At times, persons acquire property in their own names, but the true owner is a third party. Generally, for the IRS to respect the true owner as the owner for tax purposes (and not tax the titleholder), there must be a written nominee or agency agreement (among other requirements). In a case that may be useful to taxpayers who want to prove up a nominee/agent relationship for tax purposes but did not enter into a written agreement, the Tax Court respected an agency relationship without such an agreement.
In the case, a son and daughter-in-law purchased three parcels of realty on behalf of the father’s real estate development business. The deeds were in the name of the son and daughter-in-law. This was done because the business had exhausted its own lines of credit. As cash flow from sales of the parcels were received, the funds were turned over to the father. The son was also an employee of the business.
The IRS sought to tax the son and daughter-in-law on the gains from the sale of the parcels. The son and daughter-in-law argued that the income really belonged to their father, per their agency relationship.
Notwithstanding the absence of a written agency agreement (at least one was not mentioned in the opinion), the court respected the agency relationship and determined that the son and daughter-in-law were not the owners of the parcels for income tax purposes.
Chad B. Hessing, et ux., TC Memo 2013-179
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