Dalton v. Comm'r of Internal Revenue
| Decision Date | 23 September 2010 |
| Docket Number | No. 23510–06L.,23510–06L. |
| Citation | 135 T.C. No. 20,135 T.C. 393 |
| Parties | Arthur DALTON, Jr. and Beverly Dalton, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.* |
| Court | U.S. Tax Court |
R seeks to collect certain trust fund recovery penalties from Ps. In R's determination pursuant to sec. 6330, I.R.C., R rejected Ps' offer-in-compromise. Ps transferred property to P husband's father F, who in turn transferred the property to a trust 11 years before trust fund recovery penalties arose. The trust was set up to hold the property for the benefit of F's grandsons; i.e., Ps' children. R determined that Ps retained a beneficial interest in the trust property under a nominee ownership theory and, therefore, rejected Ps' offer-in-compromise. Ps contend that R's determination was an abuse of discretion because Ps did not retain a nominee interest in the trust property after the trust was created and, therefore, need not include the trust property in Ps' assets for purposes of the offer-in-compromise. In our prior opinion, we remanded this case to R's Appeals Office to consider State law as well as a Federal factors analysis regarding whether Ps had a nominee interest in the trust property.
Held, this Court has jurisdiction to decide whether R abused his discretion in rejecting Ps' offer-in-compromise because of Ps' alleged nominee interest in the trust property.
Held, further, Ps do not have a nominee interest in the trust property under State law.
Held, further, Ps do not have a nominee interest in the trust property under a Federal factors analysis.
Held, further, it was an abuse of discretion for R to reject Ps' offer-in-compromise on the basis that the offer-in-compromise did not include in Ps' assets a nominee interest in the trust property.
Ralph A. Dyer, for petitioners.
Michael R. Fiore and Erika B. Cormier, for respondent.
This case is before the Court on petitioners' motion for summary judgment pursuant to Rule 121.1 Respondent filed a response to petitioners' motion for summary judgment and subsequently filed a second motion for summary judgment.2 The instant proceeding arises from a petition filed in response to Notices of Determination Concerning Collection Actions(s) Under Section 6320 and/or 6330 issued separately to each petitioner. The issues to be decided are: (1) Whether we have jurisdiction to decide the instant matter; and (2) if so, whether respondent abused his discretion in sustaining the levy action against petitioners.
The facts set forth below are based upon examination of the pleadings, moving papers, responses, and attachments filed in the instant case. The facts are set forth in our prior opinion in the instant case, Dalton v. Commissioner, T.C. Memo.2008–165 (prior opinion), and are incorporated by reference.
Petitioners Arthur Dalton, Jr. (Mr. Dalton Jr.), and Beverly Dalton (Mrs. Dalton Jr.) are husband and wife who resided in Maine at the time of filing the petition. The instant case centers on three parcels of real property located near Johnson Hill Road in Poland, Maine (hereinafter referred to individually as lot 3, lot 4, and lot 5, respectively, and collectively as the Poland property).
By deed dated November 25, 1977, petitioners purchased lot 4, and the deed to lot 4 was recorded with the appropriate county registry on November 28, 1977. Similarly, by deed dated November 24, 1980, petitioners purchased lot 3, and the deed to lot 3 was recorded on December 1, 1980. In connection with the latter transaction petitioners obtained a bank loan secured by a mortgage on lot 3 which was recorded on December 1, 1980.
By deed dated January 13, 1983, petitioners conveyed lot 3 and lot 4 to Mr. Dalton Jr.'s father Arthur Dalton, Sr. (Mr. Dalton Sr.) for consideration of $1 and subject to the existing mortgage.3 Petitioners and Mr. Dalton Sr. executed a notarized assignment and assumption agreement dated April 1, 1983, reflecting the foregoing transaction and Mr. Dalton Sr.'s assumption of the existing mortgage. The underlying deed was recorded on May 2, 1983, and the Assignment and Assumption Agreement was recorded on August 16, 1985. On February 13, 1983, petitioners filed a declaration of Maine real estate transfer tax for the transfer of lots 3 and 4 to Mr. Dalton Sr.4
Mr. Dalton Sr. acquired lot 5 by deed dated September 24, 1984 and executed a mortgage in favor of the seller. The deed and mortgage were recorded on October 23, 1984.
On April 11, 1985, Mr. Dalton Sr. created the J & J Trust (trust), naming himself as trustee and designating his two grandsons, i.e., petitioners' sons Jonathan Dalton and Jeremy Dalton, as the beneficiaries. According to the terms of the trust, the trustee may pay to Jonathan and Jeremy Dalton a portion of the net income, and/or the principal of the trust, as the trustee deems appropriate, for their health, support, education, maintenance, and comfort. The trust terminates upon the death of the last remaining of Mr. Dalton Sr., Mr. Dalton Jr., and Mrs. Dalton Jr., with the remaining principal being divided equally between Jonathan and Jeremy Dalton, or their then living issue.
By deeds also dated April 11, 1985, Mr. Dalton Sr. transferred title to lots 3, 4, and 5 to himself as trustee of the trust. The deed with respect to lot 3 stated that the premises were conveyed subject to the 1980 mortgage given by petitioners and assumed by Mr. Dalton Sr. pursuant to the 1983 Assignment and Assumption Agreement. No other consideration was recited. The three deeds were recorded on August 16, 1985. On October 2, 1985, Mr. Dalton Sr. filed a declaration of Maine real estate transfer tax with regard to the creation of the trust claiming that the transfer was exempt as a gift to a trust.
Jonathan Dalton works as a Navy Seal, living in Virginia but using the address of the Poland property as his domicile. Jeremy Dalton works as an emergency medical technician in Massachusetts but makes regular use of the Poland property.
On September 18, 1993, Mr. Dalton Sr., as trustee of the trust, and Mrs. Dalton Jr. executed a $50,000 mortgage in favor of Key Bank of Maine, secured by lots 3 and 4. A $50,000 home equity line of credit, i.e., loan, was thereby obtained. Both individuals signed as “mortgagor”, and provisions of the mortgage recited that the mortgagor, inter alia, promised to “lawfully own the Property”. Throughout the administrative and judicial processes pertaining to the instant case, petitioners have maintained and explained that Mrs. Dalton Jr. signed the mortgage as a concession to and at the request of the bank on account of concerns regarding Mr. Dalton Sr.'s advanced age. The funds were employed by Mr. Dalton Sr. as trustee to assist Jonathan Dalton, his grandson and a trust beneficiary, with a boat and jet-ski rental business in St. Martin, French West Indies that was destroyed by a hurricane in the fall of 1993. Since at least 2000, Key Bank of Maine has reported the mortgage interest on the 1993 loan as being paid by Mr. Dalton Jr.5
There is a house (the residence) on the Poland property which became the retirement home of Mr. Dalton Sr. and his wife Beatrice Dalton (Mrs. Dalton Sr.). Petitioners and their sons visited Mr. and Mrs. Dalton Sr. and the Poland property. According to petitioners, the Poland property and related mortgages were maintained and supported before mid–1997 by Mr. Dalton Sr. and by contributions from family members, including petitioners, and the trust maintained a separate bank account for such funds.
During 1996 petitioners' demolition businesses, operated by one or more corporations, suffered reversals and failed to pay withholding taxes while awaiting payment from a developer/ customer. The developer/customer, however, filed for bankruptcy, and petitioners' corporations were unable to continue business or to pay obligations. Petitioners “lost almost everything” in the collapse when a third-party lender made a claim on a guaranty by petitioners. The claim was settled through the sale of petitioners' home in Massachusetts, all net proceeds of which were paid to creditors.
After losing their home in Massachusetts, petitioners began living in the residence, sharing occupancy with Mr. and Mrs. Dalton Sr. The joint living arrangement was an oral agreement requiring petitioners to manage and maintain the Poland property, pay rent to cover overhead expenses such as mortgage debt service and property taxes, and pay directly their costs of occupancy.
On August 11 and September 29, 1997, the Internal Revenue Service (IRS) recorded assessments against petitioners for trust fund recovery penalties pursuant to section 6672 with respect to employment taxes of petitioners' corporations for the June 30 and September 30, 1996, tax periods, respectively. Those assessments totaled $262,163.42.
On September 13, 1999, Mr. Dalton Sr. died. Petitioners continued to live in the residence with Mrs. Dalton Sr. and to care for Mrs. Dalton Sr., who suffered from advanced dementia and Alzheimer's disease, until she entered an assisted living facility during 2004. By a document dated June 8, 2000, Mr. Dalton Jr. appointed Mrs. Dalton Jr.'s brother Robert Pray (Mr. Pray), who resides in Texas, as successor trustee of the trust, and Mr. Pray formally accepted that appointment. Mr. Pray continued the oral living arrangement that petitioners had with the trust for the Poland property. Since his appointment as trustee, Mr. Pray has held meetings with petitioners three to four times a year setting rent and planning maintenance, has ensured the timely filing of tax returns, and has annually visited the property to ensure that the assets are being protected.
On or about December 9, 1999, petitioners submitted to the IRS an offer-in-compromise of $5,000 with respect to the trust fund recovery penalties...
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