Ski Condo in Revocable Trust Not Subject to IRS Lien

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Irs Tax Assessment Overturned Because Notice Not Property Mailed
Irs Tax Assessment Overturned Because Notice Not Property Mailed

Can someone set up a revocable trust to put assets beyond the reach of the IRS? The general answer is no, as federal tax liens typically attach to assets within such trusts.

However, that is not always the case. The case of United States v. Kimball, No. 2:14-cv-00521-DBH (D. Me. Sep. 28, 2016), demonstrates, there are exceptions where the IRS’s reach may not extend as expected.

Facts & Procedural History

Mr. Kimball is an attorney. He owed back taxes for tax years 2001-2004 and 2007-2010. He formed the Kimball Family Realty Trust in 1989. The purpose of establishing the trust was to buy a ski condominium in Maine for his children.

Mr. Kimball served as the trustee and the trust was for the benefit of his five children as beneficiaries. The trust provided that Mr. Kimball had the power to revoke the trust, but any portion of the trust that was revoked would go to his children.

Mr. Kimball resigned as trustee in 1993. The trust did not have a bank account, so Mr. Kimball personally paid the condominium expenses (utilities, taxes, insurance, condo fees).

Mr. Kimball had not visited the ski condominium since 2000-2001.

The IRS issued notices of its federal tax lien, which it sought to enforce against the ski condo.

The question for the court was whether the IRS could enforce the IRS tax lien for the ski condo, even though it was owned by the trust and not Mr. Kimball.

Federal Tax Lien – Property Rights 

The law provides that a federal tax lien attaches to all property and rights to property the taxpayer then holds or subsequently acquires. This is set out in Section 6321.

Generally, this lien can attach to property held in a revocable trust because the trustee has the power to revoke and reclaim the property. However, a tax lien does not attach to a trust solely because the trustee owes back taxes.

In Mr. Kimball’s case, the trust provided that any revoked portion of the trust would go to his children, not back to him. Based on this provision, the court concluded that the trust was not a standard revocable trust with respect to Mr. Kimball.

The IRS’s Nominee Powers

The law also allows the government to collect from assets held in the name of a nominee of the taxpayer.

A nominee is generally defined as a third-party individual who holds legal title to property while the taxpayer enjoys the full use and benefit of that property. Courts often look at several factors to determine if a nominee relationship exists, including:

  1. The taxpayer’s control over the property.
  2. The use and enjoyment of the property by the taxpayer.
  3. The source of funds used to purchase or maintain the property.
  4. The relationship between the taxpayer and the nominee.
  5. The taxpayer’s statements or actions regarding the property.

In Kimball, the court evaluated whether the trust served as a nominee for Mr. Kimball by considering these factors.

The court first noted that by the time of the earliest tax assessment in December 2006, the trust was irrevocable, and Mr. Kimball was no longer the trustee. Additionally, Mr. Kimball had not visited the property in five years, and the beneficiaries were adults by this time.

While Mr. Kimball paid the condo’s expenses from his personal account, the court found this fact insufficient to establish that the trust was merely holding the property as a nominee for Mr. Kimball. The lack of a trust bank account did not sway the court to view the trust as a nominee arrangement.

Balancing the above facts, the court concluded that Mr. Kimball did not have a sufficient ownership interest in the ski condo at the time his federal tax liability arose. Consequently, the IRS’s lien could not attach to the ski condo held by the trust.

The Takeaway

This case shows how the IRS can attempt to enforce tax liens on assets held in trust. The court’s decision highlights that the specific terms of the trust and the taxpayer’s relationship to the trust assets are critical factors. Conditional rights and lack of direct ownership interest can prevent the federal tax lien from attaching to the trust assets, as the court held in this case. Those who have assets they want to protect from an IRS lien should consider the factors set out in cases like this to determine whether a trust may be a viable asset protection option.

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