United States of America v. Rominski et al
Filing
97
MEMORANDUM Opinion and Order written by the Honorable Matthew F. Kennelly on 10/17/2014. For the reasons stated, the Court finds that the government has proven by a preponderance of the evidence that at all times since February 24, 2004, the date o f the Rominski-Wallis divorce decree, the Red Pine property has been and is the property of Joseph Rominski and that Lorrine Wallis holds title as his nominee. For this reason, the Court concludes that the government's lien as determined by th e April 5, 2013 judgment in this case attaches to the Red Pine property. The Court directs the government to prepare a proposed order embodying the Court's conclusion in this regard and directs Mr. Rominski to review it for form. The proposed order is to be submitted by no later than October 24, 2014. The case is set for a telephone status hearing on November 3, 2014 at 8:45 a.m. Counsel for the government is directed to make arrangements for the telephone status hearing and is to communicate the arrangements to the undersigned judge's chambers by no later than October 30, 2014. The Court will inquire at the status hearing what, if anything, remains to be determined in this case. Mailed notice.(pjg, )
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA,
Plaintiff,
vs.
JOSEPH R. ROMINSKI, LORRINE
K. WALLIS, GREAT LAKES CREDIT
UNION, and LAKE COUNTY, ILLINOIS,
Defendants.
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No. 12 C 7643
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
The government has sued Joseph Rominski for unpaid federal income taxes,
interest, and penalties. It seeks to enforce a federal tax lien against property in Lake
County, Illinois, which the parties refer to as the Red Pine property. The legal title
holder to the property is Lorrine Wallis, Rominski's former wife.
On April 5, 2013, the Court entered an agreed judgment holding Rominski liable
for unpaid federal income taxes, interest, and penalties and determining that the
overdue amounts constitute liens on all of Rominski's property and rights to property.
The judgment reads as follows:
IT IS HEREBY ORDERED AND ADJUDGED that the defendant Joseph
R. Rominski, SS No. XXX-XX-0706, is personally liable to the plaintiff,
United States, in the amount of $382,654.77, as of August 31, 2012, for
federal income taxes assessed against him. On and after August 31,
2012, interest has accrued and shall accrue on these adjudged liabilities
as specified in 26 U.S.C. §§ 6601, 6621-22, 28 U.S.C. § 1961(c), along
with all other statutory additions. IT IS FURTHER ORDERED and
ADJUDGED that under 26 U.S.C. §§ 6321-22, the amounts due,
described above, constitute liens in favor of the United States upon all
property and rights to property belonging to Joseph R. Rominski.
See Dkt. no. 46.
Earlier this year, the government moved for partial summary judgment, arguing
that a lien arising from the April 2013 judgment has attached to the Red Pine property.
The Court denied the motion, see United States v. Rominski, No. 12 C 7643, 2014 WL
2880392 (N.D. Ill. June 25, 2014), and it set the matter for trial.
A bench trial was held on September 23, 2014. Mr. Rominski was the only live
witness at the trial. The parties also submitted the depositions of Ms. Wallis and
Lawrence Kagan, a revenue officer, as well as a number of exhibits. This decision
constitutes the Court's findings of fact and conclusions of law.
The Red Pine property consists of real estate and a single-family home in
Gurnee, Illinois. Mr. Rominski has been a practicing attorney at all relevant times. He
currently lives at the Red Pine property. Mr. Rominski purchased the property in 1994.
He was not married at the time but had three daughters from a previous marriage.
Mr. Rominski and Ms. Wallis married in September 1996. At the time they were
married, Ms. Wallis owned a townhouse in Gurnee. She maintained ownership of that
home throughout the marriage. But from 1996 through sometime in 2002 or 2003, the
couple lived together at the Red Pine property.
In March 1997, Mr. Rominski transferred the Red Pine property to Wallis, in her
capacity as trustee of a trust she had established. Pl.'s Ex. 10. No consideration was
paid in return for the property, but Mr. Rominski and Ms. Wallis were married at the
time, and they were both living at the Red Pine home. The trust was revocable, in
whole or in part, by Ms. Wallis during her lifetime. Pl.'s Ex. 9, art. IX. The trust
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instrument also permitted Ms. Wallis to sell any property belonging to the trust. Id., art.
VII.
Mr. Rominski testified during the trial that he had two purposes for transferring
the property to Ms. Wallis's trust. One purpose was asset protection, specifically, to
"take care of [his] wife" and to shield his assets from possible legal malpractice
creditors. At the time, he was not facing any actual or anticipated legal malpractice
claims. Another purpose was to facilitate the eventual transfer of the property to his
daughters, who at the time were all minors. During her deposition, Ms. Wallis testified
that she had a similar understanding of the purposes for the transfer of the Red Pine
property. The Court found the testimony of both of them credible in this regard.
Mr. Rominski had a history of filing his federal income tax returns late. His 1993
return was due in October 1994, but he did not file it until November 1995. See Pl.'s Ex.
1. He paid the balance due, including interest and penalties, in late March 1996, about
a year before he transferred the Red Pine property to the Wallis trust. Id.
Mr. Rominski's 1994 return was due in April 1995, but he did not file it until June
1996, and he still owed taxes, interest, and penalties. See id. By May 1998, Mr.
Rominski had paid the balance due in full. Id.
Based on the evidence, there is no indication that Mr. Rominski filed a tax return
for 1995. This is unexplained by the evidence, and thus the Court does not know
whether Mr. Rominski earned enough income during 1995 to require him to file a return.
There is no indication, however, that he had or has any past due taxes for that year.
At the time he transferred the Red Pine property in March 1997, Mr. Rominski's
1996 tax return was not yet due. He received, on an unknown date, an extension to
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mid-September 1997 to file the return. He did not actually file it, however, until April
2001. The return reflected a tax due and owing of a little over $38,000. See id. From
the available evidence, it does not appear that Mr. Rominski paid any withholding taxes
during 1996. His payroll tax return (form 941) for the third quarter of that year was due
at the end of October 1996, but he did not file it until January 1998. It reflected a
balance due. The amounts due were eventually paid, but the last payment was not
received until July 2001. Id. Mr. Rominski's payroll tax return for the fourth quarter of
1996 was due at the end of January 1997 but likewise was not filed until January 1998.
It also reflected a balance due. The amounts due were eventually paid, but the last
payment was not received until December 2002. Id.
In 1999, Mr. Rominski learned that the secretary at his law office had been
embezzling funds from his law practice. He contacted law enforcement, and the
secretary was charged with and convicted of a felony offense. Mr. Rominski also
obtained a civil judgment against her in excess of $300,000.
In December 2001, Ms. Wallis, in her capacity as trustee, deeded the Red Pine
property to herself in her individual capacity. Mr. Rominski prepared the deed. This
was done to enable Ms. Wallis to use the property as collateral for a loan. Mr. Rominski
testified credibly that at the time, Ms. Wallis was in the process of applying for a loan of
$50,000 to $75,000 to be used by Mr. Rominski to pay down his tax-related debts, and
the property needed to be in her name individually to use as collateral. The loan
application was turned down, so the property was not pledged. No steps were ever
taken to return the property to the trust. Mr. Rominski testified credibly that he simply
forgot to take this step.
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Ms. Wallis and Mr. Rominski separated sometime in 2002 or 2003, and they
were divorced in February 2004. When they separated, Ms. Wallis moved back to her
Gurnee townhouse, and Mr. Rominski continued to live at the Red Pine property. Ms.
Wallis has been to the Red Pine property only once since the divorce.
At all times, all expenses relating to the Red Pine property have been paid by Mr.
Rominski. That said, during the course of the Rominski-Wallis marriage, the funds used
to pay property-related expenses were marital funds, and both Mr. Rominski and Ms.
Wallis lived there. (Ms. Wallis testified credibly that Mr. Rominski paid some of their
expenses from his income and that she paid some from her income.) Since the divorce,
although the property has been and continues to be in Ms. Wallis's name, she has paid
no expenses relating to the property and has derived no benefit from it. Ms. Wallis has
not encumbered the property and has not placed any limits on Mr. Rominski's use of it.
The Rominski-Wallis divorce decree does not on its face describe how their
property was divided. Rather, it recites simply that "the parties had already divided"
their real and personal property and debts. Pl.'s Ex. 8. Ms. Wallis testified, credibly,
that what this means is that "I took out what I brought in, and he took out what he
brought in. . . . I had the townhouse, and he had his house." Pl.'s Ex. 16, Wallis Dep. at
33-34. Their understanding then and now was that Mr. Rominski would keep the Red
Pine property, and Ms. Wallis would keep the Gurnee townhouse. Ms. Wallis later sold
the townhouse and kept the proceeds. With regard to the Red Pine property, she
testified as follows:
Q:
So is the fact that your name is on the deed to the Red Pine
property - - is that just an oversight?
A:
Yes.
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Q:
It should actually be Joseph's name on the deed to the Red Pine
property?
A:
It is Joseph's property.
Q:
So then, for example, if a creditor foreclosed on the property and
there was excess money to be distributed, you wouldn't be claiming any
portion of that money, right?
A:
I would not.
Pl.'s Ex. 16 at 35. The Court finds this testimony credible.
Under 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." The lien attaches to the taxpayer's property or rights to property when
the tax is assessed (unless another date is specified by law) and remains until the
person satisfies the liability or it "becomes unenforceable by reason of lapse of time."
Id. § 6322. A tax lien "applies to property owned by the delinquent at any time during
the life of the lien," including property that he or she acquires after the assessment date.
Glass City Bank of Jeanette v. United States, 326 U.S. 265, 268 (1945). "We look
initially to state law to determine what rights the taxpayer has in the property the
Government seeks to reach, then to federal law to determine whether the taxpayer's
state-delineated rights qualify as 'property' or 'rights to property' within the compass of
the federal tax lien legislation." Drye v. United States, 528 U.S. 49, 58 (1999).
The government contends that Ms. Wallis has, at all relevant times, held title to
the Red Pine property merely as Mr. Rominski's nominee, in other words, that he is the
true owner. "The Supreme Court has broadly interpreted section 6321 to include not
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only the property and rights to property owned by the delinquent taxpayer, but also
property held by a third party if it is determined that the third party is holding the
property as a nominee or alter ego of the delinquent taxpayer." Spotts v. United States,
429 F.3d 248, 251 (6th Cir. 2005) (citing G.M. Leasing Corp. v. United States, 429 U.S.
338, 350-51 (1977)). "A nominee is one who holds bare legal title to property for the
benefit of another." Scoville v. United States, 250 F.3d 1198, 1202 (8th Cir. 2001).
The government's primary argument on the nominee question focuses on the
time of Mr. Rominski's transfer of the property to Ms. Wallis in trust in 1997. The
government has failed to prove that Ms. Wallis was, at that time, a nominee. The Court
quotes from its decision on summary judgment the standard governing this issue:
Ordinarily, the Court would look to Illinois law to determine whether Wallis
qualified as nothing more than Rominski's nominee with respect to the
Red Pine property following the 1997 transfer. But "Illinois law does not
adequately articulate the nominee test . . . ." United States v. N. States
Invs., Inc., 670 F. Supp. 2d 778, 788 (N.D. Ill. 2009). When state law
provides little or no criteria for a nominee relationship, courts look to the
common law factors used by federal courts to determine whether a person
is a nominee. See id. ("[T]his court follows the federal common law to the
extent that federal law adds flesh to the state law bones."); May v. United
States, No. 07-10531, 2007 WL 3287513, at *2 (11th Cir. Nov. 8, 2007)
("[S]ince Alabama law fails to delineate a test for determining the 'real
intent' of a title transfer between spouses, we are guided by the commonlaw factors generally applied by federal courts to determine the existence
of a nominee relationship."); Cody v. United States, 348 F. Supp. 2d 682,
694 (E.D. Va. 2004) ("When faced with similar tax levy disputes, federal
courts sitting in states whose law of nominee ownership is similarly
undeveloped have typically looked to nominee ownership criteria
employed in other federal tax collection cases.").
With slight variations, federal courts have used the following factors to
determine whether a person is a nominee with respect to certain property:
1) the person paid no or inadequate consideration for the property; 2) the
property was transferred to the person in anticipation of a lawsuit or
liability, 3) the transferor of the property continues to possess, enjoy, and
control the property despite the transfer, 4) the person and transferor have
a close relationship, and 5) the transfer of property was never recorded.
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Oxford Capital Corp. v. United States, 211 F.3d 280, 284, n. 1 (5th Cir.
2000); United States v. Towne, 406 F. Supp. 2d 928, 937 (N.D. Ill. 2005).
Some courts have considered the additional factor of whether the
transferor used personal funds to purchase or maintain the property.
Cody, 348 F. Supp. 2d at 694-95; Baum Hydraulics Corp. v. United States,
280 F. Supp. 2d 910, 917, n. 14 (D. Neb. 2003); In re Richards, 231 B.R.
571, 579 (E.D. Pa. 1999).
Rominski, 2014 WL 2880392, at *4.
The Court analyzes this issue much as it did in denying the government's motion
for summary judgment. First, when Mr. Rominski transferred the Red Pine property to
Ms. Wallis, he did not receive any consideration in return. But they were, of course,
married and living together on the property at the time, and Ms. Wallis was paying some
of their joint expenses.
Second, the transfer took place about a year after Mr. Rominski had finished
paying off taxes, penalties, and interest for the year 1993 and at a time when he still had
taxes, penalties, and interest due and owing for the year 1994, though that was a
relatively modest sum. He had not filed an income tax return for 1995, but then again,
there is no evidence of a tax due and owing for that year. His 1996 income tax return
was not yet due, but as of the time of the transfer he had two past due withholding tax
returns that, if filed on time, would have shown a balance due.
A key issue is whether Mr. Rominski made the transfer in anticipation of a lawsuit
or liability. As the Court stated in its summary judgment ruling, "[c]ourts have
interpreted this factor in the nominee test to involve a situation in which the taxpayer
transferred property to shield it from a creditor associated with an expected lawsuit or
liability, not simply that the taxpayer expected a lawsuit or liability at the time of
transfer." Id. at *5 (citing cases). Though Mr. Rominski likely was aware at the time that
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he was behind on his withholding tax payments and therefore would be subject to levy,
the government has not shown that the property transfer was motivated in any way by a
desire to avoid this or any other particular expected liability. Mr. Rominski and Ms.
Wallis both testified, credibly, that he initiated the transfer for estate planning and
professional liability purposes. The Court was unpersuaded by the government's
argument that this testimony should not be believed or should carry little or no weight.
And although Mr. Rominski said that part of his motivation was to shield the property
from clients who might one day sue him for malpractice, "[t]hat rather inchoate concern .
. . is not the type of expected liability that has tended to carry the day for the
government" in claiming that the title holder is a mere nominee. Id.
There is a viable distinction between legitimate asset protection and estate
planning and avoidance of actual or anticipated creditors. For example, in In re
Richards, 231 B.R. 571 (E.D. Pa. 1999), the court persuasively distinguished the sort of
activity contemplated by the second factors of the nominee test from "estate planning,"
in that case, "establish[ing] [a] trust to protect the home generally from future creditors."
Id. at 579. The Court finds that Mr. Rominski made the 1997 transfer for legitimate
estate planning purposes and not to avoid an actual or anticipated debt.
As for the third factor in the nominee test, it is undisputed that Mr. Rominski
continued to possess and enjoy the Red Pine property even after transferring it to the
Wallis trust in 1997. It is also undisputed that Mr. Rominski financed the maintenance
of the property, insurance, mortgage payments, and so on. But the government's
reliance on those factors in this case does not adequately take account of the fact that
Mr. Rominski and Ms. Wallis were married, and living together at the Red Pine property,
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at the time of the transfer in 1997 and at all times through at least the latter part of 2002.
Even though Mr. Rominski continued to possess and use the property during that
period, Ms. Wallis did so as well. And as the Court has noted, the funds from which Mr.
Rominski made the payments in question were funds earned during the marriage and
thus were marital funds that were used in a way that benefitted both of them, and Ms.
Wallis paid other joint expenses. As at least one court has noted, a number of the
factors in the nominee test "provid[e] little utility in distinguishing tax shams from
legitimate titling decisions between spouses," largely because those factors nearly
always would point in favor of finding inter-spousal transactions to lack legitimacy.
Spotts v. United States, 429 F.3d 248, 253 n.2 (6th Cir. 2005).1
In sum, the Court concludes that the government has failed to show that when
Ms. Wallis acquired the property in 1997, she was Mr. Rominski's nominee. The
transfer was a legitimate one, made for legitimate purposes.
This, however, is not the end of the story. As discussed earlier, Mr. Rominski
and Ms. Wallis were divorced in 2004. Their settlement contemplated re-transfer of the
Red Pine property to Mr. Rominski. But that never happened. And since the time of the
divorce—and for a significant period before that—Ms. Wallis has not benefitted from the
property in any way. She has not lived in it or otherwise used it. Nor has she paid for
any expenses involving the property. In contrast to the period when they were married,
all funds used to maintain the property and to make payments for property taxes,
insurance, and so on have been Mr. Rominski's funds and his alone—not marital funds
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With regard to the other factors in the nominee test, it is undisputed that Mr. Rominski
and Ms. Wallis had a close relationship at the time of the 1997 transfer, and it is likewise
undisputed that the transfer was promptly and properly recorded.
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as had been the case prior to the divorce. Since the time of the divorce, the property
has been Wallis's in name only.
Though this situation does not fit neatly into the nominee test as the Court has
described it, that is of little consequence. The ultimate issue is who is the real owner of
the property. It is abundantly clear that, since the time of the divorce, Mr. Rominski has
been the sole true owner. Ms. Wallis said exactly that, credibly, during her deposition:
she stated that "[i]t is Joseph's property"; the property was supposed to have been
deeded back to him consistent with their property settlement; and the failure to do so
was an oversight. Pl.'s Ex. 16 at 35. This testimony could hardly be clearer: since the
divorce in 2004, Ms. Wallis has been holding the property for Mr. Rominski. That is the
very definition of a nominee: "one who holds bare legal title to property for the benefit of
another." Scoville, 250 F.3d at 1202.
For these reasons, the Court finds that the government has proven by a
preponderance of the evidence that at all times since February 24, 2004, the date of the
Rominski-Wallis divorce decree, the Red Pine property has been and is the property of
Joseph Rominski and that Lorrine Wallis holds title as his nominee. For this reason, the
Court concludes that the government's lien as determined by the April 5, 2013 judgment
in this case attaches to the Red Pine property.
The Court directs the government to prepare a proposed order embodying the
Court's conclusion in this regard and directs Mr. Rominski to review it for form. The
proposed order is to be submitted by no later than October 24, 2014. The case is set
for a telephone status hearing on November 3, 2014 at 8:45 a.m. Counsel for the
government is directed to make arrangements for the telephone status hearing and is to
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communicate the arrangements to the undersigned judge's chambers by no later than
October 30, 2014. The Court will inquire at the status hearing what, if anything, remains
to be determined in this case.
________________________________
MATTHEW F. KENNELLY
United States District Judge
Date: October 17, 2014
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