Commissioner v. Bollinger

Background

A developer, Jesse C. Bollinger Jr., and related partnerships built eight apartment complexes in Lexington, Kentucky. For each project a small Kentucky corporation (Creekside or Cloisters) was formed to hold record title as a nominee and agent so lenders would make loans at higher interest rates. The corporations signed written nominee agreements, executed loan documents, and transferred funds to the partnerships, but had no assets, employees, or bank accounts. The partnerships operated the properties and reported income and losses on partnership and individual returns. The Commissioner of Internal Revenue challenged those tax reports, arguing the corporations were the owners for tax purposes and therefore the reported losses were not attributable to the individual owners.

Reasoning

The Court considered whether a closely held corporation that holds title only as a nominee should be treated as the owner for federal income tax purposes. The Court agreed that when a corporation is a genuine agent the principal, not the corporation, is taxed on the property’s income or loss. It rejected the Commissioner’s proposal that agency in the shareholder context always require arm’s-length dealing or payment of an agency fee. Instead the Court identified a practical test: the agency role must be set out in a written agreement at acquisition, the corporation must function as agent (not principal) with respect to the asset, and third parties must be held out to understand the corporation is acting as agent. Applying that test, the Court affirmed that the partnerships and their owners were the owners for tax purposes.

Real world impact

The ruling lets owners who meet these conditions treat nominee corporations as agents and preserve pass-through tax treatment and losses. It emphasizes the need for clear written nominee agreements and consistent conduct toward third parties as proof of agency. The Commissioner still may demand unequivocal evidence of genuine agency in similar cases.