When Can the IRS Levy Church Assets as “Nominee” Property? – Houston Tax Attorneys

Religious organizations and churches often own property and bank accounts that support their mission and operations. Sometimes, these assets are also used to benefit the organization’s leaders personally. This begs the question, can the IRS collect on the religious organization or church’s assets for the individuals tax debt?

Can the IRS use the “nominee” rules to say that a church entity is merely a “nominee” holding property for the pastor? There are cases where the IRS has used its nominee arguments against employees. And the courts have touched on other church-pastor financial issues, such as whether donations to pastors are taxable income to them. But with church assets, this gets into a controversial area about government reach or overreach and where the line is when it comes to the IRS’s powers to collect back taxes.

The IRS has broad authority to collect unpaid taxes–including the ability to pursue assets held by third parties when those assets effectively belong to the delinquent taxpayer. But churches and religious organizations have special protections under the law and Constitution.

The recent Society of Apostolic Church Ministries et al. v. United States, Docket No. 24-1765 (9th Cir. 2025), case gets into this issue. The court addressed whether a religious organization was simply the “nominee” of its leaders who owed substantial personal tax debts.

Facts & Procedural History

The taxpayers, who served as leaders of a religious organization, had a lengthy history of tax troubles with the IRS. The taxpayers owed nearly $1 million in unpaid taxes for tax years 2002 through 2004. This was not their first tax dispute–the court noted that the taxpayers had been before the appeals court several times in the past on tax matters.

To collect on these unpaid taxes, as it normally does, the IRS had placed a tax lien on a property. This was filed in the county records where property known as Apache Knolls was located. Apache Knolls was owned by the religious organization, but the taxpayers lived in the property. The IRS also levied the organization’s bank account.

These collection actions were based on the IRS’s determined that the religious organization was merely the taxpayers’ “nominee”–essentially holding bare legal title to these assets while the taxpayers were the true beneficial owners.

Instead of the leaders simply discharging the taxes in bankruptcy, the religious organization filed a lawsuit challenging both the IRS tax lien and the IRS levy. It argued that it was a legitimate religious organization that owned these assets for religious purposes and it was not a front for the taxpayers. The district court granted summary judgment in favor of the government, finding that the organization was indeed the taxpayers’ nominee. The religious organization appealed to the Ninth Circuit Court of Appeals.

The Nominee Rules for Tax Collection

The IRS can use the nominee rules to access property owned by third parties. The idea is that when a taxpayer transfers assets to a third party who holds the assets as a “nominee,” the IRS can treat those assets as still belonging to the taxpayer for collection purposes.

A nominee relationship exists when one party holds “bare legal title” to property for the benefit of another. More specifically, a “nominee” is “one who holds bare legal title to property for the benefit of another.” Thus, this argument, if you will, allows the IRS to pursue assets that, while not legally titled to the delinquent taxpayer, are effectively controlled by and benefit that taxpayer.

In appropriate cases, the nominee doctrine can help prevent taxpayers from shielding assets from collection by simply transferring legal ownership to another person or entity while maintaining the benefits of ownership. This is a type of a substance over form remedy for the IRS. The doctrine looks beyond legal formalities to the economic realities of who truly owns and controls the property.

How Does the IRS Determine Nominee Status?

To give a government agency the power to take private property is contentious topic. To give it power to take property owned by a third party is even more contentious.

Given the nature of this, the courts have developed a multi-factor test to consider whether the doctrine applies. In this case, the Ninth Circuit applied factors from its prior precedent, which consider:

1. Whether the taxpayer previously owned the property
2. Whether the property was transferred for nominal or no consideration
3. Whether the taxpayer continues to enjoy the benefits of the property
4. Whether the taxpayer continues to maintain control over the property
5. Whether the transfer was for a legitimate purpose or to avoid creditors
6. Whether the relationship between the taxpayer and nominee is close

As noted by the court in this case, these factors are merely guideposts. The “overarching consideration” is whether the taxpayer “exercised active or substantial control over the property” while the nominee held legal title. This requires examining the “totality of the circumstances” rather than mechanically applying a checklist.

Religious Organizations and the Nominee Doctrine

Religious organizations present special considerations in nominee analysis. Many legitimate churches use legal structures like “corporation sole” that allow religious leaders to hold property on behalf of the church. This structure, recognized in many states, enables religious leaders to manage church property while ensuring the property remains with the church when leadership changes.

In this case, the religious organization was organized as a “corporation sole” under Montana law. Montana law specifically allows a corporation sole to “purchase, take, receive, lease, take by gift, devise, or bequest or otherwise acquire, own, hold, improve, use, and otherwise deal in and with real or personal property” provided that all property must be held “in trust for the use, purpose, and benefit of the religious denomination, society, or church.”

This creates a potential tension: religious leaders may legitimately hold property as corporation sole for their church, but individuals owing taxes might also be able to misuse this structure to shield personal assets from collection.

The Ninth Circuit’s Analysis of Nominee Status

That brings us back to this case. The Ninth Circuit in this case provided an analysis of whether the religious organization truly held the Apache Knolls property and bank account as a nominee for the taxpayers. The court focused on several aspects to find that it did in fact hold the property as a nominee.

The court found significant that one of the taxpayers repeatedly transferred the Apache Knolls property between various entities she controlled, including the religious organization, without consideration. The property’s ownership changed hands multiple times:

1. In 2003, it was acquired by one religious entity (with the taxpayer as corporation sole)
2. In 2012, it transferred to another religious corporation under the taxpayer’s control
3. Later in 2012, it transferred to the taxpayers personally
4. In 2013, it transferred to another church entity (with the taxpayer as corporation sole)
5. In 2019, it transferred to the current religious organization (with the taxpayer as corporation sole)

These transfers without consideration suggested to the court that the taxpayers maintained effective control over the property despite changes in legal title.

The court also found that the taxpayers continued to enjoy the benefits of the Apache Knolls property through each change in legal ownership. They lived on the property for over twenty years. The religious organization paid for the taxpayers’ utilities and living expenses, including gas, telephone, cable, internet, and homeowner’s insurance–despite many of these accounts being registered in the taxpayers’ names.

Similarly

Similarly, with respect to the bank account, the court noted that the organization paid for the taxpayers’ living expenses, utilities, and even a portion of their legal fees. One taxpayer was a co-signer on the bank account, and testimony established that the taxpayers had decision-making authority over the organization’s finances.

Looking at all these factors together

Looking at all these factors together, the Ninth Circuit concluded that the taxpayers exercised ‘active or substantial control’ over the Apache Knolls property despite the organization holding legal title to it. The court found that the organization held bare legal title to the Apache Knolls property to benefit the taxpayers.

The court applied the same analysis to the organization’s bank account, finding that the taxpayers “exercised substantial control over the [organization’s] bank account” and used it to pay for their personal expenses.

Does Religious Purpose Matter in Nominee Analysis?

A fundamental disagreement in this case centered on whether the religious purpose of the assets should affect nominee analysis. Judge Bumatay’s dissent contended that: “The right question is: Did the Apache Knolls property also benefit the [organization]? If so, then it’s not dispositive that the property also happened to benefit the [taxpayers].” Judge Bumatay noted that if the property was used for religious services (as the organization claimed), this might create a legitimate dual purpose.

The majority, however, focused exclusively on whether “the taxpayer exercised active or substantial control over the property.” The majority did not find it necessary to analyze whether the property also served legitimate religious purposes. This suggests that even if property serves some legitimate religious function, it can still be subject to levy if the taxpayer exercises substantial control and receives personal benefits.

The Takeaway

This case shows the broad reach of the IRS’s collection powers. Churches usually operate off of charitable donations by members and so, ultimately, we are really talking about taking the congregation member’s assets. As this case shows, the IRS has broad authority to pursue assets held by religious organizations when those assets effectively benefit individuals owing taxes. While religious organizations have special protections, they cannot always be used as shields for personal assets. Courts might look beyond legal ownership to determine who truly controls and benefits from property. This also underscores the need for religious leaders to maintain clear separation between personal and organizational assets if they have outstanding tax liabilities.

Watch Our Free On-Demand Webinar

In 40 minutes, we’ll teach you how to survive an IRS audit.

We’ll explain how the IRS conducts audits and how to manage and close the audit.

Source link

Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

Subscribe to Our Newsletter

Get our latest articles delivered straight to your inbox. No spam, we promise.

Ben Wallace Says 2004 Pistons Don’t Take Anniversary Vacations, ‘Different Era’

IRS Levy for a Debt It Already Agreed to Payment Over Time? – Houston Tax Attorneys

July 4, 2026

Risk Redux — Conflicts of the Father…, More on Judicial Recusal Reasons, Another Law Firm Data Breach

June 29, 2026

Married Filing Separate, Community Property Reduction – Houston Tax Attorneys

June 27, 2026

Captive Insurance Tax Deductions Denied, No Risk Distribution – Houston Tax Attorneys

IRS Levy for a Debt It Already Agreed to Payment Over Time? – Houston Tax Attorneys

July 4, 2026

Risk Redux — Conflicts of the Father…, More on Judicial Recusal Reasons, Another Law Firm Data Breach

June 29, 2026

Married Filing Separate, Community Property Reduction – Houston Tax Attorneys

June 27, 2026

OpenAI Rolls Out A Lockdown Mode For Extra Protection Against Prompt Injection Attacks

IRS Levy for a Debt It Already Agreed to Payment Over Time? – Houston Tax Attorneys

July 4, 2026

Risk Redux — Conflicts of the Father…, More on Judicial Recusal Reasons, Another Law Firm Data Breach

June 29, 2026

Married Filing Separate, Community Property Reduction – Houston Tax Attorneys

June 27, 2026

Recent Reviews

Captive Insurance Tax Deductions Denied, No Risk Distribution – Houston Tax Attorneys

Insurance premiums go up and then they go up some more. The amounts can be substantial. This is particularly true for businesses that offer insurance to employees or that insure more types of risks.

And many business owners note that while they pay substantial insurance premiums, the insurance companies often do not have high payouts. This is because there be very few or even no claims submitted.

This is where captive insurance comes in. It is an arrangement where by a business or businesses get into the insurance business for their own risks. To oversimplify, they basically form entities and operate their own insurance companies.

This can make business sense. It can also result in a large tax deduction. That is where the IRS comes in. The IRS has a history of challenging captive insurance arrangements. In these cases the fundamental question is often whether the arrangement truly involves the essential insurance characteristics of risk-shifting and risk-distribution or is it just a tax play?

Given the size of the tax deductions at issue, the court decisions in the tax cases for captives have defined the industry. This brings us to the Swift v. Commissioner, No. 24-60270 (5th Cir. July 2025), case, which gets into whether a captive insurance arrangement has adequate risk distribution.

Facts & Procedural History

The taxpayer was the founder and sole proprietor of an urgent care center. It had 18 locations. He also owned two smaller medical entities that focused on sports rehabilitation and dermatology.

In 2004, the taxpayer explored creating captive insurance companies. He worked with a tax lawyer who specialized in forming and maintaining such entities.

The issue in this case involved the tax years 2012 through 2015. During this period, the taxpayer operated two captives incorporated in the Federation of Saint Christopher and Nevis. Each captive was owned by a trust benefiting one of the taxpayer’s children. The taxpayer and spouse served as trustees. During these four years, the medical practice paid $5.98 million in premiums to the captives. The taxpayer claimed these payments as business expense deductions.

The captives issued two main types of coverage. First, they provided medical malpractice “tail” policies. These policies covered claims related to professional services rendered before the policy period but reported afterward. The policies covered the practice’s physicians back to their start dates. Physicians acknowledged coverage annually and bore responsibility for deductibles and losses exceeding policy limits. Second, the captives issued various nonmedical coverage policies for administrative actions, business income, employment practices, litigation expenses, terrorism, and political violence.

The taxpayer’s attorney advised that the captives needed risk distribution. To achieve this, the captives participated in reinsurance pools. These pools consisted of approximately 100 captive insurance companies. The pools were designed to ensure that at least 30% of each captive’s premiums came from unrelated business through quota-share reinsurance arrangements.

As with most of the articles on our site, the problem started with an IRS audit. The IRS issued notices of deficiency that proposed to disallow the premium payment deductions and imposed 20% accuracy-related penalties. The deficiencies totaled over $2.4 million across the four tax years.

The taxpayer petitioned the U.S. Tax Court. The court sustained both the deficiencies and penalties. The case then went up on appeal, which is the subject of the court opinion we are covering here.

What Constitutes Insurance for Tax Purposes?

The starting point for considering this issue is, what exactly is insurance for tax purposes? It sounds simple, but it is not.

The tax code does not define “insurance.” So, when there is a question, the courts have to determine when premium payments are for “insurance” and qualify for business expense deductions under Section 162(a).

The U.S. Supreme Court established that insurance involves two fundamental elements. These elements are risk-shifting and risk-distribution. Risk-shifting occurs when the insured transfers the financial consequences of potential losses to the insurer. Risk-shifting analysis focuses on whether the insured has genuinely transferred the economic burden of potential losses to another party. This element is usually satisfied in captive insurance arrangements. The captive assumes contractual responsibility for covered claims.

The more challenging requirement typically involves risk-distribution. Risk-distribution spreads those transferred risks across a sufficiently large pool of independent risks. With this requirement, the IRS has consistently emphasized that these requirements must be met in substance–not merely in form. This is the nature of the IRS’s position when litigating these cases.

Why Risk Distribution Matters in Insurance

Risk distribution is the foundation of insurance economics. It distinguishes true insurance from mere self-insurance or family arrangements.

This concept relies on the statistical principle known as the law of large numbers. The law demonstrates something important. When a sufficiently large number of independent risks each have an annual loss probability of X percent, there’s an extraordinarily small likelihood that the actual loss percentage will deviate significantly from X percent.

I am a lawyer, not a mathematician, but I happened across an article by a mathematician explains this concept to laymen using a simple coin-flipping example. It goes like this. If you flip a coin ten times, you might get seven heads and three tails. This represents a significant deviation from the expected 50-50 outcome. However, if you flip that same coin one million times, the percentage of heads will almost certainly approximate 50 percent. Insurance operates on this same principle.

When an insurer covers thousands of independent risks, it can accurately predict total losses for the group. Individual losses remain unpredictable. This predictability allows the insurer to set appropriate premiums. The insurer can maintain adequate reserves and operate profitably while providing meaningful coverage to policyholders.

So back to risk distribution. Without sufficient risk distribution, an insurer faces a problem. A single catastrophic claim could exceed all collected premiums and reserves. This is because the law of large numbers only functions effectively when the underlying risks are truly independent. Risks that are correlated or concentrated in related entities create problems. A single event could trigger multiple claims simultaneously. This defeats the statistical predictability that makes insurance economically viable.

How Many Risks Are Enough for Distribution?

So that is the economics of it. But what does that mean from a practical standpoint? How many risks are enough?

The courts have struggled to establish an exact numerical threshold for adequate risk distribution. Instead, courts analyze each case based on its particular facts and circumstances. However, examination of successful captive insurance cases reveals patterns. These patterns show the scale necessary for meaningful risk distribution and the captive insurance industry has picked up on this.

For example, the U.S. Tax Court found adequate risk distribution in the Rent-A-Center, Inc. v. Commissioner case. In that case, the captive provided workers’ compensation, automobile, and general liability insurance for 14,000 to 19,000 employees. The captive also covered 7,000 to 8,000 vehicles and 2,000 to 3,000 stores. Similarly, in Securitas Holdings, Inc. v. Commissioner, the court accepted risk distribution where the captive covered 25 to 45 entities across more than 20 countries. That captive insured more than 200,000 employees and 2,000 vehicles.

These cases show that courts typically require exposure units numbering in the thousands or tens of thousands, not hundreds. The vast scale reflects the statistical reality. Meaningful risk distribution requires substantial numbers of independent risks. This achieves the predictive accuracy that characterizes genuine insurance.

Can Reinsurance Pools Create Risk Distribution?

The question then becomes, what constitutes the appropriate “exposure unit”? If you can define the unit narrowly, then maybe you can get higher numbers and satisfy the risk distribution requirement. Different measurement approaches can yield dramatically different risk counts.

So businesses may not have sufficient direct business to achieve risk distribution. When this happens, they may remedy this through participation in reinsurance pools. These arrangements allow multiple businesses to transfer portions of their risks to a common pool. The business formats its captive and the captives simultaneously assume quota-share responsibility for the pool’s blended liability.

Conceptually, reinsurance can transform a captive’s limited, related risks. It can create participation in a much larger, diversified risk pool. If properly structured, a captive that insures only its parent company’s risks might achieve meaningful risk distribution. This happens by trading those concentrated exposures for a proportional share of the pool’s diverse, unrelated risks.

However, the success of this depends entirely on something specific. The reinsurance transactions must constitute genuine insurance arrangements. They cannot be circular movements of funds designed primarily to create favorable tax characterization. These are the cases that the IRS pushes to litigation. And the courts then examine the structures with particular scrutiny as the cases they see, now, are usually only the ones that are closer calls. The courts analyze whether the structures involve real risk transfer and arm’s-length transactions.

This brings us to the Harper Group v. Commissioner case. In that case, the court established important precedent that the captive insurance industry uses. It found adequate risk distribution where 29 to 33 percent of the captive’s business involved insuring unrelated entities. This created an informal “30 percent rule.” Many practitioners have adopted this as a target threshold for risk distribution for captive insurance arrangements.

What Made This Reinsurance Pool Arrangement Fail?

This brings us back to this case. In this case, the appeals court analyzed the reinsurance pools and concluded that they did not achieve meaningful risk distribution. The court examined multiple factors in determining whether the pools constituted genuine insurance arrangements or merely paper transactions designed to create favorable tax treatment.

The court focused on the circular flow of funds between the captives and the reinsurance pools. The court noted that the captives paid premiums to the pools for reinsurance coverage, but the captives simultaneously received nearly identical amounts back as premiums for their quota-share participation in the pools’ blended risks. The amounts received ranged from 94.98% to 99.59% of the amounts paid across the four tax years. The court noted this as circular arrangement.

The court also considered the pools’ capitalization. They did not have the financial ability to function as genuine insurers as they were underfunded. The court noted that the pools appeared “thinly capitalized.” The court concluded that the pools would struggle to pay meaningful claims. This led the court to question whether any reasonable business would enter such contracts absent tax motivations.

The court also questioned the premium-setting methodology. The parties did not use actuarial analysis to determine appropriate pricing based on covered risks. Instead, the evidence showed that the advisor and actuary “were simply manipulating numbers to design a system where 30% of total premiums would be allocated to reinsurance before being retroceded back.” The pools charged uniform percentages to all participating captives regardless of their individual risk profiles. The pools also allowed captives to choose their own reinsurance percentages for certain coverage types to achieve desired overall allocation targets.

The court noted that the arrangements also included various features designed to discourage actual use of the reinsurance coverage. These features included requiring captives to pay substantial retained limits before making claims. The pools also had authority to exclude members who submitted excessive claims. The court said that these provisions suggested that the arrangements were not intended to function as genuine insurance.

Ultimately, the appeals court sustained the tax court’s opinion. The result was a loss of the business deduction for the insurance premiums.

The Takeaway

This case shows that captive insurance arrangements have to have to be insurance. Participation in reinsurance pools does not always mean there is risk distribution. This is particularly true when the pools operate as circular fund flows rather than genuine insurance arrangements.

Businesses with or considering captive insurance structures need to consider the scale of operations for achieving adequate risk distribution and assess whether their risk profiles involve sufficient independent exposures to support genuine insurance economics. They also need genuine risk transfer rather than circular transactions, adequately capitalized pools, and they should charge actuarially appropriate premiums and operate with meaningful independence from participants.

This is an area where tax planning is needed to try to avoid the type of result in this case.