Fourth Inv. LP v. United States

• Decision Date: 13 June 2013
• Docket Number: 11–57009.,Nos. 11–56997,s. 11–56997
• Citation: 720 F.3d 1058
• Parties: FOURTH INVESTMENT LP, a California limited partnership, Plaintiff–Appellant, v. UNITED STATES of America, Defendant–Appellee. Leeds, LP, a California limited partnership, Plaintiff–Appellant, v. United States of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

720 F.3d 1058

FOURTH INVESTMENT LP, a California limited partnership, Plaintiff–Appellant,

v.UNITED STATES of America, Defendant–Appellee.

Leeds, LP, a California limited partnership, Plaintiff–Appellant,

v.United States of America, Defendant–Appellee.

Nos. 11–56997, 11–57009.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 12, 2013.

Filed June 13, 2013.

Wendy C. Lascher (argued), Ferguson Case Orr Paterson LLP, Ventura, CA, for Plaintiffs–Appellants.

Thomas J. Clark (argued), Supervising Attorney, and Bethany B. Hauser, United States Department of Justice, Tax Division, Washington, D.C., for Defendant–Appellee.

Appeal from the United States District Court for the Southern District of California, Barry T. Moskowitz, District Judge, Presiding. D.C. Nos. 3:08–cv–00110–BTM–BLM, 3:08–cv–00100–BTM–BLM.

Before: MILAN D. SMITH, JR. and MARY H. MURGUIA, Circuit Judges, and JACK ZOUHARY, District Judge.^*

OPINION

M. SMITH, Circuit Judge:

Plaintiffs–Appellants Leeds, LP (Leeds) and Fourth Investment, LP (Fourth Investment) (sometimes collectively, Appellants) brought quiet title actions challenging tax liens filed by the Internal Revenue Service (IRS) against certain commercial and residential properties located in San Diego, California, to which Appellants hold legal title. The tax liens arose from assessments against taxpayers Susanne and Don Ballantyne, based on the IRS's claim that Appellants held the relevant properties as nominees of the Ballantynes on the assessment dates. After a thirteen-day bench trial, the district court denied Appellants' quiet title claims and upheld the validity of the tax liens.

Appellants appeal, contending that California does not recognize nominee ownership. We reject this argument because California cases have unambiguously recognized the existence of nominee ownership. Although California courts have not precisely specified the factors relevant to performing a nominee analysis, we predict that the California Supreme Court would evaluate nominee status in light of the criteria set forth in relevant federal cases. Applying those criteria, the district court properly concluded that Appellants held legal title to the San Diego properties as nominees of the Ballantynes. We also reject Appellants' assertion that the district court's judgment should be vacated for failure to join the numerous shell entities utilized by the Ballantynes as part of their complex tax evasion scheme. We affirm the decision of the district court.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Ballantynes' federal tax liabilities

Susanne (Susanne) and Don (Don) Ballantyne owe the IRS substantial federal income taxes for tax years 1985, 1986, 1990, and 1997. In July 1994, the Ballantynes sought relief before the United States Tax Court, challenging income tax deficiencies claimed by the IRS for tax years 1985 and 1986, in the amounts of $388,937 and $931,970, respectively (totaling $1,320,907, collectively). The tax court conducted a trial in May 1995, and in October 1996, confirmed the deficiencies claimed by the IRS. The decision of the tax court was later affirmed on appeal by our court, see Ballantyne v. Comm'r, 211 F.3d 1272 (9th Cir.1999), and in June 1997, the IRS imposed an assessment of $1,320,907.

The Ballantynes' tax issues were not limited to those tried in the tax court. In January 1995, the IRS imposed an assessment of $25,164 for alleged income tax deficiencies for tax year 1990. In October 1998, the IRS imposed an assessment of $11,515 based on alleged deficiencies for tax year 1987. As a result of the referenced assessments, plus applicable interest and penalties, the IRS recorded liens in the amount of $5,212,494.62 on two properties in San Diego, California: a home located at 3207 McCall Street (the McCall property), and a commercial building located at 1280 Fourth Avenue (the Fourth property). On the dates of the second and third assessments, fee title to the McCall property was vested in Leeds, and fee title to the Fourth property was vested in Fourth Investment. The referenced tax lien identified Leeds and Fourth Investment as nominees of the Ballantynes.

2. Transfer of the McCall and Fourth properties to Leeds and Fourth Investment

With the specter of their tax trial looming in 1995, Susanne caused the Ballantyne Trust to transfer legal title to the McCall and Fourth properties to Leeds and Fourth Investment, and later to her and Don's children's trusts, through a series of complex transactions involving shell entities created and controlled by the Ballantynes.

A. The McCall Property

The McCall property is a single family residence, built by Susanne's parents. At some point in time, fee title to the McCall property was vested in a trust created by Susanne's mother, styled the Susan T. Cramer Trust (the Cramer Trust). In 1979, after the death of Susanne's mother, and after Susanne's brother, Ed, had received the distributions from the Cramer Trust to which he was entitled, Susanne became the Cramer Trust's sole beneficiary and trustee. In 1987, Susanne created the Susanne C. Ballantyne Trust (the Ballantyne Trust), a revocable inter vivos trust, into which she placed substantially all of her assets, including the corpus of the Cramer Trust (which included the McCall property).

In June 1995, shortly after the Ballantynes' tax court trial, the Cramer Trust conveyed the McCall property to Leeds, a newly created limited partnership, in exchange for a 99% limited partnership interest in Leeds. (The title transfer documents in this transaction were not recorded until July 1997, more than two years after the transfer.) The Cramer Trust immediately transferred its 99% interest in Leeds to the Ballantyne Trust, with Susanne executing all relevant documents on behalf of both trusts. The remaining 1% interest in Leeds was owned by a newly created entity, styled the Rhodes Investment Corporation, which was wholly owned by the Ballantyne Trust. After these transactions concluded, Susanne became the indirect owner of both the buyer and the seller of the McCall property. Specifically, after the transfers, the Ballantyne Trust owned a 99% limited partnership interest in Leeds; and Rhodes, which was owned by the Ballantyne Trust, owned a 1% general partnership interest in Leeds. No evidence was introduced at trial indicating that Leeds was created for any purpose other than to hold nominal title to the McCall property.

After the transfer to Leeds, the Ballantynes continued to maintain possession of the McCall property, purportedly as tenants of Leeds. A lease agreement was signed by Susanne on behalf of Leeds, and by Don on behalf of the Ballantynes. The Ballantynes did not begin paying rent to Leeds until nearly a year after the lease was signed. When rent was paid, it was almost never paid on time, and was rarely paid in full. In fact, it appears that the “rent” Leeds received was not rent at all, but rather payments made by the Ballantynes to cover various property expenses as they arose. Despite the Ballantynes' failure to pay rent on a timely basis or in the correct amount, Leeds never demanded full payment or charged the $100 late fee required in the lease agreement.

B. The Fourth property

The Fourth property is a commercial property in which Susanne originally owned a 12.5% undivided interest, and from which she derived rental income under a triple net lease. In 1988, Susanne quitclaimed her undivided 12.5% interest in the Fourth property to the Ballantyne Trust. In June 1995, shortly after the Ballantynes' tax court trial, the Ballantyne Trust conveyed the Fourth property to Fourth Investment, a newly created limited partnership, in exchange for a 99% limited partnership interest in Fourth Investment. (The grant deed was not recorded until October 1995, more than three months later.) The remaining 1% interest in Fourth Investment was owned by its general partner, Rhodes, which in turn was owned by the Ballantyne Trust.

Susanne indirectly owned and controlled both the buyer and the seller in the Fourth property transfer. Specifically, Fourth Investment's 99% limited partner was the Ballantyne Trust, and its 1% general partner was Rhodes (owned by the Ballantyne Trust). No evidence was introduced at trial showing that Fourth Investment ever served any function other than nominally holding title to the Fourth property.

Susanne retained control over the Fourth property's income stream after the transfer of her interest to Fourth Investment because, pursuant to Susanne's instructions, the rental income derived from the Fourth property continued to be paid to Susanne's brother, Ed, to whom Susanne owed a debt. Tenant rent payments were not made to Fourth Investment until Susanne notified her tenant to do so months after the Ballantyne Trust conveyed the Fourth property to Fourth Investment. The record does not reflect whether the tenant of the Fourth property was ever advised that the property's ownership (and, therefore, the tenant's landlord) had changed.

3. Encumbrances on the McCall and Fourth properties

Four days before the commencement of their tax court trial, the Ballantynes entered into another dizzying series of transactions which made their assets (including the McCall and Fourth properties) appear to be encumbered and nearly worthless. Specifically, in May 1995, Susanne caused the Ballantyne Trust to file a UCC–1 Financing Statement purporting to show that the Ballantyne Trust and its non real estate assets were encumbered by a personal property lien as security for a $1.1 million debt that had allegedly been incurred in November 1991, more than three years earlier. The $1.1 million debt was owed to an entity named Eastman Investment, which in turn had procured loans totaling $1.1 million from two banks. Eastman Investment was yet another family-created entity, owned 20% by the Ballantyne Trust and 80% by another company, Cramer Investments. Cramer Investments, in...