Nominee lien issue -

In the Dornbrock case, below, was published on January 17, 2009. The case involves a nominee lien issue. The issue is important to tax return preparers for obvious reasons. For example, income is taxable income to the true owner of the property, and that owner could be the substantive owner. I see these issues frequently and, in my opinion, the factors considered justify a substance over form analysis. The government was entitled to foreclose tax liens that attached to a property held by a corporation as the nominee of a delinquent taxpayer. The government established that the individual was the true beneficial and equitable owner of the property. The corporation had no business purpose and was created for the sole purpose of holding title to the property. The individual was the only officer and director of the corporation and controlled the funds, assets and bank accounts of the corporation and related entities for his own benefit. Moreover, the individual exercised clear dominion and control over the property because he was the sole occupant, never paid any rent for its use, controlled the manner in which the property could be used and claimed an ownership interest in the property. Issues this this should be disclosed to the IRS to take advantage of the "reasonable basis" standard.



United States of America, Plaintiff v. William L. Dornbrock a/k/a Robert William Lee, Inland Management Systems, Inc., and Intelec, Inc., f/k/a Integra Engineering, Inc., Defendants.

U.S. District Court, So. Dist. Fla., Fort Lauderdale Div.; 06-61669-CIV-MARRA/GONZALEZ, January 17, 2008.

Related case at 2009-1 USTC ¶50,220.







FINDINGS OF FACT AND CONCLUSIONS OF LAW


GONZALEZ, District Court Judge: This action came before this Court to reduce to judgment the federal income tax liability of Defendant William L. Dornbrock ("Dornbrock") for tax years 1994 and 1995, and to foreclose on real property in collection of that liability. An agreed judgment was entered on August 31, 2007 as to the approximately $1.2 million liability against Defendant Dornbrock. The Court held trial in this matter commencing on November 19, 2007. The main issue at trial was whether Defendant Dornbrock is the true owner of the real property upon which the United States seeks to foreclose. Defendant Dornbrock is the sole occupant of the subject property, a three-bedroom condominium in Ft. Lauderdale, purchased in 1997 for $499,000 and assessed in 2007 as worth approximately $780,000. The condominium has at all times been titled in the name of Inland Management Systems, Inc. ("Inland").

The United States alleges that defendant Inland is a nominee for the true owner, Defendant Dornbrock. The defendants counter that Inland is a nominee for defendant Intelec, Inc., formerly known as Integra Engineering, Inc. ("Intelec"). The United States responds that if Intelec is determined to be the beneficial owner of the condominium, then because Intelec is the alter ego / nominee of Intelec owner Defendant Dornbrock, Defendant Dornbrock remains the only true owner of the condominium. The defendants deny that Defendant Dornbrock owns Intelec.



I. FINDINGS OF FACT

1. On April 28, 2000, Defendant Dornbrock consented to a U.S. Tax Court judgment for income tax liabilities for tax years 1994 and 1995.

2. On June 2, 2000, Notices of Federal Tax Lien were recorded in Broward County, Florida against William L. Defendant Dornbrock, Robert W. Lee, and Inland Management Systems, Inc.

3. Pursuant to an agreed judgment in this case, Defendant Dornbrock is indebted to the United States for unpaid income taxes, penalties, and interest for the tax years 1994 and 1995 in the amount of $1,206,570.43, plus interest and statutory additions as allowed by law from August 31, 2007 until the judgment is paid.



A. Defendant Dornbrock Controlled and Benefitted from Unit 1005.

1. Defendant Inland Management Systems, Inc. was formed for the sole purpose of holding title to a three-bedroom condominium, Unit 1005 in the Point of the Americas II complex. The condominium is located at 2200 S. Ocean Boulevard, Ft. Lauderdale, Florida ("Unit 1005").

2. Inland is record title holder of Unit 1005. Since the October 31, 1997 purchase of Unit 1005, title has not been held by any other entity or person.

3. Point of Americas II Condominiums approved a sale of Unit 1005 to Inland.

4. Inland has no business purpose and has never filed a tax return.

5. Inland was automatically dissolved as a Michigan corporation on July 15, 2002.

6. Inland is not a Florida corporation.

7. Defendant Dornbrock has always been the only officer and director of Inland and the only person to act on behalf of Inland. He has held himself out as an officer of Inland. Defendant Dornbrock was the president, CEO, secretary, treasurer, and CFO of Inland.

8. Defendant Dornbrock is the only person authorized to sign bank checks for Inland and the only person who signs any documents on behalf of Inland.

9. No documentary evidence reflects that Inland is owned by Intelec.

10. Defendant Dornbrock has identified himself as the owner of Unit 1005. [Exhibit 305 page 2 paragraph 2.]

11. Defendant Dornbrock has always been the sole occupant of Unit 1005.

12. Defendant Dornbrock controls the use of Unit 1005. He decides who may stay there and for what purpose the Unit is used.

13. Defendant Dornbrock has never paid rent for the use of Unit 1005.

14. Defendant Dornbrock may have guests at Unit 1005 without approval.

15. There are no restrictions imposed by Intelec or Inland or Maureen Russell on Defendant Dornbrock's use of Unit 1005.

16. Defendant Dornbrock has never declared his use of Unit 1005 as income.

17. No individual other than Defendant Dornbrock has claimed an ownership interest in Unit 1005.

18. Absent an order of foreclosure in this case, Defendant Dornbrock has the power at any time to sell the condominium and use the sale proceeds.

19. There is no mortgage on Unit 1005. It was purchased for $499,000.

20. Unit 1005 was assessed by Broward County in 2007 at $783,860.

21. Unit 1005 was purchased for Defendant Dornbrock's benefit.

22. At the time of the purchase of Unit 1005, the IRS was examining Defendant Dornbrock's tax returns and Defendant Dornbrock had retained counsel to appear on his behalf before the IRS.

23. Within the same year that Unit 1005 was purchased for Defendant Dornbrock, Unit 207 was purchased for the benefit of Timothy and Maureen Russell.

24. Defendant Dornbrock processes and pays all expenses of Unit 1005.

25. Defendant Dornbrock has authorized improvements to Unit 1005 in 2003.


B. Defendant Dornbrock Controls the Funds, Assets, and Bank Accounts of Inland, Integra, Intelec, Support Solutions and Related Entities for his Benefit. He Intentionally Holds No Assets in his Name.


1. Defendant Dornbrock opened and maintains a bank account in Inland's name. Defendant Dornbrock makes deposits and writes checks on the Inland account. The checks on the Inland bank account include payment of Defendant Dornbrock's personal expenses, including credit cards debt, resort fees, and gifts to family. Defendant Dornbrock also writes checks to pay the taxes and expenses affiliated with Unit 1005.

2. Defendant Dornbrock maintains no bank accounts in his name from which he pays his expenses. He uses bank accounts in the name of Inland and Support Solutions, Inc. to pay his personal expenses.

3. Defendant Dornbrock freely transfers funds between financial accounts he controls in the names of Integra, Inland, Support Solutions, Internal Technical Services, and Continental Manage.

4. Defendant Dornbrock holds no assets in his name, including real estate, cars, boats or financial accounts. His boat in Michigan is titled in the name of Continental Management, Inc., a corporation that does no business. His son, Dennis Dornbrock, is the primary user of the boat.

5. Defendant William Lee Dornbrock has used the alias Robert William Lee, including owning property, signing documents, and maintaining a checking account under the alias to aid in the concealment of assets.

6. Defendant Dornbrock has opened financial accounts for his sole personal benefit at ING and Fidelity and under the Inland American Real Estate Trust but placed the accounts in the name of Support Solutions, Inc., a defunct corporation.

7. Support Solutions, Inc. operated from 1998 to 2002 as a temporary staffing company. It was not owned by any other entity. It is a defunct company. The last tax return it filed was for tax year 2002.

8. Defendant Dornbrock represented to Patrick Kirby that he owned Integra Engineering, Inc. and sold assets of Integra to Kirby in an Asset Purchase Agreement signed by Defendant Dornbrock on behalf of Integra on December 31, 2004.

9. As a result of the Asset Purchase Agreement, checks and wire transfers of more than $400,000 were made to the account number 3660564271 of Support Solutions, Inc. Defendant Dornbrock misrepresented to Kirby that Support Solutions owed Integra. Defendant Dornbrock is the only signatory to the Support Solutions bank account into which the sales proceeds were deposited.

10. Defendant Dornbrock transferred more than $300,000 from the Support Solutions bank account to financial accounts for his personal benefit and over which he has sole control. Support Solutions has paid no taxes with regard to income from these accounts.

11. Defendant Dornbrock was an authorized signatory on the Integra Engineering, Inc. bank accounts at Comerica Bank from at least from February 28, 2002 and wrote checks on the Comerica accounts, including transferring money to the Support Solutions, Inc. account he controlled, after Support Solutions no longer did business.

12. Defendant Dornbrock transferred funds from the Comerica Bank accounts of Integra for his own benefit.

13. Defendant Dornbrock and Timothy Russell controlled Integra Engineering, Inc. until Timothy Russell's death on December 7, 2001.

14. Defendant Dornbrock and Timothy Russell, while he was living, held themselves out as partners in Integra Engineering, Inc.

15. Any remaining ownership interest or claims Maureen Russell may have had in Integra Engineering Inc. after her husband Timothy Russell died were transferred to Defendant Dornbrock in or about February 2005.

16. On January 31, 2005, Defendant Dornbrock had the name of Integra Engineering, Inc. changed to Intelec, Inc., but Intelec, Inc. does no business, has no bank accounts, and has never filed a tax return.

17. Integra Engineering, Inc. last filed a Form 1120 federal income tax return for tax year 2004. It reported $38,239 in net taxable income for 2004.

18. Integra Engineering, Inc. Form 1120 federal income tax returns were signed by Defendant Dornbrock from 1997 through 2002.

19. Integra Engineering, Inc. did not identify Unit 1005 as a corporate asset to the IRS.

20. Maureen Russell denies an ownership interest in Unit 1005.

21. Maureen Russell owns Unit 201.



II. CONCLUSIONS OF LAW

a. A tax lien arises by operation of law upon the assessment of an income tax deficiency. 26 U.S.C. §§6321, 6322.

b. A tax lien attaches to any interest a taxpayer holds or will hold in property, including property held by a nominee or alter ego. G.M. Leasing v. United States [ 77-1 USTC ¶9140], 429 U.S. 338, 350-51 (1977); Shades Ridge Holding Co., 888 F.2d 725, 729 (11 th Cir. 1989). A tax lien applies to any interest in property a taxpayer acquires after the lien. United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447 at 447 (1993); see also Glass City v. United States [ 45-2 USTC ¶9449], 326 U.S. 265, 267 (1945) (tax lien applies to all property of taxpayer at any time during the life of the lien). The language of Section 6321 "is broad and reveals on its face that Congress meant to reach every interest in property that the taxpayer might have." United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985) ("Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.")

c. A Notice of Federal Tax Lien operates as public notice to those who might seek to buy property titled to either the taxpayer or his or her known nominees that the property is encumbered and any sale would be subject to the government's claim. 26 U.S.C. §6323; Fla. Stat. §695.01(1) (recording to perfect a lien).

d. The nominee theory may be established without a showing of fraud. See, e.g., United States v. Bollinger [ 88-1 USTC ¶9233], 485 U.S. 340 (1988) (corporation held title to property as a nominee for partnerships so the partnerships could avoid Kentucky usury law).

e. A nominee holds bare legal title to property for the benefit of another. Black's Law Dictionary (7th Ed. 1999); United States v. Gilbert, 244 F.3d 888, 902 n.37 (11th Cir. 2001).

f. When a taxpayer's property or rights to property are held in the name of another, or are transferred to another with the taxpayer retaining beneficial ownership, the third party is said to hold the property as a nominee for the taxpayer. William D. Elliott, Federal Tax Collections, Liens, and Levies ¶ 9.10[1] at 9-93 to 9-94.

g. The "nominee theory involves the determination of the true beneficial or equitable ownership of the property" at issue. Oxford Capital Corp. v. United States [ 2000-1 USTC ¶50,447], 211 F.3d 280, 284 (5th Cir. 2000). "Focusing on the relationship between the taxpayer and the property, the [nominee] theory attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner." In re Richards [ 99-1 USTC ¶50,317], 231 B.R. 571, 578 (E.D. Pa. 1999); see also Shades Ridge Holding Co., 888 F.2d at 728 (nominee theory focuses on delinquent taxpayer's relationship to the property); May v. United States [ 2007-2 USTC ¶50,799], Case No. 07-10531, 2007 WL 3287513 (11th Cir., Nov. 8, 2007) (same). Who really benefits from and controls the property is at the heart of a nominee case.

h. While the federal courts generally apply the law of the forum state (in this case, Florida) to resolve nominee, alter-ego and similar questions, Florida, like many states, does not have a bright-line test for determining nominee ownership. Therefore, federal common law applies. See Towe Antique Ford Found. v. IRS [ 92-1 USTC ¶50,115], 791 F.Supp. 1450, 1454 (D. Mont. 1992), aff'd on other grounds [ 93-2 USTC ¶50,430], 999 F.2d 1387 (9th Cir. 1993) (applying the test for nominees used by other courts when no applicable law from the appropriate state can be found); cf. Grippo v. Perazzo, 357 F.3d 1218, 1222 (11th Cir. 2004) (where Florida law does not answer the question at bar, the court will "look to federal law for guidance"); see also May v. United States [ 2007-2 USTC ¶50,799], Case No. 07-10531, 2007 WL 3287513 (11th Cir., Nov. 8, 2007) (affirming trial court finding that delinquent taxpayer owned land titled to a nominee).


FACTORS


i. Factors considered to determine whether property is being held by a nominee of the taxpayer include: (1) whether the taxpayer exercised dominion and control over the property; (2) whether the property of the taxpayer was placed in the name of the nominee in anticipation of collection activity; (3) whether the purported nominee paid any consideration for the property, or whether the consideration paid was inadequate; (4) whether a close relationship exists between the taxpayer and the nominee; and (5) whether the taxpayer pays the expenses (mortgage, property taxes, insurance) directly, or is the source of the funds for payments of the expenses. See Scoville v. United States [ 2001-1 USTC ¶50,442], 250 F.3d 1198, 1202 (8 th Cir. 2001); Oxford Capital Corp. v. United States [ 2000-1 USTC ¶50,447], 211 F.3d 280, 284 (5 th Cir. 2000); Shades Ridge Holding Co., 888 F.2d at 729; United States v. Klimek [ 97-1 USTC ¶50,281], 952 F.Supp. 1100, 1113 (E.D. Pa. 1997).

j. Not all of the foregoing factors are of equal weight, and they "should not be applied rigidly or mechanically, as no one factor is determinative." In re Richards [ 99-1 USTC ¶50,317], 231 B.R. 571, 579 (E.D. Pa. 1999). See also Simpson v. United States [ 89-1 USTC ¶9285], 1989 WL 73212 at *6 (M.D. Fla. 1989).

k. The most critical issue is who has substantial control over the property. See Shades Ridge, 888 F.2d at 728 ("The issue under either state or federal law depends on who has 'active' or 'substantial' control."); see also In re Richards [ 99-1 USTC ¶50,317], 231 B.R. at 579, citing United States v. Kudasik [ 98-2 USTC ¶50,535], 21 F.Supp.2d 501, 508 (W.D. Pa. 1998).

l. A related principal to the nominee doctrine is the alter ego doctrine. There are common elements to both doctrines. While the nominee doctrine focuses on the relationship between the taxpayer and the property, the alter ego doctrine focuses on whether the taxpayer is similar to or controls another individual, trust, business or corporation. See, e.g., Century Hotels v. United States [ 92-1 USTC ¶50,080], 952 F.2d 107, 110 n.5 (5th Cir. 1992) (listing objective factors to be considered); see also Zahara Spiritual Trust v. United States [ 90-2 USTC ¶50,473], 910 F.2d 240, 245 (5th Cir. 1990).


CONCLUSION


The United States has met its burden of proving that Defendant Dornbrock is the true and sole beneficial owner of Unit 1005. It is clear that Defendant Dornbrock exercised dominion and substantial control over the property located at Point of Americas. Also, this Court determines that Defendant Dornbrock holds true beneficial and equitable ownership of the property.

Therefore, foreclosure of Unit 1005 is ordered. The United States shall sell Unit 1005 to satisfy Defendant Dornbrock's tax liabilities as reflected in the judgment of August 31, 2007. The United States will submit a proposed Order of Sale setting forth the details of sale.

Judgment shall be entered for the United States.

DONE AND ORDERED.