Commissioner of Internal Revenue v. Bollinger

• Decision Date: 22 March 1988
• Docket Number: No. 86-1672,86-1672
• Citation: 108 S.Ct. 1173,485 U.S. 340,99 L.Ed.2d 357
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner v. Jesse C. BOLLINGER, et al
• Court: U.S. Supreme Court

485 U.S. 340

108 S.Ct. 1173

99 L.Ed.2d 357

COMMISSIONER OF INTERNAL REVENUE, Petitioner

v Jesse C. BOLLINGER, et al.

No. 86-1672.

Argued Jan. 13, 1988.

Decided March 22, 1988.

Syllabus

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 titleholder 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.Although 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, and the Court of Appeals affirmed.

Held: The partnerships were the owners of the complexes for federal income tax purposes, since 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, 69 S.Ct. 726, 93 L.Ed. 779 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.Pp. 344-349.

807 F.2d 65(CA61986), affirmed.

SCALIA, J., delivered the opinion of the Court, in which all other Members joined, except KENNEDY, J., who took no part in the consideration or decision of the case.

Alan I. Horowitz, Washington, D.C., for petitioner.

Charles R. Hembree, Lexington, Ky., for respondents.

Justice SCALIAdelivered the opinion of the Court.

Petitioner, the Commissioner of Internal Revenue, challenges a decision by the United States Court of Appeals for the Sixth Circuit holding that a corporation which held record title to real property as agent for the corporation's shareholders was not the owner of the property for purposes of federal income taxation.807 F.2d 65(1986).We granted certiorari, 482 U.S. 913, 107 S.Ct. 3183, 96 L.Ed.2d 672(1987), to resolve a conflict in the Courts of Appeals over the tax treatment of corporations purporting to be agents for their shareholders.CompareGeorge v. Commissioner,803 F.2d 144, 148-149(CA51986), cert. pending, No. 86-1152withFrink v. Commissioner,798 F.2d 106, 109-110(CA41986), cert. pending, No. 86-1151.

I

RespondentJesse C. Bollinger, Jr., developed, either individually or in partnership with some or all of the other respondents, eight apartment complexes in Lexington, Ken- tucky.(For convenience we will refer to all the ventures as "partnerships.")Bollinger initiated development of the first apartment complex, Creekside North Apartments, in 1968.The Massachusetts Mutual Life Insurance Company agreed to provide permanent financing by lending $1,075,000 to "the corporate nominee of Jesse C. Bollinger, Jr." at an annual interest rate of eight percent, secured by a mortgage on the property and a personal guarantee from Bollinger.The loan commitment was structured in this fashion because Kentucky's usury law at the time limited the annual interest rate for noncorporate borrowers to seven percent.Ky.Rev.Stat. §§ 360.010,360.025 (1972).Lenders willing to provide money only at higher rates required the nominal debtor and record titleholder of mortgaged property to be a corporate nominee of the true owner and borrower.On October 14, 1968, Bollinger incorporated Creekside, Inc., under the laws of Kentucky; he was the only stockholder.The next day, Bollinger and Creekside, Inc., entered into a written agreement which provided that the corporation would hold title to the apartment complex as Bollinger's agent for the sole purpose of securing financing, and would convey, assign, or encumber the property and disburse the proceeds thereof only as directed by Bollinger; that Creekside, Inc., had no obligation to maintain the property or assume any liability by reason of the execution of promissory notes or otherwise; and that Bollinger would indemnify and hold the corporation harmless from any liability it might sustain as his agent and nominee.

Having secured the commitment for permanent financing, Bollinger, acting through Creekside, Inc., borrowed the construction funds for the apartment complex from Citizens Fidelity Bank and Trust Company.Creekside, Inc., executed all necessary loan documents including the promissory note and mortgage, and transferred all loan proceeds to Bollinger's individual construction account.Bollinger acted as general contractor for the construction, hired the neces- sary employees, and paid the expenses out of the construction account.When construction was completed, Bollinger obtained, again through Creekside, Inc., permanent financing from Massachusetts Mutual Life in accordance with the earlier loan commitment.These loan proceeds were used to pay off the Citizens Fidelity construction loan.Bollinger hired a resident manager to rent the apartments, execute leases with tenants, collect and deposit the rents, and maintain operating records.The manager deposited all rental receipts into, and paid all operating expenses from, an operating account, which was first opened in the name of Creekside, Inc., but was later changed to "Creekside Apartments, a partnership."The operation of Creekside North Apartments generated losses for the taxable years 1969, 1971, 1972, 1973, and 1974, and ordinary income for the years 1970, 1975, 1976, and 1977.Throughout, the income and losses were reported by Bollinger on his individual income tax returns.

Following a substantially identical pattern, seven other apartment complexes were developed by respondents through seven separate partnerships.For each venture, a partnership executed a nominee agreement with Creekside, Inc., to obtain financing.(For one of the ventures, a different Kentucky corporation, Cloisters, Inc., in which Bollinger had a 50 percent interest, acted as the borrower and titleholder.For convenience, we will refer to both Creekside and Cloisters as "the corporation.")The corporation transferred the construction loan proceeds to the partnership's construction account, and the partnership hired a construction supervisor who oversaw construction.Upon completion of construction, each partnership actively managed its apartment complex, depositing all rental receipts into, and paying all expenses from, a separate partnership account for each apartment complex.The corporation had no assets, liabilities, employees, or bank accounts.In every case, the lenders regarded the partnership as the owner of the apartments and were aware that the corporation was acting as agent of the partnership in holding record title.The partnerships reported the income and losses generated by the apartment complexes on their partnership tax returns, and respondents reported their distributive share of the partnership income and losses on their individual tax returns.

The Commissioner of Internal Revenue disallowed the losses reported by respondents, on the ground that the standards set out in National Carbide Corp. v. Commissioner,336 U.S. 422, 69 S.Ct. 726, 93 L.Ed. 779(1949), were not met.The Commissioner contended that National Carbide required a corporation to have an arm's-length relationship with its shareholders before it could be recognized as their agent.Although not all respondents were shareholders of the corporation, the Commissioner took the position that the funds the partnerships disbursed to pay expenses should be deemed contributions to the corporation's capital, thereby making all respondents constructive stockholders.Since, in the Commissioner's view, the corporation rather than its shareholders owned the real estate, any losses sustained by the ventures were attributable to the corporation and not respondents.Respondents sought a redetermination in the United States Tax Court.The Tax Court held that the corporation was the agent of the partnerships and should be disregarded for tax purposes.48 TCM 1443 (1984), ¶ 84, 560 P-H Memo TC.On appeal, the United States Court of Appeals for the Sixth Circuit affirmed.807 F.2d 65(1986).We granted the Commissioner's petition for certiorari.

II

For federal income tax purposes, gain or loss from the sale or use of property is...