Because Kentucky's usury law limited the annual interest rate
for noncorporate 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,
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
Page 485 U. S. 341
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.
485 U. S.
344-349.
807 F.2d 65, 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.
JUSTICE SCALIA delivered 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 (1987), to
resolve a conflict in the Courts of Appeals over the tax treatment
of corporations purporting to be agents for their shareholders.
Compare George v. Commissioner, 803 F.2d 144, 148-149 (CA5
1986),
cert. pending, No. 86-1152,
with Frink v.
Commissioner, 798 F.2d 106, 109-110 (CA4 1986),
cert.
pending, No. 86-1151.
I
Respondent Jesse C. Bollinger, Jr., developed, either
individually or in partnership with some or all of the other
respondents, eight apartment complexes in Lexington, Kentucky.
Page 485 U. S. 342
(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 necessary
Page 485 U. S. 343
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
Page 485 U. S. 344
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 (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 attributable to the owner of the property.
See Helvering v. Horst, 311 U. S. 112,
311 U. S.
116-117 (1940);
Blair v. Commissioner,
300 U. S. 5,
300 U. S. 12
(1937);
see also Commissioner v. Sunnen, 333 U.
S. 591,
333 U. S. 604
(1948). The problem
Page 485 U. S. 345
we face here is that two different taxpayers can plausibly be
regarded as the owner. Neither the Internal Revenue Code nor the
regulations promulgated by the Secretary of the Treasury provide
significant guidance as to which should be selected. It is common
ground between the parties, however, that if a corporation holds
title to property as agent for a partnership, then, for tax
purposes, the partnership, and not the corporation, is the owner.
Given agreement on that premise, one would suppose that there would
be agreement upon the conclusion as well. For each of respondents'
apartment complexes, an agency agreement expressly provided that
the corporation would "hold such property as nominee and agent for"
the partnership, App. to Pet. for Cert. 21a, n. 4, and that the
partnership would have sole control of and responsibility for the
apartment complex. The partnership in each instance was identified
as the principal and owner of the property during financing,
construction, and operation. The lenders, contractors, managers,
employees, and tenants -- all who had contact with the development
-- knew that the corporation was merely the agent of the
partnership, if they knew of the existence of the corporation at
all. In each instance, the relationship between the corporation and
the partnership was, in both form and substance, an agency with the
partnership as principal.
The Commissioner contends, however, that the normal indicia of
agency cannot suffice for tax purposes when, as here, the alleged
principals are the controlling shareholders of the alleged agent
corporation. That, it asserts, would undermine the principle of
Moline Properties v. Commissioner, 319 U.
S. 436 (1943), which held that a corporation is a
separate taxable entity even if it has only one shareholder who
exercises total control over its affairs. Obviously,
Moline's separate entity principle would be significantly
compromised if shareholders of closely held corporations could, by
clothing the corporation with some attributes of agency with
respect
Page 485 U. S. 346
to particular assets, leave themselves free at the end of the
tax year to make a claim -- perhaps even a good faith claim -- of
either agent or owner status, depending upon which choice turns out
to minimize their tax liability. The Commissioner does not have the
resources to audit and litigate the many cases in which agency
status could be thought debatable. Hence, the Commissioner argues,
in this shareholder context he can reasonably demand that the
taxpayer meet a prophylactically clear test of agency.
We agree with that principle, but the question remains whether
the test the Commissioner proposes is appropriate. The parties have
debated at length the significance of our opinion in
National
Carbide Corp. v. Commissioner, supra. In that case, three
corporations that were wholly owned subsidiaries of another
corporation agreed to operate their production plants as "agents"
for the parent, transferring to it all profits except for a nominal
sum. The subsidiaries reported as gross income only this sum, but
the Commissioner concluded that they should be taxed on the
entirety of the profits because they were not really agents. We
agreed, reasoning first, that the mere fact of the parent's control
over the subsidiaries did not establish the existence of an agency,
since such control is typical of all shareholder-corporation
relationships,
id. at
319 U. S.
429-434; and second, that the agreements to pay the
parent all profits above a nominal amount were not determinative,
since income must be taxed to those who actually earn it, without
regard to anticipatory assignment,
id. at
319 U. S.
435-436. We acknowledged, however, that there was such a
thing as "a true corporate agent . . . of [an] owner-principal,"
id. at
319 U. S. 437,
and proceeded to set forth four indicia and two requirements of
such status, the sum of which has become known in the lore of
federal income tax law as the "six National Carbide factors":
"[1] Whether the corporation operates in the name and for the
account of the principal, [2] binds the principal by
Page 485 U. S. 347
its actions, [3] transmits money received to the principal, and
[4] whether receipt of income is attributable to the services of
employees of the principal and to assets belonging to the principal
are some of the relevant considerations in determining whether a
true agency exists. [5] If the corporation is a true agent, its
relations with its principal must not be dependent upon the fact
that it is owned by the principal, if such is the case. [6] Its
business purpose must be the carrying on of the normal duties of an
agent."
Ibid. (footnotes omitted).
We readily discerned that these factors led to a conclusion of
nonagency in
National Carbide itself. There, each
subsidiary had represented to its customers that it (not the
parent) was the company manufacturing and selling its products;
each had sought to shield the parent from service of legal process;
and the operations had used thousands of the subsidiaries'
employees and nearly $20 million worth of property and equipment
listed as assets on the subsidiaries' books.
Id. at
319 U. S. 425,
319 U. S. 434,
319 U. S. 438,
and n. 21.
The Commissioner contends that the last two
National
Carbide factors are not satisfied in the present case. To take
the last first: The Commissioner argues that, here, the
corporation's business purpose with respect to the property at
issue was not "the carrying on of the normal duties of an agent,"
since it was acting not as the agent, but rather as the owner of
the property for purposes of Kentucky's usury law. We do not agree.
It assuredly was not acting as the owner in fact, since respondents
represented themselves as the principals to all parties concerned
with the loans. Indeed, it was the lenders themselves who required
the use of a corporate nominee. Nor does it make any sense to adopt
a contrary-to-fact legal presumption that the corporation was the
principal, imposing a federal tax sanction for the apparent evasion
of Kentucky's usury law. To begin with, the Commissioner has not
established that these transactions
Page 485 U. S. 348
were an evasion. Respondents assert without contradiction that
use of agency arrangements in order to permit higher interest was
common practice, and it is by no means clear that the practice
violated the spirit of the Kentucky law, much less its letter. It
might well be thought that the borrower does not generally require
usury protection in a transaction sophisticated enough to employ a
corporate agent -- assuredly not the normal
modus operandi
of the loan shark. That the statute positively envisioned corporate
nominees is suggested by a provision which forbids charging the
higher corporate interest rates "to a corporation, the principal
asset of which shall be the ownership of a one (1) or two (2)
family dwelling," Ky.Rev.Stat. § 360.025(2) (1987) -- which would
seem to prevent use of the nominee device for ordinary home
mortgage loans. In any event, even if the transaction did run afoul
of the usury law, Kentucky, like most States, regards only the
lender as the usurer, and the borrower as the victim.
See
Ky.Rev.Stat. § 360.020 (1987) (lender liable to borrower for civil
penalty), § 360.990 (lender guilty of misdemeanor). Since the
Kentucky statute imposed no penalties upon the borrower for
allowing himself to be victimized, nor treated him as
in pari
delicto, but, to the contrary, enabled him to pay back the
principal without any interest, and to sue for double the amount of
interest already paid (plus attorney's fees),
see
Ky.Rev.Stat. § 360.020 (1972), the United States would hardly be
vindicating Kentucky law by depriving the usury victim of tax
advantages he would otherwise enjoy. In sum, we see no basis in
either fact or policy for holding that the corporation was the
principal because of the nature of its participation in the
loans.
Of more general importance is the Commissioner's contention that
the arrangements here violate the fifth
National Carbide
factor -- that the corporate agent's "relations with its principal
must not be dependent upon the fact that it is owned by the
principal." The Commissioner asserts that
Page 485 U. S. 349
this cannot be satisfied unless the corporate agent and its
shareholder principal have an "arm's-length relationship" that
includes the payment of a fee for agency services. The meaning of
National Carbide's fifth factor is, at the risk of
understatement, not entirely clear. Ultimately, the relations
between a corporate agent and its owner-principal are always
dependent upon the fact of ownership, in that the owner can cause
the relations to be altered or terminated at any time. Plainly that
is not what was meant, since, on that interpretation, all
subsidiary-parent agencies would be invalid for tax purposes, a
position which the
National Carbide opinion specifically
disavowed. We think the fifth
National Carbide factor --
so much more abstract than the others -- was no more and no less
than a generalized statement of the concern, expressed earlier in
our own discussion, that the separate entity doctrine of
Moline not be subverted.
In any case, we decline to parse the text of
National
Carbide as though that were itself the governing statute. As
noted earlier, it is uncontested that the law attributes tax
consequences of property held by a genuine agent to the principal;
and we agree that it is reasonable for the Commissioner to demand
unequivocal evidence of genuineness in the corporation-shareholder
context, in order to prevent evasion of
Moline. We see no
basis, however, for holding that unequivocal evidence can only
consist of the rigid requirements (arm's-length dealing plus agency
fee) that the Commissioner suggests. Neither of those is demanded
by the law of agency, which permits agents to be unpaid family
members, friends, or associates.
See Restatement (Second)
of Agency §§ 16, 21, 22 (1958). It seems to us that 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
Page 485 U. S. 350
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. Since these requirements were met here, the judgment of the
Court of Appeals is
Affirmed.
JUSTICE KENNEDY took no part in the consideration or decision of
this case.