Судебные дела / Зарубежная практика / UNITED STATES OF AMERICA, Plaintiff, vs. JOHN ENGELS; MAXINE V. ENGELS; THOMAS J. ENGELS and MARY M. WILSON as Trustees of MAJON ENTERPRISES of Floyd County, Iowa; ROBERT E. ENGELS and MARY M. WILSON as Trustees of M&J COMPANY of Floyd County, Iowa; and FARM CREDIT SERVICES OF THE MIDLANDS; Defendants., IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF IOWA EASTERN DIVISION , No. C98-2096 MJM, September 24, 2001
UNITED STATES OF AMERICA, Plaintiff, vs. JOHN ENGELS; MAXINE V. ENGELS; THOMAS J. ENGELS and MARY M. WILSON as Trustees of MAJON ENTERPRISES of Floyd County, Iowa; ROBERT E. ENGELS and MARY M. WILSON as Trustees of M&J COMPANY of Floyd County, Iowa; and FARM CREDIT SERVICES OF THE MIDLANDS; Defendants., IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF IOWA EASTERN DIVISION , No. C98-2096 MJM, September 24, 2001
UNITED STATES OF AMERICA, Plaintiff, vs. JOHN ENGELS; MAXINE V. ENGELS; THOMAS J. ENGELS and MARY M. WILSON as Trustees of MAJON ENTERPRISES of Floyd County, Iowa; ROBERT E. ENGELS and MARY M. WILSON as Trustees of M&J COMPANY of Floyd County, Iowa; and FARM CREDIT SERVICES OF THE MIDLANDS; Defendants.
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF IOWA EASTERN DIVISION
No. C98-2096 MJM
September 24, 2001
OPINION and ORDER
This case arises out of a determination by the Internal Revenue Service (IRS) that John J. and Maxine V. Engels ("the Engels") were personally liable for federal income tax owed on property held in several trusts purchased by them in the mid-1980s. Based on this determination, the Engels received notice of additional assessments for the years 1986 through 1989. 1 Following the Engels' failure to pay, federal tax liens arose pursuant to 26 U.S.C. ╖╖ 6321 and 6322 and attached to all property and rights to property then belonging to the Engels. With this civil action, the United States, pursuant to 26 U.S.C. ╖╖ 7401 and 7403, seeks to reduce the assessments to judgment and foreclose on liens attached to various real properties purportedly belonging to the trusts on the theory that the trusts are merely nominees or alter egos of the Engels. (Doc. no. 1). By answer, the defendants denied the government's allegations and counterclaimed for improper and illegal collection of taxes. 2 (Doc. no. 2).
1 On November 6, 2001, the court granted partial summary judgment to the United States on the issue of the timeliness of the additional tax assessments. (Doc. no. 58).
2 On May 24, 2001, the court granted the United States' motion to dismiss the counterclaim in full. (Doc. no. 108).
Presently before the court is the government's summary judgment motion by which it requests that the court: (1) determine that M&J Company ("M&J" or "the M&J Trust") and Majon Enterprises ("Majon" or "the Majon Trust") are the nominees and/or alter egos of John and Maxine Engels; (2) reduce to judgment the federal tax assessments made against John and Maxine Engels; (3) set aside certain conveyances of real property by the trusts as fraudulent against the United States; and (4) foreclose the outstanding federal tax liens that have attached to the real property at issue. (Doc. nos. 75 and 76). The defendants filed a resistance to the motion and the government filed a reply brief. (Doc. nos. 98 and 106). Oral arguments were heard on July 30, 2001.
I. Summary Judgment Standard
The standard for granting summary judgment is well established. A motion for summary judgment may be granted only if, after examining all of the evidence in the light most favorable to the nonmoving party, the Court finds that no genuine issues of material fact exist and that the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) ; Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Montgomery v. John Deere & Co. , 169 F.3d 556, 559 (8 th Cir. 1999). A fact is material if it might affect the outcome of the suit under the governing substantive law. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 255 (1986). An issue of material fact is genuine "if it has a real basis in the record." Hartnagel v. Norman , 953 F.2d 394, 395 (8 th Cir. 1992) (citing Matsushita , 475 U.S. at 586-87).
The party moving for summary judgment bears the "initial responsibility of informing the district court of the basis for its motion and identifying those portions of the record which show lack of genuine issue." Celotex , 477 U.S. at 323. Once the moving party has carried its burden, the opponent must go beyond the pleadings and designate specific facts-by such methods as affidavits, depositions, answers to interrogatories, and admissions on file-that show there is a genuine issue for trial. See Fed. R. Civ. P. 56(e); Celotex , 477 U.S. at 324. The evidence of the nonmoving party is to be considered as true, and justifiable inferences arising from the evidence are to be drawn in his or her favor. Anderson, 477 U.S. at 255. If the evidence of the nonmoving party is "merely colorable," or is "not significantly probative," summary judgment may be granted. Id . at 249-50. Thus, although the nonmoving party does not have to provide direct proof that genuine issues of fact exist for trial, the facts and circumstances that the nonmoving party relies upon must "attain the dignity of substantial evidence and must not be such as merely to create a suspicion." Metge v. Baehler , 762 F.2d 621, 625 (8 th Cir. 1985). In essence, the evidence must be "such that a reasonable jury could find a verdict for the nonmoving party." Anderson, 477 U.S. at 248.
II. Procedural and Factual Background
John and Maxine Engels ("the Engels") are longtime residents of Rockford, Iowa, where they raised their twelve children. From 1972 until his retirement, John Engels was associated with Na-Churs Plant Food Company ("Na-churs"), first as an independent contractor and then in a management capacity. Additionally, during most of his adult life, Mr. Engels farmed property owned by him. Like many other Iowa families, the Engels suffered losses in conjunction with the farm crisis of the 1980s. The Engels were forced to sell off some of their farm property to satisfy creditors and Maxine Engels took an outside job for the first time in her life. She worked in a bakery from September 1985 to September 1987 and as a machine operator at Unysis from August 1987 through May 1988.
In or around 1986, at the invitation of a co-worker, John Engels attended a presentation regarding the establishment of trusts. He testified that his interest in trusts stemmed from his desire to facilitate the smooth transfer of assets to his children upon his and his wife's death. The presentation was sponsored by International Business Association ("IBA"), an unincorporated association that created, promoted, and sold trust instruments through marketing seminars held around the country. See United States v. Scott , 37 F.3d 1564, 1570 (10 th Cir. 1994). 3 Mr. Engels was intrigued by the presentation and attended several more IBA-sponsored meetings. Defendant James Peterson was a frequent speaker at these meetings and defendant Mary Wilson, the IBA representative for Iowa, was usually present as well. At some point, Mr. Engels was offered a credit toward the purchase price of the trust instruments if he agreed to host an IBA presentation at his house. Consequently, four or five of these meetings were held in the Engels' home.
3 Scott was a criminal case in which the U.S. Court of Appeals for the Tenth Circuit affirmed convictions against numerous defendants involved with IBA for conspiracy to defraud the United States by impeding and obstructing federal income tax assessment and collection through a trust-selling scheme. Two of the named defendants in this action - Mary Wilson and James Peterson - were among those convicted in Scott . Further discussion of the Scott case as it relates to the case at bar is included in the court's discussion, infra , at footnote 12.
Ultimately, John Engels purchased at least two trusts from IBA through James Peterson and/or Mary Wilson - the M&J Trust and the Majon Trust. 4 John Engels testified that no cash was exchanged for the purchase of either trust and, although the purchase details were never discussed, he assumed that the trusts were paid for through "commissions" from the meetings held at his home.
4 Trust-related documents prepared by Mary Wilson suggest that several other "conduit" trusts -- both domestic and foreign -- were also purchased by, or associated in some way with the Engels and/or the M&J and Majon Trusts. John Engels has stated that he did not knowingly purchase any other trusts and did not know the function of these conduit trusts or why and how Mary Wilson established them. In Scott , the Tenth Circuit found a similar association of domestic and foreign trusts suspect for federal income tax purposes. See Scott , 37 F.3d at 1560-71 ("Even if these [trusts] operated legitimately, with genuine grantors funding them, active trustees managing them, and real foreign beneficiaries receiving distributions, there would still be a question whether the form of the trusts was sufficient to be valid under United States trust law . . ."). The Scott court's description of the manner in which the domestic and foreign conduit trusts worked together to evade federal tax assessment and collection is included in this court's discussion, infra , at footnote 12.
Establishment of the M&J Trust
The Declaration of Trust for the M&J Trust is dated October 25, 1986. The trust instrument states that it was established with a contribution of $100 from the settlor, Cache Properties Unlimited. The named first trustee is Rexford Trust Company. Both Cache Properties and Rexford Trust are associated with IBA. James Peterson signed on behalf of Rexford Trust. The trust instrument grants the board of trustees virtually unlimited power so long as the board does not take "any action contrary to valid law nor inconsistent with the provisions of the Indenture or Minutes interpreting the same." Because the trust certificate units of M&J were initially issued to Cache Properties, that entity was also the nominal beneficiary of M&J. 5
5 At some point after purchase of the M&J Trust, Maxine and John Engels replaced Cache Properties as the named beneficiaries. Thereafter, the Engels were replaced by Fair Hope, a trust. The record is unclear as to the precise nature or ownership of Fair Hope. In 1992, John and Maxine Engels' children were named as the beneficiaries of the M&J Trust.
On October 26, 1986, the day after creation of the M&J Trust, the first trustee, Rexford Trust Company, appointed Robert Engels (John and Maxine's son) as second trustee. Rexford Trust and Robert Engels then appointed John Engels as general manager, Gerald Engels (another son) as assistant general manager, and Maxine Engels as secretary/treasurer. To that end, the operation of day-to-day affairs and business matters "which include[d] the signing of checks, leases, agreements and other documents as well as buying and selling properties and goods" was delegated to John, Gerald and Maxine Engels. On that same day, Rexford Trust and Robert Engels appointed defendant Mary Wilson as trustee of M&J Trust, and Rexford Trust resigned as a trustee. Thus for most of the period in question, the named trustees were Robert Engels and Mary Wilson. 6
6 By letter dated July 22, 1992, Mary Wilson resigned as a trustee of the M&J Trust.
Establishment of the Majon Trust
The Declaration of Trust for the Majon Trust is dated March 13, 1987, and was purportedly established with a contribution of "ten ($10) dollars and other compensation agreed upon . . ." The nominal settlor of the Majon Trust was Rex F. Larson and the named first trustee was James Peterson. Because the trust certificate units were initially issued to Rex Larson, he was also the nominal beneficiary of the Majon Trust. 7
7 At some point following establishment of the Majon Trust, John and Maxine Engels replaced Rex Larson as beneficiaries of the Majon Trust. It is unclear from the record whether, and on what dates, various conduit trusts may have replaced the Engels as beneficiary prior to 1994 when the Engels' children were designated.
On March 13, 1987, James Peterson, the first trustee of the Majon Trust, appointed John Engels as the second trustee. Thereafter, Majon's board of trustees -- John Engels and James Peterson -- appointed John Engels and Maxine Engels as president and secretary, respectively. The board also appointed Maxine Engels as executive secretary-treasurer and chairperson and delegated to her, among other things, the duty of "oversee[ing] the operation of the Trust Organization." Additionally, the board appointed John Engels as director and delegated to him the duty "to carry the burden and duties of the day to day management of the Trust Organization." This included "the power to negotiate contracts of any description, to negotiate the buying and selling of property of all kinds, to direct the management of any affair which will benefit the Trust Estate, and any other power provided for in the Indenture, Bylaws and Minutes."
Two days later, on March 15, 1987, John Engels and James Peterson resigned as trustees of the Majon Trust and Mary Wilson and Gerald Engels were appointed as trustees. Thus, for most of the period in question, the named trustees were Gerald Engels and Mary Wilson. 8
8 On April 12, 1990, Thomas Engels (another son) replaced Gerald Engels as trustee of the Majon Trust. By letter dated July 22, 1992, Mary Wilson resigned as a trustee.
Transfer of property into the trusts 9
9 The facts and timelines surrounding the real property transfers to and from the Trusts are somewhat complicated and in dispute. As the particulars of each transaction become truly relevant only if the court finds the Trusts invalid for federal tax purposes, the court will not include excessive detail at this point. To the extent necessary, the court will supplement its discussion with a more detailed recitation of the relevant facts.
In its complaint, the government names six parcels of real property, nominally owned by the Trusts, which the government asserts are subject to foreclosure for satisfaction of the Engels' delinquent tax debt. These are referenced as Properties A through F in the complaint. Properties B through F were all transferred to the M&J Trust in 1988 while Property A was transferred to the Majon Trust in 1991. Looking first at the 1988 transfers, John and/or Maxine Engels quitclaimed their interest in the following parcels of real property located in Floyd County, Iowa to the M&J Trust on the dates listed below:
Parcel of real property Date of conveyance
"Property B:" 21 4 th Street, S.W. 01/01/88
- the Engels' residence
"Properties C and D:" 180 th Street parcels 05/12/88
- farmland purchased by the M&J Trust with the Engels as guarantors
"Property E:" 402 East Main Street 01/02/88
- rental property
"Property F:" 306 Second Avenue 01/02/88
- rental property
The parties dispute the nature and value of the consideration given in exchange for each of these parcels of property. The quitclaim deeds conveying Properties B, E and F to the M&J Trust were not filed with the Floyd County Recorder's Office until September 23, 1992, over four years after the conveyances. The quitclaim deed conveying Properties C and D to M&J was not filed until May 2, 1989, almost a year after the conveyances. With regard to Properties B and F, the mortgages and notes securing them were never assumed by the M&J Trust and remained in John and Maxine Engels' name until satisfied and released on September 13, 1991. With regard to Properties C and D, the Engels remained personally liable (as guarantors) for all payments due under the contract by which the M&J Trust purchased that property.
On March 17, 1997, the M&J Trust quitclaimed its interest in Property F to James and Terrie Engels (John and Maxine's son and daughter-in-law). The transfer was filed with the County Recorder's Office the following day.
Turning to the subject property purportedly conveyed in 1991 to the Majon Trust, labeled Real Property A in the complaint, the records indicate that on April 13, 1991, Maxine Engels' mother, Theresa Kramer, quitclaimed her interest in a parcel of property and farmland located at 2275 and 2285 Jersey Avenue to Maxine Engels. Two months later, on June 11, 1991, Maxine Engels quitclaimed her interest in Property A to the Majon Trust. This transfer was filed with the County Recorder's Office on July 11, 1991. The consideration purportedly given in exchange for this property was "$10.00 and Certificate Units of a non-ascertainable value." On October 15, 1991, another quitclaim deed was filed with the County Recorder's Office again conveying John and Maxine Engels' interest in this same property to the Majon Trust. The consideration indicated as given in exchange was $1.
The Engels transferred personal property to the Trusts as well. All of the furniture, appliances and other household goods in the Engels' residence (Property B), were conveyed to the M&J Trust in 1987 or 1988. It has not been shown that any consideration was given in exchange for these items. In 1988, Maxine and John Engels transferred their 1984 Chevrolet van to the Majon Trust. Before and after this transfer, John Engels used it for the business of Na-Churs. In 1991, John Engels conveyed his 1989 Chevrolet pickup to the Majon Trust. John Engels presently drives the pickup every day. The pickup is used to transport John and Maxine Engels to, among other places, the grocery store and church. Between 1986 and 1988, the M&J Trust purchased a 1984 Chevrolet Oldsmobile. Two boats were purchased in the name of the Majon Trust. Also, John Engels had a commodity trading account that was in the name of the Majon Trust from 1988 through 1997.
The Engels established a number of bank accounts in the names of the Trusts. John and Maxine Engels are named signatories on the accounts, as are Gerald and Robert as trustees on the Majon and M&J accounts respectively. Neither Gerald nor Robert has ever written or signed checks on any accounts. Gerald testified that he "didn't get involved in that way." Although Mary Wilson was a trustee on both trusts, she has never been a signatory on any accounts.
Federal taxes assessed against John and Maxine Engels
John and Maxine Engels filed personal federal income tax returns for the 1986 through 1989 tax years. They received refunds for the 1986 through 1988 tax years and a credit for the 1989 tax year.
On April 20, 1989, federal tax returns were filed in the names of the Majon and M&J Trusts. The Trust returns named Mary Wilson as preparer. On October 18, 1990, federal tax returns were again prepared by Mary Wilson and filed in the names of the Majon and M&J Trusts.
By letter dated November 17, 1989, the Engels were notified that their 1986 tax year would be audited. On August 3, 1990, the IRS informed the Engels that their 1987 through 1989 tax years would also be audited.
The IRS determined that the income and expenses on the Trust returns were the income and expenses of the Engels. Consequently, all verified income and expenses from the Trust returns were included in redetermining the Engels' 1988 and 1989 taxable income. Thereafter, the IRS determined that the Engels owed additional taxes for their 1986 through 1989 tax years. The Engels were notified of the additional tax obligation on May 17, 1994.
Title 26, United States Code, ╖╖ 7401 and 7403 authorize the government to bring civil actions in federal court for collection of taxes, including lien enforcement, "where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof . . ." 26 U.S.C. ╖ 7403(a). Should the court determine that the government is entitled to enforcement of the debt, it may subject "any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." Id. ; see also ╖ 7403(c) (explaining adjudication and decree procedures).
In this case, the government seeks relief from this court in accordance with these statutory provisions for taxes assessed against the Engels for the tax years 1986 through 1989. The government's position is that two trusts - the M&J and Majon Trusts -- established by the Engels in the mid-1980s cannot be considered separate entities for federal income tax purposes and the Engels are therefore personally liable for taxes assessed against properties held by the trusts. The government seeks a ruling to that effect as well as a determination that certain conveyances by the trusts to third parties are invalid. Finally, in conjunction with these substantive rulings, the government seeks satisfaction of the delinquent tax debt through foreclosure on federal tax liens that have attached to the real properties held nominally by the trusts. The defendants maintain that the trusts are valid separate entities and that the Engels cannot be held personally liable for taxes assessed against trust assets. Applying the summary judgment standards discussed in Part I, the court must determine whether the Engels have raised a genuine issue of disputed material fact as to: (A) the validity of the M&J and Majon Trusts; (B) the presumptive correctness of the federal tax assessments; (C) the validity of the conveyance of property to B & D Farms; and (D) the appropriateness of foreclosure on the federal tax liens that have attached to the real properties at issue.
A. Trust as Nominee or Alter Ego
It is well-established that the government may collect a taxpayer's tax debts from the assets of the taxpayer's nominee, instrumentality or alter ego. G.M. Leasing Corp. v. United States , 429 U.S. 338, 350-51 (1977); United States v. Scherping , 187 F.3d 796, 801 (8 th Cir. 1999) (affirming district court finding that business trusts were "sham" for purposes of federal income tax purposes); F.P.P. Enters. v. United States , 830 F.2d 114, 118 (8 th Cir. 1987) (upholding finding that trusts created by taxpayers were the alter egos of taxpayers and therefore not separate persons apart from taxpayers). "In determining the economic reality of a transaction, courts must analyze the substance of a transaction and are not restricted by its form." Scherping , 187 F.3d at 801. "While taxpayers are permitted to reduce their tax burden by any lawful means available, they are not permitted 'to construct paper entities to avoid taxation when those entities are without economic substance.'" Id. (quoting Chase v. Commissioner , 59 T.C.M. (CCH) 261, 264, 1990 WL 33360 (1990) (citations omitted), aff'd , 926 F.2d 737 (8 th Cir. 1991)).
This court's review of the case law and secondary authorities elicits no significant practical differences between the terms "nominee" and "alter ego." Focusing on the relationship between the taxpayer and the property, the nominee theory "attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owners." Richards v. United States , 231 B.R. 571, 578 (E.D. Pa. 1999). An alter ego theory focuses more on those facts associated with a "piercing the corporate veil" analysis. William D. Elliott, "Nominee Liens and Alter Ego," Fed. Tax Collect. Liens & Levies ╤ 9.10 (2001). And while the latter is certainly more familiar as a means of challenging a corporation's validity to shield personal liability, its multi-factor test has been adopted and/or adapted by some courts to the trust arena as well. See, e.g., William G. Wilcox, D.O. v. United States , 983 F.2d 1071, *2-3 (6 th Cir. 1992) (finding trust to be alter ego of taxpayer); United States v. Powell , 2001 WL 283808, *5-7 (D. Ariz. 2001) (applying alter ego analysis in trust context); Nantucket Village Development Co. v. United States , 2001 WL 169316 (N.D. Ohio) (finding that Ohio's recognition of alter ego doctrine and concept of equitable ownership was, essentially, recognition of nominee doctrine by another name); United States v. Letscher , 83 F. Supp. 2d 367, 374-75 (S.D.N.Y. 1999) (making no distinction between alter ego and nominee theory in finding taxpayer liable for trust assets); United States v. Kattar , 81 F. Supp. 2d 262, 273-76 (D.N.H. 1999) (applying alter ego and nominee analysis separately to trust issue). Indeed, it may be that the case law's varying use of the term "alter ego" versus "nominee" is simply a reflection of the extent to which the analysis used by a particular court evolved out of, or borrowed from, a corporation law context or otherwise. As will be discussed, however, the relevant inquiry under Iowa law is a flexible one which encompasses aspects from both the traditional alter ego and nominee analyses. And while this court is of the opinion that the more appropriate characterization of the dispute in this case is whether the Trusts are nominees of the Engels, the analysis and conclusions herein hold equally regardless of the term applied.
Generally, federal courts look to state law to determine whether an entity is an alter ego or nominee of a taxpayer. Scherping , 187 F.2d at 802 (citing Loving Saviour Church v. United States , 728 F.2d 1085, 1086 (8 th Cir. 1984)). In a case appealed from the Southern District of Iowa, Hinson v. United States , 994 F.2d 843 (8 th Cir. 1993), the Court of Appeals for the Eighth Circuit, in a per curiam opinion, upheld a summary judgment ruling that a corporation and trust were alter egos of the taxpayer and thus subject to levy for federal income tax collection. The Hinson court listed the following non-exclusive factors to be considered in determining whether, under the totality of the circumstances, a separate legal entity is a taxpayer's alter ego: (1) the family relationship between the entity's officers and the taxpayer, (2) the commingling of entity and personal funds and expenses, (3) use of the entity's assets for personal purposes, (4) transfer of valuable assets from the taxpayer to the entity for little or no consideration, and (5) use of the entity for fraudulent purposes. Id. at *1 (citing Horton Dairy, Inc. v. United States , 986 F.2d 286, 289-90 (8 th Cir. 1993); Loving Saviour Church , 728 F.2d at 1086; Valley Fin., Inc. v. United States , 629 F.2d 162, 172-73 (D.C. Cir. 1980), cert. denied , 451 U.S. 1018 (1981); and Lakota Girl Scout Council, Inc. v. Harvey Fund-Raising Mgmt., Inc. , 519 F.2d 634, 638-39 n.4 (8 th Cir. 1975)); see also Midwest Finance, Inc. v. United States , 1992 WL 316317, *3 (S.D. Iowa) (applying alter ego/nominee analysis in corporation context, the court looked to the following factors: (1) the control the taxpayer exercises over the nominee and its assets; (2) the use of entity funds to pay the taxpayer's personal expenses; and (3) the family relationship, if any, between the taxpayer and the entity officers). Other courts have applied similar multi-factor analyses. See, e.g. , Kattar, 81 F. Supp. 2d at 274 (applying alter ego analysis to trust where there is active and pervasive control of entities by the same controlling persons and there are fraudulent or injurious consequences by reason of the relationship; or there is a confused intermingling of activity and a common enterprise with substantial disregard of the separate nature of the entity or serious ambiguity about the manner and capacity in which entities and their representations are acting); United States v. Klimek , 952 F. Supp. 1100, 1113 (E.D. Pa. 1997) (considering, additionally, a failure to record conveyance); Don Gastineau Equity Trust v. United States , 687 F. Supp. 1422 (C.D. Cal. 1987) (emphasizing use and enjoyment of trust property in precisely the same manner as before the purported transfer and majority-vote structure which allowed taxpayers to make all substantive decisions regarding the trust property); Lewis G. Allen Family Trust v. United States , 558 F. Supp. 152 (D. Kan. 1982) (noting taxpayer/trustee used property transferred in same manner as prior to transfer and personal needs were paid for by advances from the trust).
The defendants first argue that the Hinson factors are inapposite because the cases cited therein predominantly involve corporations which, under Iowa law, require significantly more legal formalities than trusts which can be quite informal. This argument overlooks the fact that Hinson , an appeal from an Iowa case, involved a trust as well as a corporation and the court explicitly concluded that both were alter egos for the taxpayer. See id. at *2. (concluding that "[u]nder the circumstances, the protection normally offered by the distinct legal status of the corporation and trust would unfairly cloak the [appellant-taxpayers] and prevent satisfaction of their unpaid tax liabilities") (emphasis added). 10 Further, it is important to note that the issue before the court is not whether the Trusts were validly established under Iowa law -- which, as the defendants correctly point out, can be done quite informally -- but rather whether the Trusts were nominees or alter egos of the Engels. These are distinct issues, and while a negative finding as to the former may be extremely relevant to a determination of the latter, it is certainly not a prerequisite to a nominee/alter ego finding. 11 See Richards , 231 B.R. at 578 (holding that irrespective of whether trust was validly established, the nominee/alter ego theory remained available to the IRS in determining whether trust assets would be construed, for federal taxation purposes, as belonging to plaintiffs if they indeed treated and viewed the property as their own). And although there is little Iowa case law directly on point, what there is demonstrates that determining trust validity under Iowa law requires an examination of the relationship among the parties creating, administering and benefitting from the trust - an analysis wholly consistent with application of the Hinson factors in this context. See Ponzelino v. Ponzelino , 26 N.W.2d 330, 331-33 (Iowa 1947) (holding trust invalid where "[f]or all practical purposes [the plaintiff-trustee] remained the owner of the property [comprising the trust]" and noting that such unbridled discretion is "also objectionable . . . by reason of the uncertainty it involves"). See also Cox v. Cox , 357 N.W.2d 304, 308 (Iowa 1984) (citing Ponzelino and quoting Restatement (Second) of Trusts ╖ 125 cmt. a (1959) ("No trust is created if the transferor does not manifest an intention to impose enforceable duties on the transferee.")); Tri-State Refining and Investment Co., Inc. v. Opdahl , 481 N.W.2d 710, 712 (Iowa Ct. App. 1991) ("In actions involving invalid trusts . . . a plaintiff may look beyond a sham transaction or entity to find a judgment debtor's assets. Equity is not bound by forms, fiction, or technical rules but will seek and determine the true situation.") (citing Central Fibre Prods. Co. v. Lorenz , 66 N.W.2d 30, 33 (Iowa 1954)).
10 The court also notes that one of the cases relied upon in Hinson specifically involved only a trust. In Loving Saviour Church , the Eighth Circuit affirmed the district court's finding that a church trust was the alter ego of the taxpayers based on the following factors: (1) the taxpayers treated church assets as their own in that their residence, business and farmland comprised the church property; (2) the taxpayer carried insurance on church assets in his own name; (3) there were few internal controls in the church - the taxpayer was the minister and a trustee along with his wife, daughter and sister-in-law; (4) church funds were used to pay personal expenses; (5) there was a close family relationship between the church officers and the taxpayer/founder; (6) the taxpayers transferred property to the church for little or no consideration; (7) a car which was in the church's name bore a personalized license plate in the name of the taxpayer; (8) the taxpayers were fully supported by the funds and property of the church in whatever style they themselves chose. See 728 F.2d at 1086.
11 At oral argument, the government acknowledged this distinction and emphasized that its nominee/alter ego claim was not premised on an argument that the Trusts at issue are sham trusts without any legal validity. Rather, it argues that as nominees or alter egos of the Engels, the Trusts are ineffective for federal tax-shifting purposes.
Finally, before addressing the factual record, the court finds it appropriate to resolve a dispute between the parties as to the role that intent plays in the court's analysis. By brief and oral argument, the Engels vigorously contend that absent such a finding, no alter ego or nominee determination may be made. While many of the cases do include a finding that a trust or corporation was created to evade taxes, fraudulent intent is not a prerequisite to a nominee or alter ego finding under Iowa law. See, e.g., Adam v. Mt. Pleasant Bank & Trust Co. , 355 N.W.2d 868, 872 (Iowa 1984) ("Fraud is not a prerequisite for piercing the corporate veil . . ."). See also Towe Antique Ford Foundation v. IRS , 999 F.2d 1387, 1393 (9 th Cir. 1993) (holding that under Montana law no finding of fraud was required to pierce the corporate veil in tax collection cases); Richards , 231 B.R. at 578-80 (finding residential trust to be nominee of taxpayer even where there was "no evidence that the [taxpayors] transferred the property for the purpose of avoiding any future liability of the IRS). 12 Nor should it be where the fundamental determination to be made is merely that trust assets were incorrectly attributed to a separate entity -- an essentially neutral finding. Whether that error was made purposely, inadvertently, or innocently does not change the fact that the federal government is entitled to have the error remedied. Further, where the error was innocent or inadvertent, the law recognizes as much and may allow for alleviation from the harsh results that might otherwise follow -- e.g., the government's failure to prove fraudulent intent (presumptive or otherwise) in a fraudulent conveyance claim will be fatal to the government's attempt to "set aside" such a conveyance to a third party. Thus, while the court has no quarrel with -- and accepts as true -- the Engels' assertion that they never intended federal tax evasion and believed they had established legitimate estate planning vehicles, those subjective beliefs are simply not enough to avoid a nominee/alter ego finding if the undisputed evidence conclusively demonstrates one.
12 As this court reads the briefs, the government is arguing that the Trusts were operated in a fraudulent manner despite any purported contrary intent in creating them. In this respect, the court notes that the M&J and Majon Trusts do appear to have been operated in a manner similar to that found fraudulent by the Tenth Circuit in United States v. Scott , 37 F.3d 1564 (10 th Cir. 1994), where an IBA trust selling scheme was attacked as fraudulent "not because of the form of the trusts but because of the way they were operated." Id. at 1571.
In Scott , numerous co-defendants involved with IBA, including James Peterson and Mary Wilson, were convicted of conspiracy to defraud the United States by impeding, obstructing and defeating the IRS in the assessment and collection of federal income taxes. See id. The Scott court described a trust structure by which a domestic "shell" trust was established with a fictitious contribution by a nominal grantor -- often Cache Properties (as in the case at bar) -- which was also, initially, the nominal beneficiary of the trust's "capital units." Id. at 1570. A series of foreign conduit trusts were also generally established by IBA to receive income distribution from the domestic trusts, thereby ultimately shielding assets that originated in the domestic trust from federal tax assessment. See id.
Upon purchase of the shell trusts, "purchasers were told to transfer whatever assets they wished to the trusts. Thus, the purchasers became the real grantors who funded these trusts." Id. at 1571. The Scott court also found that because of the trusts' operating structure, whereby nominal trustees could delegate virtually unlimited power to the purchaser-manager, "the purchaser became, in all but name, the trustee of each trust." Id.
Applying the above-discussed principles to the case at bar, the court concludes that the M&J Trust and Majon Trust are ineffective for federal tax-shifting purposes and the property comprising the Trusts is taxable against the Engels personally. Looking beyond the "forms, fiction, or technical rules" to the "true situation," Opdahl , 481 N.W.2d at 712, reveals that the Engels exercised virtually unbridled control over the Trusts' assets, failed to make any practical distinction between Trust and personal expenses and funds, and continued to enjoy the use of Trust assets as if they were their own. The court finds the evidence presented on these factors sufficient to establish, as a matter of law, that under Iowa law the Trusts should be disregarded for federal tax purposes.
1. The Trusts' operating structure and the relationship between the Engels, Trust officers and Trustees:
Looking first to the family relationship surrounding operation of the Trusts, the court finds that for all practical purposes John Engels continued to exercise substantial control over the Trust assets. In this respect, this case is somewhat unique because typically the issue is whether a trustee has retained impermissible control over trust assets while here, except for a very brief period shortly after the Trusts' creation, neither John nor Maxine served as trustee to either Trust. This distinction is of little import, however, in light of the Trusts' operating structure. John Engels was named general manager of the M&J Trust and president and director of the Majon Trust on or close to the first day of the Trusts' creation. As such, he was granted broad authority over the Trusts. With respect to the M&J Trust, he was given authority over the "oper[ation of] day-to-day affairs and business matters . . . [which] include the signing of checks, leases, agreements and other documents as well as buying and selling property and goods." With respect to the Majon Trust, Mr. Engels was delegated to "carry the burden and duties of the day to day management of the Trust Organization." This included "the power to negotiate contracts of any description, to negotiate the buying and selling of property of all kinds, to direct the management of any affair which will benefit the Trust Estate, and any other power provided for in the Indenture, Bylaws and Minutes." His exercise of that power is evident from the record, including his and others' testimony that he decided which assets were to be transferred to which Trust and against which Trust liabilities were to be charged. There is no evidence that John Engels' operation and management of Trust property, including substantive decisions as to its management, administration and disposition, changed in any way when his title changed from owner to Trust employee.
While this level of substantive control by the Trusts' purchaser-manager is in itself somewhat suspect, it becomes particularly troubling where, as here, the record demonstrates that theoretically neutral or adverse trustees provided no enforceable check on Mr. Engels' decisions or actions. The trustees during most of this period were John Engels' sons - Gerald (Majon) and Robert (M&J). Both testified that they never wrote or signed a check for either Trust. Gerald testified that "he didn't get involved in that way." The other trustee for both Trusts was Mary Wilson, the Iowa IBA representative who also acted as bookkeeper for the Engels. The Engels argue that Ms. Wilson had no personal ties to them and thus her position as trustee validates the Trusts even if the Engels' sons are not considered adverse. What Hinson and others instruct, however, is that it is control of the property that serves as the touchstone in the court's inquiry rather than any technical labels given to the actors. See, e.g., Opdahl , 481 N.W.2d at 712 ("In actions involving trusts . . . [e]quity is not bound by forms, fictions or technical rules . . ."). As noted, Ms. Wilson was not a signatory on Trust bank accounts and there is no other evidence that would suggest she was anything other than a functionary - preparing various bookkeeping documents in conjunction with substantive decisions made wholly by John Engels. The mere presence of a nominal trustee will not save an otherwise defective trust which, in substance, leaves all practical control to a non-trustee. See Scherping , 187 F.3d at 802 (finding trust invalid for tax collection purposes even though taxpayers were not trustees where: 1) property comprising trust was transferred by taxpayers; 2) taxpayers, together with their mother, held 100% of the beneficial interest in the trust; and 3) the nominal trustees were two non-profit corporations that have been repeatedly recognized as vehicles for the promotion of abusive tax shelters); Scott , 31 F.3d at 1571 (explaining how trust structure similar to that at issue here can result in purchaser-manager becoming "in all but name, the trustee of each trust"); Hinson , 994 F.2d 843, at *2 (finding relevant to trust invalidity the fact that "[t]he trust's trustee functions only in a nominal role and does not independently administer the trust"); F.P.P. Enterprises , 830 F.2d at 117 (trust found to be alter ego of taxpayers even though purported settlor and trustees were third parties where property comprising trust contributed by taxpayers and taxpayers continued to treat transferred property as their own after transfer); Neely , 775 F.2d at 1095 ("Where the trustees may act by majority vote, the presence of one adverse party trustee does not save the plan from being treated as a grantor trust."). Cf. Kattar , 81 F. Supp. 2d at 273-74 (finding material fact issue regarding alter ego/nominee status where, inter alia, trustee/son of taxpayer had assumed substantial control over the trust assets, "including its checking account" and had been "liquidating [t]rust assets such as artwork and jewelry in his capacity as trustee" to pay bills of the trust). The court holds that John Engels' broad grant and exercise of authority over the Trusts - unchecked by any effective means - exceeds that contemplated under Iowa law and weighs in favor of finding for the government on the nominee/alter ego issue.
2. Use of Trust assets for personal use and commingling of personal and Trust funds and expenses:
As discussed, in reviewing an alter ego/nominee challenge, courts also look to the degree of commingling between trust and personal funds and expenses and the degree to which trust assets were used for the taxpayers' personal use. Here there can be no question that there was significant commingling of the Engels' personal funds and expenses with those of the Trusts and that the Engels benefitted from personal use of Trust assets. The record is replete with evidence demonstrating that the Engels made no practical distinction between the Trust property and their personal property. Among many other personal expenses paid from Trust bank accounts were life insurance policies for several of the Engels' children, a wedding dress and other wedding expenses for the Engels' daughter, veterinarian services for the family dog, purchase of a hearing aid and service plan for John Engels, donations to the Engels' church and other religious organizations, family groceries, shoes and hosiery. The records also reflect numerous "personal draws" against the accounts. 13 Vehicles owned by the Trusts were used for personal outings such as driving to church or the grocery store. The residence in which the Engels live belongs to the M&J Trust. The Engels aver that they pay rent on the property (by way of a credit against a loan to the Trust) but other expenses such as utilities, phone service and cable television were paid by the Trust. All furniture and appliances within the residence had also been transferred to the Trust, apparently for no consideration, but were used by the Engels as if they owned them.
13 This recitation reflects only a small sampling of the personal expenses paid from Trust accounts. The government's brief at pages 18-22, and the supporting exhibits cited therein, reference dozens of similarly personal expenses paid by the Trusts.
The Engels argue that they always reimbursed the Trusts for personal expenses paid out of Trust accounts. Their main contention in this respect is that from time to time they deposited personal funds -- including wages and tax refunds -- into the Trusts and were then free to use the Trust funds without discretion as long as the net result was to the benefit of the Trusts. While the court does not doubt that discrete instances wherein trust assets are consumed and reimbursed could, in some cases, be consistent with a valid trust, the evidence in this case cannot support such a finding. This is not a case where the occasional personal expense was advanced by the Trusts. Rather, there appears to have been no practical distinction made by the Engels - except, on occasion, for check memo purposes - between personal and Trust funds and expenses. See, e.g., Letscher , 83 F. Supp. 2d at 374-75 (granting government's summary judgment motion on nominee/alter ego theory where taxpayer retained signing authority over the trust accounts, exercised that authority to write checks for personal expenses, presented no documentation to support allegation that all such transactions were loans, and occasionally resided at a property transferred to the trust); Neely , 775 F.2d at 1094 ("A trust arrangement may not be used to turn a family's personal activities into trust activities, with the family expenses becoming expenses of the trust administration."); Don Gastineau Equity Trust , 687 F. Supp. at 1425 (finding trust invalid for federal tax purposes where taxpayers "retained the complete unrestricted beneficial use of the real property at issue while shielding it from the reach of the [IRS]"). This level of commingling and unrestricted beneficial use is not consistent with the operation of a valid trust and is precisely the type of uncertainty counseled against in Ponzelino . 14 See Ponzelino , 26 N.W.2d at 331 (discussing uncertainty that arises where trust operation does not provide for careful distinctions between trust and non-trust funds and expenses).
14 Other evidence in the record equally illustrates the uncertainty caused by excessive commingling of personal and Trust funds and expenses. As noted by the government, many of the financial obligations underlying the real property at issue remained the personal obligation of the Engels long after the properties' purported transfer to the Trusts -- either through mortgages secured only in the Engels' name or personal guarantees on land contracts.
3. Other factors:
The court acknowledges the fact disputes between the parties as to several other potentially significant factors -- particularly, whether adequate consideration was given by the Trusts in return for transferred properties, whether the Engels used the Trusts for fraudulent purposes, and whether proper trust formalities were followed. For purposes of this motion, the court accepts as true the Engels' contention that at least some of the real property was transferred for valuable consideration in the form of debt assumption, that their intention in establishing the Trusts was for estate planning purposes, and that they adhered to some trust formalities such as maintaining separate tax status for the trusts and holding occasional trustee meetings. However, as touched on above, under the facts of this case, the court finds these facts relatively immaterial to the ultimate question before the court. See Wilcox , 983 F.2d 1071, *2-3 (affirming summary judgment to government and finding fact that corporation and trust resulted from proper motives and maintained distinct taxable statuses "of little moment" to alter ego analysis). As has been noted by virtually all courts, there is no exact science to the nominee/alter ego analysis and no single factor is necessarily decisive. See, e.g., Central Nat'l Bank and Trust Co. of Des Moines v. L.H. Wagener , 183 N.W.2d 678, 681-82 (Iowa 1971); Boyd v. Boyd & Boyd, Inc. , 386 N.W.2d 540, 544 (Iowa Ct. App. 1986) ("No precise formula is available to predict when a court should disregard the corporate entity . . ."). See also, e.g., Powell , 2001 WL 283808, at *5 ("The test for determining whether an entity is simply the alter ego of its owner is a practical test, based largely on a reading of the particular factual circumstances."); Richards , 231 B.R. at 579 ("[T]hese factors should not be applied rigidly or mechanically, as no one factor is determinative."); Elliott , supra , at ╤ 9.10 ("There are no particular elements whose presence the courts always insist on to determine that property that is being held in the name of a nominee is in fact the property of another. Many factors may be considered that tend to establish that actual ownership of the property rests in the taxpayer, despite the state of the  legal title.") (citations omitted); 15A W. Fletcher, Cyclopedia of the Law of Private Corporations, ╖ 41.30, at 430-31 ("It seems clear that no hard and fast rule as to the conditions under which an entity may be disregarded can be stated as they vary according to the circumstances of each case and that factors adopted as significant in a decision . . . should be treated as guidelines and not a conclusive test."), quoted in Boyd , 386 N.W.2d at 544. The bottom line remains whether, under the totality of the circumstances, a particular trust, in substance rather than form, merits recognition as a separate entity for federal tax purposes.
In light of what this court deems clear and convincing evidence that the Engels made no practical distinction between personal and Trust property and used Trust assets as if they were their own, the court concludes that equity requires disregard of the Trusts for federal tax purposes. See, e.g., Don Gastineau Equity Trust , 687 F. Supp. at 1426-27 ("While Don Gastineau Equity Trust may have some attributes of a trust under California law, for purposes of the Federal lien statutes [the trust] is a sham which must be disregarded."). Because the Majon and M&J Trusts are alter egos or nominees of the Engels, the assets and income attributed to the Trusts for the years in question are the personal tax liability of the Engels. Aside from the trust issue just resolved, the Engels made no challenge to the presumptive correctness of the additionally imposed taxes for the 1986 through 1989 tax years and, accordingly, the government is entitled to reduction to judgment of those assessments.
B. Fraudulent Conveyance and Federal Tax Lien Foreclosure
Still to be resolved are the government's requests for summary judgment determinations as to its fraudulent conveyance claim and its request for federal tax lien foreclosure. However, at oral argument the court noted significant confusion and much dispute between the parties as to the factual and procedural histories relevant to those claims. Accordingly, to facilitate proper resolution of these matters, the court shall deny the remainder of the government's motion without prejudice to permit the parties the opportunity, should they desire, to clarify their respective positions on these issues.
In conclusion, the court holds that the M&J Trust and Majon Trust are alter egos/nominees of John and Maxine Engels and, as such, are not effective separate entities for federal taxation purposes. The Engels are thus personally liable for federal taxes as assessed against them for the 1986 through 1989 tax years in accordance with notification timely given on May 17, 1994. Accordingly, those assessments are hereby reduced to judgment. The remainder of the government's motion is denied without prejudice and the court makes no determinations as to the merits of those claims.
In accordance with the opinion filed herewith, it is ordered:
The government's motion for summary judgment (doc. no. 75) is GRANTED IN PART and DENIED IN PART.
Done and so ordered this 24th day of September, 2001.
Michael J. Melloy, Judge
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF IOWA
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