Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.

Procedure & Administration

Trusts held to be nominees of delinquent taxpayer

The IRS can assert tax liens against properties held by two trusts to satisfy the tax debts of a taxpayer because the trusts were nominees of the taxpayer.

Background

In the early 2000s, taxpayer Shant Hovnanian engaged in certain tax shelter transactions structured and marketed by tax lawyer Lance O. Valdez. The IRS determined that the shelters were illegal and denied Shant the losses he claimed associated with the shelters. The Tax Court upheld the IRS's determination, and its decision was affirmed by both the Second and Third Circuits. By 2018, the IRS claimed that Shant owed federal tax liabilities in excess of $16 million related to his participation in the shelters.

As part of its efforts to collect the taxes Shant owed, the IRS sought to attach federal tax liens and foreclose on two pieces of real property it attributed to him: 520 Navesink River Road, Middletown Township, NJ. (Navesink property), and 1 Dag Hammarskjold Blvd., Freehold, N.J. (Village Mall property).

At this time, legal title to the Navesink property was owned by the Pachava Asset Trust. Shant (as well as his ex-wife and children until 2015) lived at the property after it was built in 2008, and Shant was responsible for paying the expenses of the property. The house was previously owned by Shant's mother, but in 2012 she transferred the property to Pachava for $1. In 2018, Nina Hovnanian, Shant's sister, was the sole trustee of Pachava.

Legal title to the Village Mall property was held by the VSHPHH Trust. The property was a two-story office complex, partially rented out to tenants and partially used rent-free by Shant. Shant's parents previously owned the property but transferred it to Shant in 2015 for $1. Nina was also the sole trustee of VSHPHH in 2018.

In 2018 the IRS filed a notice of tax lien against the properties, which listed both Pachava and VSHPHH as Shant's nominees with respect to the properties. Later that year, the IRS filed an action in district court seeking an order that it had valid federal tax liens against the Navesink property and the Village Mall property and that it could foreclose the liens against the properties.

In district court, the IRS moved for summary judgment, arguing that based on the facts of this case, under the six-factor test from Patras, 544 F. App'x 137 (3d Cir. 2013), both Pachava and VSHPHH were Shant's nominees and that the tax liens assessed against him consequently attached to the Navesink and Village Mall properties.

The district court's decision

The district court held that both Pachava and VSHPHH were nominees of Shant Hovnanian. Thus, the properties were subject to the IRS's tax liens, and the IRS could foreclose on and sell the properties.

In Patras, the Third Circuit held that "[w]hen there is a tax lien on a taxpayer's property, the [IRS] may seek to satisfy it by levying upon property the taxpayer controls" (Patras, 544 F. App'x at 140). A third party is a taxpayer's nominee (and thus the taxpayer controls property owned by the third party) where "the taxpayer has engaged in a legal fiction by placing legal title to property in the hands of [that] third party while actually retaining some or all of the benefits of true ownership" (id. at 141). The court formulated a six-factor test to use in determining whether a nominee relationship existed under both federal and New Jersey law:

1. Whether the nominee paid adequate consideration for the property;

2. Whether the property was placed in the nominee's name in anticipation of a suit or other liabilities while the taxpayer continued to control the property;

3. Whether there was, and the extent of, a relationship between the taxpayer and the nominee;

4. Whether the conveyance of the property was recorded;

5. Whether the property remained in the taxpayer's possession; and

6. Whether the taxpayer...