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Fourth Investment LP v. United States

August 4, 2010

FOURTH INVESTMENT LP, PLAINTIFF,
v.
UNITED STATES OF AMERICA, DEFENDANT.



The opinion of the court was delivered by: Honorable Barry Ted Moskowitz United States District Judge

ORDER RE CROSS-MOTIONS FOR SUMMARY JUDGMENT AND MOTION TO AMEND COMPLAINT

Plaintiff and Defendant have each filed motions for summary judgment on a variety of claims [Docs. 58, 59]. Also pending is Plaintiff's motion to file a Second Amended Complaint [Doc. 74]. For the following reasons, the Court GRANTS the United States's motion for summary judgment and DENIES Plaintiff's motion for summary judgment. The Court DENIES Plaintiff's motion to file a Second Amended Complaint as moot.

I. BACKGROUND

This is a quiet-title suit challenging tax liens placed by the United States on real property, at 1280 Fourth Avenue, San Diego, CA 92101 (the "Fourth Avenue Property"). The Internal Revenue Service ("IRS") placed liens on the property because Don and Susanne Ballantyne, who owe the IRS substantial income taxes, are allegedly its true owners. Plaintiff contends that it is the only owner and that the Ballantynes have no interest in it. This is the core dispute in this case.

1. The IRS Files Tax Liens Against Don and Susanne Ballantyne

Don and Susanne Ballantyne owe income taxes to the IRS. Although they owe income taxes for several tax years, the tax years for which they owe the most money are 1985 and 1986. They filed a petition with the United States Tax Court challenging notices of income tax deficiency sent by the IRS for those two years. The court held a trial in May 1995. And on October 10, 1996, the court filed an opinion stating the Ballantynes owed deficiencies of $388,937.00 for 1985, and $931,970.00 for 1986. On appeal, the Ninth Circuit affirmed the judgment of the Tax Court.

After trial, on June 30, 1997 the IRS made assessments against the Ballantynes for those two years in the amounts of $388,937.00 (1985) and $931,970 (1986). Notice and demand for payment was made on the same day.*fn1 The IRS has made other assessments against the Ballantynes: one on January 2, 1995 for $25,164.00, plus interest (1990 tax year) and the other on November 16, 1998 for $11,515.00, plus interest (1997 tax year).

On November 14, 1997, the IRS recorded with the San Diego County Recorder's office a Notice of Federal Tax Lien in the amount of $5,539,789.51 against the Ballantynes for tax years 1985 ($1,743,607.49) and 1986 ($3,796,182.02). Several years later, on July 17, 2006, the IRS recorded another Notice of Federal Tax Lien in the amount of $5,212,494.62, identifying Plaintiff Fourth Investment as the nominee/alter ego of Susanne

C. Ballantyne. The lien attached the Fourth Avenue Property to the extent of an undivided 12.5% interest. Plaintiff has now filed this quiet-title action to remove the lien.

2. History of the Fourth Avenue Property and Its Owners

Susanne Ballantyne owned an undivided 12.5% interest in the Fourth Avenue Property. In 1987, she formed an intervivos trust, of which she was the sole settlor, trustee and beneficiary, called the Susanne C. Ballantyne Trust. She then quitclaimed her 12.5% interest into the trust in May 1988. Then, on June 21, 1995, the Susanne C. Ballantyne Trust transferred its 12.5% interest to Fourth Investment LP (the Plaintiff here) in exchange for a 99% limited partnership interest in Fourth Investment.

Fourth Investment was created in May 1995 by its 1% general partner, B&B Business Services, Inc. Soon thereafter, in June 1995 B&B withdrew as the general partner, and was replaced by Rhodes Investment Corporation. Rhodes is still the 1% general partner of Fourth Investment. Rhodes itself was owned by the Susanne C. Ballantyne Trust; the trust was Rhodes's sole shareholder. And Susanne Ballantyne was Rhodes's president, secretary-treasurer, and director. Clark L. Ballantyne, her son, later took over her roles in Rhodes on November 26, 1997, a month after the Susanne C. Ballantyne Trust sold its interest in Rhodes to the Children's Trusts (defined infra).

To summarize the Fourth Avenue Property's relevant history up until this point, Susanne Ballantyne owned a 12.5% interest in it. Then she quitclaimed her interest to her trust. The trust then sold the property to Fourth Investment in exchange for a 99% interest in Fourth Investment, whose general partner was Rhodes. And Rhodes was owned by the Susanne C. Ballantyne Trust, and operated by Susanne Ballantyne herself. So, in effect, Susanne Ballantyne indirectly owned entities on both sides of the transaction: she owned the Susanne C. Ballantyne Trust, which sold the 12.5% interest, and also indirectly owned Fourth Investment LP, which bought the interest.

This complicated history continues. In January 1996, a limited partnership called Hemet C bought a 1% limited partnership interest in Fourth Investment. In April 1997, the Susanne C. Ballantine Trust transferred the remaining 98% limited partnership interest in Fourth Investment to Hemet C. So, as of April 1997, Hemet C owned about 99% of Fourth Investment as the limited partner, and Rhodes about 1% as general partner.

But who owns Hemet C? Hemet C is a limited partnership. Its 99% limited partners are trusts named after Don and Susanne Ballantyne's children, the Clark Lindsay Ballantyne Trust and the Laura Ballantyne Trust (collectively "Children's Trusts"). They each hold a 49.5% interest in Hemet C. A company called Snow Valley Holdings, Inc. holds Hemet C's remaining 1% as the general partner.

Snow Valley, Hemet C's general partner, is a corporation whose shares are owned by the Children's Trusts. So, the Children's Trusts are the 99% limited partners in Hemet C, and also own its 1% general partner. At the time Snow Valley became the general partner of Hemet C in December 1995, Don and Susanne Ballantyne were among its officers and directors. Don Ballantyne was a vice president and director, and Susanne Ballantyne was the secretary-treasurer and a director. They resigned their positions in November 1997.

So, in summary, when Fourth Investment purchased the 12.5% interest in the Fourth Avenue Property from the Susanne C. Ballantyne Trust, Fourth Investment's 1% general partner was Rhodes (owned by the Susanne C. Ballantyne Trust) and its 99% limited partner was the Susanne C. Ballantyne Trust. Although Rhodes retained its 1% general partnership interest, Hemet C purchased the 99% limited partnership from the Susanne C. Ballantyne Trust. And Hemet C itself is owned by the Children's Trusts (limited partners) and Snow Valley (general partner), which at the time counted Don and Susanne Ballantyne among its officers and directors.

II. LEGAL STANDARD

Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure if the moving party demonstrates the absence of a genuine issue of material fact and entitlement to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material when, under the governing substantive law, it could affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir. 1997). A dispute is genuine if a reasonable jury could return a verdict for the nonmoving party. Anderson, 477 U.S. at 248.

A party seeking summary judgment always bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323. The moving party can satisfy this burden in two ways: (1) by presenting evidence that negates an essential element of the nonmoving party's case; or (2) by demonstrating that the nonmoving party failed to establish an essential element of the nonmoving party's case on which the nonmoving party bears the burden of proving at trial. Id. at 322-23. "Disputes over irrelevant or unnecessary facts will not preclude a grant of summary judgment." T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987).

Once the moving party establishes the absence of genuine issues of material fact, the burden shifts to the nonmoving party to set forth facts showing that a genuine issue of disputed fact remains. Celotex, 477 U.S. at 314. The nonmoving party cannot oppose a properly supported summary judgment motion by "rest[ing] on mere allegations or denials of his pleadings." Anderson, 477 U.S. at 256. When ruling on a summary judgment motion, the court must view all inferences drawn from the underlying facts in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

III. DISCUSSION

1. The Basis of the United States's Claimed Interest in the Property

In this quiet title action, the Court must resolve the parties' competing claims against the Fourth Avenue Property. Plaintiff Fourth Investment believes that the lien imposed by the IRS is improper because the IRS seeks assets of the Ballantynes, and they have no interest in Fourth Investment or the Fourth Avenue Property. The United States claims that Fourth Investment is merely the nominee of the Ballantynes, and that they are the true owners of the 12.5% interest in the property.

"A nominee is one who holds bare legal title to property for the benefit of another." Scoville v. United States, 250 F.3d 1198, 1202 (8th Cir. 2001) (citing Black's Law Dictionary (7th ed. 1999)). "Property held by a nominee is subject to a tax lien attaching to the property of the true owner." United States v. Beretta, 2008 WL 4862509, at *7 (N.D. Cal. 2008) (citing G.M. Leasing Corp. v. United States, 429 U.S. 338, 351 (1977)); see also 26 U.S.C. § 6321 (If a person fails to pay federal tax after a demand, a lien automatically attaches to "all property and rights to property, whether real or personal, belonging to such person."). Nominee claims require two levels of analysis, one applying state law and the other applying federal law. A court must "look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation." United States v. Craft, 535 U.S. 274, 278 (2002) (internal quotation marks and citations omitted).

In the first step, a court must determine whether a purported true owner of the property has a state-law interest in the property. United States v. Government, 424 F.2d 1142, 1144 (9th Cir. 1970). The purported owner must have an interest in the property on or after the date of the assessment. See 26 U.S.C. § 6322; Rice Inv. Co. v. United States, 625 F.2d 565, 568 (5th Cir. 1980) (citing Glass City Bank v. United States, 326 U.S. 265 (1945)). Plaintiff challenges primarily this first step, arguing that the Ballantynes have no state-law property interest in the Fourth Avenue Property. Plaintiff addresses several forms of state-law ownership, arguing that each is inapplicable or otherwise foreclosed to the United States. The Court addresses each of them below.

2. State-Law Property ...


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