The IRS Will Soon Be Asking Questions PART I — Nominees and FATCA

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In my tax practice in the Middle East, it is very common for family members to have legal title to assets they do not own. For example, it is common for a parent to have the eldest son hold legal title to property in which the child has no beneficial interest whatsoever; sometimes the nominee relationship is entered into in an attempt to circumvent forced inheritance shares of Sharia law, or to avoid probate.

What is a Nominee and How Does a Nominee Relationship work?

A nominee is a person or entity named by another party (called a “nominator”) to hold title to a certain property. The nominee is the registered owner of the property but he is not the beneficial owner. All rights and incidents of true ownership belong to the beneficial owner and essentially, the nominee stands in a position of trust to follow the orders of the beneficial owner with respect to the asset. For example, if a parent registers stock in the name of his son, and the parties understand that the son holds bare legal title to the stock, the parent is the party with the right to vote the stock. Further, the payment of dividends by the company to the son does not mean the son can keep the funds so paid. He has the duty to turn over the dividend income to the parent. Following these lines, the parent, and not the son must report the dividend income on his or her tax return. This example illustrates how the use of nominees does not alter the obligations of the beneficial owner with regard to paying tax and meeting any reporting requirements with respect to the stock.

In the real world, most people in family or close relationships do not document the existence of the nominee relationship. This is a big mistake for various reasons. What if the son turned against his parent and decided to disregard the nominee relationship, voting the shares as his own and keeping the dividend income? Perhaps the son may decide to sell the shares and keep the proceeds. While the parent may have recourse in a court of law, it may be very difficult to prove the parent gave the stock to the son to hold as a nominee, rather than giving it as a true gift. If the parent has died, and other siblings claim their share of the stock, what messy situation will result? A legal wrangle may also be inevitable in the case of a divorce – that is, when the other spouse is demanding a share of assets. I think you get the picture that such nominee holdings can result in unanticipated problems.

US Tax and the Nominee

From a US tax perspective, things can also get messy. With full implementation of the Foreign Account Tax Compliance Act (FATCA) just a heartbeat away, things are bound to get messier once the US Internal Revenue Service (IRS) starts receiving information from a foreign financial institution about a US account holder who, for example, has not reported income from the account or reported ownership of the asset on a Form 8938. Read more on my blog post about Form 8938. How does a taxpayer prove to the IRS that he is really only a “nominee” and that he had no reporting duties with regard to that asset?

Part II of this blog post will discuss the US tax issues that arise, for example, when a US nominee holds stock in a foreign corporation for a non-US person, or holds a bank account as a nominee for such a person. Do the US reporting duties on Form 5471, 8938 or FBAR simply disappear because of the nominee status?

In accordance with Circular 230 Disclosure

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.


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