United States:
The IRS And Nominee Liability
19 April 2022
Freeman Law
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Nominee Liability
Under the Internal Revenue Code, the IRS can satisfy a tax
deficiency by imposing a lien on any “property” or
“rights to property” belonging to the taxpayer. The
statutory language is broad and reaches virtually every interest in
property that a taxpayer might have, with limited exceptions. In
fact, the IRS’s legal ability to reach “property” and
“rights to property” can include not only property and
rights to property owned by the taxpayer in the taxpayer’s
name, but also property held by a third party if the third party is
holding the property as a nominee of the delinquent taxpayer.
What is a nominee?
Under the nominee doctrine, the IRS may reach property held by a
taxpayer’s nominee-that is, such property may be subject to a
federal tax lien or levy. The true owner of a parcel of land or
other property may be someone other than the record owner.
A “nominee” is someone designated to act for another.
As used in the federal tax lien context, a nominee is
generally a third-party individual who holds legal title to
property of a taxpayer while the taxpayer enjoys full use and
benefit of that property. In other words, the federal tax lien
extends to property “actually” owned by the taxpayer even
though a third party holds “legal” title to the property
as a nominee.
The nominee theory focuses on the taxpayer’s relationship to
a particular piece of property. The ultimate inquiry is whether the
taxpayer has engaged in a legal fiction by placing legal title to
the property in the hands of a third party while actually retaining
some or all of the benefits of true ownership.
Nominee Liens
The law generally defines a lien as a charge or encumbrance that
one person has on the property of another as security for a debt or
obligation. Under federal tax law, a federal tax lien arises when any
“person” liable to pay any federal tax fails to pay the
tax after a demand by the Government for payment. However, the IRS
may need to file a NFTL in order to have priority over the
taxpayer’s other creditors.
In the case of a nominee lien, the IRS proceeds against a
taxpayer’s nominee in order to satisfy the taxpayer’s
obligations. In such a case, the IRS will file a Notice of Federal
Tax Lien with the nominee identified as the name of the taxpayer.
Nominee situations typically involve specific pieces of a
taxpayer’s property that were conveyed to the nominee.
Therefore, in a nominee situation, the NFTL will typically contain
a notation indicating that the lien attaches specifically to
certain identified property.
The Interplay of State and Federal Law
The nominee doctrine involves questions of both state and
federal law. A federal tax lien does not arise or attach to
property in which a person has no interest under state law. Thus,
courts look initially to state law to determine what rights the
taxpayer has in the property that the IRS seeks to reach.
If the court concludes that the taxpayer has a property interest
under state law, then federal law will determine whether the
taxpayer’s state-delineated rights qualify as
‘property’ or ‘rights to property’ within the scope
of a federal tax lien.
Nominee Factors
Courts generally evaluate whether a nominee relationship exists
through a series of factors, including but not limited to:
- whether the consideration paid by the putative nominee was
adequate, - whether the property was transferred in anticipation of
liability, - whether a close relationship exists between the transferor and
putative nominee, - whether the conveyance of the property was recorded,
- whether the transferor retains possession and/or use of the
property notwithstanding the transfer, and - whether the transferor continues to enjoy the benefits of the
property, - whether the taxpayer after the transfer paid costs related to
maintenance of the property (such as insurance, tax, or mortgage
payments)
Courts also focus on whether the transferor furnishes the funds
used to purchase the property, whether the transferor is providing
the wherewithal needed to maintain the property post-transfer, and
whether the transferor continues to treat the property as his own.
Ultimately, the question turns on the totality of the
circumstances.
Trusts are often involved in nominee situations. The IRS and
courts will generally also look to the following factors in the
context of a trust that may be serving as a nominee:
- whether, in the case of a trust, there were sufficient internal
controls in place with respect to the management of the trust, - whether, in the case of a trust, trust assets were used to pay
the taxpayer’s personal expenses.
Moreover, even if the record titleholder “paid”
consideration for the property, the IRS and courts may look to the
source of the funds used for the acquisition of the property by
examining the extent to which the judgment-debtor/taxpayer and the
record titleholder used their own personal funds to acquire the
property.
In any event, not all of the nominee factors are of equal
weight, as their importance will vary depending on the
circumstances.
Who can be a Nominee?
The IRS has used the nominee doctrine to collect federal taxes
where the nominee is:
- an individual,
- a trust, and
- a corporate entity
In addition, the assets of an unincorporated business can be
applied to the liability of the proprietor even if he or she uses
another individual as the nominee for the business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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