The IRS and Nominee Liability

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Nominee Liability

Under the Internal Revenue Code, the IRS can satisfy a tax deficiency by imposing a lien on any “property” or “rights to property” belonging to the taxpayer.  The statutory language is broad and reaches virtually every interest in property that a taxpayer might have, with limited exceptions.  In fact, the IRS’s legal ability to reach “property” and “rights to property” can include not only property and rights to property owned by the taxpayer in the taxpayer’s name, but also property held by a third party if the third party is holding the property as a nominee of the delinquent taxpayer.

What is a nominee?

Under the nominee doctrine, the IRS may reach property held by a taxpayer’s nominee—that is, such property may be subject to a federal tax lien or levy.  The true owner of a parcel of land or other property may be someone other than the record owner.

A “nominee” is someone designated to act for another. As used in the federal tax lien context, a nominee is generally a third-party individual who holds legal title to property of a taxpayer while the taxpayer enjoys full use and benefit of that property. In other words, the federal tax lien extends to property “actually” owned by the taxpayer even though a third party holds “legal” title to the property as a nominee.

The nominee theory focuses on the taxpayer’s relationship to a particular piece of property.  The ultimate inquiry is whether the taxpayer has engaged in a legal fiction by placing legal title to the property in the hands of a third party while actually retaining some or all of the benefits of true ownership.

Nominee Liens

The law generally defines a lien as a charge or encumbrance that one person has on the property of another as security for a debt or obligation.  Under federal tax law, a federal tax lien arises when any “person” liable to pay any federal tax fails to pay the tax after a demand by the Government for payment.  However, the IRS may need to file a NFTL in order to have priority over the taxpayer’s other creditors.

In the case of a nominee lien, the IRS proceeds against a taxpayer’s nominee in order to satisfy the taxpayer’s obligations.  In such a case, the IRS will file a Notice of Federal Tax Lien with the nominee identified as the name of the taxpayer.  Nominee situations typically involve specific pieces of a taxpayer’s property that were conveyed to the nominee.  Therefore, in a nominee situation, the NFTL will typically contain a notation indicating that the lien attaches specifically to certain identified property.

The Interplay of State and Federal Law

The nominee doctrine involves questions of both state and federal law.  A federal tax lien does not arise or attach to property in which a person has no interest under state law.  Thus, courts look initially to state law to determine what rights the taxpayer has in the property that the IRS seeks to reach.

If the court concludes that the taxpayer has a property interest under state law, then federal law will determine whether the taxpayer’s state-delineated rights qualify as ‘property’ or ‘rights to property’ within the scope of a federal tax lien.

Nominee Factors

Courts generally evaluate whether a nominee relationship exists through a series of factors, including but not limited to:

    1. whether the consideration paid by the putative nominee was adequate,
    2. whether the property was transferred in anticipation of liability,
    3. whether a close relationship exists between the transferor and putative nominee,
    4. whether the conveyance of the property was recorded,
    5. whether the transferor retains possession and/or use of the property notwithstanding the transfer, and
    6. whether the transferor continues to enjoy the benefits of the property,
    7. whether the taxpayer after the transfer paid costs related to maintenance of the property (such as insurance, tax, or mortgage payments)

Courts also focus on whether the transferor furnishes the funds used to purchase the property, whether the transferor is providing the wherewithal needed to maintain the property post-transfer, and whether the transferor continues to treat the property as his own.  Ultimately, the question turns on the totality of the circumstances.

Trusts are often involved in nominee situations.  The IRS and courts will generally also look to the following factors in the context of a trust that may be serving as a nominee:

    1. whether, in the case of a trust, there were sufficient internal controls in place with respect to the management of the trust,
    2. whether, in the case of a trust, trust assets were used to pay the taxpayer’s personal expenses.

Moreover, even if the record titleholder “paid” consideration for the property, the IRS and courts may look to the source of the funds used for the acquisition of the property by examining the extent to which the judgment-debtor/taxpayer and the record titleholder used their own personal funds to acquire the property.

In any event, not all of the nominee factors are of equal weight, as their importance will vary depending on the circumstances.

Who can be a Nominee?

The IRS has used the nominee doctrine to collect federal taxes where the nominee is:

    1. an individual,
    2. a trust, and
    3. a corporate entity

In addition, the assets of an unincorporated business can be applied to the liability of the proprietor even if he or she uses another individual as the nominee for the business.

Freeman Law Tax Attorneys

Freeman Law aggressively represents clients in tax litigation at both the state and federal levels. When the stakes are high, clients rely on our experience, knowledge, and talent to help them navigate all levels of the tax dispute lifecycle—from audits and examinations to the courtroom and all levels of appeals. Schedule a consultation or call (214) 984-3000 to discuss your tax needs.