Can a taxpayer put property beyond the IRS’s reach by purchasing the property in the name of a corporation or a third party? The answer is typically “no.” The recent Arlin Geophysical Co. v. United States, No. 2:08-cv-00414-DN-EJF (C.D. Utah 2018) provides an example.
Facts & Procedural History
The court case involves an individual who earned money, put the money into various corporations that he established, and then he used the money in the corporations for, among other things, his personal expenses. The individual transferred money between the corporations without following corporate formalities for doing so and the corporations did not have the requisite corporate paperwork, such as by-laws. The evidence suggested that his corporations did not file income tax returns, have employees or pay salaries, etc.
One of these corporations is named Fujilyte. Fujilyte purchased the real estate that is the subject of this court case. It made the purchase with funds from its individual owner and by taking out a mortgage from a third party. The individual owner pledged an interest in another entity that he owned to secure the mortgage. In the mortgage company foreclosure suit, the individual owner testified that he owned the real estate personally.
The IRS assessed income taxes against the individual owner and filed lien notices. Eight years later the IRS filed liens against Fujilyte as an alter ego, nominee and/or transferee of the individual owner. The IRS sued to enforce the liens and then it foreclosed on the properties held by Fujilyte. The courts authorized the sale of the properties and the proceeds were deposited with the court. This court case concerned whether the IRS had the right to foreclose and sell the properties held by Fujilyte.
The IRS’s Ability to Take Property
Generally, the IRS can only get at a property owned by the individual taxpayer. Our Federal tax laws say that one looks to state law to determine what rights to property a taxpayer has and, if it is determined that the taxpayer has some property interest, then Federal tax law dictates whether the IRS can collect upon the property. In this case, the IRS argued that the individual held a beneficial interest in the property held by Fujilyte under the resulting trust.
Resulting Trust Laws
A resulting trust is not a trust created by a legal document, as is common with most other trusts. Rather, a resulting trust is a theory that allows the courts to conclude that a trust was established. Resulting trusts can be found when one party takes title to property, but another party pays for the property. The law presumes that the party who holds title to the property does so in trust for the person who paid for the property.
Not all states have laws that allow for resulting trusts. This court case concerned Utah, which has such a law (our state, Texas, also provides for resulting trusts). Since Utah has a resulting trust law, the court found that Fujilyte held the property for the individual owner of Fujilyte. Since the individual owner of Fujilyte owed the IRS unpaid taxes, the lien on the individual attached to the properties owned by Fujilyte. The court concluded that the IRS was able to foreclose on the property held by Fujilyte and the IRS was entitled to the proceeds from the sale of these properties.