The Internal Revenue Service (“IRS”) can seek to collect on a taxpayer’s liability, from the property of a third (3rd) party, when the third (3rd) party is holding the taxpayer’s property as a nominee.
The nominee theory is based on the premise that the taxpayer ultimately retains the benefit, use, or control over property that was allegedly transferred to the third (3rd) party. Thus, the nominee theory focuses on the relationship between the taxpayer and the transferred property. In spite of whether a transfer of legal title may or may not have occurred, the IRS does not believe a substantive transfer of control over the property in fact occurred.
In a nominee situation, the taxpayer places the taxpayer’s asset(s) in the name of another person or entity, but control of the asset(s) and other incidents of ownership remain with the taxpayer. The transfer is “in name only”. In other words, in a nominee situation, a separate person or entity, such as a trust, holds specific property for the exclusive use and enjoyment of the taxpayer.
Factors to determine if a nominee situation exists are: (i) the taxpayer previously owned the property; (ii) the third (3rd) party paid little or no consideration for the property; (iii) the taxpayer retains possession or control of the property; (iv) the taxpayer continues to use and enjoy the transferred property just as the taxpayer had done before the transfer; (v) the taxpayer pays all or most of the expenses of the property; and (vi) the transfer was for tax avoidance purposes. Although there are six (6) factors to evaluate for a nominee situation, the IRS places significant emphasis on the factor of taxpayer control.
Internal Revenue Manual §18.104.22.168
Internal Revenue Manual §22.214.171.124
Internal Revenue Manual §126.96.36.199.7