The opinion of the court was delivered by: Hon. Otis D. Wright, II United States District Judge
Order DISMISSING Case with Prejudice
This is a quiet-title action challenging certain tax liens placed by the United States of America, Internal Revenue Service ("IRS") on real property located at 5505 Paseo Joaquin, in Yorba Linda, California ("Property"). The IRS placed liens on the Property because Dino and Trina Adam, who owe the IRS substantial taxes, are allegedly its true owners. Luke and Chandra Adam (collectively, "Plaintiffs") contend they are the sole owners and Dino and Trina Adam have no interest in the Property. This is the core dispute in this case.
The following facts are derived from the July 10, 2007 Final Pretrial Conference Order (the "PCO") and the Court's August 6, 2007 Order and Judgment (the "Order"). The Property was purchased by Dino and Trina Adam in 1982, (PCO ¶ 5(a)), and subsequently sold at a foreclosure sale on September 13, 1994 to Great Western Bank. (PCO ¶ 5(e).) The Property was then transferred to EMC Mortgage Corporation ("EMC"). (PCO ¶ 5(g).) On January 31, 1996, the Property was purchased from EMC by Ibrahim Matta, a business partner of Jacob Adam, Dino Adam's brother ("Matta Purchase"). (PCO at ¶ 5(h)-(i).) The Matta Purchase was made with funds provided by Dino Adam. (Order ¶ 1.)
Thereafter, in October 1996 and November 1996, the IRS recorded a Notice of Federal Tax Lien with respect to the income tax liabilities owed by Dino and Trina Adam for the years 1989, 1991, and 1993. (PCO ¶ 5(k)-(l).) After these tax liens were recorded, the Property was subject to several transfers, each of which involved relatives of Dino and Trina Adam. In April 1999, Ibrahim Matta conveyed title to the Property to Joseph Adam, Dino Adam's nephew. (PCO ¶ 5(m).) On June 29, 2000, Joseph Adam conveyed the Property to Plaintiff Chandra Adam, Dino and Trina Adam's daughter. (PCO ¶ 5(n).) On February 6, 2001, Chandra Adam conveyed the property to herself and her brother, Luke Adam. (PCO ¶ 5(o).) Each of these transactions was consummated with less than full and adequate consideration, many times with no consideration whatsoever. (Order ¶¶ 2-4.) Despite the multiple transfers of legal title, however, Dino and Trina Adam currently reside at the Property, and have continuously done so since 1982. (PCO ¶ 5(c).) Although Plaintiffs claim to have received rent from Dino and Trina Adam, neither has ever reported any rental income from the Property on their federal income tax returns. (PCO ¶ 5(q).)
On March 7, 2001, Dino and Trina Adam filed a bankruptcy petition under Chapter 7 of the Bankruptcy Code. (PCO ¶ 5(p).) The bankruptcy proceeding resulted in a discharge of personal liability for Dino and Trina Adam with respect to their income tax debts to the IRS for the years 1989, 1991, and 1993. (Id.) On November 29, 2004, the IRS re-filed its Notice of Federal Tax Lien, previously recorded on November 18, 1996. (PCO ¶ 5(x).) Subsequently, on January 12, 2005, the IRS recorded two Notices of Federal Tax Lien, one against Plaintiff Luke Adam and one against Plaintiff Chandra Marie Adam. (PCO ¶ 5(y).) These two notices identified Plaintiffs as "nominees" of their parents. (Id.)
On October 11, 2005, Plaintiffs filed a Complaint challenging the January 12, 2005 IRS liens recorded against them. In July 2007, this Court held a three-day trial on the matter, after which it concluded that Plaintiffs held title to the Property as nominees for Dino and Trina Adam. (Order ¶ 5.) Consequently, the Court dismissed Plaintiffs' First Amended Complaint and entered judgment in favor of the IRS. (Order ¶ 6-7.)
On appeal, the Ninth Circuit concluded that this Court erred by not analyzing California law in determining whether Plaintiffs held title to the Property as nominees for Dino and Trina Adam. (Dkt. No. 56.) Accordingly, the Ninth Circuit vacated the judgment and remanded the case. (Id.) On remand, the Ninth Circuit instructed the Court to determine Dino and Trina Adam's rights in the Property, if any, under California law. (Id.) The Ninth Circuit further instructed the Court that if it determined that Plaintiffs did not have a beneficial interest in the property, it must provide a reasoned determination as to whether Plaintiffs, as holders of bare legal title, have standing to bring a procedural challenge to the tax liens under 28 U.S.C. § 2410. (Id.) After extensive briefing by the parties, the Court now addresses these issues.
Pursuant to 26 U.S.C. § 6321, "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." This statute "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." U.S. v. Craft, 535 U.S. 274, 278 (2002) (quoting United States v. Bess, 357 U.S. 51, 55 (1958); United States v. National Bank of Commerce, 472 U.S. 713, 722 (1985)). Thus, whether Dino and Trina Adam's interest, if any, in the Property constitutes "property and rights to property' for the purposes of the federal tax lien statute . . . is ultimately a question of federal law" that "largely depends upon state law." See Craft, 535 U.S. at 278.
Accordingly, the Court must engage in two levels of analysis, one applying state law and the other applying federal law. First, the Court must look to state law to determine what rights, if any, Dino and Trina Adam have in the Property under California law. If this inquiry is resolved by finding that Dino and Trina Adam have a beneficial interest in the Property and Plaintiffs have no beneficial interest in the Property, the Court then must determine whether Plaintiffs, as holders of bare legal title, have standing under
28 U.S.C. § 2410 to challenge the IRS tax liens.
A. CALIFORNIA RECOGNIZES A NOMINEE THEORY ...