Typical nominee . . . scenarios start with people falling behind on their taxes. Facing the loss of their homes or businesses to the federal government [for the taxes owed] some taxpayers take steps to try to separate themselves from their valuable assets. The taxpayer's house may be deeded to a friend, although the taxpayer continues to reside there. Or perhaps all the taxpayer's cash disappears, yet the taxpayer's personal bills are being paid by a closely-held and controlled corporation. The factual scenarios are as creative and varied as are taxpayers themselves. However, the tax collector's reaction is usually consistent: upon discovering that a third party is being used to thwart the IRS's collection efforts, the government will file a notice of a federal tax lien identifying the third-party target as the taxpayer's nominee or alter ego and will attempt to satisfy the tax liability from assets held by the third party.Here are some key excerpts that I think are helpful students in understanding the nominee or alter ego concept: These are quotes from the case, but I strip out the case citations except for the Supreme Court decision in Drye] and most of the quotation marks in order to provide a more readable narrative version:
A nominee is one who holds bare legal title to property for the benefit of another. Although the Supreme Court has clearly indicated that the IRS may impose nominee tax liens, it has provided only limited guidance concerning how such nominee determinations are to be made. However, the Court has explained that application of the federal tax lien statutes involves questions of both state and federal law. The federal tax lien statute itself creates no property rights but merely attaches consequences, federally defined, to rights created under state law. Consequently, in making nominee determinations in a tax lien context, we must look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach. After determining that the taxpayer has a property interest under state law, we then look to federal law to determine whether the taxpayer's state-delineated rights qualify as property or rights to property within the compass of the federal tax lien legislation.
The Government contends that nominee doctrine should be governed by federal common law rather than state law. We reject this position, just as it has been uniformly rejected by our sister circuits and by nearly every federal court that has examined the issue. [The cases are assembled and discussed in footnote 4 which I omit but which can be viewed at the link.]
The government correctly notes that under Drye [Drye v. United States, 528 U.S. 49 (1999)], the Code and interpretive case law place under federal, not state, control the ultimate issue whether a taxpayer has a beneficial interest in any property subject to levy for unpaid federal taxes. Nevertheless, in reaching that ultimate issue, Drye requires that we look initially to state law to determine the taxpayer's ownership interest in the property.
The government further urges that the federal common law must govern nominee determinations because the ability to collect taxes is a vital federal interest. The government's position is predicated on a fear that state courts will construe their own nominee doctrines in such a way as to frustrate specific objectives of the federal government. To date, however, this concern has proven to be unfounded, because state law nominee doctrine is typically so similar to its federal common law counterpart that the distinction is of little moment. The government's concern that diverging state law nominee doctrines will undermine a nationally uniform body of law, is similarly misplaced because courts across many jurisdictions almost universally utilize the same criteria in evaluating nominee relationships.
Moreover, should a state ever adopt an interpretation of the nominee doctrine that frustrates federal objectives, or disrupts commercial relationships, recourse may be sought through the legislative or federal regulatory processes.
Accordingly, we adopt the interpretation of Drye advanced by the reasoning of our sister circuits and hold that questions of nominee status require a "fact-specific state-law inquiry" prior to determining whether a nominee lien may lawfully be enforced as a matter of federal law.For other blog discussions of nominee liens, see the link below on Nominee Liens.