IRS TAX LIENS ON PROPERTY HELD BY NOMINEE OR ALTER EGO ENTITIES

Section 6321, of the United States Code provides: “If 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 language of this statute is “broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” United States v. National Bank of Commerce, 472 U.S. 713, 719–20 [56 AFTR 2d 85-5210], 105 S.Ct. 2919 [56 AFTR 2d 85-5210], 86 L.Ed.2d 565 (1985). ““Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes.”” Id. (quoting Glass City Bank v. United States, 326 [pg. 2003-6024] U.S. 265, 267 [34 AFTR 1], 66 S.Ct. 108 [34 AFTR 1], 90 L.Ed. 56 (1945)).

The IRS can collect tax debts from the assets of a taxpayer's nominee, instrumentality, or alter ego. United States v.. Scherping, 187 F.3d 796, 801 [84 AFTR 2d 99-5546] (8th Cir. 1999), cert. denied, 528 U.S. 1162, 120 S.Ct. 1175, 145 L.Ed.2d 1084 (2000). Taxpayers are allowed to reduce their tax burden by any lawful means available, but they may not “construct paper entities to avoid taxation when those entities are without economic substance.”

The nominee theory stems from equitable principles. Focusing on the relationship between the taxpayer and the property, the theory attempts to discern whether a taxpayer has engaged in a sort of legal fiction, for federal tax purposes, by placing legal title to property in the hands of another while, in actuality, retaining all or some of the benefits of being the true owner. Said another way, the nominee theory is utilized to determine whether property should be construed as belonging to the taxpayer if he/she treated and viewed the property as his/her own, in spite of the legal machinations employed to distinguish legal title to the property.   If there is a nominee relationship, the IRS can file a tax lien against the property of the nominee because that property is deemed to be the property of the taxpayer who is subject to the IRS tax lien.

The United States can collect on tax liens from a taxpayer who holds property in the name of another entity on either of two theories, the “nominee” theory and the “alter ego” theory.

While related, the concepts of “nominee” ... and “alter ego” are independent bases for attaching the property of a third party in satisfaction of a delinquent taxpayer's liability. A nominee theory involves the determination of the true beneficial ownership of property. An alter ego theory focuses more on those facts associated with a “piercing of the corporate veil” analysis. Oxford Capital Corp. v. United States, 211 F.3d 280, 284 [85 AFTR 2d 2000-1840] (5th Cir.2000). In practice, the distinction between the two theories is minimal, and courts often merge the analysis of whether an entity is a taxpayer's nominee or alter ego into a single question. Baum Hydraulics Corp. v. United States, 280 F.Supp.2d 910, 917 [92 AFTR 2d 2003-6019] (D.Neb.2003) (“[The C]ourt's review of the case law and secondary authorities elicits no significant practical differences between the terms “nominee” and “alter ego””); see also Macklin v. United States, 300 F.3d 814, 818 [90 AFTR 2d 2002-6052] n. 2 (7th Cir.2002) (merging the definitions of “nominee” and “alter ego”).

In determining whether an entity is a taxpayer's nominee, courts may consider the following factors: (1) the lack of consideration paid by the titleholder; (2) the close relationship between the taxpayer and the titleholder; (3) the control exercised over the property by the taxpayer while the title is held by another; (4) the use and enjoyment by the taxpayer of the property titled to another; (5) the lack of interference in a taxpayer's personal expenses; (6) the exercise of dominion and control over the property; and (7) whether title was placed in the record owner's name as a result of or in anticipation of the taxpayer's liability. In re Callahan, 442 B.R. 1, 6 [106 AFTR 2d 2010-7323] n. 5 (D.Mass.2010) (citing Oxford Capital, 211 F.3d at 281 n. 1); see also Wellington Condo. Trust v. Pino, 686 F.Supp.2d. 117, 121–22 (D.Mass.2010).

A nominee theory involves the determination of the true beneficial ownership of property. An alter ego theory focuses more on those facts associated with a “piercing the corporate veil” analysis. In contrast, a transferee theory requires (1) an intent to defraud the Internal Revenue Service as a creditor or (2) a transfer without consideration which rendered the taxpayer insolvent. These issues are fact-intensive and involve imprecise legal rules.” William D. Elliot, Federal Tax Collections, Liens and Levies 6 9.10[2] (2nd Ed. 2000). Specific property in which a third person has legal title may be levied upon as a nominee of the taxpayer if the taxpayer in fact has beneficial ownership of the property. See, e.g., Towe Antique Ford Foundation v. Internal Revenue Service, 791 F. Supp. 1450, 1454 (D.Mont.1992), aff'd w/o opinion, 999 F.2d 1387 [72 AFTR 2d 93-5495] (9th Cir. 1993). Under the alter ego doctrine, however, all the assets of an alter ego corporation may be levied upon to satisfy the tax liabilities of a delinquent taxpayer-shareholder if the separate corporate identity is merely a sham, i.e., it does not exist independent of its controlling shareholder and that it was established for no reasonable business purpose or for fraudulent purposes. See United States v. Jon-T Chemicals, 768 F.2d 686 (5th Cir. 1985).  Cause to believe that a third party is holding particular property of the taxpayer as a nominee, without cause to believe alter ego status, justifies a levy upon the property of the third party only with respect to that specific property held as a nominee.

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