to the Property in nearly 16 years." Def. Family Trust's Add'l Statement of Facts at ¶ 11 (ECF No. 42).[16]

         The United States's argument for relief on Count Two is straightforward. The United States argues that when unpaid taxes are assessed, a federal tax lien "attaches to all property and rights to property the taxpayer then holds or subsequently acquires. To satisfy a taxpayer's tax liability, the IRS may collect from assets held in the name of a nominee of the taxpayer." Mot. at 10-11 (ECF No. 40). The United States argues that the Family Trust is holding the ski condominium as Kimball's nominee and that the IRS should be able to enforce its tax liens on the condominium for Kimball's personal tax liabilities. Id. at 11. It has not argued that the creation or funding of the Family Trust was a fraudulent transfer.

         But while the United States's argument is straightforward, the proper analysis of who or what is a nominee for federal tax lien purposes is complex. The term "nominee" does not originate in the Internal Revenue Code, but (like "alter ego") in various court decisions.[17] The usual reference is to G.M. Leasing Corp. v. United States, 429 U.S. 338 (1977). There, the Supreme Court observed that under 26 U.S.C. § 6321, the assessments against a taxpayer "were a lien in favor of the United States upon all property belonging to [the taxpayer]. If petitioner was [the taxpayer's] alter ego, . . . [i]t would then follow that the Service could properly regard petitioner's assets as [the taxpayer's] property subject to the lien under § 6321 . . ." Id. at 350-51. But in G.M. Leasing, the Court explicitly avoided deciding whether the petitioner in that case was the taxpayer's alter ego, observing that its grant of certiorari did not include that question and that it accepted for purposes of the decision that the petitioner was the taxpayer's alter ego without deciding the issue. Id. at 351.

         In United States v. Craft, 535 U.S. 274 (2002), [18] the Supreme Court described how to decide whether property, or rights to property, belong(s) to a taxpayer for purposes of the federal tax lien statute, 26 U.S.C. § 6321:

[It] is ultimately a question of federal law. The answer to this federal question, however, largely depends upon state law. The federal tax lien statute itself "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." Accordingly, "[w]e look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as ‘property' or ‘rights to property' within the compass of the federal tax lien legislation."

Id. at 278 (emphasis added) (internal citations omitted); accord Drye v. United States, 528 U.S. 49, 58 (1999). In assessing "nominee" status in a trust case, the First Circuit likewise starts with state law, see Dalton v. Commissioner, 682 F.3d 149, 157 (1st Cir. 2012). In Dalton, the First Circuit stated that "[i]n connection with real property, Maine recognizes the nominee doctrine. This doctrine allows for the possibility that the true owner of a parcel of land may be someone other than the record owner." Id. The First Circuit referred to a single Maine Law Court decision, Atkins v. Atkins, 376 A.2d 856 (Me. 1977), as invoking a three-factor test, and said that "Maine case law does not fully delineate the contours of the nominee doctrine." 682 F.3d at 157. But in Dalton, the First Circuit explicitly did not "determine whether the IRS applied the correct rule of law" in that Maine-law case, id., because the only issue was whether the IRS acted reasonably in its rejection of a minimal settlement proposed in a Collection Due Process appeal by the taxpayers. Id. at 157-59; See generally Adam M. Cole, Note, A Preference for Deference: The Benefits of the First Circuit's Customized Standard of Review for Collection Due Process Appeals in Dalton v. Commissioner, 58 Vill. L. Rev. 239 (2013). In evaluating IRS reasonableness in Dalton, the First Circuit also described what courts other than Maine's do in determining a nominee relationship, describing them as "balancing a series of factors." Id. at 158.[19]

         Unlike Dalton, I must actually decide the Maine law issue here. In doing so, I look at Atkins, a more recent Maine decision, MERS v. Saunders, 2010 ME 79, 2 A.3d 289, and other Maine law sources in deciding what rights Kimball has in the ski condominium.

         First, I consider Maine trust law. When Kimball created this Family Trust, when he resigned as trustee, and when he last visited the ski condo, Maine had not yet adopted the Uniform Trust Code. During all this time, Maine trust law was governed by the "modest" provisions of the Maine Uniform Probate Code's Article VII "Trust Administration"[20] and the decisions of the Maine Law Court. The Maine Uniform Probate Code provided limited rules regarding registration of trusts (18-A M.R.S.A. §§ 7-101 - 7-105), the jurisdiction of courts concerning trusts (18-A M.R.S.A. §§ 7-201 - 7-206), the duties and liabilities of trustees (18-A M.R.S.A. §§ 7-301 - 7-307), and the powers of trustees (18-A M.R.S.A. §§ 7-401 - 7-408). However, the Maine Uniform Probate Code was silent regarding the rules on drafting trusts or even what types of trusts could be created.

         But there is no question that the Maine Law Court recognized the type of inter vivos trust that Kimball created in 1989. The law on "gifts by declaration in trust" was already "well established in this state." Rose v. Osborne, 180 A. 315, 317 (Me. 1935). "It is not essential . . . that the donor should part with the possession in the cases where he . . . declares a trust." Bath Savings Inst'n v. Fogg, 63 A. 731, 733 (Me. 1906) (quoting approvingly Pomeroy's Equitable Jurisprudence). "The mere fact that the settlor appoints himself trustee and retains powers to revoke the trust and to use the trust corpus for his own benefit during his lifetime is not in itself a sufficient basis for regarding an inter vivos trust as incomplete . . ." Staples v. King, 433 A.2d 407, 410 (Me. 1981) (citing Restatement (Second) of Trusts § 26, cmt. h) (Am Law Inst.). "[R]eservation of the power of amendment or revocation" does not "alter our conclusion that the children's interests vested." First Nat. Bank of Bar Harbor v. Anthony, 557 A.2d 957, 959 (Me. 1989). Moreover, in the case of trust bank accounts, neither additional deposits nor withdrawals of earned interest by the trustee extinguished the trust. Cazallis v. Ingraham, 110 A. 359, 362 (Me. 1920).

         Before Maine enacted the Uniform Trust Code, the presumption in Maine was that a trust was irrevocable unless it stated otherwise. See Rose, 180 A. at 318 ("Where the word ‘trustee' appears on a bank book, indicating that it is a trust fund, there is raised the presumption that an irrevocable trust was intended and is sufficient proof of it in the absence of other controlling proof."). In this case, the Family Trust document states clearly that the trust is revocable, but with two important caveats: first, only the Original Trustee can revoke the trust and, second, if he does so, the portion of the trust property to which the revocation is applicable goes to the beneficiaries outright.[21] Under no condition does the property revert to Kimball, the Settlor. Thus, this Family Trust is unlike the typical revocable trust (and trusts created under Maine's later adoption of the Uniform Trust Code) where a settlor retains the unrestricted right to revoke for his own benefit and, as a result, creditors can execute against the trust assets. 18-B M.R.S.A. §§ 602(1), 505(1)(A).[22] There is no suggestion on the summary judgment record that Kimball failed to establish a valid trust under Maine law or that his resignation and the appointment of a successor trustee were invalid. As a result, under this trust instrument, after Kimball's resignation in 1993, the Family Trust could not be revoked, even for the benefit of the beneficiaries.[23] "If a[n irrevocable] trust be created, no later act of the donor, whether impulse by good or by bad, can destroy it." Cazallis, 110 A. at 361.

         I turn next to Maine law on nominees. Atkins was not a trust case, but a case where a divorced spouse was seeking her spousal share of a piece of real estate that had been paid for by her husband and titled in the name of her son. 376 A.2d at 858. Atkins did not use the term "nominee, " but dealt with whether the husband was the equitable owner, such that the wife was entitled to a spousal share of the property. Id. at 859. In reversing the trial court's summary judgment ruling against her, the Maine Law Court pointed to the facts that the husband had furnished the down payment, taken depreciation for the property on his own income tax return, and paid the taxes and insurance on the property through a company that he owned: "Whether these facts are sufficient to warrant a finding that [the husband] was, in fact, the beneficial owner was a question for the jury." Id.[24]

         Does the summary judgment record viewed in the light most favorable to the Family Trust, the nonmoving party, demonstrate that as a matter of law Kimball was the "beneficial owner" of the ski condo under Atkins? I conclude that it does not. First, it is "standard common-law doctrine" that a trustee holds a "nonbeneficial" ownership and that it is the beneficiaries of the trust who hold beneficial interests or equitable title while the trustee ordinarily "holds ‘bare' legal title." Restatement (Third) of Trusts § 42 and cmts. a, c. (Am. Law Inst.)[25] Such labels of course are not determinative in assessing Kimball's rights in the Family Trust property. But second, under the terms of this Family Trust, Kimball was not a beneficiary and, although he had power to revoke the trust before he resigned in 1993, such a revocation could not benefit him. It could only transfer title immediately to the beneficiaries. It is true that Kimball furnished the money to buy the ski condominium (like Atkins), and paid the real estate taxes and insurance (like Atkins), but there is no evidence that he treated the property as his own on his federal income tax return (unlike Atkins).[26]Moreover, by the time the earliest assessment in question was made (December 2006), the trust was irrevocable, Kimball was no longer trustee, he had not visited the Family Trust property in five years, and the beneficiaries were adults.[27] At best, then, whether Kimball "was, in fact, the beneficial owner [is] a question for the jury." Atkins, 376 A.2d at 859.

         MERS also was not a trust case, but a mortgage case where the mortgage documents explicitly denominated Mortgage Electronic Registration Systems "solely as the ‘nominee' to the lender." 2010 ME 79 at ¶ 9. The Maine Law Court stated: "A nominee is a ‘person designated to act in place of another, usu[ally] in a very limited way, ' or a ‘party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.'" Id. at ¶ 10. Kimball, no longer the trustee, does not fit the definition of a "person designated to act in place of another." Kimball's sister as trustee does hold "bare legal title for the benefit of others, " but here the "others" are not Kimball the trust settlor and taxpayer but are instead the trust beneficiaries, Kimball's adult children. Like Atkins, the MERS definition of nominee does not entitle the United States to summary judgment that Kimball currently has a property interest under Maine law in the Trust assets.

         So what is the basis for ignoring the Family Trust here as an entity separate from Kimball? The United States presents the following grounds for finding nominee status:

1. Kimball, as donor/settlor/trustee of the Kimball Trust, provided the funds for the purchase of the Property, as in Dalton and Berkshire Bank. See Kimball III (30(b)(6) Deponent for the Trust), Depo. p. 20:14-22; p. 48:3-6 (hereinafter, "Kimball III Depo."), attached hereto as Exhibit 1.
2. Even though Kimball had served as the trustee of the Kimball Trust, until being replaced by his sister, neither Kimball's sister nor the Kimball Trust paid Kimball any consideration for the Property, as in Dalton. Kimball III Depo. p. 48:7-24.
3. Kimball makes all payments for the Property's upkeep, including condominium fees, utilities, and real estate taxes, as in Dalton. Kimball III Depo. p. 19:7-20.
4. Kimball uses or has used the Property as a family vacation home, indicating that he treated it as his own, as in Dalton and Berkshire Bank. ...

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