Nominee – Agency

Alter-Ego

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Interest Paid by Taxpayer’s Nominee Corporation

Taxpayer’s often form nominee corporations in order to hold property they do not want to hold in their own name. Such corporations are usually set up in connection with a specific transaction: they hold title to the taxpayer’s property, execute the necessary notes and mortgages, and often are required to reconvey the property to the taxpayer and dissolve once they have completed these functions. Noncorporate taxpayers form such corporations in order to avoid state usury laws (which are often inapplicable to corporations) so as to obtain the financing for the transaction.

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 narrow exception to the rule that a corporation is a distinct entity from it shareholders applies if the parties to a transaction unequivocally treat the corporation as a mere nominee or agent. A corporation will be treated as an agent only if:

(1) the fact that the corporation is acting as agent for its shareholders with respect to a particular asset is set forth in a written agreement at the time the asset is acquired;

(2) the corporation functions as agent and not as principal with respect to the asset for all purposes, and

(3) the corporation is held out as the agent and not principal in all dealings with third parties relating to the asset. 66

/Footnote/ 66 Comr. v. Bollinger, 485 U.S. 340 (1988). See also George v. Comr., 844 F.2d 225 (5th Cir. 1988). Compare Heaton v. Comr., T.C. Memo 1989-459 (Bollinger test not satisfied in absence of written agreement that corporation acted as agent and third parties were unaware of agency status).

Example – Corporation as Agent

B forms a partnership, P, to develop real estate. A lender requires B to use a corporate nominee to borrow money for the venture and act as record titleholder to avoid restrictions on interest rates under state law. B organizes a corporation, C, wholly owned by B, which pursuant to an agreement takes title to the property as P’s nominee and agent solely to secure financing. P has sole control of the development, and is the principal owner of the property during financing, construction, and operation. All parties involved in the project recognize P as the owner and are aware that C is P’s agent. Income and losses from the development are reported on P’s returns. P is entitled to deduct the losses from the venture because C is respected as the agent of P. 67

/Footnote/ 67 Comr. v. Bollinger, 485 U.S. 340 (1988). The Court rejected the IRS’s contention that a corporation must have an arm’s length relationship with its shareholders to be recognized as an agent.


Information Returns for Dividends, Interest, and Other Reportable Payments

Corporations, banks, trust companies, farmer cooperatives, or other persons who pay dividends, patronage dividends or interest 658 totaling $10 or more to any person during a calendar year are required to file annual information returns on Form 1099. 659 Any payee who receives interest or dividends as a “nominee” for the actual owner and makes payments of $10 or more must also file information returns. 660 Written statements furnished to recipients by the payors of dividends, interest or royalties must show the payor’s name, address, telephone number, the amount reported to the IRS, and must be mailed not later than January 31 (February 10 in the case of a nominee) following the close of the calendar year in which the payments were made. 661 These forms must be filed with the IRS on or before February 28 662 or, if filed electronically, March 31. 663

/Footnote/ 658 Cf. Rev. Proc. 2000-30, 2000-28 I.R.B. 113 (Financial institutions, as defined in §265(b)(5), are not required to report certain non-cash, de minimis premiums given to induce depositors to open or add to accounts).

/Footnote/ 659 §§6042(a), 6044(a), 6049(a); Regs. §§1.6042-2(a), 1.6044-2(a), §1.6049-1(a).

/Footnote/ 660 §6042(a)(1)(B).

/Footnote/ 661 Regs. §1.6042-4(b), (e)(1); §6042(c)(1). Any person who must furnish statements to recipients may do so electronically, without regard to any first class mailing requirement, provided the recipient has consented to receive the statement electronically. The statement may be furnished in a manner similar to the one permitted for Form W-2 or in another manner provided by the Secretary. 2002 Job Creation and Worker Assistance Act (JCWAA), P.L. 107-147, §401, effective for statements for any taxable year ending after Mar. 9, 2002. No automatic extension of the time to submit the statement is available. Regs. §1.6081-8(e) (T.D. 9163, 69 Fed. Reg. 70547 (12/7/04).

/Footnote/ 662 Regs. §1.6041-6.

/Footnote/ 663 §6071(b); Regs. §1.6041-6. An automatic 30-day extension of time to file the return with the government is available if the filer or the transmitter timely files an application on Form 8809 (Request for Extension of Time to File Information Returns), or submits its request in any other prescribed manner, in accordance with Regs. §1.6081-8(b). Regs. §1.6081-8(a) (T.D. 9163). The IRS may allow one additional 30-day extension if the filer or transmitter submits a signed request for the additional extension, with a detailed explanation, before the automatic extension period expires. Regs. §1.6081-8(d) (T.D. 9163).

The forms used for reporting payments of dividends and interest are as follows: 664

  • Form 1099-DIV (for dividends and other corporate distributions to shareholders)
  • Form 1099-INT (for interest income)
  • Form 1099-OID (for original issue discount)
  • Form 1099-PATR (for taxable distributions from cooperatives)
  • Form 1099-MISC (for miscellaneous payments)
  • Form 1096 (annual summary and transmittal of Forms 1099) 665
  • Form 5452 (corporate report of nondividend distributions). 666

/Footnote/ 664 Regs. §1.6042-2(a). For guidance on the filing of substitute forms, see ¶3820.01.H.2, above.

/Footnote/ 665 Form 1096 must be filed on or before Feb. 28 or, if filed electronically, Mar. 31 following the end of the calendar year. Regs. §1.6041-6; §6071(b).

/Footnote/ 666 Form 5452 must be filed with the tax return due for the tax year in which the nondividend distribution was made.

Payors may furnish either the official Form 1099 or an acceptable substitute payee statement in person or in a statement mailing. If a statement mailing is used, only certain limited enclosures in the statement mailing can be made with the payee statement. 667

/Footnote/ 667 See, e.g., Regs. §1.6042-4(d)(2)(i). A mailing is not a statement mailing if it encloses any other material such as advertising, promotional material, or a quarterly or annual report. Although the regulations specifically permit logos on the envelope and on the permitted nontax enclosures, they do not permit logos on the substitute Form 1099 itself. See, e.g., Regs. §1.6042-4(d)(2)(i). In Notice 96-62, 1996-2 C.B. 228, the IRS announced its intent to amend the regulations to allow the use of certain logos and identifying slogans on substitute Forms 1099. Pending issuance of the amended regulations, the IRS will not impose penalties in connection with a payor’s use of a logo or a slogan used by the payor in the ordinary course of its trade or business. The logo or slogan also must not make it less likely for a reasonable payee to recognize the importance of the statement for tax reporting purposes. Rev. Proc. 2004-58, 2004-41 I.R.B. 602, §4.1.2.


Pass-Thru and Indirect Partners

Pass-thru partner means a partnership, S corporation, trust, estate, nominee, or any similar person through whom other persons hold an interest in the partnership with respect to which unified audit proceedings apply. 101 An indirect partner is a person who holds an interest in a partnership through one or more pass-thru partners. 102

/Footnote/ 101 §6231(a)(9). /Footnote/ 102 §6231(a)(10).

Indirect partners are in much weaker positions than notice partners or notice groups vis-a-vis notification from the IRS. 103 Often, the partnership may not be aware of who is an indirect partner during the TEFRA audit proceedings; nevertheless, the procedures are binding on them. For instances, an extension of the statute of limitations is binding on indirect partners, even though they may not be identified on the partnership’s return. 104

/Footnote/ 103 See §6223(a); Regs. §301.6223(g)-1. /Footnote/ 104 See Regs. §301.6223(e)-1(b).

Nevertheless, a pass-thru partner has a duty to send copies of IRS notices (whether received from the IRS, the TMP, or another pass-thru partner) to the indirect partners holding an interest in the partnership through the pass-thru partner. 105 If the pass-thru partner fails to comply with these provisions, this has no effect on the validity of the unified audit proceedings. 106

/Footnote/ 105 §6223(h); Regs. §301.6223(h)-1. /Footnote/ 106 §6230(f). See Sente Investment Club Partnership of Utah v. Comr., 95 T.C. 243 (1990).


Nominees and Agents

Where stock in an S corporation is held by a nominee or agent on behalf of the beneficial owner of the stock, the beneficial owner (rather than the nominee or agent) is treated as the shareholder for S corporation eligibility purposes. 244 However, if the ownership relationship is properly classified as a trust, or if the purported nominee or agent is the beneficial owner of the stock, the eligibility of the trust or other person holding the stock must be considered in determining whether the corporation is a qualifying small business corporation. 245

/Footnote/ 244 Regs. §1.1371-1(d) (issued prior to the SSRA); Regs. §1.1361-1(e)(1). See also PLR 8010028. /Footnote/ 245 See T.I.R. 113 (11/26/58) in which the IRS announced that stock transferred to a minor under the Uniform Gifts to Minors Act is considered as owned by the minor and not by a trust. See also PLRs 8010028, 8847016.


§1.6031(c)-1T Nominee Reporting Of Partnership Information (Temporary).

1.6031(c)-1T(a) Statements Required To Be Furnished To Partnership

1.6031(c)-1T(a)(1) Statement From Nominee
1.6031(c)-1T(a)(1)(i) In General.
Except as otherwise provided in this section, any person who holds, directly or indirectly, an interest in a partnership (required under section 6031(a) and the regulations thereunder to file a partnership return for a taxable year) as a nominee on behalf of another person at any time during the partnership taxable year shall furnish to the partnership a written statement (or statements) for that taxable year with respect to such other person containing the information described in paragraph(a)(1)(ii) of this section.

1.6031(c)-1T(a)(1)(ii) Contents Of Statement.
The statement required under paragraph (a)(1)(i) of this section shall, except as otherwise provided in paragraph (a)(4) of this section, include the following information:

1.6031(c)-1T(a)(1)(ii)(A) The name, address, and taxpayer identification number of the nominee; 1.6031(c)-1T(a)(1)(ii)(B) The name, address, and taxpayer identification number of such other person; 1.6031(c)-1T(a)(1)(ii)(C) Whether such other person is 1.6031(c)-1T(a)(1)(ii)(C)(1) A person that is not a United States person; 1.6031(c)-1T(a)(1)(ii)(C)(2) A foreign government, an international organization, or any wholly-owned agency or instrumentality of either of the foregoing; or 1.6031(c)-1T(a)(1)(ii)(C)(3) A tax-exempt entity (within the meaning of section 168(h)(2)); 1.6031(c)-1T(a)(1)(ii)(D) A description of any interest in the partnership held by the nominee on behalf of such other person at the beginning of the partnership taxable year; 1.6031(c)-1T(a)(1)(ii)(E) A description of any interest in the partnership that the nominee acquires (within the meaning of paragraph (g)(1) of this section) on behalf of such other person during the partnership taxable year, the method of acquisition (e.g., purchase, exchange, acquisition at death, gift, or commencement of nominee relationship) and acquisition cost (within the meaning of paragraph (g)(2) of this section) of such interest, and the date of the acquisition of such interest; and 1.6031(c)-1T(a)(1)(ii)(F) A description of any interest in the partnership that the nominee transfers (within the meaning of paragraph (g)(5) of this section) on behalf of such other person during the partnership taxable year, the net proceeds from the transfer (within the meaning of paragraph (g)(6) of this section) of such interest, and the date of the transfer of such interest.

A description of a partnership interest must include sufficient detail to enable the partnership to furnish to such other person the statement required under § 1.6031(b)-1T (a).1.6031(c)-1T

1.6031(c)-1T(a)(2) Special Rule For Clearing Agencies. A clearing agency registered pursuant to the provisions of section 17A of the Securities Exchange Act of 1934 (or its nominee) that holds an interest in a partnership as a nominee on behalf of another person shall not be required to furnish any statement described in paragraph (a)(1)(i) of this section with respect to such interest.1.6031(c)-1T

1.6031(c)-1T(a)(3) Special Rule For Brokers And Financial Institutions– 1.6031(c)-1T(a)(3)(i) Additional Statement Required. Any broker (within the meaning of paragraph (g)(3) of this section) or financial institution (within the meaning of paragraph (g)(4) of this section) that holds an interest in a partnership indirectly through a nominee described in paragraph (a)(2) of this section at any time during a partnership taxable year shall furnish (in addition to any statement (or statements) required under paragraph (a)(1)(i) of this section) to the partnership a written statement (or statements) containing the information described in paragraph (a)(3)(ii) of this section with respect to any interest in such partnership that it holds (directly or indirectly) for its own account at any time during such partnership taxable year.

1.6031(c)-1T(a)(3)(ii) Contents Of Statement. The statement required under paragraph (a)(3)(i) of this section shall, except as otherwise provided in paragraph (a)(4) of this section, include the following information:

1.6031(c)-1T(a)(3)(ii)(A) The name, address, and taxpayer identification number of the broker or financial institution; 1.6031(c)-1T(a)(3)(ii)(B) Whether such broker of financial institution is a person that is not a United States person; 1.6031(c)-1T(a)(3)(ii)(C) A description of any interest in the partnership held by the broker or financial institution for its own account at the beginning of the partnership taxable year; 1.6031(c)-1T(a)(3)(ii)(D) A description of any interest in the partnership that the broker or financial institution acquires for its own account during the partnership taxable year, the method of acquisition and acquisition cost of such interest, and the date of the acquisition of such interest; and 1.6031(c)-1T(a)(3)(ii)(E) A description of any interest in the partnership that the broker or financial institution transfers for its own account during the partnership taxable year, the net proceeds from the transfer of such interest, and the date of the transfer of such interest.

A description of a partnership interest held by a broker or financial institution for its own account must include sufficient detail to enable the partnership to furnish to the broker or financial institution the statement required under § 1.6031(b)-1T (a).1.6031(c)-1T

1.6031(c)-1T(a)(4) Exception– 1.6031(c)-1T(a)(4)(i) In General. Except as otherwise provided in this paragraph (a)(4), any statement required under paragraph (a)(1)(i) or (3)(i) of this section for a taxable year is not required to include– 1.6031(c)-1T(a)(4)(i)(A) That part of the information described in paragraph (a)(1)(ii)(E) and (3)(ii)(D) of this section regarding the method of acquisition and acquisition cost; or 1.6031(c)-1T(a)(4)(i)(B) That part of the information described in paragraph (a)(1)(ii)(F) and (3)(ii)(E) of this section regarding the net proceeds from the transfer; to the extent that, prior to the beginning of the partnership taxable year, the partnership has provided the nominee with a written statement that the nominee need not provide such information to the partnership, and the partnership has not modified or revoked such statement. For purposes of the preceding sentence, the modification or revocation of a statement furnished to a nominee is effective for a partnership taxable year if and only if the partnership notifies the nominee of such modification or revocation by a written statement more than 60 days before the beginning of the partnership taxable year. The nominee shall retain a copy of any statement that is furnished to it by the partnership under this paragraph (a)(4) in the nominee’s records so long as the contents thereof may become material in the administration of any internal revenue law.

1.6031(c)-1T(a)(4)(ii) Effect Of Election Under Section 754. Paragraph (a)(4)(i)(A) of this section shall not apply to a partnership taxable year if– 1.6031(c)-1T(a)(4)(ii)(A) The partnership has an election in effect under section 754 (relating to optional adjustment to basis of partnership property) for such taxable year; and 1.6031(c)-1T(a)(4)(ii)(B) The nominee knows or has reason to know of such election more than 60 days before the beginning of such taxable year.1.6031(c)-1T

1.6031(c)-1T(a)(5) Examples. The following examples illustrate the application of this paragraph (a):

Example (1) B, a broker, holds 50 units of interest in Partnership P, a calendar year partnership, in street name for customer A, the beneficial owner. B holds the units on behalf of A at all times during 1989. B must furnish a statement to P for calendar year 1989 under paragraph (a)(1)(i) of this section that includes the information required under paragraph (a)(1)(ii)(A) through (D) of this section. The description of the partnership interest held by B on A’s behalf on January 1, 1989, must identify the number of units of P held by B on A’s behalf at that time (50), and the class of the partnership interest (including the Committee on Uniform Security Identification Procedures (CUSIP) number of the partnership interest, if known).

Example (2) The facts are the same as in example (1), except that pursuant to A’s instructions, B sells 25 of A’s units of interest in P on August 1, 1989, receiving net proceeds from the transfer of $500. In addition to the information described in example (1), the statement that B must furnish to P must include the class of the partnership interest transferred (including the CUSIP number of the partnerhsip interest, if known), the number of units transferred (25), the net proceeds from the transfer ($500), and the date of the transfer (August 1, 1989.)

Example (3) The facts are the same as in example (1), except that A is not the beneficial owner, but rather holds the units as a nominee on behalf of C, the beneficial owner, at all times during 1989. In addition to the statement that B must furnish to P (as described in Example (1) of this paragraph (a)(5)), A must furnish a statement to P for calendar year 1989 under paragraph (a)(1)(i) of this section that includes the information required under paragraph (a)(1)(ii)(A) through (D) of this section. If both A and B provide P with the statement required under paragraph (a)(1)(i) of this section, P must provide C with the statement required under § 1.6031(b)-1T (a)(1).1.6031(c)-1T

1.6031(c)-1T(b) Time For Furnishing Statements. A nominee may furnish to the partnership any statement required under paragraph (a) of this section annually, quarterly, monthly, or on any other basis, provided that all statements required to be furnished under paragraph (a) of this section for a partnership taxable year shall be furnished on or before the last day of the first month following the close of such partnership taxable year. 1.6031(c)-1T

1.6031(c)-1T(c) Use Of Magnetic Media. A nominee required to furnish a written statement under paragraph (a) of this section, may, in lieu of furnishing such written statement, furnish the required information on magnetic tape or by other media if the partnership and the nominee so agree. 1.6031(c)-1T

1.6031(c)-1T(d) Use Of Single Document. Any person who holds interests in a partnership as a nominee on behalf of more than one other person during the partnership taxable year, may, in lieu of furnishing to the partnership a separate statement for each such other person, furnish to the partnership a single document which includes, for each such other person, the information described in paragraph (a)(1)(ii) of this section. To the extent that a single document is used, references in this section to the statement required under paragraph (a)(1)(i) of this section shall be deemed to refer also to the information included in a single document under this paragraph (d). 1.6031(c)-1T

1.6031(c)-1T(e) Retention Of Information. The nominee shall retain a copy of any statement that is furnished to the partnership under this section in the nominee’s records so long as the contents thereof may become material in the administration of any internal revenue law. 1.6031(c)-1T

1.6031(c)-1T(f) Use Of Agent. If a partnership has designated another person, such as a clearing organization, as the partnership’s agent for purposes of receiving the statements required under paragraph (a) of this section, such statements may be furnished to that other person instead of the partnership. If a nominee has designated another person as its agent for purposes of furnishing to the partnership (or its agent) the statements required under paragraph (a) of this section, that other person may furnish such statements to the partnership (or its agent) on behalf of the nominee. 1.6031(c)-1T

1.6031(c)-1T(g) Meaning Of Terms. For purposes of this section, the following terms have the meanings set forth below: 1.6031(c)-1T 1.6031(c)-1T(g)(1) The term “acquires” means 1.6031(c)-1T(g)(1)(i) A purchase or other acquisition of a partnership interest; or 1.6031(c)-1T(g)(1)(ii) The commencement of a nominee relationship, including the substitution of one nominee for another.1.6031(c)-1T 1.6031(c)-1T(g)(2) The term “acquisition cost” means the sum of any money paid and the fair market value of any property (other than money) transferred to acquire a partnership interest increased by any expenses paid or incurred with respect to the acquisition (such as broker’s fees or commissions).1.6031(c)-1T 1.6031(c)-1T(g)(3) The term “broker” shall have the meaning set forth in paragraph (a)(1) of § 1.6045-1.1.6031(c)-1T 1.6031(c)-1T(g)(4) The term “financial institution” means a financial institution such as a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank, homestead association, credit union, industrial loan association or bank or other similar organization.1.6031(c)-1T

1.6031(c)-1T(g)(5) The term “transfer” means 1.6031(c)-1T(g)(5)(i) A sale, exchange, or other disposition of a partnership interest; or 1.6031(c)-1T(g)(5)(ii) The termination of a nominee relationship, including the substitution of one nominee for another.1.6031(c)-1T 1.6031(c)-1T(g)(6) The term “net proceeds from the transfer” means the sum of any money and the fair market value of any property (other than money) received in connection with a transfer of a partnership interest reduced by any expenses paid or incurred with respect to the transfer (such as broker’s fees or commissions).1.6031(c)-1T 1.6031(c)-1T(g)(7) The term “person” includes the United States, a State, the District of Columbia, a foreign government, a political subdivision of a State or foreign government, or an international organization.1.6031(c)-1T

1.6031(c)-1T(h) Statement Required By Nominees That Do Not Comply With § 1.6031(c)-1t(a)–1.6031(c)-1T 1.6031(c)-1T(h)(1) In General. Any person that– 1.6031(c)-1T(h)(1)(i) Holds an interest in a partnership as a nominee (other than a nominee described in paragraph (a)(3) of this section) on behalf of another person at any time during the partnership taxable year;

1.6031(c)-1T(h)(1)(ii) Does not furnish to such partnership the statement required under paragraph (a)(1)(i) of this section for such other person with respect to such interest in the partnership; and 1.6031(c)-1T(h)(1)(iii) Receives from such partnership the statement described in paragraph (a)(1) of § 1.6031(b)-1T with respect to such interest in the partnership; shall furnish to such other person a written statement containing the information described in paragraph (h)(2) of this section with respect to such interest in the partnership. 1.6031(c)-1T

1.6031(c)-1T(h)(2) Contents Of Statement. The statement required under paragraph (h)(1) of this section shall contain the following information:

1.6031(c)-1T(h)(2)(i) The distributive share of partnership income, gain, loss, deduction or credit required to be shown on the partnership return that is allocable to such interest in the partnership; and 1.6031(c)-1T(h)(2)(ii) Any additional information that may be required to apply particular provisions of subtitle A of the Code to the beneficial owner of such interest in the partnership in connection with items related to the partnership.1.6031(c)-1T

1.6031(c)-1T(h)(3) Time For Furnishing Statements. A nominee shall furnish the statement required under paragraph (h)(1) of this section within 30 days after receiving the statement described in paragraph (a) of § 1.6031(b)-1T. 1.6031(c)-1T

1.6031(c)-1T(i) Remics. This section shall not apply with respect to any interest in a real estate mortgage investment conduit (REMIC) treated as a partnership under subtitle F of the Code by reason of section 860F(e). For the nominee reporting requirements with respect to REMICs see § 1.6031(c)-2T. 1.6031(c)-1T

1.6031(c)-1T(j) Penalties. [Reserved]1.6031(c)-1T 1.6031(c)-1T(k) Effective Date–1.6031(c)-1T 1.6031(c)-1T(k)(1) In General. Except as otherwise provided in paragraph (k)(2) of this section, the provisions of this section shall apply to partnership taxable years beginning after October 22, 1986. 1.6031(c)-1T

1.6031(c)-1T(k)(2) Transitional Rule For Taxable Years Beginning Before January 1, 1989. For partnership taxable years beginning before January 1, 1989, — 1.6031(c)-1T(k)(2)(i) Any statement that a nominee is required to furnish to a partnership under paragraph (a)(1) of this section shall not be required to include the following information:

1.6031(c)-1T(k)(2)(i)(A) The information described in paragraph (a)(1)(ii)(C) of this section; 1.6031(c)-1T(k)(2)(i)(B) That part of the information described in paragraph (a)(1)(ii)(E) of this section regarding the method of acquisition and acquisition cost of a partnership interest; or 1.6031(c)-1T(k)(2)(i)(C) That part of the information described in paragraph (a)(1)(ii)(F) of this section regarding the net proceeds from the transfer of a partnership interest. 1.6031(c)-1T(k)(2)(ii) A broker or financial institution shall not be required to furnish the additional statement described in paragraph (a)(3)(i) of this section.

[T.D. 8225, 53 FR 34491, Sept. 7, 1988]

 

Internal Revenue Manual (IRM) Part 5. Collecting Process Chapter 12. Federal Tax Liens Section 1. Lien Appeals

5.12.1.2.11  Nominee and Alter-Ego Situations (12-01-2006)
 Persons identified as nominees or alter egos are not entitled to a Collection Due Process Hearing.

If a nominee or alter ego is sent Letter 3177, Notice of Federal Tax Lien Filing “Nominee and Alter Ego” there is no requirement to send this notice certified mail.

The person identified as a nominee or alter ego may use the appeal process under the Collection Appeals Program (CAP).

The taxpayer is entitled to CDP rights under IRC §6320.

 

5.12.1.2.11  (01-09-2009) Nominee and Alter-Ego Situations

  1. Persons identified as nominees or alter-egos are not entitled to a Collection Due Process hearing. CDP hearings are only available to delinquent taxpayers. Remember to send these lien requests to Collection Advisory for review. Advisory will forward the lien request to Counsel for approval.Note:
    Prior to requesting the POA notification, revenue officers must prepare the Form 668(Y)(c). Scan the document into a PDF file and secure e-mail it and any attachments to the CLU. If scanning is not an option, mail the NFTL and any attachments to the lien unit. CLU will complete the billing and issuance process.
  2. Send Letter 3177, Notice of Federal Tax Lien Filing – Nominee and Alter-Ego to individuals identified as nominees or alter egos, with a copy of the lien. Certified mailing is not required. See IRM 5.12.2.
  3. The person identified as the nominee or alter-ego may appeal under the Collection Appeals Program (CAP) process.
  4. The taxpayer (transferor) is entitled to CDP rights under IRC 6320.
    1. Example: John Smith owned property at 1111 Blackstone Park, Anywhere, MD. Mr. Smith has a tax liability. The collection information statement shows no assets. However, research shows he sold property to Jane Smith, his daughter, for a nominal amount. Mr. Smith uses the property as collateral for loans, pays the mortgage, maintains the property, makes repairs and improvements, etc. A NFTL is not filed. Follow-up actions show that Mr. Smith displays ownership. Even though the property is titled to Ms. Smith, Mr. Smith is the beneficial owner. Counsel recommends that a nominee lien be filed against Jane Smith as the nominee for John Smith.
  5. The taxpayer (transferor), in this situation, must receive the right to a hearing notice. In most instances the taxpayer would have received CDP rights (L3172) under IRC 6320 when a NFTL was filed in the taxpayer’s name. Research ALS before issuing the notice.
  6. If necessary, issue L3886, Notice to Taxpayer of Nominee/Alter Ego Federal Tax Lien Filing and Your Rights to a Hearing Under IRC 6320, only if the taxpayer has not received appeal rights (issued L3172) for the identified tax periods.ALS will not generate L3886. Employees assigned the case must ensure the response due date is calculated and the notice is sent certified mail within the required five business day mailing period.
  7. Document the notice mailing in the case file history.
  8. Retain the date stamped receipted copy of the certified mail label. See IRM 5.12.6.4.7 for additional retention information.Note:  Check with your recording official. Some recording offices allow the submission of Form 3982, Billing Support Voucher for Liens and Certificate Fees, for fee payment. The recording office will add the fee to the monthly invoice submitted to CLU for payment.

 

5.12.6.3.11 (10-14-2013) Nominee and Alter-Ego Situations

 


5.12.2.6.5 Preparing Nominee Liens (02-01-2007)

A nominee is someone who is designated to act for another. As used in the federal tax lien context, a nominee is generally a third person who holds legal title to property of the taxpayer while the taxpayer enjoys full use and benefit of the property.     The FTL extends to property actually owned by the taxpayer even though a third party owns legal title.     The third person can be any person listed in IRC §7701(a)(1).

The nominee situation normally involves a fraudulent conveyance or transfer of a taxpayer’s property to avoid legal obligations. To establish a nominee lien situation, it must be shown that while a third party may have legal title to the property, it is the taxpayer that owns the property and who enjoys the full use and benefits.

Request area counsel advice before filing a nominee lien. Consider the following circumstances when developing your case:

  • The taxpayer is paying maintenance expenses.
  • The taxpayer is using the property as collateral for a loan.
  • The taxpayer is paying state and local taxes on the property.
  • Other use or benefit from the property.
  • Other relevant facts.

You may not file a nominee lien without the written approval of area counsel…

In determining what additional enforcement action should be taken, consideration must be given to the confusion in the chain of title and redemption rights of the taxpayer.     These conditions may depress the sale of the property.

A judicial lien, foreclosure or seizure followed by suit to foreclose the NFTL will generally bring a greater sale price, particularly for real property.

The administrative seizure and sale process may be used if prompt action is needed to protect the government’s interest. If there is any doubt, request an opinion from area counsel.

 


5.12.2.6.5 Preparing Nominee Liens (10-30-2009)

  1. Requirements for processing nominee or other special liens are found in IRM 5.12.2.6.4.
  2. A nominee is someone designated to act for another. As used in the federal tax lien context, a nominee is generally a third person who holds legal title to property of a taxpayer while the taxpayer enjoys full use and benefit of that property. The FTL extends to property actually owned by the taxpayer even though a third person holds legal title. The third person can be any person listed in IRC 7701 (a) (1). Note: See IRM 5.12.1.2.11 for procedures for issuing nominee collection due processing notices.
  3. A nominee situation normally involves a fraudulent conveyance or transfer of a taxpayer’s property to avoid legal obligations. To establish a nominee lien situation, it must be shown that while a third party may have legal title to the property, it is the taxpayer that owns the property and who enjoys the full use and benefits.
  4. Request Area Counsel advice before filing a nominee lien. Consider the following circumstances when developing your case:
    • the taxpayer is paying maintenance expenses,
    • the taxpayer is using the property as collateral for loans,
    • the taxpayer is paying state and local taxes on the property,
    • the taxpayer has the use or benefit from the property
    • other relevant facts. See also IRM 5.17.2.5.7.2(2)
  5.  You may not file a nominee lien without the written approval of Area Counsel.
    • Cases should be developed to withstand court challenge (with minimal additional development).
    • Focus should be for advice as to the need for a supplemental assessment, a new notice and demand and the language to be incorporated in the NFTL.
    • Prepare a report containing all of the facts of the case to accompany the request.
    • Request Area Counsel direction regarding enforcement of the lien.
  6. Subsequent enforcement action is at the Area Office’s discretion once Area Counsel has approved application of the nominee theory in writing.
  7. In determining what additional enforcement action should be taken, consideration must be given to the confusion in the chain of title and redemption rights of the taxpayer. These conditions may depress the sale of the property.
  8. A judicial lien foreclosure or seizure followed by suit to foreclose the NFTL will generally bring a greater sale price particularly for real property.
  9. The administrative seizure and sale process may be used if prompt action is needed to protect the governments’ interest. If there is any doubt, request an opinion from Area Counsel.
  10. See IRM 5.17.2, Federal Tax Liens, for additional information.

 

5.17.2.5.7.2 (12-12-2014) Nominee

 


5.12.2.6.6 Determining When a Nominee Lien is Required (02-01-2007)

Under certain circumstances, a statutory lien continues to attach to transferred property, even though a NFTL was not filed at the time of transfer.     For example,

  • The taxpayer (transferrer)(sic) transfers property to a party (transferee) and does not receive adequate and full consideration in money or moneys worth.         The transferee is not considered a purchaser.         See §6323(h)(6)…
  • If NFTL is filed in the name of the taxpayer before the transferee encumbers or sells the property to a valid purchaser, the government’s lien interest is fully protected.
  • In these circumstances, the lien can be enforced by the seizure of the property from the transfer or subsequent valid purchaser, or by a suit to foreclose the lien.

A nominee lien or a “specific property” lien filed in the name of the taxpayer and specifically describing the transferred property is not required to protect the government’s interest when these conditions are met.     Such liens should not be recorded.

The taxpayer may record fraudulent transfer documents that make it appear as if the transfer of their property was to a valid person prior to the filing of the NFTL.     For example, the taxpayer may record a warranty deed showing the transferee paid fair market value for the property instead of a quick(sic) quit-claim deed for a love and affection.     In these circumstances, consider filing:

  • A nominee lien (if the transfer was in name only), or
  • A transferee lien (if the taxpayer gave title and use and control of the property to the transferee, although no consideration was received.

 


5.12.2.6.6 Determining When a Nominee Lien iis Required  (10-30-2009)

  1. Requirements for processing nominee or other special liens are found in IRM 5.12.2.6.4.
  2. Under certain circumstances a statutory lien continues to attach to transferred property even though a NFTL was not filed at the time of transfer. For example,
    • The taxpayer (transferor) transfers property to a party (transferee) and does not receive adequate and full consideration in money or money’s worth. The transferee is not considered a purchaser. See IRC 6323(h)(6) for a more complete definition of purchaser
    • If a NFTL is filed in the name of the taxpayer before the transferee encumbers or sells the property to a valid purchaser, the government’s lien interest is fully perfected.
    • In these circumstances, the lien can be enforced by a seizure of the property from the transferee or subsequent valid purchaser, or by a suit to foreclose the lien.
  3. A nominee lien or a “specific property” lien filed in the name of the taxpayer and specifically describing the transferred property is not required to protect the government’s interest when these conditions are met. Such liens should not be recorded.
  4. The taxpayer may record fraudulent transfer documents that make it appear as if the transfer of the property was to a valid purchaser prior to the filing of the NFTL. For example, the taxpayer may record a warranty deed showing the transferee paid fair market value for the property instead of a quit-claim deed for love and affection. In these circumstances consider filing:
    • a nominee lien (if the transfer was in name only), or
    • a transferee lien (if the taxpayer gave title and use and control of the property to the transferee although no consideration was received).
  5. Minnie College owes $70,000 for tax periods 199912 and 20012. Minnie deeds property valued at $150,000 to her daughter, Molly for no cost. Minnie continues to maintain the property and uses it as collateral for obtaining a car. Molly lives on the property. Molly is a nominee for Minnie because consideration was not received for the property.
  6. William and Mary Black give a $600,000 home to their son Bob. William and Mary, have outstanding tax liabilities and state they have no property and cannot pay their liability. Bob maintains the property, the deed is in his name and he refinanced the home. Bob is the transferee in this case. Bob did not pay for the home. Bob also uses the home for collateral.

 

 

5.12.7.6 (10-18-2013) Special Condition NFTLs (Nominee, Alter Ego, Transferee)

 

5.12.2.6.7 Alter Ego Liens (02-01-2007)

The “alter ego” (second self) doctrine has been summarized as follows: the obligation of a corporation will be recognized as those of another person and vice versa, where it appears that the corporation is not only influenced and governed by that person, but there is such a unity of interest and ownership that the individual reality or separateness of the person and the corporation has ceased. Also the facts are such that adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction of fraud or promote injustice.”

  1. There are two elements to the alter ego doctrine:
    • Unity of ownership and interests,
    • Fraud or inequity would result in the failure to disregard corporate entity.
  2. Some factors pertinent to a determination to disregard the corporate entity are whether the individual:
    • Is in a position of control of authority over the entity.
    • Controls the entity to shield himself from personal liability.
    • Uses the business entity for his or her own financial benefit.
    • Uses the business entity to assume personal debts, or debts of another.
    • Uses personal funds to pay the business entity’s debts.
  3. Some facts established from the factors in (3) above are:
    • Commingling of funds and other assets
    • Failure to segregate funds of the separate entities
    • An unauthorized diversion of corporate funds or assets to other than corporate uses.
    • Treatment by an individual of the assets of the corporation as his or her own.
    • Failure to obtain authority to issue stock or to subscribe to or issue the same
    • Holding out by an individual that he or she is personally liable for the debts of the corporation
    • Failure to maintain minutes or adequate corporate records, and confusion of records of separate entities
    • The identical equitable ownership in two entities
    • Failure to adequately capitalize a corporation, the total absence of corporate assets, and undercapitalization…
  4. Do not file a NFTL in the name of an alter ego without legal review, advice and written direction from area counsel…

 

 


5.12.2.6.7 Alter-Ego Liens  (10-30-2009)

  1. Requirements for processing alter ego or other special liens are found in IRM 5.12.2.6.4.
  2. The “‘alter-ego’” (second self) doctrine has been summarized as follows: The obligation of a corporation will be recognized as those of another person, and vice versa, where it appears that the corporation is not only influenced and governed by that person, but there is such a unity of interest and ownership that the individuality or separateness, of the person and the corporation has ceased. Also the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote an injustice.
    Note:  It is generally more difficult to establish alter-ego relationships than a nominee situation.
  3. There are two elements to the alter ego doctrine:
    • Unity of ownership and interest,
    • Fraud or inequity would result from the failure to disregard the corporate entity.
  4.  Some factors pertinent to a determination to disregard the corporate entity are whether the individual:
    • is in a position of control or authority over the entity;
    • controls the entity to shield himself from personal liability;
    • uses the business entity for his or her own financial benefit;
    • uses the business entity to assume personal debts, or debts of another, or
    • uses personal funds to pay the business entity’s debts.
  5.  Some facts establishing the factors in (3) above are:
    • commingling of funds and other assets,
    • failure to segregate funds of the separate entities,
    • an unauthorized diversion of corporate funds or assets to other than corporate uses,
    • treatment by an individual of the assets of the corporation as his own,
    • failure to obtain authority to issue stock or to subscribe to or issue the same,
    • holding out by an individual that he or she is personally liable for the debts of the corporation,
    • failure to maintain minutes or adequate corporate records, and the confusion of records of separate entities,
    • the identical equitable ownership in two entities,
    • the failure to adequately capitalize a corporation, the total absence of corporate assets, and under capitalization,
  6. Explore the possibility of using the administrative process of jeopardy, transferee assessment, nominee lien, emergency lien foreclosure action, or emergency transferee or fraudulent conveyance suit before filing a NFTL in the name of an alter-ego.
  7. Do not file a NFTL in the name of an alter-ego without legal review, advice, and written direction from Area Counsel as to:
    • the need for a supplemental assessment,
    • a new notice and demand, and
    • the language to be incorporated in the NFTL.
  8. Refer to the Legal Reference Guide for Revenue Officers, 5.17, for additional information.

 

5.12.7.6.2 (10-18-2013) Alter-Ego Lien Notices

 


5.12.2.6.8 Transferee Liens (03-01-2004)

There are two methods the government can use to collect an unpaid tax liability where a taxpayer has transferred property to a third party prior to or after the assessment of the tax. Collection of the tax is based on finding that the transfer was a fraudulent conveyance…

  • The first method, a suit to set aside a fraudulent conveyance, the government collects the transferrer’s(sic) transferor’s tax from the transferred property. This is done by filing a civil action in U.S. Court.         See IRM 5.17.14.1.
  • The second method is administratively imposing transfer liability, which results in the imposition of personal liability for the tax on a third party.         The liability is then collected from the third party’s property. To do this, the Commissioner may issue the notice of transferred liability to the transferee. If a Tax Court petition is not filed or the liability is sustained by the Tax Court, The Commissioner may assess the tax against the transferee under the authority of IRC §6901.

Once the assessment is made, a Notice of Demand and Payment is issued and if the transferee does not pay, a NFPL may be issued…

Contact local counsel for authorization before issuing a transferee lien.

 


5.12.2.6.8 Transferee Liens (10-30-2009)

  1. Requirements for processing transferee or other special liens are found in IRM 5.12.2.6.4.
  2. There are two methods the government can use to collect an unpaid tax liability where a taxpayer (the transferor) has transferred property to a third party (the transferee) prior to or after the assessment of the tax. Collection of the tax is based on finding that the transfer was a fraudulent conveyance. However, liability may arise under contract, various federal liability statutes or state statutes governing bulk sales, corporate dissolutions, and corporate reorganizations.
    •  The first method, a suit to set aside a fraudulent conveyance, the government collects the transferor’s tax from the transferred property. This is done by filing a civil action in U.S. District Court. See IRM 5.17.14.1.
    • The second method is administratively imposing transferee liability, which results in the imposition of personal liability for a tax on a third party. The liability is then collected from the third party’s property. To do this, the Commissioner mails a notice of transferee liability to the transferee, then, if a tax court petition is not filed or the liability is sustained by the Tax Court, assesses the tax against the transferee under the authority of IRC 6901.
    • Once the assessment is made, a notice of demand and payment is issued, and if the transferee does not pay, a NFTL may be issued.
      Note: The application of payments between the transferee and transferor is similar in concept to the cross referencing done with Trust Fund Recovery penalty collections. However, there are no cross-reference transaction codes to cross apply funds. So, even though these accounts are handled by non-master file, payment applications may not be correctly reflected. When receiving payments on an IRC 6901 case, work with Counsel on their application.
  3. You will find many of the same issues in transferee situations that are found in nominee and alter-ego situations. Refer to IRM 5.17.14 for additional information on fraudulent conveyances and transferee liability.
  4. Contact local Counsel for written authorization before issuing a transferee lien.

 

5.1.30.9 (12-12-2010) Successor Entities

1.One problem encountered in complex business cases involves entities such as corporations, partnerships, sole proprietorships, and Limited Liability Companies (LLCs), closing one business entity only to turn around and immediately start another business under a new EIN. The new entity often performs the same type of work and has the same assets, location, employees and individuals operating the new business.

2.Once the assets and income of the taxpayer entity have been transferred, the “successor entity” theory may be used to collect from the new entity. The successor entity theory is a legal theory that relies on fraudulent conveyance and/or alter ego theories. Litigation may be required in order to collect against transferred assets or from the income and assets of the new entity.

3.In these cases it is imperative to do the following:

  • Move as quickly as possible to levy against any known assets of the taxpayer entity, such as account receivables and bank accounts, before they are transferred to the successor entity.
  • Determine what if any assets have been transferred to the successor entity.
  • Determine the value of the transferred assets. Verify any claimed payments used to purchase the assets. Property Appraisal and Liquidation Specialists (PALS) or IRS Engineers can assist with any valuation problems.
  • If the assets were transferred in the face of the recorded lien, consult with PALS to determine the value of the assets. If sufficient equity exists, use the pre-seizure analysis to determine if seizure is the next appropriate action.
  • If assets of sufficient value and equity were transferred in the face of the statutory lien for less than full consideration, seizure again should be considered. Secure all documents and facts related to the transfer and consult with Advisory and Area Counsel to confirm the lien position in the property. Determine if the filing of a nominee, alter ego or transferee lien is needed to ensure the lien interest in the assets is protected.
  • If the taxpayer claims that the assets were transferred for adequate consideration, closely examine the records of what consideration actually passed between the parties. Sometimes, when assets are transferred between related entities payments may not actually have been made. This fact is very important in determining lien priority. As mentioned previously, consult with Advisory and Area Counsel. This situation will most likely require the filing of nominee, alter ego or transferee liens to ensure the lien interest in the assets is protected.
  • If the property in question was transferred before the assessment lien arose, gather all of the pertinent facts regarding the transfer and consult with Advisory and Area Counsel to discuss alternative collection tools that are available based on the facts and the appropriate federal and state laws. These could include:
    • ◦Transferee assessment against successor entity
    • ◦Suit to establish transferee liability
    • ◦Alter ego or nominee liens and levies
    • ◦Suit to foreclose on the federal tax lien
    • ◦Suit to set aside a fraudulent transfer

Note:
Transferred property can be discharged from the effects of the lien if the successor party pays the fair market value of the property less any senior encumbrances. This could be done in lieu of any of the above actions.

4.If the amount owed and the estimated collection from the successor entity warrants the use of the successor entity theory, determine what assets have been transferred by:

  • Reviewing financial statements previously submitted by the taxpayer.
  • Reviewing the most recent balance sheet on the Form 1120 or 1065.
  • Summoning any recent loan applications by the taxpayer.
  • Questioning current or ex-employees regarding the transfers.
  • Questioning principals of the business under oath.
  • Searching local locator sources for both entities for such things as vehicle records, real property records, UCC filings.
  • Summoning insurance records.
  • Summoning the last known bank account and trace the final funds from this account to see if monies where moved into the account of the successor entity.
  • Checking with accounts receivable of the taxpayer entity to see who they paid for work done by the taxpayer. Request copies of payments in order to trace where they were deposited.

5.Proving the “successor entity” theory:

  • Match Secretary of State records for both entities to determine if both are listing the same members or officers.
  • Use state employment records to identify common employees of the taxpayer entity and the successor entity.
  • Contact accounts receivable and accounts payable to determine if they were advised of the change by either entity. Often the successor entity will send a letter telling the party that they have changed their name or the business reorganized. A copy of this letter is excellent proof of the close relationship between the entities.
  • Identify any contracts the taxpayer entity may have had such as lease agreements or contracts for specific jobs. Find out if the contracts were changed to include the successor entity. If not, this may be evidence that the entities are essentially the same.
  • Check local business records such as fictitious names filings or business licenses to determine if they have formally registered the new name and applied for licenses under the new name.
  • Check for a business web page to see how and if the new entity is identified.
  • Secure copies of payments of income earned by the taxpayer to determine if the monies were deposited in to the successor corporate bank account.
  • Summon the taxpayer’s bank account(s) to determine if expenses of the successor corporation were being paid from the income of the taxpayer.
  • Review basic information to see what changed when the new entity was created. This would include common nominee indicators, such as phone and fax numbers, utility providers, such as electricity and gas.
  • Examine to see if deposits of the old entity were refunded or if the utilities were actually changed
  • Check E-mail addresses and web pages
  • Examine service agreements for equipment such as photo copiers.
  • Check rental agreements.

6.Collecting Using Successor Entity Theory

The income and/or assets of the successor corporation must be carefully evaluated.

  • Consider the amount of the liabilities, the equity in any assets, and the amount of income being generated by the successor entity. If the case will require litigation, the amount expected to be collected must equal or exceed the LEM amount for suit recommendations.
  • Consider any weaknesses in the case if it were to go forward to litigation.
  • Consult with local Counsel. The successor entity theory requires approval from Counsel for any lien or levies against the successor assets or income.