Saturday, June 7, 2014

Oh What a Tangled Web We Weave

Originally published on Passive Activities and Other Oxymorons on January 3rd, 2011.
BENNETT v. U.S., Cite as 106 AFTR 2d 2010-6321, 12/09/2010

I had a friend who was in some financial difficulties.  As part of his strategy, he transferred some assets to his father with the expectation of getting them back at some point.  His father died.  My friend did not have a good relationship with his step mother.  He said he called her up every once in a while to remind her about the assets.  It was always good for a laugh on her part.  At his expense.

Timothy Bennett, at least as I can tell from the facts in the case, has not lost his father nor does he have a difficult step mother complicating his transactions.  Still it is a mess.  Mr. Bennett purchased a house from his father.  His mother, who was divorced from his father, was in the real estate business.  The plan was for her to rent the house for $600 per month plus pay the real estate taxes.

Just before the closing, Joanne Bennet (mom), the real estate genius, had a brainstorm.  Since she was living there she could qualify for a Michigan homestead exemption if her name were also on the title.  So even though Timothy Bennett provided all the consideration the house was deeded to Timothy Bennett and Joanne Bennett  as co-owners. It was just a formality.

Timothy Bennett later testified that he relied on Joanne Bennett as his real estate agent, mother and fiduciary to handle the purchase transaction. He testified that he believed that by signing the homestead affidavit, or “homesteading,” Joanne Bennett was simply attesting to the fact that she planned to live at the property.

It later turned out that putting Mom on the title fortuitously had another benefit :

In the summer of 2005, Timothy Bennett and his wife Ann Marie Bennett divorced. As part of the judgment in his divorce case, Timothy Bennett represented that the Cooley Beach property was jointly owned by Joanne Bennett and himself. The parties agreed that his interest in it was not marital property.

Once the divorce was out of the way Mr. Bennett decided that it would be better if the property were totally in his name.  Once again family help was available :

In September 2005, Timothy Bennett asked his brother, Kevin Bennett, an attorney, to draft a quitclaim deed conveying the Cooley Beach property from Timothy Bennett and Joanne Bennett as tenants in common to Timothy Bennett and Joanne Bennett as joint tenants with rights of survivorship.  The quitclaim deed was executed and recorded with the Oakland County Register of Deeds on December 13, 2005.

 In June 2006, the parties prepared another quitclaim deed conveying the property from Timothy Bennett and Joanne Bennett to Timothy Bennett alone. It was executed and recorded with the Oakland County Register of Deeds on August 8, 2006. Through this quitclaim deed, Timothy Bennett and Joanne Bennett granted their interest in the Cooley Beach property to Timothy Bennett alone. The deed states that it was executed for the full consideration of one dollar, but both Timothy Bennett and Joanne Bennett testified that no consideration was given in exchange for this transfer. He further testified that he was merely trying to “clean up the title” to the property in the wake of his divorce. .) “I was trying to get everything straightened out so I could move on with the title.... [Joanne Bennett] should never have been on [the deed] to start with.”

Joanne Bennett's financial situation was not good.  She seldom paid the $600 monthly rent and did not pay the real estate taxes.  Timothy found out about the real estate taxes not being paid and paid them himself.  It turned out that rent and real estate taxes were not the only things that Joanne Bennett was not paying :

Joanne Bennett did not file federal income tax returns between 1999 and 2007. IRS account transcripts show that the IRS began contacting Joanne Bennett in 2002, requesting that she file her delinquent federal income tax returns.  In early 2007, after she had transferred the Cooley Beach property to Timothy Bennett and upon the urging of a friend, Joanne Bennett filed her delinquent tax returns.  No payments were made with these returns.

Ms. Bennett had other bills too and ended up in bankruptcy.  An initial review by IRS Officer Lynsey Taulbee  determined that her delinquent taxes were uncollectible, but management thought there should be some checking for other assets:

 After discovering the June 30, 2006 quitclaim deed, and reviewing utilities and maintenance bills, Taulbee concluded that the Cooley Beach property had been transferred to Timothy Bennett as Joanne Bennett's nominee. Officer Taulbee filed a Notice of Federal Tax Lien and recorded it in the Oakland County Register of Deeds office on March 23, 2009.

According to their testimony this was the first that Timothy learned of his mother's income tax problems.  Family solidarity had found a limit.  He asked her to leave so he could get some paying tenants in.  Unrelated paying tenants.

The case is a suit for "quiet title" on the property. Both sides were asking for summary judgement.  Mr. Bennett's motion was dismissed.  The IRS was granted summary judgement on the issue of Joanne Bennett's having an interest in the property.

Essentially Mr. Bennett's argument is that he and his mother were just trying to chisel on property taxes and hoodwink his ex-wife.  They weren't trying to pull the wool over the IRS's eyes.  The legal analysis is fairly complicated and I'm not going to get into it.  The case is not resolved at this point.  I think the lesson to be learned here is that when Ms. Bennett had her brainstorm about the property taxes, she should have reflected on that fact that she was delinquent on her income tax filing.  Perhaps it would not be fair for Mr. Bennett to lose this property to his mother's income tax problems.  Of course the assessors in the town and his ex-wife might find it to be poetic justice.

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