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 can legally 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).
Selig &
Associates predicts the IRS will increase it’s enforcement
operations by 67.3% in 2018. David Selig says the Trump Administration has
directed the IRS to revoke passports and seize real property. Attorney Bradley
Dorin says one of the most serious infractions is unpaid payroll taxes. Selig
says most taxpayers can avoid criminal charges by retaining qualified legal
representation.
