• Who Owns That Real Property?
  • July 10, 2009 | Author: Vincent E. Mauer
  • Law Firm: Frost Brown Todd LLC - Office
  • We often care about who owns property. Lienors and judgment creditors search for assets owned by particular individuals. Lenders transfer cash in reliance on the belief that they know who owns particular assets. Real property and other assets that have government issued or recorded title documents are some the easiest assets to locate and lien because the government tells us who owns that property.

    In an extension of what looks like fraudulent transfer law, the Internal Revenue Service (“IRS”) has demonstrated that what title documents tell us is not always true. See Lisa C. May v. A Parcel Of Land, 458 F. Supp. 2d 1324 (D. Ala 2006), affirmed 100 A.F.T.R. 2d (RIA) 6602 (11th Cir. 2007). In May, a taxpayer (“Mr. May”) transferred his interest in certain real property to his wife; that transfer occurred in 1989. At that time, the taxpayer owed back taxes, but that debt was subsequently settled.

    Later, in 1991, as part of a divorce settlement, Mr. May caused the transfer of that same real property from his first wife to his second wife, Lisa C. May. Thus, the land was never titled to the taxpayer, Mr. James May, after 1989. Thereafter, Mr. May paid the bills and Mr. May made the payments on a loan taken out by Lisa May and the taxpayer to improve the property. Mr. May continuously lived in the property.

    Mr. May was frequently indebted to the IRS. A lien was filed against him by the IRS in 2003 for taxes dating to 1999. By law, that lien attached to all of Mr. May’s property. Internal Revenue Code Section 6321. 26 U.S.C. Section 6321. The IRS filed a nominee lien asserting that the property titled to Lisa May was in fact owned by the taxpayer, Mr. May.

    An IRS lien extends to property held by a taxpayer’s nominee or alter ego. State law determines what property a taxpayer owns such that the tax lien may attach to that interest. Citing cases from Kansas, Michigan and Nebraska, the May court in Alabama stated that the IRS lien attaches to property held by a taxpayer’s nominee if the taxpayer treats and views the property as his own.

    Analyzing Alabama law, the May court concluded that an individual can retain an interest in property deeded to a close relative if the “parties’ real intent is for the individual to remain a beneficial owner of such property.” The court determined and discussed similar legal positions made by several other states. Of relevance to us in Ohio, Michigan, Tennessee and Kentucky, the May court noted that the Sixth Circuit has warned that many transfers between spouses look like nominee transfers when in fact they are not. See, Spotts v. United States, 429 F.3d 248 (6th Cir. 2005).

    Affirming the district court’s May opinion, the appellate court held that the IRS may proceed directly against the nominee and the property interests of Mr. May despite the fact that a fee simple deed is held by Lisa May and despite the fact that Mr. May was last in the chain of title about 15 years before the IRS filed its lien in 2003. The IRS is not required to first void the transfer as fraudulent conveyance.

    Despite the fact that title to the property was not vested in the taxpayer for 14 years and despite the fact that Lisa May had been the title owner for 11 years, the IRS’ lien was found to attach to the property.

    The lesson of this case is that there are situations when assets long ago transferred by a debtor may be reached by a creditor. So, consider extending your asset discovery beyond the one, four or six year periods typically provided by fraudulent conveyance and fraudulent transfer statutes. Your diligence may be rewarded.