Commissioner of Internal Revenue v. Bollinger et al.
485 U.S. 340 (1988)
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Rule of Law:
When a corporation acts as an agent for its shareholder-principal with respect to an asset, the agency relationship is genuine for tax purposes if the corporation's agency status is set forth in a written agreement, the corporation functions as an agent, and it is held out as an agent in all dealings with third parties.
Facts:
- Jesse C. Bollinger, Jr., a real estate developer, formed partnerships to develop apartment complexes.
- Kentucky's usury law at the time limited interest rates for noncorporate borrowers, making it difficult to secure financing.
- To obtain loans at market rates, lenders required Bollinger to use a 'corporate nominee' as the nominal debtor and titleholder for the mortgaged property.
- Bollinger incorporated Creekside, Inc., in which he was the sole stockholder, to serve this purpose.
- Bollinger and Creekside, Inc. executed a written agreement specifying that the corporation would hold title to the property as Bollinger's agent solely for securing financing.
- The corporation executed loan documents, but all loan proceeds were transferred to the partnership's accounts, and the partnerships managed all aspects of construction and operation.
- All third parties, including lenders and contractors, were aware that the corporation was acting merely as an agent for the partnerships, which were the true owners.
- The partnerships reported all income and losses from the properties, and the corporation itself had no assets, employees, or bank accounts.
Procedural Posture:
- The Commissioner of Internal Revenue disallowed the losses that the respondents (Bollinger and his partners) reported on their individual tax returns.
- Respondents sought a redetermination of their tax liability in the United States Tax Court.
- The Tax Court held that the corporation was a true agent of the partnerships and that the losses were properly reported by the respondents.
- The Commissioner appealed the Tax Court's decision to the United States Court of Appeals for the Sixth Circuit.
- The Court of Appeals affirmed the Tax Court's decision in favor of the respondents.
- The Supreme Court granted the Commissioner's petition for a writ of certiorari to resolve a conflict among the circuit courts.
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Issue:
Does a corporation that holds record title to real property as an agent for its shareholder-principals own the property for federal income tax purposes when the agency relationship is clearly established and consistently maintained?
Opinions:
Majority - Justice Scalia
No. A corporation that holds record title to property as a genuine agent for its shareholders is not the owner of the property for federal income tax purposes. The Court rejected the Commissioner's argument that an 'arm's-length' relationship and an agency fee are required to prove a genuine agency between a corporation and its shareholders. While acknowledging the need to prevent shareholders from abusing the corporate form to avoid taxes under Moline Properties, the Court found the Commissioner's proposed test too rigid. The Court reasoned that the genuineness of the agency is the key, not a specific commercial formality. The Court looked past the six factors from National Carbide Corp. v. Commissioner, viewing the fifth factor (that the agent's relationship with the principal must not be dependent on the principal's ownership) as a generalized statement of the concern against subverting Moline, rather than a strict requirement. Instead, the Court established a clearer, more practical test to determine if a genuine agency exists in this context.
Analysis:
This decision provides a clear, practical test for taxpayers seeking to use a corporation as an agent, particularly in real estate financing. It clarifies the ambiguous fifth factor of the National Carbide test, shifting the focus from a rigid 'arm's-length' dealing requirement to whether the agency relationship is consistently and openly maintained in both form and substance. This holding provides a safe harbor for shareholders, assuring them that as long as the agency is documented and consistently represented to third parties, the tax consequences of property ownership will pass through to them. The case harmonizes the principle of corporate separateness from Moline Properties with the practical realities of using corporate agents for legitimate business purposes.
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