FRADULENT TRANSFERS, TRANSFEREE AND OTHER THIRD PARTY LIABILITY
Part 5. Collecting Process
Chapter 17. Legal Reference Guide for Revenue Officers
Section 14. Fraudulent Transfers and Transferee and Other Third Party Liability
5.17.14 Fraudulent Transfers and Transferee and Other Third Party Liability
18.104.22.168 Transferee Liability Section Overview
22.214.171.124 Types of Transfers
126.96.36.199 Nominees and Alter Egos
188.8.131.52 Fraudulent Transfers
184.108.40.206 Transferee and Fiduciary Liability
Transferee Liability Section Overview
Previous sections have dealt with the collection of taxes from property and rights to property which belong to a taxpayer or which are subject to a tax lien. This section discusses methods to collect an unpaid liability (tax or non-tax) where a "transferor" has transferred property to a third party (the "transferee" ) prior to or after a liability is incurred (such as the assessment of a tax). Frequently, collection of the tax is based on a finding that the transfer was fraudulent. However, liability may also arise under a contract, under federal statutes, under state statutes governing bulk sales, corporate dissolutions, and corporate reorganizations.
The following are examples of underlying debt for which a transferee proceeding can be brought. The list is not exhaustive, but intended to indicate the range of underlying liabilities, particularly non-tax.
A tax liability for which a deficiency notice was issued to the taxpayer and that is assessed against the taxpayer, or that is set forth in a judgment against the taxpayer.
A liability for a tax not subject to the deficiency procedures that is assessed against the taxpayer, or that is set forth in a judgment against the taxpayer.
A tax liability for which a deficiency notice could have been issued to the taxpayer, or a judgment obtained against the taxpayer, but for which, instead, a notice of deficiency is issued to a transferee or fiduciary, or a judgment obtained against the transferee or fiduciary.
An erroneous refund or credit, where the amount owed is determined in a judgment against the recipient-transferor.
Government property, such as trust funds or the employer's portion of employment tax liabilities received by a professional employee organization (PEO) from a common law employer which is diverted to a person related to the PEO, where the amount is determined in a judgment against the PEO.
Erroneous direct deposit refund obtained by a bogus return (involving theft of identity of a named taxpayer) falsely claiming a payment credit not assessable under IRC § 6201(a)(3).
One way to collect the liability is by a civil law suit brought by the United States in a United States district court.
One method is a suit to impose transferee liability, which results in a judgment collectable out of any of the transferee's assets.
A second method is a suit to collect against the transferred property in the hands of the transferee, in which the court is asked to order a sale of the property to pay the debt due to the United States.
A third method is a suit to set aside a fraudulent transfer to enable the United States to collect the transferor's liability from the transferred property. This method is generally preferable when the value of the property has increased since the transfer. The court is asked:
• to find the transfer of the property to be in fraud of a debt owed the United States,
• to set aside the transfer,
• to reinstate the transferor's ownership of the property, and
• to order the property sold to pay the transferor's debt.
These procedures are discussed in IRM 220.127.116.11.1, below.
Another way to collect the liability is to administratively impose transferee liability, which results in the imposition of personal liability on the third party. The liability is then collected from any of the third party’s property. To make a third party liable for another’s tax, the Service mails a notice of transferee liability to the transferee, and later, if a Tax Court petition is not filed or the liability is sustained by the Tax Court, assesses the tax against the transferee under the authority of IRC § 6901. These procedures are discussed in IRM 18.104.22.168, below.
When fraudulent transfers are identified, it may be advisable to file a specially worded Notice of Federal Tax Lien identifying the transferee and specific property involved to prevent further clouding of title while enforcement actions are being taken. Approval of and guidance as to the styling of such specially worded notices of lien must be secured from Area Counsel before recording.
If a Notice of Federal Tax Lien was properly filed before the transfer, then the lien will take priority over any subsequent transferees, purchasers, or other interests. See IRC § 6323. If this is the case, the federal tax lien can be enforced directly without recourse to the remedies discussed in this section.
Types of Transfers
A transfer can be direct or indirect and includes:
The disposition of or parting with an asset or an interest in an asset.
The payment of money.
The payoff of debt.
The release of a debt or claim.
The granting of a lease.
The creation of a lien or other encumbrance.
The compensation, especially when excessive, paid to corporate officers.
The distribution of sale proceeds or other corporate assets to shareholders.
Nominees and Alter Egos
A fraudulent transfer should be distinguished from a nominee (or alter ego) situation. Although they often share common facts, and one case can involve both concepts, they are not the same.
The nominee situation is based on a simulated transfer, often to a fictitious entity which is an alter-ego of the taxpayer; the transfer is a sham. See United States v. Klimek, 952 F. Supp. 1100 (E.D. Pa. 1997).
Most fraudulent transfers are intended to effect an actual transfer of property or an interest in property. Between the transferor and the transferee, the transfer is valid under contract law.
In a nominee situation, the simulated transfer is not intended to divest the transferor of any rights to the property. An example of a nominee situation is a transfer of property to a party with the understanding that the property will be returned to the transferor after the transferor’s creditors lose interest in collecting their claims. Another example is a taxpayer who creates a corporation, owned and controlled by the taxpayer, into which the taxpayer transfers assets to shield them from creditors. While the corporation is the nominal owner of the assets, because the taxpayer and the corporation are basically one and the same—alter egos—the taxpayer remains the true owner.
A taxpayer’s liability can be collected from the taxpayer’s property held by a nominee or alter ego using administrative collection procedures, including the filing of nominee liens. In other words, the purported transfer is ignored. As to collection against property held by a nominee or alter ego, the IRS can rely on an assessment made against the taxpayer and a lien filed in the name of the taxpayer. To protect the revenues in respect of rights of third parties, however, a lien based on the assessment against the taxpayer is filed in the name of the nominee or alter ego, and property is seized by a nominee or alter ego levy. Area Counsel approval is required to issue an alter ego or nominee lien or levy, see IRM 22.214.171.124.5, IRM 126.96.36.199.4, and IRM 188.8.131.52.5.
Because a fraudulent transfer is valid between the transferor and the transferee, it can only be set aside by a court.
Although the Service may take the position that a person or entity is either a transferee or, alternatively, a nominee (alter ego, if an entity), the person or entity cannot be both.
Although fraudulent transfers take many forms, their common goal is to put assets out of the reach of creditors. It is important to look for a transaction which diminishes a taxpayer’s assets. Any transaction which leaves a taxpayer with something less than what the taxpayer started with potentially can be a fraudulent transfer. As an example, the forgiveness by a taxpayer of a debt owed him or the release by a taxpayer of a bona fide claim against a third party constitutes a transfer which may be set aside if the necessary elements of fraud are present.
A transfer is in fraud of a debt owed to a creditor when real or personal property is transferred to a third party with the object or the result of placing the property beyond the reach of the creditor or hindering the creditor’s ability to collect a valid debt. The party who conveys the property is the "transferor." The recipient of the property is the "transferee."
Suit to Set Aside a Fraudulent Transfer
If a taxpayer transfers property in fraud of a tax debt owed the United States, the United States may commence a civil law suit against the transferor and the transferee in a United States district court. Ordinarily, the suit requests that the court set aside the transfer. If successful, ownership of the property is reinstated in the transferor, and the transferor’s tax is collected from the property. This approach is generally preferable when the value of the property has increased since the transfer.
The right of the United States to set aside a fraudulent transfer is found in federal law and in state law.
The Federal Debt Collection Procedures Act (FDCPA) provides a federal cause of action for setting aside a fraudulent transfer in a federal district court, other than the United States Tax Court. 28 USC § 3301 et seq.
The United States may also use all of the remedies available to a private creditor under applicable state law to defeat a fraudulent transfer. Generally, the law of the state in which the transfer occurs will govern.
In a suit to obtain relief with respect to a fraudulent transfer, the burden is on the United States to prove that the transfer of the property was in fraud of a debt owed the United States. Depending on the circumstances, the United States must prove that the transfer was the result either of the transferor’s actual fraud or constructive fraud.
Generally, the focus of the cause of action is the transferred property (an "in rem" action). Usually, a personal judgment is not rendered against the transferee. However, a personal judgment against the transferee may be granted where:
the transferee has allowed the transferred property to depreciate in value;
the transferee has concealed, disposed of, or converted the transferred property; or
the transferee has commingled the transferred property with other property.
Where the value of the property has decreased following the transfer, the amount of any personal judgment against the transferee ordinarily cannot exceed the value of the property at the time of the transfer.
Generally, a suit to set aside a fraudulent transfer is combined with a suit to foreclose any liens for the transferor’s taxes which attach to the transferred property once the transferor’s ownership in the property has been reinstated. If a Notice of Federal Tax Lien was properly filed before the transfer, then the lien will encumber the property in the hands of any transferee and normally have priority. See IRC § 6323. Thus, an administrative collection action or a lien foreclosure action can be considered in lieu of a fraudulent transfer suit.
Types of Fraud in a Fraudulent Transfer
Constructive fraud and actual fraud are the two principal kinds of fraud. At least one of them must be proven to set aside a transfer.
Proof of constructive fraud is sufficient to set aside a transfer that occurs after the debt arises. FDCPA § 3304(a).
Proof of actual fraud will defeat a transfer whether the debt arises before or after the transfer. FDCPA § 3304(b).
The tax debt is imposed by statute upon the end of the taxable period and not when the return is due or the tax is assessed. Leach v. Commissioner, 21 TC 70 (1953), acq., 1954 WL 44441. However, a tax debt is also considered to be in existence at the time of transfer if the transfer occurred at any point during the taxable period resulting in liability.
Constructive fraud exists when property is transferred for inadequate consideration and the transferor either is insolvent when the transfer occurs or is made insolvent by the transfer. FDCPA § 3304(a). A transferor’s intent is immaterial if constructive fraud is proven.
Actual fraud occurs when property is transferred with the actual intent to hinder, delay, or defraud a creditor in the collection of a debt owed it. FDCPA § 3304(b).
It can be difficult to prove that a transfer was made with the actual intent to defraud a creditor. A fraudulent transfer usually is made without any verbal or written expression of the reason for the transfer.
Because of this, actual fraud is proved through circumstantial evidence known as the "indicators of fraud," such as lack of adequate consideration or a transfer to insiders. For other indicators of fraud, see IRM 184.108.40.206.3.2(3).
The fact that a taxpayer is in debt does not preclude the taxpayer from transferring property for valuable consideration. A transfer founded on good consideration and made with a bona fide intent is valid against the United States. But see the discussions of preferential transfers in IRM 220.127.116.11.11(3) and the trust fund doctrine in IRM 18.104.22.168.13.
Fraudulent Transfers under Federal and State Law
The Federal Debt Collection Procedures Act (FDCPA) became effective in 1991. 28 USC § 3001 et seq. Prior to the FDCPA, the United States relied on applicable creditor and debtor law of the various states to attack fraudulent transfers. The FDCPA gives the United States a uniform federal procedure for setting aside a fraudulent transfer to aid in the collection of federal debts, including tax debts. 28 USC § 3301 et seq. These sections of the FDCPA are based on the Uniform Fraudulent Transfers Act, 7A Pt. II Uniform Laws Annotated (ULA) 2. The United States is not bound to use the FDCPA to collect its debts. If necessary, it can proceed under any cause of action provided by state or federal law. See United States v. Letscher, 99-2 USTC ¶ 50,947 (S.D.N.Y. 1999).
All states recognize a cause of action to set aside a fraudulent transfer. A majority of jurisdictions have adopted either the Uniform Fraudulent Conveyance Act, 7A Pt. II ULA 246 (UFCA) (2 states & U.S. Virgin Islands) or its successor, the Uniform Fraudulent Transfer Act, 7A Pt. II ULA 2 (UFTA) (43 states and the District of Columbia). The fraudulent transfer provisions found in the UFTA are similar to those in the FDCPA. It is important to review the law of the state in which the transfer occurred.
The FDCPA, the UFCA and the UFTA recognize actual fraud and constructive fraud as grounds for setting aside a transfer.
To set aside a transfer of property as to a debt owed the United States arising before the transfer is made, the United States may prove constructive fraud.
Constructive fraud exists when a transferor does not receive reasonably equivalent value (FDCPA & UFTA) or fair consideration (UFCA) in exchange for the transfer, and the transferor was insolvent at the time of the transfer or became insolvent as a result of the transfer.
Reasonably equivalent value is not defined by the FDCPA or the UFTA except that a purchaser at a regularly conducted non-collusive foreclosure sale is presumed to give reasonably equivalent value. FDCPA, 28 USC § 3303(b); UFTA § 3(b), 7A Pt. II ULA 2; UFCA § 3, 7A Pt. II ULA 246.
Fair consideration for purposes of the UFCA is given in exchange for property if:
it is a "fair equivalent" to the property conveyed; and
exchanged in good faith.
UFCA § 3.
A transferor is insolvent if the sum of the transferor’s debts exceeds a fair valuation (FDCPA & UFTA) or the fair salable value (UFCA) of the transferor’s assets. FDCPA, 28 USC § 3302; UFTA § 2, 7A pt. II ULA 2; UFCA § 2, 7A Pt. II ULA 246.
The FDCPA and the UFTA presume that a transferor who generally is not paying debts as they come due is insolvent.
Where insolvency results from a series of related transfers, some of which may have occurred before actual insolvency, all of the transfers can be set aside as fraudulent.
The FDCPA and the UFTA contain another category of transfers which are considered fraudulent as to a current creditor. A transfer is fraudulent if:
the transfer was made to an insider on account of an antecedent debt;
the transferor was insolvent at the time; and
the insider had reason to believe that the transferor was insolvent when the transfer occurred.
This is commonly known as a preferential transfer to an insider. FDCPA, 28 USC § 3304(a)(2); UFTA § 5(b), 7A Pt. II ULA 2.
Examples of insiders include:
family members, when the transferor is an individual
directors and officers, when the transferor is a corporation
general partners and relatives of general partners, when the transferor is a partnership.
FDCPA, 28 USC § 3301(5); UFTA § 1(7), 7A Pt. II ULA 2.
Proof of actual fraud as to a debt owed the United States is sufficient under the FDCPA, the UFCA and the UFTA to set aside a transfer whether the debt arises before or after the transfer. FDCPA, 28 USC § 3301(5); UFCA § 7, 7A Pt. II ULA 246; UFTA § 4, 7A Pt. II ULA 2.
Actual fraud exists when a transferor actually intended to hinder, delay or defraud a creditor.
A transferor’s actual intent is proved through the indicators of fraud. The commonly recognized indicators of fraud include:
the transfer lacks fair consideration;
the transferor and transferee are closely related, such as family members, or a shareholder and the shareholder’s closely held corporation;
the transferor retains the enjoyment, possession and control of the property after its transfer;
the transfer was concealed;
before the transfer, the transferor had been sued or was threatened with suit;
substantially all of the transferor’s assets were transferred;
the transferor left the jurisdiction secretly;
the transferor removed or concealed assets;
the transferor was insolvent at the time of transfer or became insolvent shortly after the transfer occurred;
the transfer occurred shortly before or after a substantial debt was incurred; or
the transferor transferred the essential assets of a business to the holder of a lien who subsequently transferred the assets to an insider.
See FDCPA, 28 USC § 3304(b)(2).
The adequacy of the consideration for the transfer is an important indicator of fraud. United States v. Green, 201 F.3d 251 (3rd Cir. 2000); United States v. Denlinger, 982 F.2d 233 (7th Cir. 1992).
A person cannot give property away if it is to the detriment of creditors. If some consideration has changed hands, it may be necessary to determine whether the consideration was a "cover" for a fraudulent transfer.
Although the possibility exists of proving that a transfer was fraudulent even if consideration changed hands, the presence of adequate consideration is a strong defense.
A transfer of all or nearly all of a taxpayer’s property which leaves the taxpayer without any means of paying creditors is highly indicative of fraud. It must be determined, however, whether this property was transferred in an attempt to pay the transferor’s debts. If so, there may be no basis to invalidate the transfer without showing that the United States had legal priority over the creditors who were paid.
A transfer made shortly before or after the tax is due may be evidence of fraud. United States v. Scherping, 187 F.3d 796 (8th Cir. 1999); United States v. Parks, 91-1 USTC ¶ 50,263 (D. Utah 1991).
In attempting to set aside a transfer, it is helpful to show that the transaction was not made in the usual course of business. Examples of this are:
a sale made outside of usual business hours;
a failure to record an instrument that would normally be recorded;
an extension of credit for an unusually long period of time to a purchaser without security; and
a failure by the transferee to properly inventory goods transferred to him.
A reservation of an interest in the transferred property that is inconsistent with a bona fide transfer indicates fraud.
The FDCPA, the UFCA and the UFTA also consider a transfer of property without receipt of reasonably equivalent value or fair consideration to be fraudulent, whether the debt arises before or after the transfer, if the transferor:
was engaged in or was about to engage in a business or a transaction for which the remaining assets of the transferor were unreasonably small in relation to the business or transaction, or
intends or believes that he will incur debts beyond his ability to pay as they mature.
FDCPA, 28 USC § 3304(b)(1)(B); UFCA § 5 & 6, 7A Pt. II ULA 246; UFTA § 4(a)(2), 7A Pt. II ULA 2
The remedies provided for by Federal and state laws in a fraudulent transfer action include:
After finding that a transfer of property was in fraud of a debt, a court can set aside the transfer of the property, reinstate the transferor’s ownership of the property, and order collection of the transferor’s debt from the property. FDCPA § 3306(a)(1); UFTA § 7.
The creditor may recover a judgment against the transferee for the value of the asset transferred. FDCPA § 3307(b).
Some state laws require a party seeking to set aside a transfer of property as fraudulent to exhaust all other remedies against the transferor. The United States should make a reasonable search for additional assets and attempt to satisfy the debt out of those assets retained by the transferor.
Defenses, Liability, and Protection of Transferee
A transferee who takes property in good faith and for a reasonably equivalent value is not affected by a transferor’s actual fraud. The transferee’s rights in the transferred property are superior to the transferor’s creditors, and the transfer will not be set aside. FDCPA § 3307(a); UFTA § 8(a).
To be considered a good faith purchaser, the transferee must be without knowledge of the fraudulent purpose of the transferor at the time of the transfer and at the time consideration passes between them.
To qualify as a purchaser for reasonably equivalent value, the transferee must have exchanged property for the transfer. A promise to pay or payment with a nonnegotiable note is not sufficient.
If the transferee is not a good faith purchaser for reasonably equivalent value, then the transferee will be ordered to surrender the property or an equivalent amount of money. The transferee also is subject to an accounting for any rents or profits generated by the transferred property.
Even though a transfer is set aside as fraudulent, a good-faith transferee is allowed a credit for any consideration given to the transferor. The credit may be in the form of a lien on the transferred property or a setoff against any money judgment entered against the transferee. The transferee also will receive a credit for amounts expended to preserve the transferred property.
Another defense available to a transferee is a claim that he has paid other creditors of the transferor to the extent of the value of the transferred property.
The defense of "laches" (which will bar a lawsuit that is filed so unreasonably late that it is unfair to the party sued) does not apply to an action by the United States to set aside a fraudulent transfer.
A good-faith purchaser from a transferee of the transferred property generally takes the property free of the initial transferor’s fraud. The same holds true for a creditor who in good faith extends a loan to the transferee and takes a security interest in the transferred property.
A subsequent transferee with notice of the fraudulent transfer is subject to the rights of creditors of the initial transferor.
Statute of Limitations
A fraudulent transfer suit brought by the United States under IRC § 7402(a) to impose transferee liability on a transferee to collect on an assessment against the transferor is subject to the statute of limitations on collection of a tax imposed by IRC § 6502 (ten years after assessment against the transferor, plus applicable extensions). See also FDCPA, 28 USC § 3003(b)(1) (FDCPA does not impose time limits on actions to collect taxes brought under provisions outside the FDCPA).
It is the position of the majority of the courts that the United States is not bound by any state statute of limitations, including the UFTA (generally, four years after transfer). The FDCPA does not set a time limit. FDCPA § 3003(b)(1). Thus, in a fraudulent transfer suit brought by the United States pursuant to IRC § 7402(a) and a state statute, the limitations period under IRC § 6502 should control.
Where the United States brings suit under the fraudulent transfer provisions of the FDCPA, those provisions generally impose a six-year limitations period. See FDCPA, 28 USC § 3306(b). It may be arguable, however, that FDCPA, 28 USC § 3003(b)(1), allows the United States to rely on whichever limitations period is longer, ten years from assessment against the transferor under IRC § 6502, or six years from the fraudulent transfer to the transferee under FDCPA, 28 USC § 3306(b).
Transferee and Fiduciary Liability
The previous subsection discussed a method by which the United States may file a lawsuit to proceed against property transferred in fraud of creditors to collect a tax due from the transferor. This section describes how the Service imposes personal liability for the tax on a transferee or fiduciary. The liability then is collected from any of the transferee’s or fiduciary’s property. This approach is generally preferable when the value of the property has decreased since the transfer.
To make a transferee or fiduciary personally liable for another’s tax, the Service may:
issue a notice of transferee or fiduciary liability and assess the tax against the transferee or fiduciary under IRC § 6901 (subject to the transferee’s or fiduciary’s right to a trial before the United States Tax Court), or
bring suit under IRC § 7402(a) to impose personal liability, if the requirements for imposing liability under IRC § 6901 are not met.
Liability Under IRC § 6901
IRC § 6901 provides a procedure by which the Service may assess and collect the unpaid taxes, penalties, and interest:
from a transferee or
from a fiduciary liable under 31 USC § 3713.
IRC § 6901 is strictly a procedural statute; it does not create the substantive liability of a transferee for the transferor’s tax debt. The existence of, or extent of, a transferee’s liability is determined by applicable state or federal law. Commissioner v. Stern, 357 U.S. 39 (1958).
A transferee’s liability may be established at law, e.g., by contract, or under a state or federal liability statute. Liability may also be established in equity, which is based on a state’s fraudulent transfer statutes. IRC § 6901(a).
The procedures for establishing transferee and fiduciary liability under IRC § 6901 are similar to the deficiency procedures.
A notice of transferee or fiduciary liability must be mailed to the last known address of the transferee or fiduciary.
The transferee or fiduciary may petition the United States Tax Court within 90 days.
The liability will be assessed against the transferee or fiduciary if:
• the Tax Court enters a decision against the transferee or fiduciary;
• the transferee or fiduciary defaults on the notice of liability; or
• the transferee or fiduciary agrees to an assessment of the liability.
Once the liability is assessed, and after notice and demand and a refusal to pay, a lien is created which attaches to all property of the transferee or fiduciary. A Notice of Federal Tax Lien must be filed to protect the Service’s interests under IRC § 6323.
The assessment may be collected administratively from all property and rights to property of the transferee or fiduciary.
The period for collection of the assessment against the transferee is the IRC § 6502 collection statute of limitations (10 years running from the assessment against the transferee).
A transferee is defined under IRC § 6901(h) as including a donee, heir, legatee, devisee, and distributee, and with respect to estate taxes, any person who, under IRC § 6324(a)(2), is personally liable for such tax.
The regulations add to the definition of a transferee: a distributee of an estate of a deceased person, a shareholder of a dissolved corporation, the assignee or donee of an insolvent person, the successor of a corporation, a party to a reorganization as defined in IRC § 368, all other classes of distributees, and with respect to the gift tax, a donee. Treas. Reg. § 301.6901-1(b).
These definitions are not all-inclusive, but are merely examples of transferees.
A transferee can be liable under IRC § 6901 for a transferor’s:
income tax, estate tax or gift tax; or
other taxes, such as employment taxes, if the transferee’s liability arises out of a liquidation of a partnership or corporation, or a corporate reorganization under IRC § 368(a). .
A fiduciary is liable under IRC § 6901 for the income tax, estate tax or gift tax due from the estate of a taxpayer, decedent or donor. IRC § 6901(a)(1)(B).
The transferee or fiduciary may be liable for any of the above-mentioned taxes shown on a return or for any deficiency or underpayment of these taxes. IRC § 6901(b).
The periods of limitation under IRC § 6901(c) for the assessment of the liability of a transferee or fiduciary are:
For an initial transferee, one year after the assessment period against the transferor ends.
For a transferee of a transferee, one year after the period for assessment against the preceding transferee ends, but not more than three years after the period for assessment against the transferor ends.
If, however, before the end of the period for assessment against the transferee, a court proceeding to collect the tax is begun against the transferor or the last preceding transferee, then the period for assessment against the transferee expires one year after the "return of execution" in the court proceeding (when the officer charged with carrying out a judgment returns the order to the court stating the judgment has been executed).
For a fiduciary, one year after the fiduciary liability arises or the period for collection of the tax ends, whichever is the later.
Under IRC § 6901(d), the periods mentioned above may be extended, prior to expiration, by agreement. In the case of a transferee of a transferee, however, the execution of an extension agreement by the initial transferee is not effective to extend the overall three-year limitations period discussed above in paragraph (9)b of this subsection.
If a notice of liability has been mailed to a transferee or fiduciary, the running of the statute of limitations for assessment is suspended for the period during which an assessment is prohibited by IRC § 6213 and for 60 days thereafter. IRC § 6901(f).
Where the statute of limitations on assessment with respect to the transferor is open because of the transferor’s tax fraud or his failure to file a tax return, then the statute of limitations remains open as to the transferee. See IRC § 6501(c).
Statutes of limitations for state fraudulent transfer statutes do not apply to IRC § 6901. Bresson v. Commissioner, 111 T.C. 172 (1998).
Transferee or Fiduciary Liability by Suit
Prior to enactment of IRC § 6901, the United States established transferee or fiduciary liability by way of a suit filed in district court. This method is still available. It is used, for example, when the procedures of IRC § 6901 are not available because the statute of limitations for assessment has expired.
Since a suit to establish transferee or fiduciary liability is a collection suit, the ten-year statute of limitation in IRC § 6502 for suits to collect taxes applies.
A suit to establish transferee or fiduciary liability is not limited to certain types of taxes as are the assessment procedures of IRC § 6901. All types of taxes, including employment and excise taxes, can be collected in a transferee suit.
Burden of Proof
In a proceeding before the United States Tax Court under IRC § 6901, the burden is on the Service to prove that a transferee or fiduciary is liable for the tax of another. IRC § 6902(a). Where liability is sought to be imposed on a third-party for another’s tax by way of a suit brought by the United States in a district court, the burden of proof likely is on the United States as the petitioning party. When a transferee files a refund suit, the burden of proof remains with the transferee.
A transferor's deficiency is presumed correct, but a transferee may prove otherwise. A transferee has the burden of proof on this issue, not the Service. IRC § 6902(a). When a court has already decided a transferor’s tax liability, however, a transferee may not relitigate the issue. Jahncke Serv., Inc. v. Commissioner, 20 BTA 837 (1930).
To establish fiduciary liability under 31 USC § 3713(b), the Service has the burden to prove that the fiduciary paid a debt of the person or estate for whom the fiduciary is acting before paying the debts due the United States. The fiduciary is not liable unless the fiduciary knew of the tax debt or had information that would put a reasonably prudent person on notice that an obligation was owed to the United States. United States v. Coppola, 85 F.3d 1015 (2nd Cir. 1996).
Transferee Liability at Law
To establish a transferee’s liability at law, the Service must prove:
the transferor transferred property to the transferee;
the transferor was liable for the tax at the time of the transfer, or the transfer occurred in the year of liability, and the transferor remains liable for the tax;
the value of the transferred property at the time of the transfer;
all reasonable efforts to collect the tax from the transferor have been tried or would be futile; and either
the transferor and the transferee entered into a contract in which the transferee agreed to assume the transferor's tax liability, or
the transferee is strictly liable under a federal or state statute (e.g., a bulk-sales law or a statute on corporate mergers).
Liability at Law Based on a Statute
Federal and state statutes impose liability on a transferee for the debts of another.
The Internal Revenue Code has several provisions which impose liability on a transferee for another’s tax.
No assessment against the transferee or fiduciary is needed to collect in the situations listed below during the 10 year lien period provided by IRC § 6324, in respect of the lien that arises automatically without assessment. A judgment or assessment may be needed after that.
A distributee of certain types of property from a decedent’s estate is personally liable under IRC § 6324(a)(2) for estate taxes to the extent of the value of the property received.
A donee of a gift is personally liable under IRC § 6324(b) for any gift tax incurred by the donor to the extent of the value of the gift.
Most states also have statutes which impose liability on a transferee in certain circumstances.
Bulk sale provisions found in the Uniform Commercial Code (UCC) impose liability for a business’s debts on the purchaser of substantially all the inventory or equipment of the business if notice of the purchase is not given to creditors.
State statutes typically provide that a surviving corporation of a merger or consolidation is liable for the debts of the absorbed corporation. Under this form of liability, the surviving corporation steps into the shoes of and becomes the taxpayer rather than a transferee; the surviving corporation becomes primarily liable as a successor in interest.
Transferee Liability in Equity
Transferee liability may also be "in equity," resulting from a fraudulent transfer. The elements of transferee liability in equity are:
the transferor transferred property to the transferee;
the transferor was liable for the tax at the time of the transfer, or the transfer occurred in the year of liability, and the transferor remains liable for the tax.;
the value of the transferred property at the time of transfer (which generally determines the limits of the transferee’s liability);
the transfer was fraudulent under state law;
all reasonable efforts have been made to collect the liability from the transferor, and further collection efforts would be futile.
State statutes require either actual or constructive fraud to prove a fraudulent transfer.
In general, constructive fraud exists when property is transferred for inadequate consideration and the transferor either is insolvent when the transfer occurs or is made insolvent by the transfer. A transferor’s intent is immaterial if constructive fraud is proven. To overcome the presumption that a transfer was fraudulent, the transferee can only offer proof that the consideration was adequate or that the transferor was solvent.
Actual fraud occurs when property is transferred with the actual intent to hinder, delay, or defraud a creditor in the collection of a debt owed it.
For a complete discussion of constructive fraud and actual fraud see IRM 22.214.171.124.3.1, "Constructive Fraud," and IRM 126.96.36.199.3.2, "Actual Fraud."
Courts consider a transferee’s liability to be secondary to the primary liability of the transferor. (In contrast, the liability of a surviving corporation as successor in interest is primary; it becomes the taxpayer).
Before pursuing a transferee, the Service must exhaust all legal remedies it may have against the transferor for collection of the tax. The extent to which the Service must proceed against the transferor depends on the facts and circumstances. The Service is not required to attempt to collect the unpaid tax from a transferor where it would be useless or futile. For instance, the Service need not pursue a corporate taxpayer that has been stripped of its assets or a trust that has distributed its property to a beneficiary and terminated.
Proof by the transferee that the transferor’s tax liability has been paid is a valid defense to transferee liability. The transferor’s liability will be collected only once. A transferee’s liability is extinguished once the tax liability is paid by the transferor or other transferee, and either the transferor waives any right to a refund or the period of limitations for seeking a refund has expired. Because a transferee’s liability is secondary to the primary liability of the transferor, a compromise of the transferor’s liability may either reduce or extinguish the liability of the transferee.
Acceptance of an offer to compromise a transferee’s liability has no effect on the transferor’s primary liability or on the liability of other transferees. Any payment by the transferee, though, reduces the transferor’s liability and, thereby, the liability of other transferees.
A transferee may contest the liability of the transferor.
No liability is imposed on the transferee if it is proven that the transferor is not liable for any tax.
A prior decision on the merits of a tax liability of a transferor fixes the amount of the tax for purposes of a transferee’s liability. The transferee is barred from litigating the transferor’s liability, just as the transferor would be barred from relitigating the transferor’s liability in another forum.
• A decision on the merits includes a determination by a court following a trial or an agreed stipulation of a tax liability.
• A voluntary dismissal prior to entry of a decision by a court or a dismissal for lack of jurisdiction is not considered to be a determination on the merits. In such a case, the transferee can later litigate the transferor’s tax liability in another forum.
• A defaulted notice of deficiency is not a decision on the merits.
• A closing agreement between a transferor and the Service binds the transferee.
Other defenses include:
the expiration of the statute of limitation;
return of all or a part of the transferred property;
any other defense that can be used for the type of liability asserted (e.g., that the Service has not exhausted its remedies against the transferor).
Extent of Transferee Liability
The amount of the transferee’s liability for the transferor’s unpaid tax, penalties, and interest is generally limited to the value of the property transferred at the time of transfer. Where transferee liability is at law, a transferee's liability is not limited to the value of the property transferred. Each transferee is jointly and severally liable for the transferor’s unpaid taxes to the extent of the value of assets received at the time of transfer. The Service therefore is not required to apportion liability among transferees. For example, if three transferees each received transfers worth $20,000 and the transferor's liability is $15,000, then each transferee is liable for the entire $15,000 and not a mere pro rata share ($5,000). The Service may collect the liability from one, two, or all three of the transferees, subject to a total collection of $15,000.
A transferee is liable for interest under IRC § 6601 from the date that the transferee receives notice of transferee liability. Patterson v. Simms, 281 F.2d 577 (5th Cir. 1960).
A transferee may also be liable for interest running from the date of transfer, regardless of the value of the transferred property, if a state or federal statute allows for the interest. See Stansbury v. Commissioner, 102 F.3d 1088 (10th Cir. 1996). The statute sets the interest rate. If the Service issues a notice of transferee liability under IRC § 6901, then this interest ends on the notice date.
A transferee of the initial transferee may be subject to liability for the tax of the transferor. A transferee of an initial transferee is liable if:
the initial transferee is liable and
there is a basis for transferee liability of the subsequent transferee (such as a fraudulent transfer from the initial transferee).
The liability of a subsequent transferee is generally limited to the value of the property received (see (1) – (3) above).
Transferee Liability of a Corporation
If a corporation transfers its assets to another corporation, the transferee corporation may be liable for the debts of the transferor corporation based on transferee liability in law or in equity. Examples are:
the transferee corporation expressly or impliedly agrees to assume the debts of the transferor corporation;
the transfer is part of a consolidation or merger of the corporations and under state law the surviving corporation is liable as a transferee (and not primarily liable) for the transferor’s debts;
the transfer results in an implied trust fund under the trust fund doctrine (see IRM 188.8.131.52.13); or
the transfer of property was a fraudulent transfer.
The transferee liability of a corporation is distinguishable from successor liability. State law may provide that when a corporation reorganizes or reincorporates or when two or more corporations merge or consolidate, the successor corporation is considered to be the same as the predecessor(s) for purposes of liability. In that case, the successor-in-interest becomes the taxpayer and is primarily liable for the predecessor’s tax liability. Oswego Falls Corp. v. Commissioner, 26 B.T.A. 60 (1932).
Transferee Liability of a Shareholder or Distributee of a Corporation
Shareholders/distributees who receive assets from a corporate liquidation can be subject to transferee liability for the unpaid corporate income taxes.
Shareholders who receive assets of a corporation on its dissolution and who are liable as transferees (in equity, at law, or under the trust fund doctrine) are jointly and severally liable to the extent of the assets transferred to them. The Service is not obligated to pursue all of the shareholders for collection of the corporation’s unpaid income taxes. Since the liability of a shareholder, however, is generally limited to the value of the assets received from the corporation, it may practically be necessary to pursue all shareholders to collect the full liability.
A distribution to a shareholder based on the shareholder’s equity interest in a corporation, such as a dividend, or a payment by the corporation of a debt owed to a shareholder, can be a preferential transfer to an insider, thus, resulting in transferee liability.
If a stockholder is also an officer or an employee of the corporation, and receives a bonus or salary which is unreasonable, the stockholder may be treated as a transferee on the theory that the excessive salary is the equivalent of a distribution of corporate assets.
Transferee liability may arise in a stock or asset sale context, where the sale is in economic substance a "sham."
The purchase of the stock of a corporation, followed by the liquidation of the corporation, may render the purchaser liable as a transferee.
If the acquisition of assets is a fraud to the creditors of the transferor corporation, the acquiring corporation is liable as a transferee. A sale of corporate assets may also result in a trust in favor of creditors under the trust fund doctrine.
Transferee liability may also be a consideration in Notice 2001-16 intermediary transaction tax shelters. These listed transactions are basically intended to avoid the payment of taxes on a corporate stock or asset sale. The participants to a transaction—the seller's shareholders, the buyer, the intermediary, and the transaction's facilitators—may be possible transferees. Their potential liability for unpaid taxes resulting from the transaction will depend on the facts of the case and the proper tax treatment of the transaction.
Pursuant to 31 USC § 3713(b), a representative of a person or an estate (except a trustee acting under the Bankruptcy Code of Title 11) paying any part of a debt of the person or estate before paying a debt due to the United States is personally liable to the extent of the payment for unpaid claims of the United States. A fiduciary is not liable unless the fiduciary knows of the tax debt.
Personal liability under 31 USC § 3713(b) only applies where the United States has priority under 31 USC § 3713(a), the Insolvency Statute.
The priority generally applies where the person or estate is insolvent.
The priority is superseded by interests that would have priority over the federal tax lien IRC § 6323.
Prior to enactment of IRC § 6901, the United States proceeded against a fiduciary by means of a suit filed in a federal district court. This procedure is still available.
IRC § 6901(a)(1)(B) permits the Service to impose personal liability on a fiduciary under 31 USC § 3713(b) by way of a procedure commenced with the issuance of a notice of fiduciary liability. The fiduciary may then contest the proposed liability in the Tax Court. See IRM 184.108.40.206.1.
Fiduciary liability is discussed more fully in IRM 220.127.116.11, Personal Liability of the Fiduciary Under 31 USC § 3713(b).
Trust Fund Doctrine
The trust fund doctrine is a basis for transferee liability. It is separate from the other bases: liability at law or in equity.
The theory behind the doctrine is that when a transfer leaves the transferor without enough assets to pay debts, the transferee holds the transferred property in trust for the benefit of the transferor's creditors.
To establish liability, a creditor must prove:
the transfer of assets;
the value of the assets;
the transferor's insolvency at the time of the transfer or as a result of the transfer or a series of transfers; and
the exhaustion or futility of efforts to collect from the transferor.
Benoit v. Commissioner, 238 F.2d 485, 491 (1st Cir. 1956).