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June 28, 2016

Ski Condo Held in Revocable Trust Not Subject to Federal Tax Lien

IRS Debts

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A Look at the IRS Automated Underreporter ProgramIn U.S. v. Kimball, No. 2:14-CV-521-DBH, the U.S. District Court in Maine held that a federal tax lien did not attach to a ski condo held in trust even though the trust was a revocable trust and the taxpayer had access to the condo and he paid the expenses for the condo with his personal assets.

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 Kimball had the power to revoke the trust, but any portion of the trust that was revoked would go to his children.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. A federal tax lien generally attaches to property held in a revocable trust as the trustee has the ability to revoke and recoup the property.

This was not a standard revocable trust, however. This trust provided that the condo would go to the children and not Mr. Kimball if he revoked the trust. Based on this the court concluded that this was not really a revocable trust as to Mr. Kemball.

The law also allows the government to collect from assets held in the name of a nominee of the taxpayer. So the court considered the definition of “nominee” in deciding whether the trust held the ski condo as a nominee for Mr. Kimball. The term “nominee” is not defined.

The court noted the general definition in the IRS’s policy manual, which describes a nominee as “ a third-party individual who holds legal title to property of a taxpayer while the taxpayer enjoys full use and benefit of that property.”

Court Decision  

The court concluded that the trust was not a nominee for Mr. Kimbell. The court noted the following facts in support of its position: “by the time the earliest assessment in question was made (December 2006), the trust was irrevocable, Kimball was no longer trustee, he had not visited the Family Trust property in five years, and the beneficiaries were adults.”

The court balanced this against other factors, such as “[t]he lack of a trust bank account, Kimball’s payment of expenses from his personal account, Kimball’s manner of using the ski condo, his contested tax status at the time he created the trust.” The court noted that the facts were not fully developed. In balancing the facts before the court, 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.

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