The opinion of the court was delivered by: Honorable Barry Ted MoskowitzUnited States District Judge
FINDINGS OF FACT ANDCONCLUSIONS OF LAW
Plaintiffs have filed the above-captioned quiet-title actions to remove federal tax liens on real property at 3207 McCall Street, San Diego, CA 92106 ("McCall property") and on a 12.5% interest in real property at 1280 Fourth Avenue, San Diego, CA 92101 ("Fourth property"). These tax liens identify Plaintiff Leeds, L.P., ("Leeds"), the purported owner of the McCall property, and Fourth Investment, L.P., ("Fourth"), the purported owner of the Fourth property, as nominees/alter egos of Susanne C. Ballantyne.
Plaintiffs contend that tax liens encumbering Susanne and, her husband, Don Ballantynes' property do not encumber the McCall and Fourth property. The United States argues that the federal tax liens at issue did attach to the McCall and Fourth properties at the time they arose and remain attached to the properties.
Having considered the testimony and evidence introduced at trial, oral argument, the pre and post- trial briefs, and all other filings that are a part of the trial record, in accordance with Fed. R. Civ. P. 52(a), the Court hereby issues the following findings of fact and conclusions of law.
In the course of fifteen days of trial, the Court was presented with an abundance of evidence that, for years, Don and Susanne Ballantyne engaged in a complex scheme to frustrate IRS attempts to collect on the Ballantynes' multi-million dollar federal tax liability. The Court heard evidence describing more than thirteen entities used by the Ballantynes to hold their assets, including Leeds LP, Fourth Investment LP, Rhodes Investment Corporation, B&B Business Services, Inc., TPH Investment LP, New Horizon Lighting LLC, Eastman Investment, Fremont Corporation, Snow Valley Holdings, Inc., Hemet C. LP, Fulton 162 LP, Sonora Investment LP, and Mountain Living, Inc. Although Plaintiffs take the position that each of these entities is a legitimate business, operating independently from the Ballantynes, the Court finds to the contrary. Each of the entities cited above (and virtually all other entities referenced at trial) was owned and controlled by the Ballantynes, their children, their children's trusts, and/or Ms. Ballantyne's brother, Ed Cramer. The Court heard no evidence that these entities engaged in any true independent business activity. Instead, during the time periods relevant at trial, nearly all of these entities' primary function appeared to be to hold the Ballantynes' assets and/or to create additional entities to be used to hold the Ballantynes' assets, in order to defeat collection efforts by the IRS and other potential creditors.
The trusts at issue in this case are similarly controlled by the Ballantynes. First, Ms. Ballantyne was the sole trustee and beneficiary of the Susan T. Cramer Trust. Next, the Susanne C. Ballantyne Trust is a revocable trust. (Ex. 1007.3) Because Ms. Ballantyne has the right to terminate the trust and remove property from the trust, under California law, Ms. Ballantyne effectively owns the property held in the trust. See United States v. Stolle, No. CV 99-00823-GAF, 2000 U.S. Dist. LEXIS 5454, at *16 (C.D. Cal. 2000). Finally, the Court finds that the trustee of the Ballantynes' children's trusts, G. William Dunster*fn1 , did not operate independently from the Ballantynes, with respect to any of the transactions referenced at trial. Mr. Dunster, the only person involved in the relevant transactions in this case not related to the Ballantynes by blood, was a long-time business associate and confidant of the Ballantynes. (Tr. 40)
Stripping away the fiction that these companies and trusts are independent entities, an extraordinarily complex set of facts becomes simpler. As set forth below, Don and Susanne Ballantyne transferred the McCall and Fourth properties into entities within their control as part of an initial attempt to render their assets more difficult to attach. The Ballantynes then engaged in a series of transactions to transfer their assets to their children but failed to fully relinquish control and continued to benefit from the properties at issue.
On Don And Susanne Ballantyne's Property Don and Susanne Ballantyne have incurred significant federal tax liability. Although they owe income taxes for several tax years, the tax years for which they owe the most money are 1985 and 1986.
On July 25, 1994, the Ballantynes petitioned the United States Tax Court challenging notices of income tax deficiency sent by the IRS for those two years. (Joint Timeline at 7) The Tax Court held a trial from May 8-10, 1995. (Joint Timeline at 8) On October 10, 1996, the court filed an opinion stating that the Ballantynes owed deficiencies of $388,937 for 1985 and $931,970 for 1986.*fn2 (Stipulation No. 2)
On June 30, 1997, the IRS made an assessment against the Ballantynes for these two tax years for a total of $1,320,907 in taxes. (Joint Timeline at 40) The Ballantynes' tax liability for the 1985 and 1986 tax years also included millions of dollars in penalties and interest. All told, the IRS calculated the Ballantynes' liability for taxes, penalties, and interest for these two tax years to be $5,539,789.51 as of November 14, 1997. See Stipulation of Fact No. 4.
The IRS has made two other assessments against the Ballantynes: (1) January 2, 1995, in the amount of $25,164, plus interest, for the 1990 tax year (ex. 3114); and (2) November 16, 1998, in the amount of $11,515, plus interest, for the 1997 tax year (ex. 5003).
Notice and demand for payment was made, without any defect, on the same day as all three assessments. See August 4, 2010 Order RE Cross-Motions for Summary Judgment at 16-17. Accordingly, statutory liens attaching to all of the Ballantynes' property and rights to property arose on January 2, 1995, June 30, 1997, and November 16, 1998. See 26 U.S.C. § 6321.
C. Transfer Of McCall And Fourth Properties To Plaintiffs
Susanne Ballantyne's parents built the McCall property around 1929 and they raised her there. (Joint Timeline at 1) The property was owned by the Susan T. Cramer Trust, named after Ms. Ballantyne's mother. Id. After Susan T. Cramer died, Ms. Ballantyne and her brother, Ed Cramer, became the co-beneficiaries of this trust. Id. Mr. Cramer took his apportioned distribution of the Susan T. Cramer trust in 1979, leaving Ms. Ballantyne as its only trustee and beneficiary. (Joint Timeline at 2) The Susan T. Cramer Trust still owned the McCall property at that time. Id. In 1987, Susanne Ballantyne formed an intervivos trust, of which she was the sole settlor, trustee and beneficiary, called the Susanne C. Ballantyne Trust. (Joint Timeline at 3) The Susanne C. Ballantyne Trust's Declaration of Trust lists the Susan T. Cramer Trust as one of its assets. (Joint Timeline at 3; Ex. 1007.37)
On June 30, 1995, less than two months after the tax trial on the 1985 and 1986 deficiencies, the Susan T. Cramer Trust transferred, via a grant deed signed by Ms. Ballantyne, legal title to the McCall property to Leeds LP (the Plaintiff here).*fn3 (Ex.1016). In exchange, the trust received a 99% limited partnership interest in Leeds. (Ex. 1014.33). The next day, with Ms. Ballantyne signing on behalf of both entities in the transaction, the Susan T. Cramer Trust transferred all of its partnership units in Leeds to the Susanne C. Ballantyne Trust. (Ex. 1018)
Leeds was formed six weeks before this transfer by its 1% general partner B&B Business Services, an entity controlled by Don Ballantyne. (Ex. 1010) Soon thereafter, on June 19, 1995, B&B withdrew as the general partner and was replaced by Rhodes Investment Corporation ("Rhodes"). (Ex. 1012) Rhodes was another Ballantyne family company. Ms. Ballantyne owned 100% of its shares, (Ex. 3011), and Ms. Ballantyne was listed on its stock registration as CEO, CFO, Secretary, sole director, and registered agent (Ex. 3002). As general partner of Leeds, Rhodes -- and Ms. Ballantyne in her capacity as Rhodes' president -- controlled Leeds' business decisions. See Tr. 744 - 745.
In short, the Ballantynes stood on both sides of the transaction transferring the McCall property. Ms. Ballantyne effectively controlled and owned both the seller, the Susan T. Cramer Trust, and the buyer, Leeds L.P.
In the 1970s, Ms. Ballantyne inherited a 12.5% interest in the commercial property located at 1280 4th Avenue, San Diego, CA. (Joint Timeline at 1) In 1988, Ms. Ballantyne quitclaimed her interest in the Fourth property to the Susanne C. Ballantyne Trust. (Joint Timeline at3)
In 1979, the owners of the Fourth property, including Ms. Ballantyne, entered into a triple net lease with the tenant on the Fourth property, Golden State Sanwa Bank ("Sanwa Bank"). (Joint Timeline at 2) Sanwa Bank loaned $900,000 to the Fourth property owners to construct the bank on this property. (Tr. 322, 968; Ex. 2043) Sanwa Bank paid mortgage payments on this loan, as well as operating expenses on the building. (Tr. 969) These payments were deducted from rent owed on the building, and the balance of rent was distributed pro rata to the Fourth Property owners, generating an income stream for the Ballantynes throughout the life of the lease. (Tr. 407-09, 964, 970-71)
On June 30, 1995, the same day the McCall property was transferred to Leeds LP, the Susanne C. Ballantyne Trust transferred its interest in the Fourth property to Fourth LP (the other Plaintiff here). (Ex. 2008) As before, the Ballantynes stood on both sides of the transaction. Don Ballantyne filed Fourth LP's certificate of limited partnership in May of 1995 with B&B Business Services as general partner. (Ex. 2003) On June 19, Rhodes, an entity owned and controlled by Ms. Ballantyne, was substituted as general partner of Fourth in place of B&B Business Services. (Ex. 2005) In exchange for the 12.5% interest in the Fourth property, the Susanne C. Ballantyne Trust received a 99% ownership interest in Fourth LP; Rhodes owned the remaining 1%. (Ex. 2007.33).
D. Purpose Of Transfer Of The Subject Properties To Leeds And Fourth
The Ballantynes transferred the McCall and Fourth properties into Leeds LP and Fourth LP as part of a plan to frustrate future IRS attempts to collect on the Ballantynes'significant federal tax liabilities. The transfer of the McCall and Fourth properties into Leeds LP and Fourth LP served no true business purpose, with the Ballantynes sitting on both sides of these transactions. The Ballantynes' alternative explanation for these transfers, discussed below, does not overcome the conclusion that these transfers were made to defeat IRS collection efforts. As set forth in the following section, shortly after the conclusion of the tax trial, Ms. Ballantyne had transferred approximately $1.4 million to accounts and entities that she controlled, but were not facially associated with Mr. Ballantyne or her. Like these transfers, the Ballantynes' conveyance of the McCall and Fourth properties to Leeds LP and Fourth LP during this same time period was for the purpose of frustrating future attempts to collect on the Ballantynes' federal tax liability.
1. Transfer Of Assets During Tax Court Trial
The Ballantynes signed documents creating Leeds, Fourth, and Rhodes between May 15, 1995 and May 26, 1995, beginning just five days after the conclusion of their tax trial. (Ex. 1010, 2003, 3000) The transfer of the McCall and Fourth properties occurred weeks later.
These transactions were part of a flurry of activity taking place around the time of the Ballantynes' tax court trial where the Ballantynes transferred assets from their name to entities owned and controlled by them. Beginning in November 1994, after the Ballantynes filed their tax court petition, until early 1995, Ms. Ballantyne transferred over a hundred thousand dollars from the Susanne C. Ballantyne Trust's bank account to a bank account jointly controlled by Susanne and Don Ballantyne called "B&B 18."*fn4 (Tr. 733-37; Ex.4100.200, .202, .246-.47) Similarly, on June 6, 1995, Ms. Ballantyne transferred over $1,286,000 in notes from her trust to TPH Investments, LP ("TPH"), an entity she owned and controlled.*fn5 The same day, Ms. Ballantyne transferred $10,000 worth of notes to Sonora Investments, LP, another entity owned by the Susanne C. Ballantyne Trust.*fn6
Thus, the transfers of the McCall and Fourth properties to Leeds and Fourth fall squarely within the Ballantynes' pattern of conveying assets to accounts facially not associated with them during the period of months surrounding the tax court trial.
2. Ballantynes' Explanation For the Transfers
The Ballantynes contend that these transfers were instead made for protection against "future liabilities," such as liability for slip and fall accidents (and not liability for the tax deficiencies at issue in the tax trial), and estate planning purposes. See, e.g., Tr. 79, 510, 890. These explanations are not credible in light of the evidence. Plaintiffs take the position that the 1985 and 1986 tax deficiencies could not be considered "future liabilities" because the Ballantynes believed that they would ultimately prevail in tax court. See Tr. 445; see also Pl. Post-Trial Br. at 6-8; Trial Brief at 7. This position lacks merit because regardless of whether the Ballantynes' "absolutely expected to win" the tax trial, the Ballantynes must have considered the possibility that they could lose and be subject to millions of dollars in tax liability. The Court finds that it was precisely this "future liability" that the Ballantynes were concerned with when they transferred the McCall and Fourth properties to Leeds and Fourth.*fn7 Similarly, the purported estate planning purpose of these transfers rests in the Ballantynes' desire to frustrate future attempts to collect on their federal tax liability. As described, infra, from 1996 to 1998, the Ballantynes engaged in a complex series of transactions to transfer their assets, including their interests in Leeds and Fourth, to their children in furtherance of their scheme to defeat IRS collection efforts. Mr. Ballantyne explained that the initial transfer of the McCall and Fourth properties was in preparation of a later sale to their children's trusts because "the children's trusts did not want to acquire direct ownership in anything. It wanted to . . . [ac]quire entities, for the same reason, because of future liabilities." Tr. 194; see also Tr. 304. As above, the "future liabilities" that the children's trusts sought to limit by not taking property directly from Mr. and Mrs. Ballantyne were the tax liabilities at issue in the May 1995 tax trial.*fn8
E. The Ballantynes' Retention Of The Properties' Benefits
The Ballantynes continued to live in the McCall property, despite its purported transfer to Leeds until June 30, 2000. (Joint Timeline at 52) Plaintiffs contend that this arrangement was proper because the Ballantynes lived on the property pursuant to a five-year lease calling for a monthly rent of $3,000 due on the first day of each month. (Ex. 1009; Tr.However, this lease was not the result of an arms-length transaction. The Ballantynes stood on both sides of the lease, with Susanne Ballantyne signing for the landlord, Leeds, and Don Ballantyne signing for the tenant. (Ex. 1009.03)
Basic terms of the lease were not adhered to. Ms. Ballantyne acknowledged that no rental payments were made and a security deposit was not paid in 1995. (Tr. 794-95, 769-70) Instead, Ms. Ballantyne, and not Leeds, the purported owner, continued to pay the mortgage, as well as the insurance and other obligations for the McCall property during that year. (Tr. 770-771, 782-83)
This arrangement continued into 1996. Not until April of 1996 do the books of Leeds reflect any rental payments. Ex. 1084.4; see also Tr. 798. However, these rental payments still did not comply with the lease terms. Of the fourteen payments that year, only one was for $3000, as provided by the lease, and only one was made on the due date. Ex. 1084.4; see also Tr. 799-800. It appears that, as opposed to making regular rent payments, Ms. Ballantyne was transferring money to Leeds to pay the costs of the McCall property as they arose. See Tr. 794-95 ("Q: So what we see here is when an obligation becomes due there is a deposit made into the Leeds account for approximately the same amount? [Ms. Ballantyne:] Yes.")*fn9
Similarly, rental payments in 1997 were not in compliance with the lease. Ms. Ballantyne paid $2,900 in rent in January, March, and April, and only $1,200 in November. (Ex. 1085.05) Payments in June and July were made on the 20th and 14th of these months. (Id.) Contrary to the terms of the lease, no late fees were charged for these or any other late payments. (Tr. 799, 1333-34)
The Ballantynes stopped making payments altogether after November 7, 1997. (Ex. 1085.05) Instead, the Ballantynes' children made rental payments of $900 each for the months of November and December, falling $1,200 short of the amount owed for these months.*fn10 This arrangement continued in 1998, through the date of the final assessment at issue in this case. (Ex. 1086.08) The majority of rent payments by the Ballantynes' children that year were well after the date due, although monthly rent payments did total $3,000. (Id.)
Ms. Ballantyne continued to use the revenue from the lease payments on the Fourth property for her own benefit after the transfer to Fourth LP. On May 16, 1994, Ms. Ballantyne, as trustee of the Susanne C. Ballantyne Trust, directed that her portion of the rental income for the Fourth property be directed to her brother, Ed Cramer, to pay a personal debt that Ms. Ballantyne owed to him. (Ex. 2042) This arrangement continued until January 16, 1996, over six months after the transfer to Fourth. On that date, Ms. Ballantyne wrote to Sanwa Bank to redirect payment to Fourth, stating: "This letter is to authorize and direct you to make your next and future rental payments for [sic] Susanne C. Ballantyne Trust . . . into Fourth Investment, L.P. . . . . This is in lieu of depositing it into the Edward T. Cramer account." (Ex. 2044)
Ms. Ballantyne did not sign the letter on behalf of Fourth LP or acknowledge that Fourth now owned her interest in this property. Similarly, Ms. Ballantyne testified that she did not attempt to amend the deed of trust on the triple net lease to reflect Fourth's ownership. (Tr. 1009) Thus, although rental payments were made to Fourth from January 16, 1996 through the dates of the 1985, 1986, and 1997 tax year assessments, there is no evidence that the tenant of the Fourth property was aware of the transfer. Accordingly, Ms. Ballantyne effectively retained the power to alter how Fourth property's income stream could be assigned after the transfer to Fourth LP.
F. Ownership And Control Of Leeds And Fourth During Assessment Periods
1. June 30, 1997 Assessment
As discussed above, both the McCall and Fourth properties were transferred into entities owned and controlled by the Ballantynes on June 30, 1995. On this date, Rhodes (an entity owned and controlled by Ms. Ballanytne) owned a 1% interest in both Leeds and Fourth as general partner and the Susanne C. Ballantyne Trust owned a 99% interest in Leeds and Fourth as limited partner. The ownership structure of these entities remained unchanged for at least six months until Hemet C purchased a 1% interest from the ...