Alter Ego

  • Alter Ego

Alter Ego Doctrine (IRS + Courts): How “Entity Protection” Fails When You Don’t Operate Separately

Asset protection only works when the structure is real. The alter ego doctrine is the legal tool used to treat an LLC, corporation, or even a trust arrangement as a “second self” when the facts show you never operated it as an independent structure. When alter ego is proven, courts (and the IRS) can bypass limited liability and pursue assets that would otherwise appear protected.

This page is designed for DSCEU clients using trusts, LLCs, SPVs, and contract-based structuring to mitigate risk. It is written for education and operational clarity—not as legal or tax advice.

Key Takeaways (Read This First)

  • Alter ego is not theory—it’s an enforcement pathway. If your structure is treated as your personal wallet, it can be treated as you.
  • Commingling funds, poor records, and “paper-only” entities are the fastest way to lose protection.
  • Trusts are fiduciary relationships—not magic invisibility tools. Trustees must act as fiduciaries and follow the trust terms.
  • IRS collection rules explicitly address alter ego / nominee concepts for enforcing federal tax liens.

Related DSCEU resources:
Asset Protection •
Online Secure Trust Application •
Contact DSCEU

Definitions (With External References)

DSCEU pages use precise terminology. Use these references to align your documentation and operations with standard definitions:

IRS Definition and Enforcement Reality

The IRS applies alter ego concepts primarily in tax collection. When the IRS determines that an entity is effectively indistinguishable from the taxpayer (because the taxpayer controls it and abuses separateness), the IRS can seek to treat the entity’s assets as reachable for collection.

What the IRS Uses (Internal Revenue Manual)

Start with the IRS Internal Revenue Manual (IRM):
IRM 5.17.2. This is where IRS collection guidance addresses alter ego and related theories in practice.

Important DSCEU compliance note: If your goal is lawful risk mitigation, your operating behavior must match the legal structure. If you operate an entity “as yourself,” IRS collection analysis becomes much easier.

Federal vs. State Analysis (Why Uniformity Matters)

The IRS Chief Counsel has also published guidance emphasizing a federal common law approach for alter ego analysis to support uniform tax enforcement. See:
Chief Counsel Notice CC-2012-002 (PDF).

DSCEU practical point: Do not rely on “state shopping” myths. If you are exposed to federal collection, the analysis can be more aggressive than what internet forums suggest.

What Triggers Alter Ego Risk (Operational Red Flags)

Alter ego findings are fact-driven. The pattern is always the same: unity of interest + unfair result if separateness is honored.

Risk Factor What It Looks Like in Real Life What to Do Instead (DSCEU Standard)
Commingling Personal bills paid from business accounts; mixed deposits; undocumented transfers. Separate accounts, separate books, documented intercompany transfers, written approvals.
No records / no formalities No operating agreement discipline, no minutes/notes, no contracts, no invoices. Maintain an audit trail: contracts, invoices, resolutions, and decision logs.
Undercapitalization Entity has obligations but no realistic funding or reserves. Capital plan + reserves appropriate to activity; proper insurance where applicable.
Dominion & control One person makes all decisions with no separation of roles. Role separation: manager vs. member, trustee vs. beneficiary, protector oversight when used.
Sham purpose Entity exists only on paper; no legitimate business operations. Clear purpose, documented activity, lawful operations aligned with stated objectives.

Definitions:
Undercapitalization (Investopedia) •
Limited liability (Cornell Wex)

Key Court Rulings (Corporations + Trust Context)

Courts pierce the veil when the entity is used as an instrument for personal affairs and honoring separateness would produce an unjust result. Below are commonly cited examples that illustrate patterns DSCEU clients must avoid.

Corporations / LLCs: Classic Veil-Piercing Pattern

  • Castleberry v. Branscum (Texas Supreme Court, 1986): illustrates veil-piercing where a corporation was treated as a sham and used in a fraudulent manner. (Case text: Justia)
  • Anderson v. Abbott (U.S. Supreme Court, 1944): illustrates shareholder liability where control and structure produced an unjust outcome. (Case text: Justia)
  • Youree v. Recovery House of East Tennessee (Tennessee Supreme Court, 2025): modern example emphasizing updated veil-piercing standards. (Summary: TN Courts press release)

Trusts: “Not an Entity” Does Not Mean “Untouchable”

Trusts are fiduciary relationships, and courts analyze control and conduct. A frequently cited California decision explains the nuance:

  • Greenspan v. LADT LLC (California Court of Appeal, 2010): clarifies that a trust is not an entity for alter ego purposes, but the doctrine may still reach the trustee depending on the facts. (Case text: Justia)

DSCEU operating standard: If you want trust-based risk mitigation, trustees must act like trustees. That means fiduciary administration, documented decisions, and strict separation from personal spending patterns.

Regulatory Use: FTC and SEC Context

Alter ego concepts are not limited to private lawsuits. Regulators and enforcement agencies regularly examine whether structures are real, especially when allegations involve fraud, deception, or misuse of investor/customer funds.

  • SEC: SEC administrative opinions and releases frequently reference veil-piercing factors and alter ego arguments when assessing liability and remedies in enforcement contexts. Example documents:
    SEC IA-4400 (PDF) and
    SEC Release 34-98969 (PDF).
  • FTC: In Commission decision history, alter ego language appears in cases evaluating successor entities and corporate separateness. Example archival decision volume:
    FTC Commission Decisions (Vol. 70, PDF).

Bottom line: If your structure must survive scrutiny, it must survive the paper trail. DSCEU builds documentation-forward operations so your entity behavior matches your stated purpose.

DSCEU Checklist: How to Reduce Alter Ego Exposure

This is the operational discipline DSCEU expects in any asset isolation plan (LLC, trust, SPV, or hybrid):

  • Separate money: separate accounts, separate accounting, separate approvals.
  • Separate authority: defined roles and decision rights (manager, trustee, protector, officer).
  • Separate documentation: agreements, invoices, resolutions, minutes/notes, and internal controls.
  • Separate purpose: the entity must do what the documents say it does—consistently.
  • Capital + insurance: appropriate funding and risk transfer aligned with operations.
  • Clean transfers: no mystery “owner draws” across entities; document intercompany loans and payments.

Want DSCEU to review your structure for alter ego weakness? We can help you identify the operational gaps that destroy separateness and outline a documentation plan you can take to your licensed tax/legal professionals for implementation.

Protect the Structure by Operating the Structure

Entity protection is earned through disciplined operations. If you want asset isolation that withstands scrutiny, DSCEU helps you build a compliance-forward structure with real documentation and real separation.

Contact DSCEU

Disclosure: This page is general educational information and does not constitute legal, tax, or investment advice. Outcomes depend on jurisdiction, facts, and professional implementation.

Last updated: January 07, 2026