Law School Case Brief
Commissioner v. Bollinger - 485 U.S. 340, 108 S. Ct. 1173 (1988)
The genuineness of the agency relationship is adequately assured, and tax-avoiding manipulation adequately avoided, when the fact that the corporation is acting as agent for its shareholders with respect to a particular asset is set forth in a written agreement at the time the asset is acquired, the corporation functions as agent and not principal with respect to the asset for all purposes, and the corporation is held out as the agent and not principal in all dealings with third parties relating to the asset.
Because Kentucky's usury law limited the annual interest rate for non-corporate borrowers, lenders willing to provide money only at higher rates required such borrowers to use a corporate nominee as the nominal debtor and record title holder of mortgaged property. Accordingly, respondents, who formed a series of partnerships to develop Kentucky apartment complexes, in each instance entered into an agreement with a corporation wholly owned by respondent Bollinger, which provided that the corporation would hold title to the property as the partnership's nominee and agent solely to secure financing, that the partnership would have sole control of and responsibility for the complex, and that the partnership was the principal and owner of the property during financing, construction, and operation.
All parties who had contact with the complexes, including lenders, contractors, managers, employees, and tenants, regarded the partnerships as the owners and knew that the corporation was merely the partnerships' agent, if they were aware of the corporation at all. Income and losses from the complexes were reported on the partnerships' tax returns, and respondents reported their distributive share of the income and losses on their individual returns. Subsequently, the Commissioner of Internal Revenue disallowed respondents' losses on the ground that they were attributable to the corporation as the owner of the property. The Tax Court held that the corporation was the partnerships' agent and should therefore be disregarded for tax purposes, which the Court of Appeals affirmed. The Commissioner filed a petition for certiorari review.
Did the lower courts err in holding that the corporations were agents of the partnerships and should be disregarded for tax purposes?
The United States Supreme Court held that the partnerships were the owners of the complexes for federal income tax purposes, because in each instance the relationship between them and the corporation was, in both form and substance, an agency with the partnership as principal. It is reasonable for the Commissioner to demand unequivocal evidence of an agency relationship's genuineness in the corporation-shareholder context in order to prevent tax evasion. However, there is no merit to the Commissioner's contention that National Carbide Corp. v. Commissioner, 336 U. S. 422, requires such evidence to include arm's-length dealing between principal and agent and the payment of an agency fee. The genuineness of an agency is adequately assured, where, as here, the fact that the corporation is acting as its shareholders' agent with respect to a particular asset is set forth in a written agreement at the time the asset is acquired, the corporation functions as agent and not principal with respect to the asset for all purposes, and the corporation is held out as the agent and not the principal in all dealings with third parties relating to the asset.
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