How the IRS Can Levy Property Held by a Third Party
We know by now that the IRS can levy on all of a taxpayer’s property and rights to property, except that exempt from levy under IRC Section 6334, and on which there is a lien for the payment of tax. The IRS may seize or sell levied property or property rights, whether real or personal, tangible or intangible; provided that the property is in the taxpayer’s possession. However, the taxpayer’s property may be levied even if it is not “formally” in his possession. It is possible under the equitable doctrines that the third party in possession of the property is the taxpayer’s alter ego or that the third party is a nominee of the taxpayer.
Sacramento tax lawyer Jin Kim represents clients in tax controversies with the IRS. If the IRS has filed a Federal tax lien or is seeking to levy your property, call the Law Office of Jin Kim at (916) 299-9913 for a free consultation.
Alter Ego Doctrine
An alter ego situation exists when there is a unity of ownership and interest between the taxpayer and another party, usually a corporation or other legal entity, including limited liability companies (LLCs) and trusts. Under the alter ego doctrine, the focus is on the taxpayer’s identity liable for the tax. The law does not recognize the taxpayer and his alter ego independent from each other for debt collection purposes. Once the IRS finds the facts and circumstances point to an alter ego situation, it may seize by levy any property that is in possession of the alter ego.
The IRS should refer to state law in determining whether it may reach the property of a separate entity under the alter ego doctrine due to a lack of consistency between Circuits and existing precedent in some circuits. Nevertheless, IRS attorneys may argue that federal common law alter ego analysis applies to preserve the issue for appeal.
3rd Party Entity Factors
IRS attorneys may focus on factors to determine whether a third party is a sham, such as:
- Whether there is common ownership of the third party and the taxpayer
- Whether there are common directors or officers
- Whether the third party is operating with grossly inadequate capital
- Whether the taxpayer pays the expenses of the third party
- Whether the third party has little or no business independent of the taxpayer
- Whether the operations are kept separate
3rd Party Non-Entity Factors
On the other hand, if the third party is a non-corporate entity, the facts considered are:
- Whether the taxpayer treats the assets as belonging to the taxpayer
- Whether the taxpayer maintains insurance on the property held by the third party
- Whether there are internal controls in the third-party organization
- Whether the third party’s funds are used to pay the taxpayer’s personal expenses
- Whether the taxpayer transferred the property to the third party for little or no consideration
Nominee Doctrine
The IRS may reach property owned by a third party to satisfy a taxpayer’s debt under the nominee doctrine. The doctrine focuses on the true beneficial owner of the property in a third party’s possession. Hence, if a third party is a taxpayer’s nominee, the IRS may only levy on specific property “actually” belonging to the taxpayer.
The courts look into facts in determining whether a third party is a nominee, such as:
- The nominee made no consideration or inadequate consideration for the transferred property.
- The property was placed in the nominee’s name while the transferor continued to exercise control over the property in anticipation of a suit or occurrence of liabilities.
- The transferor and the nominees have a close relationship.
- The conveyance of the property was not recorded.
- The transferor retained possession of the property.
- The transferor has continued enjoyment of the benefits of the transferred property.
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