Title to Accounts

DISCLAIMER
Please note: "Nominee" "Alter-Ego" "Reverse Alter-Ego" "Agents" "Agency" "Straw Man" "Dead Cat" "Assignment of Income" "Off-shore Trusts" "Asset Protection" "Series LLCs" "Xtreme LLCs" "Nevada Corporations" "Unity of Interest" "Instrumentality Rule" "Identity Rule" and many other entities and schemes have been found to have been used for improper or illegal purposes.  Nothing on this website is to be used or to be considered as promoting anything other than proper, legal tax planning with advisory from your own qualified lawyer. 

Do not read further if you are seeking illegal federal income tax avoidance strategies or other inappropriate or illegal activities, as you will not find anything here to be of interest to you.

http://www.irs.gov/pub/irs-pdf/f1040as1.pdf
Nominees. If you received a Form 1099-INT that includes interest you received as a nominee (that is, in your name, but the interest actually belongs to someone else), report the total on line 1. Do this even if you later distributed some or all of this income to others. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter "Nominee Distribution" and show the total interest you received as a nominee. Subtract this amount from the subtotal and enter the result on line 2.

If you received dividends as a nominee, you must give the actual owner a Form 1099-DIV unless the owner is your spouse. You must also file a Form 1096 and a Form 1099-DIV with the IRS. For more details, see the General Instructions for Forms 1099, 1098, 5498, and W-2G and Instructions for Form 1099-DIV.

http://www.irs.gov/instructions/i1040sa/ar02.html
Nominees - If you received a Form 1099-INT that includes interest you received as a nominee (that is, in your name, but the interest actually belongs to someone else), report the total on line 1. Do this even if you later distributed some or all of this income to others. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter "Nominee Distribution" and show the total interest you received as a nominee. Subtract this amount from the subtotal and enter the result on line 2.

http://www.irs.gov/businesses/small/article/0,,id=106572,00.html
Nominee - A nominee is an individual or entity, which acts on behalf of a beneficial owner. Most often the nominee pretends to be the owner of an entity, asset, or transaction to provide a veil of secrecy as to the beneficial owner's involvement. Many offshore entities provide nominee services whereby they will provide a nominee to act as owner of your arrangement but generally will not act unless instructed to by the beneficial owner.

http://www.irs.gov/taxtopics/tc403.html
You must use Form 1040 to report interest in some situations. For example, you cannot use Form 1040A or 1040EZ if you are reporting original issue discount in an amount that differs from the amount shown on Form 1099-OID, or if you received or paid accrued interest on a bond transferred between payment dates. You must use Form 1040 or Form 1040A if you received interest in your name as a nominee for the actual owner, or you received a Form 1099-INT for U.S. savings bond interest.

If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Form 1040 Schedule B or Form 1040A Schedule 1. Follow the form instructions for nominees. You must prepare a Form 1099-INT (PDF) for the interest that is not yours and give Copy B to the actual owner. You must also file a copy and a completed Form 1096 (PDF), Annual Summary and Transmittal of U.S. Information Returns, with the Internal Revenue Service Center.

http://www.irs.gov/pub/irs-pdf/i1040sd.pdf#search=%222005%20Instruction%201040%20Schedule%20D%20%22
Schedule D, lines 1 and 8 - Add the following amounts reported to you for 2005 on Forms 1099-B and 1099-S (or substitute statements) that you are not reporting on another form or schedule included with your return: (a) proceeds from transactions involving stocks, bonds, and other securities and (b) gross proceeds from real estate transactions (other than the sale of your main home if you are not required to report it). If this total is more than the total of lines 3 and 10, attach an explanation of the difference (for example, you were the nominee for the actual owner of the property)

Nominee - Agency & Alter-Ego reporting issues

IRS to pursue enforcement actions for the improper use of nominees:
http://www.irs.gov/businesses/small/article/0,,id=214886,00.html

http://www.irs.gov/businesses/small/article/0,,id=214471,00.html

Business Terms:
Straw Man - One who purchases property that is, in turn, conveyed to another for the purpose of concealing the identity of the eventual purchaser. See also Nominee.

Real Estate Terms:
Straw Man - One who purchases property that is, in turn, Conveyed to another for the purpose of concealing the identity of the eventual purchaser.

Example: A Developer is assembling land, for a Subdivision from a large number of individually owned plots. To avoid the possibility that a few landowners will hold out for high prices, the developer uses straw men to purchase the Parcels. Agents of the developer purchase plots in their own names and later convey the land to the developer.

Legal Encyclopedia:
Straw Man - An individual who acts as a front for others who actually incur the expense and obtain the profit of a transaction.

In the terminology employed by real estate dealers, a straw man is an individual who acts as a conduit for convenience in holding and transferring title to the property involved. For example, such a person might act as an agent for another in order to take title to real property and execute whatever documents and instruments the principal directs with respect to the transaction.

Dead Cat - This refers to is the practice of placing an imaginary person on the Initial/Annual List of Officers, and other documentation. In other words, there are some people signing the corporate documentation as an imaginary "nominee officer" to cut costs and maintain control, while supposedly meeting the statutory reporting requirements of the Secretary of the State.

There's no reason, even in terms of common sense, to use a DEAD CAT when a legitimate nominee officer will do. Don't break the law. Get a qualified nominee officer!

From Black's Law Dictionary, 7th Edition. (It's a big red book).

Straw man:
1. A fictitious person, esp. one that is weak or flawed.
3. A third party used in some transactions as a temporary transferee to allow the principal parties to accomplish something that is otherwise impermissible.

Nominee:
1. A person who is proposed for an officer, position, or duty.
2. A person designated to act in place of another, usually in a very limited way.
3. A party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.




http://64.233.161.104/search?q=cache:xH2EuXTdoFYJ:www.boe.ca.gov/proptaxes/pdf/200_0358.pdf+%22straw+man%22+nominee&hl=en&gl=us&ct=clnk&cd=18
The partnership agreement provided that title to the property would be held by one of the corporations as nominee for the partnership. The corporation holding title was subsequently merged into another corporation both of which were wholly owned by the same person.. The latter corporation, as successor by merger to the real property, later conveyed the property to the partnership. The court held that no change in ownership occurs "upon the transfer of bare legal title without a corresponding transfer of the beneficial use thereof," and that since the nominee corporation and its successor held no more than "bare legal title" to the property, the transfer to the partnership was not a change in ownership

Nominee holders are used in real estate transactions for the following purposes:

1. to conceal the identity of the developer;
2. to avoid state usury statutes, which often exempt corporate borrowers;
3. to avoid personal liability on the loan by the developer;
4. to participate in certain government-subsidized housing programs;
5. to conceal information from the beneficial owner’s creditors;
6. to have warranties given by the nominee rather than the beneficial owner;
7. to make transfers without the knowledge of or consent of the beneficial owner’s spouse;
8. to avoid probate proceedings;
9. to avoid problems presented by the beneficial owner's legal disability (e.g., the owner is a minor).

One of the main differences between an agent / principal relationship and a straw party relationship is the degree of control asserted by the principal. An agent stands in a fiduciary relationship with the principal and may only act pursuant to the principal's direction. A straw party, although bound by his contract with the principal, is free to act of its own accord. A straw party could refuse to convey the real estate to the principal or wrongfully convey the real estate to a third party resulting in litigation on the principal's part to regain the property. Consequently, it is safer for a principal to establish a corporation that it directly controls to act as a straw party rather than contract with an individual to act as a straw party. Real Estate Financing § 2C.03.


 

Nominee holders are used in securities transactions for the following purposes:

1. for expediency in establishing a brokerage account using the name of an individual, rather than face the red-tape to establish an account using the name of an entity;
2. to get margin loan approval, options trading approval or commodities trading approval with little or no complications by using the name of an individual rather than use the name of an entity;
3. to trade an account or talk on the telephone with the brokerage with no complications - by using the name of an individual rather than use the name of an entity;
4. to avail the entity to a long-derived Special Memorandum Account (SMA) position in an existing brokerage account rather than build up SMA from scratch over many years in a newly established account;
5. to enhance margin availability by rotating fed calls between different tax ID numbers;
6. to avoid non-individual classification which results significantly higher "professional trader" NYSE and NASD fees;
7. to help maintain some level of secrecy and avoid the odd looks from people who learn that you make your living by "day trading";
8. to help maintain some level of secrecy and avoid to some extent people at brokerage firms from observing your positions and activity;
9. to keep and maintain long-standing contacts, subscriptions and accounts without making it anyone's business that you trade on behalf of an entity;
10. to maximize asset protection under Securities Investor Protection Corporation (SIPC) and under Federal Deposit Insurance Corporation (FDIC).
11. to avoid red-tape when opening bank accounts re: The USA Patriot Act and "know your customer" rules;
12. to avoid problems presented by the beneficial owner's legal disability (e.g., the owner is a minor, an incompetent, a non-USA citizen, insolvent, bankrupt, charging orders).

Brokerage accounts titled in the name of the business can look like this:

USA Trading Partners, LLC
123 Street
City, State

USA Trading Partners, LLC
Mark-To-Market Trading Account
123 Street
City, State

USA Trading Partners, LLC
Long-Term Investment Account *
123 Street
City, State

* It generally is not advisable to hold investments in an entity that was set up to qualify under trader status.



Brokerage accounts titled in the name of a nominee who holds bare legal title for the benefit of the trader business can look like this:

John Smith
123 Street
City, State

John Smith, nominee
123 Street
City, State

John Smith
Mark-To-Market Trading Account
123 Street
City, State

John Smith
Securities Trading Account
123 Street
City, State

John Smith
USA Trading Account *
123 Street
City, State

* Be aware that sometimes it is not advisable to use what is obviously the name of an entity listed here (i.e. USA Trading, LLC) since the brokerage may then choose to charge higher fees applicable to a professional trader.



Investments held by an individual can be titled like this:

John Smith
Long-Term Investment Account *
123 Street
City, State

* Be aware that the IRS can attack trader status when the taxpayer has significant investments besides his investment in his securities trading business.  To help avoid such an attach the taxpayer may form a separately filing entity to run the trading business activity through.
 

Nominees, Alter-Egos and Successors - US Dept of Justice whitepaper (PDF file) discussing the improper use of nominee accounts as a tool used to assist tax evaders in hiding  assets and the taxable income thereon.   Nominee account must never be used (or even appear to be used) to improperly hide or re-direct taxable income in violation of the US Income Tax Laws.


Assets held with bare legal title in the name of a "straw man" or a "nominee" which is done legitimately for everyday business transactions should not be confused with Assignment of Income which can be unlawful.

 

Arguments that can be used by the IRS to challenge a nominee relationship:

The following parties may not claim interest deductions when they make payments on the other's debt:

• partnerships and partners; 267
• husbands and wives; 268
• parents and children; 269 and
• corporations and stockholders. 270

/Footnote/ 267 Steinert v. Comr., T.C. Memo 1985-581.
/Footnote/ 268 Teitelbaum v. Comr., 346 F.2d 266 (7th Cir. 1965).
/Footnote/ 269 Prendergast v. Comr., T.C. Memo 1983-419.
/Footnote/ 270 Abdalla v. Comr., 69 T.C. 697 (1978), aff'd, 647 F.2d 487 (5th Cir. 1981); Morris Plan Co. of Binghamton v. Comr., 26 B.T.A. 772 (1932).

Example - Ex-Spouse
G, a cash basis taxpayer, pays $10,000 of interest in 1989 on his ex-wife's debt, which she incurred while they were married. By the terms of their divorce, G has no obligation to discharge this debt. The $10,000 is accordingly not deductible since it is not paid on his own debt. (See Teitelbaum v. Comr., 346 F.2d 266 (7th Cir. 1965)).

update: August 11, 2008. Taxpayers using a husband-wife LLC raise the eyebrows of the Court in G. Holsinger, TC Memo. 2008-191, Dec. 57,512(M) as it was noted that the five brokerage accounts used by the LLC apparently were held in the bare legal title name of the individual member with the individual's social security number (rather than held in the name of the LLC with the LLC's taxpayer ID#) and they were used by the individual, as his own, prior to the formation of the LLC.

update: August 5, 2013. Taxpayer was allowed to act as an agent or conduit for his father Hessing, TC Memo. 2013-179 and the Court decided to ignore the taxpayer's name as it appeared on the various documents, and attributed all tax liability to the true beneficial owner, the taxpayer's father.  Apparently the father failed to report the income, and perhaps the form 1099-S was not issued to his name, and therefore the IRS did not know that he sold the property.

Discussion - when the entity is the nominee for the individual:

The problem with nominee corporations in the context of interest deductions is that the corporation may be treated as a taxpayer separate and distinct from the taxpayer that set up the corporation. If so, the interest on the debt used to acquire the property may not be deductible by the taxpayer if the debt is considered a debt of the nominee corporation.

A true agency relationship between the nominee corporation and the taxpayer must exist for the corporation to be disregarded and the interest on the debt to be deductible by the taxpayer (who is the beneficial owner of the property). The following three factors have been used as the "test" of a true agency relationship:

• the fact that the corporation is acting as the taxpayer's agent is set forth in a written agency agreement at the time the property is acquired;
• the corporation functions as an agent and not as a principal with respect to the property for all purposes; and
• the corporation is held out as an agent in all dealings with third parties relating to the property. 272

/Footnote/ 272 Bollinger v. Comr., 108 S.Ct. 1173 (1988), aff'g 807 F.2d 65 (6th Cir. 1986); followed in George v. Comr., 844 F.2d 225 (5th Cir. 1988).

Other factors that tend to establish a true agency relationship are:

• the corporation holds title to the property as the taxpayer's agent for the purpose of securing financing and agrees to convey, assign, or encumber the property and disburse the proceeds as directed by the taxpayer;
• the corporation has no obligation to maintain the property or to assume liability by reason of execution of the notes to the lender;
• the taxpayer indemnifies the corporation from any liability it sustains as the taxpayer's agent and nominee; and
• although the nominee corporation is the owner of record, the taxpayer is the principal and owner of the property during financing, construction, and operation. 273

/Footnote/ 273 Id.

A taxpayer must present "unequivocal evidence" of an agency relationship in order to deduct interest paid on a nominee corporation's debt. 274 Such evidence was not presented where the corporation signed documents in its own name, maintained its own bank account, and maintained its own account books. 275

/Footnote/ 274 Greenberg v. Comr., T.C. Memo 1989-12.

/Footnote/ 275 Id.

No advance rulings or determination letters are available from the IRS concerning who is the true owner of property or the true borrower of money where formal ownership or liability rests in a party other than the taxpayer (such as a nominee corporation). 276

/Footnote/ 276 Rev. Proc. 80-22, 1980-1 C.B. 654, superseded by Rev. Proc. 81-10, 1981-1 C.B. 647, superseded by Rev. Proc. 82-22, 1982-1 C.B. 469.

 A Traders Tax Responsibilities



Colin M. Cody, CPA, CMA
TraderStatus.com LLC
6004 Main Street
Trumbull, Connecticut 06611-2400

(203) 268-7000