Beneficial ownership and legal title are important concepts in the reporting of foreign financial assets and income therefrom to the U.S. government.   The beneficial owner of property is the real, true, owner of the property, the person entitled to control the property, and to realize the benefit of it.[1]  Legal title is merely whose name is on the title to the property.

Courts have long recognized that a financial account may be beneficially owned by a person other than the one whose name is on the account (the legal titleholder).[2]  Nurrle v. Fitzgerald[3] involved Charles Nurrle, a subcontractor with the Palmer Company laying track for the Michigan Central Railway.  Nurrle’s business took him around the State, and he was not at home during banking hours.  His wife opened a bank account for his business, but in her name.  She died, and at her death the account had a balance of $5,655.  The wife’s executor claimed the account for  the wife’s estate, leaving Mr. Nurrle without working capital for his business.  Mt. Nurrle sued the executor in the Kalamazoo County Circuit Court, arguing that although the account was titled solely in his wife’s name, he beneficially owned the account.  The Circuit Court agreed with Mr. Nurrle, and the Supreme Court of Michigan affirmed.

A client (whom we shall call “Son”) recently reported that his mother (whom we shall call “Mother”) had added him as a joint owner of her financial accounts.  Mother is a native-born citizen of Canada, and resides there.  The accounts are with Canadian financial institutions.  Son is a lawful permanent resident of the United States, and resides in the U.S.  Son is concerned that he may need to report Mother’s financial accounts on FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs), and on Forms 8938, Statement of Specified Foreign Financial Assets, filed with his U.S. income tax return.

Mother added Son’s name to the accounts as a will substitute, so that the accounts would pass to Son upon Mother’s death.  Mother remained in control of the accounts at all times.  Only Mother made deposits to the accounts, or withdrawals from them. 

Mother clearly is the beneficial owner of her Canadian financial accounts.   For federal income tax purposes, where property has a beneficial owner different from its legal titleholder, gross income produced by the property is realized by (taxable to) the beneficial owner, not the legal title holder.[4]  Thus, Son should not report income from Mother’s Canadian accounts on his U.S. income tax return.  Nor should Son report the Canadian accounts on Form 8938 filed with his U.S. income tax return.  Gratuitously reporting the accounts or income therefrom could subject Son to penalties.  In that event, Son would need the assistance of someone like me to seek relief from the penalties.

Son does, however, need to report his joint ownership of the Canadian accounts on an annual FBAR, Part III, Information on Financial Account(s) Owned Jointly.  A person has a “financial interest” in a foreign financial account reportable on an FBAR if the person holds legal title to the account or has beneficial interest in the account.[5]  Son could avoid penalties by filing delinquent FBARs under the Internal Revenue Service’s Delinquent FBAR Submission Program.

In sum, Son should not report Mother’s Canadian financial accounts or income therefrom on a U.S. income tax return.  Son should, however, report his joint ownership of Mother’s Canadian financial accounts on an annual FBAR.

[1] Central Bank and Trust Co. v. Shipman, 127 So.2d 706, 707 (Fla. App. 1961); Dove v. White, 211 Md. 228, 248, 126 A.2d 835, 846 (1956); Hale v. Windsor Sav. Bank, 90 Vt. 487, 98 A. 993, 996 (1916); Union Stock-Yards Nat. Bank v. Gillespie, 137 U.S. 411, 422, 11 S.Ct. 118, 122, 34 L.Ed. 724 (1890).

[2] Estate of Muhammad, 123 Ill.App.3d 756, 758-59, 463 N.E.2d 732, 734-35, 79 Ill.Dec. 178 (1984), after remand, 165 Ill.App. 3d, 890, 893, 520 N.E.2d 795, 797, 117 Ill.Dec. 444 (1987), lv. app. denied, 119 Ill.2d 557, 522 N.E.2d 1247 (1988) (citing Central Nat’l Bank v. Connecticut Mut. Life Ins. Co., 104 U.S. 54, 66, 26 L.Ed. 693 (1881) and Union Stock-Yards Nat. Bank v. Gillespie, 137 U.S. 411, 422, 11 S.Ct. 18, 122, 34 L.Ed. 724 (1890)).  See also In re Johnson, 232 B.R. 735, 739 (Bankr., C.D. Ill. 1999); 5 Michie, Banks and Banking &s;§79, at 217 (1950).

[3] 222 Mich. 327, 331, 192 N.W. 573, 575 (1923).

[4] Bussell v. Commissioner, T.C. Memo 2005-77, at *9 (2005); Cepeda v. Commissioner, T.C. Memo 1994-62, at *3-4 (1994); Cordes v. Commissioner, T.C. Memo 1994-377, at *4 (1994); Feraco v. Commissioner, T.C. Memo 2000-312, at *5-6 (2000). See also Joint Committee on Taxation Report on P.L. 111-147, at n.129 (Mar. 18, 2010).

[5] Financial Crimes Enforcement Network, BSA Electronic Filing Requirements for Report of Foreign Bank and Financial Accounts (FinCEN Form 114) (2017), at 5.