Legal Document

485 U.S. 340 108 S.Ct. 1173 99 L.Ed.2d 357 COMMISSIONER OF INTERNAL REVENUE, Petitionerv.Jesse C. BOLLINGER, et al. No. 86-1672. Argued Jan. 13, 1988. Decided March 22, 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 use a corporate nominee as nominal debtor and record titleholder of mortgaged property. Accordingly, respondents, who formed series partnerships develop Kentucky apartment complexes, in each instance entered into an agreement with corporation wholly owned by respondent Bollinger, which provided that would hold title property partnership's agent solely secure financing, partnership have sole control responsibility complex, was principal owner during construction, operation. All parties had contact including lenders, contractors, managers, employees, tenants, regarded owners knew merely partnerships' agent, if they were aware all. Income losses from complexes reported on tax returns, respondents their distributive share income individual returns. Although Commissioner Internal Revenue disallowed respondents' ground attributable property, Tax Court held should therefore be disregarded purposes, Appeals affirmed. Held: The federal since relationship between them was, both form substance, agency principal. It is reasonable demand unequivocal evidence relationship's genuineness corporation-shareholder context order prevent evasion. However, there no merit Commissioner's contention National Carbide Corp. v. Commissioner, 336 422, 69 726, 93 L.Ed. 779 requires include arm's-length dealing payment fee. adequately assured, where, here, fact acting its shareholders' respect particular asset set forth written time acquired, functions not all out dealings third relating asset. Pp. 344-349. 807 F.2d 65 (CA6 1986), SCALIA, J., delivered opinion Court, other Members joined, except KENNEDY, took part consideration or decision case. Alan I. Horowitz, Washington, D.C., petitioner. Charles R. Hembree, Lexington, Ky., respondents. Justice SCALIA Court. 1 Petitioner, Revenue, challenges United States Sixth Circuit holding real corporation's shareholders purposes taxation. (1986). We granted certiorari, 482 913, 107 3183, 96 672 (1987), resolve conflict Courts over treatment corporations purporting agents shareholders. Compare George 803 144, 148-149 (CA5 cert. pending, 86-1152 Frink 798 106, 109-110 (CA4 86-1151. 2 * Respondent Jesse Jr., developed, either individually some eight Kentucky. (For convenience we will refer ventures "partnerships.") Bollinger initiated development first Creekside North Apartments, 1968. Massachusetts Mutual Life Insurance Company agreed permanent financing lending $1,075,000 "the Jr." percent, secured mortgage personal guarantee Bollinger. loan commitment structured this fashion because noncorporate seven percent. Ky.Rev.Stat. §§ 360.010, 360.025 (1972). Lenders true borrower. On October 14, 1968, incorporated Creekside, Inc., under laws Kentucky; he stockholder. next day, complex Bollinger's purpose securing convey, assign, encumber disburse proceeds thereof directed Bollinger; obligation maintain assume any liability reason execution promissory notes otherwise; indemnify harmless it might sustain his nominee. 3 Having through borrowed construction funds Citizens Fidelity Bank Trust Company. executed necessary documents note mortgage, transferred account. acted general contractor hired paid expenses When completed, obtained, again accordance earlier commitment. These used pay off loan. resident manager rent apartments, execute leases collect deposit rents, operating records. deposited rental receipts into, from, account, opened name but later changed "Creekside partnership." operation Apartments generated taxable years 1969, 1971, 1972, 1973, 1974, ordinary 1970, 1975, 1976, 1977. Throughout, 4 Following substantially identical pattern, developed separate partnerships. For venture, obtain financing. one ventures, different corporation, Cloisters, 50 percent interest, borrower titleholder. convenience, Cloisters corporation.") supervisor oversaw construction. Upon completion actively managed depositing paying account complex. assets, liabilities, bank accounts. In every case, apartments title. 5 standards (1949), met. contended before could recognized agent. position disbursed deemed contributions capital, thereby making constructive stockholders. Since, view, rather than estate, sustained Respondents sought redetermination purposes. 48 TCM 1443 (1984), ¶ 84, 560 P-H Memo TC. appeal, petition certiorari. II 6 gain loss sale See Helvering Horst, 311 112, 116-117, 61 147, 85 75 (1940); Blair 300 5, 12, 57 330, 333, 81 465 (1937); see also Sunnen, 333 591, 604, 68 715, 722, 92 898 (1948). problem face here two taxpayers can plausibly owner. Neither Code nor regulations promulgated Secretary Treasury significant guidance selected. common parties, however, holds partnership, then Given premise, suppose upon conclusion well. expressly "hold for" App. Pet. Cert. 21a, n. 4, identified tenants—all development—knew existence 7 contends, normal indicia cannot suffice when, alleged principals are controlling corporation. That, asserts, undermine principle Moline Properties 319 436, 63 1132, 87 1499 (1943), entity even has shareholder exercises total affairs. Obviously, 's separate-entity significantly compromised closely could, clothing attributes leave themselves free end year make claim—perhaps good-faith claim—of status, depending choice turns minimize liability. does resources audit litigate many cases status thought debatable. Hence, argues, reasonably taxpayer meet prophylactically clear test agency. 8 agree principle, question remains whether proposes appropriate. debated length significance our supra. three subsidiaries another operate production plants "agents" parent, transferring profits sum. gross sum, concluded taxed entirety really agents. agreed, reasoning first, mere parent's did establish agency, typical shareholder-corporation relationships, id., 429-434, S.Ct., 730-732; second, agreements parent above amount determinative must those actually earn without regard anticipatory assignment, 435-436, 733-734. acknowledged, thing "a . [an] owner-principal," 437, 734, proceeded four requirements sum become known lore "six factors": 9 "[1] Whether operates principal, [2] binds actions, [3] transmits received [4] receipt services employees assets belonging relevant considerations determining exists. [5] If relations dependent [6] Its business carrying duties agent." Ibid. (footnotes omitted). 10 readily discerned these factors led nonagency itself. There subsidiary represented customers (not parent) company manufacturing selling products; shield service legal process; operations thousands subsidiaries' nearly $20 million worth equipment listed books. Id., 425, 434, 438, 21, 728, 732-733, 21. 11 contends last satisfied present To take first: argues issue agent," law. do agree. assuredly fact, concerned loans. Indeed, Nor sense adopt contrary-to-fact presumption imposing sanction apparent evasion begin with, established transactions assert contradiction arrangements permit practice, means practice violated spirit law, much less letter. well generally require protection transaction sophisticated enough employ agent—assuredly modus operandi shark. That statute positively envisioned nominees suggested provision forbids charging "to shall ownership (1) (2) family dwelling," § 360.025(2) (1987)—which seem device home-mortgage event, run afoul Kentucky, like most States, regards lender usurer, victim. 360.020 (1987) (lender liable civil penalty), 360.990 guilty misdemeanor). Since imposed penalties allowing himself victimized, treated him pari delicto, contrary enabled back sue double already (plus attorney's fees), (1972), hardly vindicating depriving victim advantages otherwise enjoy. basis policy nature participation 12 Of more importance violate fifth factor—that agent's "relations principal." asserts unless "arm's-length relationship" includes fee services. meaning factor is, risk understatement, entirely clear. Ultimately, owner-principal always ownership, cause altered terminated time. Plainly what meant, interpretation subsidiary-parent agencies invalid specifically disavowed. think factor—so abstract others—was generalized statement concern, expressed own discussion, doctrine subverted. 13 decline parse text though itself governing statute. As noted earlier, uncontested consequences genuine principal; context, Moline. basis, consist rigid (arm's-length plus fee) suggests. demanded permits unpaid members, friends, associates. Restatement (Second) Agency 16, 22 (1958). seems us tax-avoiding manipulation avoided, when met judgment 14 Affirmed. 15 KENNEDY

Classification Label: 11