Fourth Investment LP v. United States

When determining the enforceability of a nominee lien as a matter of federal law, questions of nominee status first require an evaluation of state law as applied to the specific facts of the case.

Fourth Investment LP and Leeds LP brought quiet title claims to remove federal tax liens assessed by the Internal Revenue Service (“IRS”) on two properties originally owned by Susanne and Don Ballantyne. The Ballantynes owed significant taxes on the properties and created a complex scheme of transactions to shift ownership of the properties to shell corporations. The district court upheld the validity of the tax liens and denied the claims to remove the liens. The district court found no evidence that the multiple transfers happened for any reason except to avoid tax liability and that the Ballantynes conducted a scheme to transfer the properties to their children's trust without consideration. The district court held Fourth Investment LP and Leeds LP were nominees of the Ballantynes, holding bare legal title to the property. Thus, the tax liens applied to the properties. The Ninth Circuit found that the IRS has the power to impose tax liens on taxpayer property under 26 U.S.C. § 6321, including property held by a taxpayer's nominee. The panel held that nominee status questions require a fact-specific state law inquiry before determining whether the lien may be enforced under federal law. The panel also found that California recognizes the nominee lien theory of ownership and predicted that the California Supreme Court would adopt the factors recognized by federal courts if presented with this question. The panel determined that the district court properly evaluated the nominee ownership status of Fourth Investment LP and Leeds LP under a federal six factor test. Finally, the panel held that the thirteen shell entities that had not been joined to the action were not required parties and declined to dismiss the action for failure to join those parties. AFFIRMED.