Fourth Investment Lp v. United States

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
FOURTH INVESTMENT LP, a No. 11-56997
California limited partnership,
Plaintiff-Appellant, D.C. No.
3:08-cv-00110-
v. BTM-BLM
UNITED STATES OF AMERICA ,
Defendant-Appellee.
LEEDS, LP, a California limited No. 11-57009
partnership,
Plaintiff-Appellant, D.C. No.
3:08-cv-00100-
v. BTM-BLM
UNITED STATES OF AMERICA ,
Defendant-Appellee. OPINION
Appeal from the United States District Court
for the Southern District of California
Barry T. Moskowitz, District Judge, Presiding
Argued and Submitted
April 12, 2013—Pasadena, California
Filed June 13, 2013
2 FOURTH INVESTMENT LP V . UNITED STATES
Before: Milan D. Smith, Jr. and Mary H. Murguia,
Circuit Judges, and Jack Zouhary, District Judge.*
Opinion by Judge Milan D. Smith, Jr.
SUMMARY**
Tax
The panel affirmed the district court’s decision denying
appellants’ quiet title claims to remove federal tax liens
encumbering their real properties and upholding the validity
of tax liens filed by the Internal Revenue Service.
The tax liens arose from assessments against taxpayers
Susanne and Don Ballantyne, based on the IRS’s claim that
appellants held the properties as nominees of taxpayers as the
result of a series of complex transactions involving shell
entities created and controlled by taxpayers. The panel held
that California law unambiguously recognizes the existence
of nominee ownership. Moreover, although state courts have
not precisely specified the factors relevant to the analysis, the
panel predicted that the California Supreme Court would
evaluate nominee status in light of the criteria set forth in
relevant federal cases. The panel explained that courts should
look initially to state law to determine what rights the
*
The Honorable Jack Zouhary, District Judge for the U.S. District Court
for the Northern District of Ohio, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
FOURTH INVESTMENT LP V . UNITED STATES 3
taxpayer has in the property the Government seeks to reach
and, after determining that the taxpayer has a property
interest under state law, the courts should look to federal law
to determine whether the taxpayer’s rights qualify as property
or a property right within the compass of the federal tax lien
legislation. The panel then considered a six-factor test under
federal law to determine nominee ownership and held that, in
this case, the district court properly determined that
appellants were taxpayers’ nominees.
COUNSEL
Wendy C. Lascher (argued), Ferguson Case Orr Paterson
LLP, Ventura, California, 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.
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
4 FOURTH INVESTMENT LP V . UNITED STATES
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
FOURTH INVESTMENT LP V . UNITED STATES 5
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
6 FOURTH INVESTMENT LP V . UNITED STATES
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 intervivos 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
FOURTH INVESTMENT LP V . UNITED STATES 7
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.
8 FOURTH INVESTMENT LP V . UNITED STATES
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 turn, was owned in equal parts by Susanne
and her brother, Ed.
FOURTH INVESTMENT LP V . UNITED STATES 9
In June 1995, shortly after the conclusion of their tax
court trial, Susanne caused the Ballantyne Trust to record
deeds of trust that purported to specifically encumber the
McCall and Fourth properties as further security for the
Eastman Investment debt. Although the McCall and Fourth
properties appeared to have been encumbered in connection
with the Eastman Investment transaction, the Ballantynes’
own valuation of Leeds and Fourth Investment (which then
held title to the McCall and Fourth properties) did not show
that Leeds, Fourth Investment, or the real properties they
owned, were encumbered by the liens of the referenced deeds
of trust.
Subsequently, in July 1995, the Ballantyne Trust granted
Eastman Investment a first security interest in Rhodes (the
general partner of Leeds and Fourth Investment), and TPH
Investments, LP (TPH), another newly formed limited
partnership, which was also owned and controlled by the
Ballantyne Trust. Susanne executed this transaction on behalf
of both Eastman Investment and the Ballantyne Trust, but the
Ballantyne Trust received no consideration for its granting of
these additional security interests.
4. Transfer of the McCall and Fourth properties to the
Children’s Trusts
The Ballantynes next created a plethora of new entities
for the purpose of transferring the McCall and Fourth
properties to their children without realizing any taxable
gain.1 The principal vehicle used to effectuate these transfers
1
T he Byzantine series of entities created by the Ballantynes, and the
extraordinarily complex scheme in which they operated, brings to mind
Sir W alter Scott’s observation: “Oh, what a tangled web we weave, W hen
10 FOURTH INVESTMENT LP V . UNITED STATES
was a limited partnership styled Hemet C, which acquired the
Ballantyne Trust’s 99% limited partnership interest in Leeds
and Fourth Investment in a series of transactions that
occurred between January 1996 and February 1997. Hemet
C was structured such that a group of trusts owned by the
Ballantynes’ children (the Children’s Trusts) owned a 99%
limited partnership interest, and a company styled Snow
Valley Holdings, Inc., whose shares were owned by the
Children’s Trusts, was its 1% general partner. The
Ballantynes and their children served as Snow Valley’s
officers and directors. The Ballantyne Trust exchanged its
limited partnership interest in Leeds (valued by the
Ballantynes at $323,070) for a $248,000 promissory note and
an agreement by Hemet C to assume a $75,000 unsecured
debt that Don owed to a relative. Susanne signed on behalf
of the Ballantyne Trust, and Don signed on behalf of Hemet
C. Don testified that the Ballantyne Trust had previously
assumed his familial debt, but he conceded that the
assumption of debt was undocumented and not supported by
consideration.
The Leeds promissory note was immediately assigned to
TPH. Shortly thereafter, the Ballantyne Trust deducted
$176,638.32 from the $248,000 principal on the Leeds note
(a nearly 80 percent reduction) to credit Hemet C for accrued
interest on various notes held by the Children’s Trusts. The
notes, which were all in default, had purportedly been made
several years earlier by companies owned by the Ballantynes
that had subsequently gone out of business. Don testified that
the defaulted notes had been guaranteed by the Ballantyne
Trust when made, but there is no record of any guarantee, and
first we practice to deceive!” Sir W alter Scott, Marmion, Canto vi, Stanza
17 (1808).
FOURTH INVESTMENT LP V . UNITED STATES 11
at least four of the purported loans were made before the
Ballantyne Trust even purchased the companies.
The Ballantyne Trust exchanged its limited partnership
interest in Fourth Investment (valued by the Ballantynes at
$317,000) for a $251,000 promissory note and an agreement
by Hemet C to assume $66,000 in unsecured promissory
notes owed to various Ballantyne-owned companies and the
Children’s Trusts. Nearly two-thirds of the $66,000 in
assumed notes arose from circular transfers of funds between
the Ballantyne Trust and the Children’s Trusts. Specifically,
the Ballantyne Trust transferred $40,000 to the Children’s
Trusts in December 1993, and borrowed $40,000 from the
Children’s Trusts contemporaneously.
Like the Leeds note, the Fourth Investment note was
immediately assigned to TPH, and was thereafter reduced by
$66,000 due to an alleged accounting error by Susanne. The
note was subsequently reduced by another $21,675.76 to give
Hemet C credit for accrued interest on the assumed debts,
despite the fact that Hemet C had made no interest payments.
The reduction of the promissory note was not supported by
consideration.
Hemet C apparently made some payments on the
unsecured promissory notes, but, at most, only $500 was
distributed on the Leeds note and $11,000 on the Fourth
Investment note, before Hemet C re-acquired its own notes
from TPH in the transaction described below.
5. Foreclosure
In October 1997, the Ballantynes figuratively, but
intentionally, toppled the house of cards they had created by
12 FOURTH INVESTMENT LP V . UNITED STATES
causing a foreclosure on secured debt involving several
entities within their control, for the purpose of transferring
the McCall and Fourth properties to their children without
consideration. To effectuate the foreclosure, the Ballantyne
Trust ceased making payments on the $1.1 million Eastman
Investment debt, and Eastman Investment (which was
effectively controlled by Susanne2) made no effort to collect.
The Ballantyne Trust then gave partnership interests in
Investment Associates, LP, a limited partnership owned by
the Children’s Trusts and controlled by Don, to a newly
created entity, Fulton 162, also owned by the Children’s
Trusts and controlled by Don. In exchange, Fulton 162
agreed to make payments on the Eastman Investment note.
But Fulton 162 made no payments. In a purported attempt to
protect itself from an impending default, Eastman Investment
then sold the Eastman Investment note to New Horizon
Lighting, LC (yet another Ballantyne-created entity owned by
other Ballantyne-created entities and controlled by the
Children’s Trusts). In exchange for the note, Eastman
Investment received an identical note, thereby rendering the
transfer wholly without substance.
New Horizon subsequently foreclosed on its security
interests to satisfy the Eastman Investment note. As a result,
Hemet C (controlled by the Children’s Trusts) acquired the
Ballantyne Trust’s interests in TPH, including the limited
2
Although Susanne’s brother Ed owned a 50% interest in a company
that in turn owned an 80% interest in Eastman Investment, Susanne
appears to have had effective control over Eastman Investment at all
times. Specifically, she executed virtually every document involved in the
Eastman Investment loan, and there is no indication that Ed ever sought
to protect his interest in Eastman Investment despite the complete failure
of Ballantyne-owned entities to make any payments on the Eastman
Investment note.
FOURTH INVESTMENT LP V . UNITED STATES 13
partnership interests in Leeds and Fourth. The Children’s
Trusts also acquired the Ballantyne Trust’s interest in
Rhodes, the general partner of Leeds and Fourth. The
foreclosure had no effect on the Ballantynes as a practical
matter, however, because New Horizon chose not to foreclose
on the McCall and Fourth properties, or to take any of the
Ballantynes’ personal property that it had acquired as a result
of the foreclosure.
6. Present action
In January 2008, Appellants filed these now-consolidated
quiet title actions seeking to remove the federal tax liens
encumbering the McCall and Fourth properties. The district
court concluded that Appellants held bare legal title to the
properties as nominees of the Ballantynes. The district court
looked to federal case law to supply the standards for
evaluating the nominee doctrine under California law. The
court’s determination was based on findings that: (1) the
initial transfer of the properties to Appellants in exchange for
partnership units was undertaken as part of a larger scheme to
transfer the properties to the Children’s Trusts without
adequate consideration; (2) the Ballantynes failed to show
that the multiple transfers between and amongst the shell
entities were effectuated for any purpose other than to evade
substantial tax liabilities; (3) the Ballantynes continued to
maintain possession and control over the McCall property
throughout the relevant time period, and retained the power
to direct the distribution of income from the Fourth property;
and (4) few, if any, of the transactions discussed at trial were
conducted at arms length. Appellants timely appealed the
judgment. We have jurisdiction under 28 U.S.C. § 1291.
14 FOURTH INVESTMENT LP V . UNITED STATES
STANDARD OF REVIEW
We review de novo the district court’s interpretation of
state law. Salve Regina Coll. v. Russell, 499 U.S. 225, 231
(1991). We review the district court’s findings of fact for
clear error, and its conclusions of law de novo. Red Lion
Hotels Franchising, Inc. v. MAK, LLC, 663 F.3d 1080, 1087
(9th Cir. 2011).
DISCUSSION
The IRS has broad powers to impose federal tax liens
under 26 U.S.C. § 6321. Section 6321 provides that a lien
may be imposed “upon all property and rights to property . . .
belonging to” a taxpayer who has failed to pay taxes owed
after assessment and demand. The Supreme Court has
interpreted section 6321 to apply to all property of a taxpayer,
including property that is held by a third party as the
taxpayer’s nominee or alter ego. G.M. Leasing Corp. v.
United States, 429 U.S. 338, 350–51 (1977).
“A nominee is one who holds bare legal title to property
for the benefit of another.”3 Scoville v. United States,
3
As aptly described by one scholar,
Typical nominee . . . scenarios start with people falling
behind on their taxes. Facing the loss of their homes or
businesses to the federal government some taxpayers
take steps to try to separate themselves from their
valuable assets. The taxpayer’s house may be deeded
to a friend, although the taxpayer continues to reside
there. Or perhaps all the taxpayer’s cash disappears,
yet the taxpayer’s personal bills are being paid by a
closely-held and controlled corporation. The factual
FOURTH INVESTMENT LP V . UNITED STATES 15
250 F.3d 1198, 1202 (8th Cir. 2001) (citations omitted).
Although the Supreme Court has clearly indicated that the
IRS may impose nominee tax liens, see G.M. Leasing Corp.,
429 U.S. at 350–51, it has provided only limited guidance
concerning how such nominee determinations are to be made.
However, the Court has explained that application of the
federal tax lien statutes involves questions of both state and
federal law. See Drye v. United States, 528 U.S. 49, 58
(1999); see also United States v. Craft, 535 U.S. 274, 278
(2002). “The federal tax lien statute itself ‘creates no
property rights but merely attaches consequences, federally
defined, to rights created under state law.’” Craft, 535 U.S.
at 278 (quoting United States v. Bess, 357 U.S. 51, 55
(1958)). Consequently, in making nominee determinations in
a tax lien context, we must “look initially to state law to
determine what rights the taxpayer has in the property the
Government seeks to reach[.]” Drye, 528 U.S. at 58; see also
United States v. Nat’l Bank of Commerce, 472 U.S. 713, 722
(1985) (noting that “state law controls in determining the
nature of the legal interest which the taxpayer had in the
property” (citations and internal quotations omitted)). After
determining that the taxpayer has a property interest under
state law, we “then [look] to federal law to determine whether
scenarios are as creative and varied as are taxpayers
themselves. However, the tax collector’s reaction is
usually consistent: upon discovering that a third party
is being used to thwart the IRS’s collection efforts, the
government will file a notice of a federal tax lien
identifying the third-party target as the taxpayer’s
nominee or alter ego and will attempt to satisfy the tax
liability from assets held by the third party.
Teresa Dondlinger Trissel, A Uniform Standard for Alter Ego and
Nominee Tax Litigation, 58 Fed. Law. 38, 38 (2011).
16 FOURTH INVESTMENT LP V . UNITED STATES
the taxpayer’s state-delineated rights qualify as ‘property’ or
‘rights to property’ within the compass of the federal tax lien
legislation.” Drye, 528 U.S. at 58.
The Government contends that nominee doctrine should
be governed by federal common law rather than state law.
We reject this position, just as it has been uniformly rejected
by our sister circuits and by nearly every federal court that
has examined the issue.4,5
The government correctly notes that under Drye, “the
Code and interpretive case law place under federal, not state,
control the ultimate issue whether a taxpayer has a beneficial
4
See Berkshire Bank v. Town of Ludlow, 708 F.3d 249, 252 (1st Cir.
2013) (clarifying that state law, rather than federal law, provides the
“substantive rules” of nominee doctrine) (quoting Dalton v. Comm’r of
Internal Revenue, 682 F.3d 149, 157 (1st Cir. 2012)); see also Holman v.
United States, 505 F.3d 1060, 1067–68 (10th Cir. 2007) (rejecting the
government’s argument that a “uniform federal rule should . . . govern
whether the nominee theory is to apply,” and remanding for application
of Utah law); Spotts v. United States, 429 F.3d 248, 253 (6th Cir. 2005)
(“Because there is no indication that the district court applied [state] law
before determining the scope of the federal tax lien we must reverse.”); cf.
Old W. Annuity & Life Ins. Co. v. Apollo Grp., 605 F.3d 856, 861 (11th
Cir. 2010) (in a case involving alter ego theory, rejecting under Drye the
government’s argument that federal common law, rather than state law,
governs for purposes of determining the taxpayer’s interest in the
property).
5
W e have not previously provided precedential guidance on this issue,
and two of our unpublished dispositions appear to be inconsistent with one
another. Compare Adam v. United States, 400 F. App’x 175, 176 (9th Cir.
2010) (the district court must look to state law in evaluating nominee
status); with United States v. Wheeler, 403 F. App’x 301, 302 (9th Cir.
2010) (affirming the application of federal law to determine nominee
relationship without reference to state’s nominee doctrine).
FOURTH INVESTMENT LP V . UNITED STATES 17
interest in any property subject to levy for unpaid federal
taxes.” Drye, 528 U.S. at 57. Nevertheless, in reaching that
ultimate issue, Drye requires that we “look initially to state
law” to determine the taxpayer’s ownership interest in the
property. Id. at 58; see also Mark A. Segal, IRS Attacks Asset
Transfers Designed to Thwart Tax Collections, 80 Practical
Tax Strategies 78, 79 (2008) (noting that “[s]tate law
generally holds significance to the determination of whether
a party is a nominee” due to “the long-standing recognition of
the role of state law in determining property rights”).
The government further urges that the federal common
law must govern nominee determinations because the ability
to collect taxes is a vital federal interest. The government’s
position is predicated on a fear that state courts will construe
their own nominee doctrines in such a way as to “frustrate
specific objectives of the federal” government. United States
v. Kimbell Foods, Inc., 440 U.S. 715, 728 (1979). To date,
however, this concern has proven to be unfounded, because
state law nominee doctrine is typically “so similar” to its
federal common law counterpart “that the distinction is of
little moment.” Shades Ridge Holding Co., Inc. v. United
States, 888 F.2d 725, 728 (11th Cir. 1989). The
government’s concern that diverging state law nominee
doctrines will undermine a “nationally uniform body of law,”
Kimbell Foods, 440 U.S. at 728, is similarly misplaced
because courts across many jurisdictions “[a]lmost
universally” utilize the same criteria in evaluating nominee
relationships. Dalton, 682 F.3d at 158.
Moreover, should a state ever adopt an interpretation of
the nominee doctrine that frustrates federal objectives, or
disrupts commercial relationships, recourse may be sought
through the legislative or federal regulatory processes. See
18 FOURTH INVESTMENT LP V . UNITED STATES
Robert T. Danforth, The Role of Federalism in Administering
a National System of Taxation, 57 Tax Law. 625, 659 (2004)
(suggesting that “[i]n cases involving the federal tax lien,
federal courts should respect state definitions of property and
rights to property” and that “[i]f this approach leads to abuse
or raises other tax policy concerns, the remedies should come
from Congress, not the courts”); see also Teresa Dondlinger
Trissell, A Uniform Standard for Alter Ego and Nominee Tax
Litigation, 58 Fed. Law. 38, 40 (2011) (advocating that
Congress or the IRS, through federal regulations, establish a
uniform standard for nominee determinations). Because the
state law abuses conjured by the government are merely
theoretical at this point in time, we decline the government’s
invitation to ignore state law in evaluating the validity of a
tax lien in the nominee context.
Accordingly, we adopt the interpretation of Drye
advanced by the reasoning of our sister circuits and hold that
questions of nominee status require a “fact-specific state-law
inquiry” prior to determining whether a nominee lien may
lawfully be enforced as a matter of federal law. Holman,
505 F.3d at 1068; see also Spotts, 429 F.3d at 251 (“[B]efore
determining what, if any, federal tax consequences attach, we
must first address the pertinent questions of state property
law.”).
1. California law and nominee doctrine
Appellants assert that California does not recognize a
nominee lien theory of ownership. They are mistaken.
California cases unambiguously confirm the existence of
nominee ownership. See Lewis v. Hankins, 262 Cal. Rptr.
532, 536 (Ct. App. 1989) (determining that “the parcels were
beneficially owned by defendant because such entities were
FOURTH INVESTMENT LP V . UNITED STATES 19
mere agents or nominees of defendant” (emphasis added));
see also Parkmerced Co. v. City & Cnty. of S.F., 197 Cal.
Rptr. 401, 403 (Ct. App. 1983); Baldassari v. United States,
144 Cal. Rptr. 741, 744 (Ct. App. 1978); Baumann v.
Harrison, 115 P.2d 530, 535 (Dist. Ct. App. 1941). Despite
California’s longstanding recognition of nominee ownership,
however, California courts have not yet specified the factors
relevant to determining whether a person or entity holds title
as a nominee. Given “‘the absence of a controlling California
Supreme Court decision’” dictating the criteria relevant to a
nominee analysis, we “‘must predict how the California
Supreme Court would decide the issue, using intermediate
appellate court decisions, statutes, and decisions from other
jurisdictions as interpretive aids.’” Kairy v. SuperShuttle
Int’l, 660 F.3d 1146, 1150 (9th Cir. 2011) (quoting Gravquick
A/S v. Trible Navigation Int’l Ltd., 323 F.3d 1219, 1222 (9th
Cir. 2003)).
When California courts encounter a dearth of California
appellate decisions on a particular legal question, they “often
look to decisions of California federal courts and out-of-state
cases in resolving” the issue. August Entm’t, Inc. v. Phila.
Indem. Ins. Co., 52 Cal. Rptr. 3d 908, 916 (Ct. App. 2007).
The California Supreme Court specifically gives “‘great
weight’” to federal court decisions “when they reflect a
consensus.” Coral Constr., Inc. v. City & Cnty. of S.F.,
235 P.3d 947, 958 (Cal. 2010) (quoting Barrett v. Rosenthal,
146 P.3d 510, 526 (Cal. 2006)). Applying these principles
here, we predict that the California Supreme Court would
likely find the federal court cases evaluating nominee
ownership to be highly persuasive, for at least two reasons.
First, the federal decisions reflect an “almost universal[]”
consensus regarding the factors relevant to a nominee
analysis. Dalton, 682 F.3d at 158. Second, those factors
20 FOURTH INVESTMENT LP V . UNITED STATES
have been adopted by federal courts in California.6 See, e.g.,
United States v. Bell, 27 F. Supp. 2d 1191, 1195 (E.D. Cal.
1998).
The practice of grafting federal nominee doctrine onto an
amorphous state law scheme is quite common. See Stephanie
Hoffer, et al., To Pay or Delay: The Nominee’s Dilemma
under Collection Due Process, 82 Tul. L. Rev. 781, 809
(2008) (explaining that “[d]ue to the nonstatutory nature of
nominee theory, courts have been faced with a dearth of state
precedent” and are thus frequently forced to canvass the law
of other jurisdictions). Indeed, federal courts evaluating “ill-
defined” nominee doctrines in Alabama, Maine, Montana,
Nebraska, New Jersey, and Virginia, have looked to “federal
law to supply standards for evaluating” that state’s nominee
doctrine. May v. A Parcel of Land, 458 F. Supp. 2d 1324,
1337–38 (S.D. Ala. 2006); see also Dalton, 682 F.3d at 157;
Cody v. United States, 348 F. Supp. 2d 682, 694 (E.D. Va.
2004); Baum Hydraulics Corp. v. United States, 280 F. Supp.
2d 910, 916 (D. Neb. 2003); LiButti v. United States,
968 F. Supp. 71, 75 (N.D.N.Y. 1997); Towe Antique Ford
Found. v. I.R.S., Dep’t of Treasury, U.S., 791 F. Supp. 1450,
1454 (D. Mont. 1992).
We thus confirm that California law recognizes a nominee
theory of property ownership. We also predict that if the
6
Those factors are: “(1) whether inadequate or no consideration was
paid by the nominee; (2) whether the property was placed in the nominee’s
name in anticipation of a lawsuit or other liability while the transferor
remains in control of the property; (3) whether there is a close relationship
between the nominee and the transferor; (4) whether they failed to record
the conveyance; (5) whether the transferor retained possession; and (6)
whether the transferor continues to enjoy the benefits of the transferred
property.” Spotts, 429 F.3d at 253 n.2 (internal quotation marks omitted).
FOURTH INVESTMENT LP V . UNITED STATES 21
California Supreme Court had occasion to evaluate the factors
relevant to determining nominee ownership under California
law, it would adopt the uniform set of factors generally
recognized by federal courts. See, e.g., Spotts, 429 F.3d at253 n.2.
2. Application of the nominee theory of ownership
Appellants assert that even if California recognizes
nominee ownership, the district court erred in concluding that
Appellants hold title to the McCall and Fourth properties as
nominees of the Ballantynes.
The district court properly evaluated Appellants’ nominee
status in light of the six-factor test set forth in Spotts and
other federal cases. Those factors are:
(1) whether inadequate or no consideration
was paid by the nominees;
(2) whether the properties were placed in the
nominees’ names in anticipation of a lawsuit
or other liability while the transferor remains
in control of the property;
(3) whether there is a close relationship
between the nominees and the transferor;
(4) failure to record the conveyances;
(5) whether the transferor retained possession;
and
22 FOURTH INVESTMENT LP V . UNITED STATES
(6) whether the transferor continues to enjoy
the benefits of the transferred property.
Id. “Virtually without exception, courts focus on the totality
of the circumstances,” and no single factor is dispositive.
Dalton, 682 F.3d at 158. Rather, the overarching
consideration is “whether the taxpayer exercised active or
substantial control over the property.” In re Richards,
231 B.R. 571, 579 (E.D. Pa. 1999).
The federal tax liens properly attached to the McCall and
Fourth properties only if one or both of the Ballantynes
individually held title to the properties (or held title to the
properties through a revocable inter-vivos trust in which
Susanne was the sole trustee and beneficiary), or if
Appellants are found to have been nominees of the
Ballantynes as of the dates of the various tax assessments.
See 26 U.S.C. §§ 6321, 6322. The assessments at issue in
this case were made on January 2, 1995, June 30, 1997, and
November 16, 1998. The first assessment occurred before
Susanne caused the Ballantyne Trust to transfer the McCall
and Fourth properties to Appellants. If Appellants are
adjudged to be independent third-party purchasers who paid
“adequate and full consideration” for the properties, then the
federal tax lien related to the initial assessment would not
attach to the properties. See 26 U.S.C. § 6323(a), (h)(6). The
tax lien related to the January 1995 assessment will attach,
however, if Appellants are found to have been nominees of
the Ballantynes at the time of the initial transfer.
We agree with the district court that an evaluation of the
totality of the circumstances in this case strongly indicates
that Appellants were nominees of the Ballantynes as of June
1995, the date of the initial transfer of the properties, and on
FOURTH INVESTMENT LP V . UNITED STATES 23
the dates of the subsequent assessments. Nearly every factor
supports the existence of a nominee relationship.
The first factor, which considers whether inadequate or no
consideration was paid by the nominee, strongly favors the
government. Although the Fourth and McCall properties
were initially transferred for adequate consideration,
consisting of partnership interests in Leeds and Fourth
Investment, those interests were subsequently transferred to
Hemet C in exchange for promissory notes that were
improperly reduced in value, and the assumption of various
unsecured “debts” owed to family members or family-owned
entities (many of which were already in default). The district
court properly found that these reduced notes and unsecured
debts of dubious value rendered consideration inadequate.
Appellants nevertheless assert that any inadequacy of
consideration relating to the Hemet C transfer cannot affect
their ownership interests with regard to the first transfer,
which was supported by adequate consideration. Appellants
fail to recognize, however, that we evaluate the nominee issue
in light of the totality of the circumstances, and that in this
case, among other factors, Don acknowledged that the
transfers were all part of a larger scheme to convey the
properties to the Children’s Trusts.
The second factor, whether the properties were transferred
to the nominees in anticipation of a lawsuit while the
transferor remained in control of the property, similarly
supports the existence of a nominee relationship. The record
demonstrates that the Ballantynes transferred the properties
only weeks after their tax court trial. Moreover, Don
acknowledged that the transfers were effectuated to protect
against “future liabilities.” After the transfers, the
Ballantynes maintained possession of the McCall residence,
24 FOURTH INVESTMENT LP V . UNITED STATES
directed the income stream of the Fourth property, and
controlled both properties through their ownership and
control of Leeds and Fourth Investment. See Berkshire Bank,
708 F.3d at 253. Indeed, the Ballantynes continued to exert
the same type of control over the properties that an owner
would. For example, they funded the property expenses of
the McCall residence instead of paying the monthly rent
required in the lease, and they failed to notify the tenants of
the Fourth property regarding a change in the ownership of
the property. Although Susanne resigned from her positions
at Rhodes (the 1% general partner of Leeds and Fourth
Investment) prior to the third assessment, it is undisputed that
she continued to perform services for the limited partnerships
exactly as she had before her resignation, by, for example,
signing checks for Leeds and Fourth Investment through
1999, and acting as bookkeeper through at least 2004.
Though Appellants contend that Susanne performed these
managerial functions after her resignation as an employee of
Ocean Business Services LLC, we agree with the district
court that Ocean Business (yet another Ballantyne-owned
entity) was simply another vehicle utilized by the Ballantynes
to obscure their continued control of Leeds and Fourth
Investment.
The third factor, which evaluates the closeness in
relationship between the nominees and the transferor, also
persuasively indicates the existence of a nominee
relationship. The government established that Appellants
(along with every other entity involved in the Ballantynes’
complex scheme) were wholly owned and controlled by one
or more of the Ballantynes or their children at the time of the
initial transfer and subsequent assessments.
FOURTH INVESTMENT LP V . UNITED STATES 25
The fourth factor alone partially favors Appellants,
because the conveyances of title between the Ballantynes and
Appellants were ultimately recorded. However, this factor is
not particularly persuasive because none of the conveyances
was recorded promptly. Indeed, the district court suspected
that the Ballantynes had backdated several of the documents
produced at trial because so many of them had not been
recorded until months or even years after their alleged
execution. The fact that the recording of the property
conveyances was similarly delayed (by more than three
months in the case of the Fourth property, and by more than
two years in the case of the McCall property) further
strengthens this inference of backdating. Thus, we agree with
the district court that, on balance, the fourth factor is only
marginally helpful to the Ballantynes.
Finally, the fifth and sixth factors, which consider
whether the transferor continued to retain possession and
enjoy the benefits of the transferred property, strongly favor
the government. After the transfers, the Ballantynes
continued to maintain possession of the McCall property and
enjoy it as their primary residence exactly as they had before
the transfer. They benefitted from a leasehold relationship in
which they could ignore key terms of the lease, such as rent
payment, without consequence. The Ballantynes also
continued to enjoy the benefits of the Fourth property after
the transfer by continuing to control the distribution of rental
income. As the district court found, the Ballantynes
additionally retained the benefit of transferring the Fourth
property to their children in a way they believed would avoid
the realization of any taxable gain.
Because these factors inescapably affirm the existence of
a nominee relationship when viewed in light of the totality of
26 FOURTH INVESTMENT LP V . UNITED STATES
the circumstances, the district court properly determined that
Appellants held the McCall and Fourth properties as
nominees of the Ballantynes.
3. Required Joinder
For the first time on appeal, Appellants assert that the
district court’s judgment should be vacated because the more
than thirteen shell entities involved in the Ballantynes’
complex tax avoidance scheme were not joined in the action.
Appellants’ claim is unavailing.
Federal Rule of Civil Procedure 19(a) provides in relevant
part that a person “must be joined as a party if that person
claims an interest relating to the subject of the action and . . .
disposing of the action in the person’s absence may as a
practical matter impair or impede the person’s ability to
protect the interest.” Fed. R. Civ. P. 19(a)(1). Appellants fail
to identify the specific entities they contend must be joined or
explain how the interests of those entities will be impaired by
the judgment in this case absent joinder. Moreover, none of
these entities ever attempted to join this litigation—and
Appellants never moved to join them—despite the fact that
the entities were both owned and controlled by the
Ballantynes, who were considerably involved in the district
court trial.
In any event, the district court made no findings of fact
regarding the validity of any third party’s interest in the
properties; instead, it adjudicated only whether Leeds and
Fourth Investment held title in the McCall and Fourth
properties as nominees of the Ballantynes when the relevant
tax liens attached to those properties. Appellants cite no
authority requiring third party joinder in a situation such
FOURTH INVESTMENT LP V . UNITED STATES 27
as this one, where the district court has neither quieted title
nor determined whether the federal tax liens are effective
against third parties. “[W]hen the judgment appealed from
does not in a practical sense prejudicially affect the interests
of the absent parties, and those who are parties have failed to
object to non-joinder in the trial court, [we] will not
dismiss an otherwise valid judgment.” Sierra Club v.
Hathaway, 579 F.2d 1162, 1166 (9th Cir. 1978) (citations
omitted). Accordingly, Appellants have not established that
the absent entities were necessary parties under Rule 19(a),
and the district court properly resolved Appellants’
ownership interests in the McCall and Fourth properties in
their absence. See Eldredge v. Carpenters 46 N. Cal. Cntys.
Joint Apprenticeship & Training Comm., 662 F.2d 534, 537
(9th Cir. 1981).
CONCLUSION
For the foregoing reasons, the district court’s judgment is
affirmed.
AFFIRMED.