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Tuesday, October 24, 2017

Understanding Nominees and the Alter Ego Doctrine: IRS ENFORCEMENT




The doctrine by which a court of law holds individual shareholders liable for a corporation’s debts if the corporation is deemed to be nothing more than an “alter ego” of the corporation’s owners.
“In a nutshell, the nominee and alter ego theory holds that when a taxpayer retains the benefit, use, or control of transferred assets, the IRS may seize those assets – and quite literally, put the financial boots to you!” says David Selig of Selig and Associates.
FYI Fraud is not a necessary element for the application of the alter ego doctrine. Ragan v. Ragan v. Tri-County Excavating, Inc., 62 F.3d at 508 (Under Pennsylvania law, “no finding of fraud or illegality is required before the corporate veil may be pierced, but rather the corporate entity may be disregarded ‘whenever it is necessary to avoid injustice.’”) (citations omitted) (non-tax case); DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 684 (4th Cir. 1976) (non-tax case) (“[P]roof of plain fraud is not a necessary element in a finding to disregard the corporate entity.”) (citing, among other cases, Anderson v. Abbott, 321 U.S. 349, 362 (1944); National Marine Service, Inc. v. C.J. Thibodeaux & Co., 501 F.2d 940, 942 (5th Cir. 1974)). The Eighth Circuit in Scherping, supra, also noted that “proof of strict common law fraud was not required” to apply the reverse piercing branch of the alter ego doctrine, and affirmed the district court’s holding that the trusts were “sham entities created on behalf of and used by the taxpayers to evade payment of their federal income tax liabilities.” 187 F.3d at 802 (citations omitted).
Courts that have been called upon to apply the alter ego doctrine in tax cases use objective factors in determining whether an alter ego relationship exists. See, e.g., Century Hotels v. United States, 952 F.2d 107, 110 n.5 (5th Cir. 1992) (listing numerous objective factors to be considered in alter ego case, including: (1) whether taxpayer expended personal funds for property titled in the name of the entity; (2) whether taxpayer enjoyed the benefit and use of the property; (3) whether a close family relationship existed between taxpayer and title holder of property; (4) whether taxpayer exercised dominion and control over the property; (5) whether the entity maintained its own books and records, including bank accounts; (6) whether funds are transferred between taxpayer and the entity showing commingling of assets; and (7) whether the entity has its own separate existence and identity); Horton Dairy, Inc. v. United States, 986 F.2d 286, 289 (8th Cir. 1993); Loving Saviour Church v. United States, 728 F.2d at 1086 (church was alter ego of taxpayers where taxpayers treated church assets as their own in that their residence, business and farmland comprised church property; insurance was in taxpayer’s name; taxpayer was the minister and trustee and was in control of the church; church funds used to pay personal expenses of taxpayer; close family relationship between church officers and taxpayer; taxpayers transferred property to church for little or no consideration; taxpayers supported by church funds); F.P.P. Enters. v. United States, 830 F.2d at 118 (listing objective factors); Zahra Spiritual Trust v. United States, 910 F.2d at 245; Lemaster v. United States, 891 F.2d 115, 117-119 (6th Cir. 1989); Grant Investment Fund v. IRS, 1993 WL 269617 (9th Cir. 1993); Towe Antique Ford Foundation v. IRS, 791 F. Supp. 1450, 1453 (D. Mont. 1992) (listing objective factors to be considered), aff’d, 999 F.2d 1387 (9th Cir. 1993).
The alter ego doctrine has been applied by numerous courts to a variety of relationships that exist between a taxpayer and a corporation, partnership, trust, proprietorship or individual. See, e.g., Ross Controls, Inc. v. United States, 164 B.R. 721 (successor corporations were alter egos of defunct corporate taxpayer); Today’s Child Learning Center, Inc. v. United States, 40 F. Supp.2d 268, 273-274 (E.D. Pa. 1998) (second corporation was alter ego of taxpayer); United States v. Scherping, 187 F.3d at 801-804 (trusts were alter egos for taxpayers); F.P.P. Enterprises v. United States, 830 F.2d 114, 116-117 (8th Cir. 1987) (trusts were alter egos of taxpayers where the residence was conveyed by the taxpayers to the trust and the taxpayers continued to treat the residence as their own by (1) continuing to live in the residence, and (2) paying the insurance, taxes and mortgage on the residence); United States v. Geissler, 1993 WL 625535 (D. Idaho 1993) (trust was nominee/alter ego of taxpayers where: (1) taxpayers, as trustees maintain an absolute position of trust; (2) taxpayers need not consult anyone else in making decisions for the trust; (3) there is no provision imposing a fiduciary responsibility on trustee; (4) there was no evidence of any consideration for transfer of property from taxpayers to trust; (5) and taxpayers continue to enjoy the benefits of the transferred property); United States v. Gerads, 1993 WL 114411 (D. Minn. 1993) (Trust was alter ego of taxpayers), aff’d, 999 F.2d 1255 (8th Cir. 1993), cert. denied, 510 U.S. 1193 (1994)); Loving Saviour Church v. the United States, 556 F. Supp. at 691-692 (D. S.D.), aff’d, 728 F.2d 1085 (8th Cir.) (unincorporated association, Church, was alter ego of taxpayers); Grant Investment Fund v. IRS, 1 F.3d 1246 (Table), 1993 WL 269617 (9th Cir. 1993) (partnership was an alter ego of taxpayer where: (1) taxpayer manages entity and has complete control over it; (2) taxpayer uses his own assets and partnership assets interchangeably to pay debts; (3) investors in partnership are related to or controlled by taxpayer; (4) partnership made loans to taxpayer, such loans were approved by taxpayer as manager of partnership and taxpayer did not repay the loans; and (5) taxpayer used partnership to discharge personal obligations and for personal gain); Lemaster v. United States, 891 F.2d 115, 117-119 (6th Cir. 1989) (son held to be the alter ego of the taxpayer-father where: taxpayer’s business ceased; a new business was started in the name of taxpayer’s son; new business acquired assets of defunct business; new business was conducted in son’s name, but taxpayer was given power of attorney and controlled the new business).
Furthermore, if the alter ego or a nominee relationship otherwise exists between a taxpayer and another party or entity, the timing of when the tax liabilities arose is legally irrelevant. Stated differently, the timing of the creation of the trust or entity that is found to be an alter ego or nominee has no legal significance. See G.M. Leasing Corp. v. The United States, 429 U.S. at 350-351 (property of taxpayer’s nominee or alter ego is subject to tax lien and levy); In re Richards, 231 B.R. at 578; United States v. Landsberger, 1997 WL 792506 at * 5 (D. Ariz. 1997) (timing of creation of trust has “no import” if it is being used to avoid creditors) (citing G.M. Leasing, supra; F.P.P. Enters. v. United States, 830 F.2d at 118), aff’d, 172 F.3d 60 (9th Cir. 1999); accord United States v. Williams, 581 F. Supp. 756 (N.D. Ga.) (taxpayer’s nominee (his mother) took a title in real property before tax liabilities arose; however because the taxpayer was the true owner of the property, tax lien (which arose after the property was purchased) attached and could be foreclosed on taxpayer’s interest therein); cf. Keefer v. Commissioner, 1993 WL 221066 (Tax Ct. 1993) (trust was a sham even though tax liabilities arose after the creation of trust).
At Selig and Associates, all tax representation is provided by a Federal Tax Practitioner and Licensed Attorney. To schedule a FREE face-to-face consultation, contact Selig & Associates directly at (212) 974-3435. Offices at: 147 West 35th Street, Suite 1602, New York, NY 10001.

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