Taxpayer Can't Avoid IRS Levy by Transferring Cello to a Trust

(Parker Tax Publishing July 2023)

A district court denied a taxpayer's motion to quash the government's writ of execution to authorize the seizure of a fine Italian cello in order to collect on a judgment for unpaid estate taxes. The court found that although the cello was held by an irrevocable trust, the taxpayer was the cello's equitable and legal owner because he was the beneficiary and sole trustee of the trust. U.S. v. Firestone, 2023 PTC 161 (W.D. Wash. 2023).

Background

In 2012, the IRS notified Omar Firestone that the estate of Ghaida M. Firestone had been selected for an audit. Firestone was the executor of the estate. On April 16, 2013, the IRS notified Firestone that the recomputed estate tax liability for the estate was approximately $1.8 million, including penalty and interest. On May 17, 2013, Firestone created the Firestone Irrevocable Cello Trust ostensibly transferring a fine Italian cello from Firestone as the settlor to the Firestone as the trustee of the trust. In 2014, the estate stipulated to additional estate tax liabilities. Firestone failed to pay the tax assessment.

In 2019, the government brought an action against Firestone to reduce an unpaid estate tax to judgment and foreclose on certain real property. In 2021, a district court entered a judgment against Firestone in the amount of $2.5 million plus statutory accruals and interest. In 2022, the government filed an ex parte application for a writ of execution. The court granted the government's request and issued the writ of execution that authorized the seizure of the cello in order to collect on the judgment.

Firestone filed a motion to quash the writ of execution. He argued that the government's action was barred by the six-year statute of limitations in Section 3306(b)(1) of the Federal Debt Collection Procedures Act (FDCPA) (28 U.S.C. Section 3306(b)(1)). Section 3306(b)(1) applies to actions to set aside or void a transfer by a debtor that is fraudulent and done with intent to hinder, delay, or defraud a creditor. Firestone also argued that the cello was not his personal property because it belonged to the trust. However, Firestone also claimed that he had a life estate interest in the cello. Firestone asserted that someone else - Robert Cauer - was the actual beneficiary of the trust. According to Firestone, the trust was created to compensate Cauer, a Los Angeles string instrument dealer, for the loss of a sales commission when Firestone defaulted on the payments to the cello's owner. Firestone attached to his motion an email from Cauer in which he claimed to "certify" that he was the beneficiary of the trust.

The IRS said it was unclear whether the cello was ever transferred to the trust. The IRS also argued that its action was governed by the 10-year statute of limitations on actions to collect assessed taxes under Code Sec. 6502(a).

Analysis

The district court denied Firestone's motion to quash the government's writ of execution. The court further ordered that if the cello was no longer within the United States, Firestone was required to repatriate the cello.

The court found that both parties missed the mark regarding the appropriate statute of limitations. Contrary to Firestone's assertion, this case did not include a fraudulent transfer claim, even if the government questioned the validity of the trust. Contrary to the government's assertion, however, the court found that this case was also not an action to collect taxes under the Code but rather an action to collect debt under the FDCPA. The court pointed out that the government sought and obtained a writ of execution under 28 U.S.C. Section 3203 to collect on a judgment. Therefore, the court concluded that the action was not barred by a statute of limitations, since the FDCPA provides no time limit for the collection of debts by writ of execution.

Regarding the issue of Firestone's ownership of the cello, the court noted that under the FDCPA, all property in which the judgment debtor has a "substantial nonexempt interest" is subject to levy pursuant to a writ of execution. The FDCPA broadly defines "property" as any present or future interest, whether legal or equitable, in property including personal property. The court further noted that under Ninth Circuit precedent, in determining whether a property right falls within the FDCPA's definition of property, the important consideration is the breadth of control the taxpayer could exercise over the property, which is determined by reference to the state law governing the right.

In the court's view, Firestone held a substantial interest in the cello because under California law, he possessed both present equitable and legal interests in personal property that was held in trust. First, the court found that under California law, trust beneficiaries hold the equitable or beneficial interest in property held in trust and are regarded as the real owners of that property. The court observed that Firestone was the lifetime beneficiary of the trust with permission to possess and play the cello during his lifetime. The court also noted that Firestone himself stated that he had a life estate interest in the cello. The court rejected Firestone's self-serving declaration and Cauer's unsworn statement as insufficient to defeat to the clear terms of the trust agreement itself. According to the court, Firestone could have included Cauer as a beneficiary, but chose not to do so, naming only himself as the beneficiary. He also could have provided legal documentation such as a deed reflecting the transfer of interest to Cauer but failed to do so.

The court also found that as the sole trustee of trust, Firestone also held a legal interest in the cello because California law treats a trustee as holding legal title to property held in trust. Thus, after determining that he held both an equitable and a legal interest in the cello, the court concluded that Firestone had a substantial nonexempt interest in the cello which could be executed upon by the government.

For a discussion of the IRS's collection authority, see Parker Tax ¶260,510.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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