That's certainly the way IRS would like you to read the statute.  However, IRS also approved the Regulation that says, "a person shall not be considered to be a nominee as to any portion of an interest payment which is actually owned by another person whose name is also shown on the information return filed by the payer or nominee with respect to such interest payment."  It's not uncommon for two names to be on an account, but the bank to use only one SSN on a 1099.  That's not a nominee distribution.

Furthermore, Section 6049 says "For purposes of subsection (a), the term “interest” does not include—
(A)interest on any obligation issued by a natural person."  So even if he uses the money in his Schedule C business, John does not have to issue his sister Mary a 1099 for the interest he paid her on the money she loaned him.  Why would Congress exclude "natural persons" from reporting interest on direct transactions, but include them when they are only indirect agents?

I agree, IRS has too much work to do already, no one is going to Leavenworth if nominees in these circumstances don't file 1099s.