How can making someone a retroactive owner even work, given tax issues and costs we have put into the house?

My parents, sister and I planned to buy a rental house together a few years ago. My sister had unfiled taxes at that time and we all agreed she would have to clean that up before being accepted as a partner. She did give my parents some money as part of her anticipated share of the down payment (although not enough to claim the 1/3 part). The deed has only my parents and my name. Shortly after buying the property and before her name could be added, because 6 months later she still had not finished her taxes, my father was diagnosed with cancer and died soon thereafter. Before dying, he was desperate to make final financial arrangements. He decided to put the house into my parent's living trust. Although I protested, he said that since she was still possibly subject to a tax lien and therefore could not be a partner (he was a lawyer). Now, several years later, my mother has tried to return my sister's share of the down payment (plus a lot of interest) but she has refused to accept it. She is now taking legal action against us, trying to get her name on the deed and claiming a 1/3 interest (despite only having given my mother about 25% of what would have been the down payment). Does she have any legal standing to claim ownership? My mother and I both feel that since she did not hold up her end of the deal and get her taxes settled even 6 months after the purchase, returning her "down payment" plus a generous amount of interest was more than fair. My mother is distraught over this.