8.7.5  Transferee and Transferor Liabilities

Manual Transmittal

September 28, 2012

Purpose

(1) This transmits revised IRM 8.7.5, Technical and Procedural Guidelines, Transferee and Transferor Liabilities.

Material Changes

(1) Revised IRM to reflect new organizational titles resulting from the Appeals 2012 Realignment Project.

(2) Updated IRM references throughout.

(3) IRM 8.7.5.1 (2) - revised to clarify computation date for tax, penalties and interest.

(4) IRM 8.7.5.2 (1) (a) - clarified procedures for carding in transferee cases.

(5) IRM 8.7.5.6.1 - revised to replace references to a "face sheet" with "Form 3610" and to include instructions to use the Employer Identification Number of the transferee on Form 3610.

(6) IRM 8.7.5.6.3 - revised to clarify that the same person preparing the computations should also prepare Form 1296, and to instruct the Appeals Officer to use the Form 1296 prepared by Exam if it is accurate and no computations are needed.

(7) IRM 8.7.5.6.4 - revised to clarify that a statement of account may be requested on a docketed transferee case.

(8) IRM 8.7.5.9 - revised to reflect correct agreement forms.

(9) IRM 8.7.5.9 - revised to include instructions for sending the notice to Counsel for review because the burden of proof is on the Service and correctly identifying the parts of the Notice of Liability.

(10) IRM 8.7.5.9.1 - revised to replace references to Form 4089 with notice of transferee liability statement.

(11) IRM 8.7.5.9.2 - revised to update information to be used on letter.

(12) IRM 8.7.5.9.2.1 - moved sample paragraphs to Exhibit 8.7.5-5, Sample Opening Paragraphs for Letter 3424.

(13) IRM 8.7.5.9.3 - revised to rename "Statement Face Sheet" to "Notice of Transferee Liability Statement" and provided instructions for preparing the notice.

(14) IRM 8.7.5.9.3.1 and 8.7.5.9.3.2 - moved sample paragraphs to Exhibit 8.7.5-6, Transferee Statements Attached to Letters.

(15) IRM 8.7.5.9.5 - revised to reflect correct waivers are either Form 870-T or Form 890-T.

(16) IRM 8.7.5.9.6 - new subsection added to include instructions for preparation of Form 1296

(17) IRM 8.7.5.11 - revised to clarify instructions for completing Form 1296.

(18) New Exhibit 8.7.5-5, Sample Opening Paragraphs for Letter 3424. This results in the renumbering of subsequent exhibits.

(19) New Exhibit 8.7.5-6, Transferee Statements Attached to Letters. This results in the renumbering of subsequent exhibits.

(20) Exhibit 8.7.5-7, Full Liability Transferee Notice - revised to include Form 870-T.

(21) Exhibit 8.7.5-8, Limited Liability for Transferee - Notice Letter, Form 870-T and Statement - revised to include Form 870-T.

Effect on Other Documents

This supersedes IRM 8.7.5 dated November 6, 2007.

Audience

Appeals

Effective Date

(10-01-2012)


Susan L. Latham
Director, Policy, Quality and Case Support

8.7.5.1  (10-01-2012)
Introduction to Working Transferee Cases in Appeals

  1. IRC 6901 provides a transferee liability against a recipient (transferee) of property from the transferor, for the tax liability of the transferor and is a tool used to collect a taxpayer’s tax liability. A transferor is the person or entity who created the tax liability and transferred assets to another party. The transferee is the person or entity who is additionally liable for the tax (because they received the transferred assets for less than full, fair and adequate consideration).

  2. The government can assess another taxpayer’s (transferor’s) liability against a transferee to collect this tax liability based on some other provision of state or federal law. The liabilities include taxes, penalties and interest. Taxes and penalties are computed through the date of the transfer, while interest may not be limited to the date of the transfer. It also includes additional liabilities resulting from an examination.

  3. Appeals considers and processes transferee cases in much the same manner as other cases. The administrative file of a transferee case must contain the tax returns of the transferor with a revenue agent's report.

  4. Use current transcripts to confirm the liability was assessed against either the transferor or one or more transferees.

8.7.5.2  (10-01-2012)
Points for Account and Processing Support (APS) to Remember When Establishing Transferee/Transferor Cases

  1. When establishing transferee/transferor cases on CASES, remember the following:

    1. The transferor is the key case in the work unit, with each transferee case established as a related return.

    2. The total tax (deficiency) dollars are shown by tax period on the transferor's case with no duplication shown.

    3. When there are multiple transferors in a case, each transferor and their related transferees are established as a separate work unit. This helps when researching specific cases.

    4. When showing the liability per tax period for each transferee case, remember to show the same amount in duplication.

    5. When establishing transferee/transferor cases, use Non-Master File (NMF) codes in certain data elements to distinguish the case from Master File (MF) cases with the same name that might be in the office at the same time. The codes also help when researching or updating specific cases based on work unit number, TIN, and MFT.

8.7.5.3  (11-06-2007)
How APS Establishes a Case with Transferee and Income Tax Liabilities

  1. When a transferee/transferor case is received that contains both transferee and income tax liabilities, it is established in one of two ways: (1) the transferee liability and transferor case are established as one work unit and the income tax liability as a separate work unit; or (2) if the income tax liability is related to the transferee/transferor adjustments, all are established in one work unit by using a TIN modifier (A through J) to distinguish the transferee case.

  2. Establish the transferee and income tax (related) cases first and the transferor (key case) last.

8.7.5.3.1  (11-06-2007)
Input for Cases Inventory Screen on Transferee Case

  1. Follow normal procedures for input into the fields in CASES with the exception of the following fields:

    1. TIN - Since the transferee assessment is Non-Master File (NMF), enter N after the TIN.

    2. MFT - When the type of tax is known, enter the NMF tax code. Refer to Document 6209 for a list of NMF codes for each type of tax.

    3. TYPE - Refer to Form 1296, Assessment Against Transferee or Fiduciary. In the upper right hand corner, indicate the type of tax; enter code as appropriate.

    4. FEATRCD - Enter "TF" .

    5. KEYTP, KEYTIN, and KEYPER - On related cases, enter the transferor's information.

    6. Note - Type in "transferee " .

8.7.5.3.2  (11-06-2007)
Input for Return Information Screen on Transferee Case

  1. Follow normal input procedures for input into the fields on the return information screen with the exception of the following fields:

    1. AIMS Indicator - Enter "E" since these cases are not controlled on AIMS.

    2. Tax Period - Enter each tax period for which there is a transferee liability.

    3. Proposed $ Def/-OA (Tax) - Enter the unpaid liability amount (in whole dollars) for each tax period.

    4. Duplication - Add all the unpaid liabilities together and enter this amount in duplication. As a result, the case grading dollars will be zero (-0).

8.7.5.3.3  (11-06-2007)
Input for Related Income Tax Case

  1. When establishing the related income tax case, follow the normal procedures for establishing cases with the exception of the input to the following fields:

    1. Enter the transferor's information in KEYTP, KEYTIN, and KEYPER field.

8.7.5.3.4  (11-06-2007)
Input for CASES Inventory Screen on Transferor Case

  1. Follow normal input procedures in the fields of the case inventory screen when establishing the transferor key case except for the following:

    1. TIN - Enter N after the TIN.

    2. TYPE - Enter the type code bases on the type of tax indicated on Form 1296.

    3. FEATRCD - Enter "TF."

    4. MFT - Enter the NMF tax code per Document 6209.

    5. Since the transferor is the key case, no information will be entered in the KEYTP or KEYTIN fields.

    6. Note - Type in "transferor" .

8.7.5.3.5  (11-06-2007)
Input for Return Information Screen on Transferor Case

  1. Use normal input procedures for the input on the return information screen of the transferor case except for the following:

    1. AIMS Indicator - Enter "E" or "Y" depending on if the return is controlled on AIMS or not required to be on AIMS.

    2. Tax Period - Enter each tax period for which the transferor has tax due.

    3. Proposed $ Def/-OA (Tax) - Enter the total tax (in whole dollars) for each tax period entered.

    4. Duplication - Leave blank

8.7.5.4  (11-06-2007)
Considering Transferor and Transferee Cases at the Same Time

  1. When possible, give simultaneous consideration to the transferor and all transferees. If any of the cases are pending in another Appeals office, consolidate them if possible. If consolidation is not possible, coordinate case processing.

  2. If the possibility of transferee liability first comes to light during Appeals consideration of a case, advise the Area Director and request the appropriate investigation.

  3. Additional information regarding transferee cases is found in IRM 4.11.52, Transferee Liability Cases.

8.7.5.5  (11-06-2007)
Consents and Period of Limitations on Transferee Cases

  1. Immediately obtain a current transcript on the transferor since the transferee's statute of limitations is based upon the transferor's statute of limitations.

    1. The statute of limitations for the initial transferee is one year after the expiration of the period of limitation for assessment against the transferor.

    2. The statute of limitations for a transferee of a transferee is one year after the expiration of the period of limitations against the preceding transferee, but no more than three years after the expiration of the limitations period against the original transferor.

    3. See IRM 4.11.52.4, Assessment Statute of Limitations (SOL), and IRM 4.10.13.3.3, Statutory Period and Consents, for additional information.

  2. Extend the period of limitations for assessment against the transferee by using Form 977, Consent To Extend the Time To Assess Liability at Law or in Equity for Income, Gift and Estate Tax Against a Transferee or Fiduciary. This will not extend the period for assessment against a transferee of a transferee.

  3. Separate extensions are necessary for each transferee.

  4. In the case of a statutory merger, consolidation or a mere change in identity, form, place or organization, the new or surviving corporation is held to be the same as the old and is primarily liable for the debts of the old. Take action against the new or surviving corporation within the statutory period of limitation for assessment against the transferor.

  5. See IRM 8.21, Appeals Statute Responsibility, for additional information on consents and statutes for Appeals cases.

8.7.5.6  (10-01-2012)
Settlement Computations in Transferee Cases

  1. This subsection covers the procedures followed by the Tax Computation Specialist (TCS) or other Appeals employee who prepares settlement computations on transferee cases.

  2. Generally, the settlement computation in transferee cases shows a recomputation of the transferor’s unpaid liability, including assessed tax and any assessed penalties.

  3. When preparing the recomputation of tax (on Form 5278, Form 4549, etc.) show the transferor’s name, SSN, and tax period on all schedules since the recomputed tax is actually the transferor's.

  4. Unlimited liability cases: Value of the assets the transferee receives from the transferor exceeds the transferor's unpaid tax liability, or deficiency. The liability of the transferee is the full amount of the unpaid tax or deficiency of the transferor.

  5. Limited liability case: Value of the assets transferred to the transferee is less than the transferor's unpaid tax liability, or deficiency.

  6. The following table is a guide to actions needed in each particular situation:

    If ... Then ...
    Transferee's liability is limited reflect transferor's total unpaid liability for each tax period which is not adjusted or reduced because of the transferee's limited liability.
    Transferee is liable for part or all of the unpaid deficiency of transferor a computation is required.
    No change to previously computed transferor liability only Form 3610 is required. No tax computation is necessary.
    Transferee is liable for part or all of the unpaid original assessment of the transferor only Form 3610 is required. No tax computation is necessary.

  7. Carefully check a current transcript to see if the transferor’s liability was assessed either against the transferor or against other transferees, or if there are payments on the liability. There may be a need to secure NMF transcripts when working transferee/transferor cases.

  8. If the transferor made payments to reduce the liability, the payments are netted against the tax, penalties and interest for the earliest tax periods first.

    1. The payments are allocated to the tax, penalties and interest previously assessed against the transferor on the basis of the ratio of the separate amounts of tax, penalties and interest to the aggregate amount assessed in each specific tax period so as to reduce or eliminate the earliest tax periods’ total liability first.

    2. The net remaining unpaid liability is reflected on the settlement computation.

  9. See IRM 8.7.5.9. This section entitled, Issuing a Notice of Liability on an Unagreed Transferee Case, has additional information about transferee cases, including a discussion of limited and unlimited liability. See also IRM 4.11.52, Transferee Liability Cases, for more information.

8.7.5.6.1  (10-01-2012)
How to Prepare the Form 3610

  1. Procedures for preparing the Form 3610 for a transferee/transferor case are the same as those followed when preparing Form 3610 in any other case, except for the following.

  2. Show the name of taxpayer as follows:

    John Q. Taxpayer, Transferee of the assets of
    XYZ Corporation, Transferor

  3. Use the Taxpayer Identification Number (TIN) of the transferee on Form 3610.

  4. Use the tax period of the transferor as the tax period of the transferee.

    1. For example, if the transferor is XYZ Corporation with a fiscal year ending 09/30/95, and the transferee is John Q. Taxpayer with a tax year ending 12/31/95, show the tax year for John Q. Taxpayer as 09/30/95.

    2. In the reverse situation, if the transferor is John Doe with a tax year ending 12/31/96 and the transferee is ZZZ Company with a fiscal year ending 08/31/96, show the tax year for ZZZ Company as 12/31/96.

  5. Unlimited liability cases:

    1. Show liability amounts once on Form 3610.

    2. Show name of taxpayer as discussed in paragraph (2) above.

    3. Modify Form 3610 to include a label titled "Liability of Transferee" under the deficiency and overassessment columns.

  6. Limited liability case:

    1. Prepare the columns of the Form 3610 like the examples shown in the exhibits. See Exhibit 8.7.5-1 and Exhibit 8.7.5-2.

  7. State law sometimes governs the interest liability of the transferee. In these cases, avoid misunderstandings by adding the following to the Form 3610:

    "Plus interest at _% from ______(date)"

8.7.5.6.2  (10-01-2012)
Interest Computations in Transferee Cases

  1. The Tax Court has jurisdiction of interest in transferee cases and may sometimes require computations of interest.

  2. Interest on a transferee liability is computed based on the state or federal law that governs the liability. State laws that may apply, for example, are wrongful transfer or fraudulent conveyance statutes. IRC 6901 is strictly procedural as to the assertion of transferee liability. O'Sullivan v. Comr, T.C. Memo. 1994-17 summarizes some of the principles.

  3. Interest on Unlimited Liability (value of transferred assets is greater or equal to the transferor's total tax liability, including penalties and interest): Transferee is liable for interest under IRC 6601 from the due date of the tax of the transferor. Lowy v. Comr., 35 T.C. 393 (1960) discusses this principle.

    1. See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 20.2.1, Interest, General and Legal Authorizations, for further information.

  4. Interest on Limited Liability (value of transferred assets is less than transferor's total tax liability, including IRC 6601 interest): Amount of the transferee's liability is limited by the value of the transferred assets, except to the extent the state law that gives rise to the transferee liability allows interest. Estate of Stein v. Comr., 37 T.C. 945 (1962) discusses this principle. In other words, the transferee may be liable for tax, penalties and IRC 6601 interest up to the value of the transferred assets. In these circumstances, state law will provide the applicable interest rate.

    1. Consider when total tax liability (deficiency plus penalties and interest) becomes larger than the value of assets, the state law governing the asset transfer, the date the assets were transferred, and the date of the notice of transferee liability. These items are relevant when determining interest in a limited liability situation.

    2. After the date of the notice of transferee liability, interest runs on the transferee liability assessment pursuant to IRC 6601.

    3. Seek Counsel’s advice as to the state interest rate (if applicable) and the effective dates of both state and federal rates. See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 5.17.14.2.3.2.1, Fraudulent Transfers under Federal and State Law.

  5. Interest on Estate/Gift Tax Transferee Liability:

    1. State law has no bearing on transferee liabilities (limited or unlimited) resulting from a transferor’s estate/gift tax liability.

    2. IRC 6324(a) specifically governs the transferee’s estate/gift tax liability and together with IRC 6901 provides that interest under IRC 6601 will apply from the due date of the tax of the transferor. See IRM 8.7.4, Appeals Estate and Gift Tax Cases, for more information on estate and gift cases.

8.7.5.6.3  (10-01-2012)
Form 1296, Assessment Against Transferee or Fiduciary

  1. Form 1296, Assessment Against Transferee or Fiduciary, is used to make Non-Master File (NMF) transferee assessments. The form is generally prepared by the same person that prepares the settlement computations, at the time those computations are prepared. If no settlement computation is needed, the Appeals Officer should review Form 1296 prepared by Exam and, if that form is accurate, may use that form instead of preparing a new one.

    1. Form 1296 is available in an Excel spreadsheet on the Appeals Tax Computation web site or as a fillable Adobe Acrobat form on the Electronic Publishing Catalog web site.

  2. The transferee is controlled using a "dummy" TIN on NMF.

    1. The transferee’s account is set up on NMF using the transferee’s Taxpayer Identification Number (TIN) with a "-D" (dummy) and "Transferee" after the name to indicate transferee status.

    2. Using the "-D" eliminates the other dashes in the TIN. For example if our transferee is John Smith with a SSN of 123-45-6789, on NMF the TIN is reflected as 123456789-D.

    3. The creation of the "Dummy" TIN format is necessitated by the fact that our current ERCS / AIMS programs do not allow both a MF and a NMF control for the same TIN. Therefore, establish a dummy TIN with a "-D" for the transferee case.

    4. See paragraph (3) of IRM 4.11.52.6 for further information.

  3. Unlimited liability cases:

    1. In unlimited liability cases, prepare a separate Form 1296 for each taxable period and each kind of tax.

    2. Use the tax period of the transferor as the tax period of the transferee.

  4. Limited liability cases:

    1. If the value of assets received by the transferee is less than the unpaid liability of the transferor and more than one year is involved, do not allocate the transferee’s liability to the various years. Instead, show the liability as one amount on the Form 1296 of the earliest unpaid liability year of the transferor without identifying it with any particular year of the transferee.

    2. Prepare a single Form 1296. Show total transferee liability on the right-hand side of Form 1296.

    3. Annotate the interest starting date and the interest rate on Form 1296 or the attachment to Form 1296.

    4. Itemize the liability of the transferor for each taxable year on an attachment, or in the remarks section of Form 1296, or on a separate Form 1296, depending upon the preference of the processing office.

  5. An example of a completed Form 1296 and the attachment are found in the exhibits. See Exhibit 8.7.5-3 and Exhibit 8.7.5-4.

  6. See IRM 8.7.5.9.1. This section contains more detailed information on transferee assessments.

8.7.5.6.4  (10-01-2012)
Statements of Account in Transferee Cases

  1. In some instances the Appeals Officer, Appeals Team Case Leader or Counsel Attorney may request a statement of account on a docketed transferee case. See IRM 8.17.3, Preparing a Statement of Account, for instructions for preparing a statement of account.

8.7.5.7  (10-01-2012)
Modification of Agreement Forms in Transferee Cases

  1. Form 2045, Transferee Agreement, is an admission of status as a transferee and waives any requirement for issuance of a statutory notice to the transferor. It is not, however, a substitute for a waiver of restrictions against the assessment of tax against the transferee.

  2. Secure agreement Form 870-T in settled cases involving transferee liability.

  3. For an agreed Estate and Gift Tax Transferee case, secure agreement Form 890–T.

  4. For an agreed Employment Tax Transferee case, secure agreement Form 2504 or Form 2504–WC, whichever is appropriate.

  5. In the case of a transferee (other than one liable under section 31 U.S.C. section 3713) insert the following on the agreement form: "This represents the undersigned's liability as a transferee of the assets of (name and address of transferor) for (type of tax), penalties, and interest thereon as provided by law due from said transferor."

    1. In the case of a transferee of a transferee, insert the following on the agreement form: "This represents the undersigned's liability as a transferee of assets of (first transferee), (address), transferee of assets of (transferor), (address), for (type of tax) tax due from (transferor)." IRM 4.10.13.3.4.2, Transferee Waivers.

    2. If a fiduciary liability exists under 31 U.S.C. section 3713 for income, estate or gift taxes insert the following on the agreement form: "This represents the undersigned's personal liability under section 3713 of Title 31 of the United States Tax Code, for (kind of tax) tax due from ______."

  6. If the transferor's total liability exceeds the assets transferred insert the following on the agreement form - "This, plus interest thereon, represents the undersigned's liability as a transferee of the assets of (name and address of the transferor) for (type of tax), penalties and interest thereon, to the extend of the net value of the assets received from the transferor, plus interest thereon as provided by law. It has been determined that the net value of the assets received is (value of the assets received)."

  7. For information concerning closing agreements in transferee cases, see IRM 8.13.1, Closing Agreements.

8.7.5.8  (10-01-2012)
Closing an Agreed Transferee Case

  1. Treat the transferor case as the "principal" or "key" case when preparing Form 5402 and Form 5403 and case memos. This applies even when the amount of the unpaid liability against the transferor was assessed. For case memos in related cases, see IRM 8.6.2, Conference and Settlement Practices, Appeals Case Memo Procedures.

  2. If there is concurrent settlement of the transferor and transferee cases, instruct Account and Processing Support (APS) to abate any excess assessment against the transferor. Then, waive the liability against the transferee(s) if the agreed liability is paid immediately by or for the transferor.

  3. If the liability, or any part of it, was not assessed against the transferor, instruct APS to include it in the required payment and assess it.

  4. If the liability of the transferor was assessed against the transferee(s), instruct APS to abate the transferee assessment(s).

  5. To avoid misunderstandings, Appeals Officers must advise taxpayers or representatives of the rate of transferee interest and the date from which it is computed. For example, under varying state law in limited liability cases, it might be computed at the legal rate from one of the following:

    • Due date of transferor's return;

    • Date of transfer of assets;

    • Date of notice of transferee liability.

    Appeals Officers should seek Counsel's advice when determining the applicable interest rates in transferee liability cases.

  6. In situations where there are multiple transferees and not all agree, close the key transferor case with the agreed transferees and create a new key case for the transferor along with related cases for the remaining unagreed transferees.

8.7.5.9  (10-01-2012)
Issuing a Notice of Liability on an Unagreed Transferee Case

  1. Tax Computation Specialists (TCS) are generally responsible for the preparation of Notices of Liability in transferee/transferor cases.

  2. Notices are issued to a transferee (at law or in equity) liable for income, estate, and gift taxes; including liability of a fiduciary under 31 U.S.C. section 3713(b) for income, estate and gift taxes; and in respect of taxes arising on a liquidation of a partnership or corporation, or on a reorganization within the meaning of IRC 368(a), liability in respect of any tax imposed by the Internal Revenue Code.

  3. Notices of transferee liability are issued for employment taxes only to the extent that a notice of determination of worker classification would have been issued to the transferor. IRC §6901, Transferred Assets, provides "the liability will be assessed, paid and collected in the same manner as in the case of the taxes with respect to which the liabilities were incurred." Therefore, the only time a notice of transferee liability is issued for employment taxes is when the transferor's employment tax liability was based upon worker classification issues under IRC §7436.

  4. Since notices of deficiency are not issued to a taxpayer for excise taxes, no notice of transferee liability is issued to a transferee regarding excise taxes.

  5. Issue the notice to the transferee within the applicable statutory period (usually one year beyond the transferor's limitation date) whether or not a Notice of Deficiency was issued to or assessed against the transferor.

  6. The term "transferee" includes transferee of a transferee, heir, legatee, devisee, distributee of an estate, shareholder of a dissolved corporation, assignee or donee of an insolvent person, successor of a corporation, party to a reorganization defined in IRC 368, and all other classes of distributees. It also includes in gift tax cases, the donee, without regard to the solvency of the donor, and any person who, under IRC 6324(a)(2), is personally liable for any part of the estate tax.

    1. Title 31 of the U.S. Code in section 3713(b) provides a fiduciary is personally liable for tax where he or she has paid debts or distributed assets without first having satisfied the claim of the United States, in violation of federal priority found in section 3713(a).

    2. Issue the notice the later of the following periods: (1) One year after the liability arises or (2) the collection period of the tax in respect of which such liability arises.

  7. IRC 6901 provides for assessment and collection against a transferee of property for tax liability of the transferor, and describes the types of tax liabilities to which this provision applies.

  8. There are many different aspects of the law to consider when determining whether the transferee's liability is limited or full. The Appeals Officer, Appeals Team Case Leader or Counsel Attorney is responsible for making the determination and providing the information to the TCS when requesting work. The Appeals Officer, Appeals Team Case Leader or Counsel Attorney must also provide the approximate date that the assets were transferred to the transferee. If liability is limited, they must provide the amount of the limited liability.

    Note:

    The amount of the limited liability is needed because in limited transferee liability cases the paragraphs that are included on the notice letter and the notice statement require an entry for the amount that the transferee is liable for. Also, in a limited liability case, the notice statement requires the approximate date that the assets were transferred to the transferee.

    1. See IRM 5.17.14.3 (1) for discussion of liability under IRC 6901. The burden of proof is on the Service to prove that a transferee or fiduciary is liable for the tax of another. IRC 6902(a).

    2. Counsel must review the notice before issuance because the burden of proof is on the Service. See IRM 8.17.4.28(1) f.

  9. The following provides a simple overview of limited and full liability:

    1. Limited Liability - Generally, the liability of the transferee is limited to the excess of the value of the assets received from the transferor over the consideration paid by the transferee for the assets, if that excess is less than the unpaid liability of the transferor. If more than one year is involved in a limited liability situation, state the transferee liability as one figure in the notice and do not allocate the transferee liability to various years.

    2. Full Liability - Generally, where the excess of the value of the assets received from the transferor over the consideration paid by the transferee for the assets is more than the unpaid liability or deficiency of the transferor, the transferee is liable for the full amount of the unpaid liability or deficiency of the transferor. If more than one year is involved in a full liability situation, assert the transferee liability for the same years as that of the transferor.

  10. Usually transferee cases in which Notices of Liability are issued by Appeals, cover the following situations:

    1. Transferee liability for the full liability for the unpaid deficiency of the transferor. See Exhibit 8.7.5-7.

    2. Transferee liability for limited liability for the unpaid deficiency of the transferor. See Exhibit 8.7.5-8. (The Form 5278 and explanations use the same format as those shown in Exhibit 8.7.5-7.)

    3. Transferee liability for the full liability for the unpaid original assessment of the transferor.

    4. Transferee liability for limited liability for the unpaid original assessment of the transferor.

  11. There are three parts to the Notice of Liability:

    • Letter to the transferee (Letter 3424);

    • Statement that summarizes the liability of the transferee; and

    • Waiver (usually Form 870–T or Form 890–T).

      Note:

      Schedules to show the computation or tax and explanations of adjustment may be attached if necessary.

  12. For transferee cases involving types of tax other than income tax, alter the letter and statements to fit the type of tax.

8.7.5.9.1  (10-01-2012)
Identification of Tax Years in Transferee Notice

  1. Transferor assessments are made on Master File (MF) for the appropriate tax year.

  2. Transferee liability assessments are made on Non-Master File (NMF) using the transferor's tax year.

    1. For example, if the transferor is XYZ Corporation with a fiscal year ending 09/30/95, and the transferee is Joe Smith with a tax year ending 12/31/95, the assessment against Joe Smith would be made Non-Master File using a taxable period of 09/30/95. Therefore, the transferee notice of liability would show the tax year for Joe Smith as 09/30/95.

    2. In the reverse situation, if the transferor is John Doe for a tax year ending 12/31/96 and the transferee is ZZZ Company with a fiscal year ending 08/31/96, the transferee notice of liability for ZZZ Company would show the tax year as 12/31/96.

  3. If the value of assets received is less than the unpaid liability or deficiency of the transferor and more than one year is involved, the transferee liability is not allocated to various years but is stated as one figure in the notice. See Exhibit 8.7.5-8. This exhibit contains an example of language to use in the first paragraph of the notice letter, in the Form 870–T and in the Notice of Liability Statement.

8.7.5.9.2  (10-01-2012)
Letter 3424 - Notice of Liability

  1. Letter 3424 - only address to the transferee.

    1. "Taxpayer Identification Number" field on the letter - Use the transferee's TIN.

    2. "Form Number" field on the letter - enter the tax form filed by the transferor.

    3. Use the transferor's tax year on the Letter 3424.

  2. Use this letter instead of Letter 901. A copy of this letter is shown in Exhibit 8.7.5-7.

  3. A special opening paragraph is used depending on the type of transferee liability involved. Use the opening paragraphs shown in IRM Exhibit 8.7.5-5, and discussed further in IRM 8.7.5.9.2.1. When using APGolf, select the appropriate paragraph when generating the letter. The opening paragraphs in APGolf also give the option to select full or limited liability.

  4. In limited liability cases the opening paragraph of the letter is modified to reflect the limited liability of the transferee.

8.7.5.9.2.1  (10-01-2012)
Opening Paragraphs for Letter 3424

  1. Letter 3424 must include special opening paragraphs, depending on the type of transferee liability, that will identify the name and address of the transferor and the nature of the tax liability. The mailing address on the letter will only include the name and address of the transferee. If the transferee liability is based on substantive state law (state fraudulent conveyance act, state bulk sales law, state merger and dissolution law, etc.), the basis should be asserted in the first paragraph of the letter.

  2. See Exhibit 8.7.5-5, Sample Opening Paragraphs for Letter 3424. Select the appropriate paragraphs when generating the letter using APGolf.

    1. In limited liability cases the APGolf opening paragraphs give the option to select full or limited liability. If limited liability is selected, then the opening paragraph generated using ACDS for the Letter 3424 is modified appropriately.

8.7.5.9.2.2  (10-01-2012)
Modify Opening Paragraph for Jeopardy Assessment Against Transferee

  1. If a jeopardy assessment has been made under IRC 6861 and IRC 6862 against a transferee with respect to an unpaid liability, modify the opening paragraphs as discussed below:

    1. Delete the reference at the end of the second sentence that reads: "and will be assessed against you" .

    2. Add the following at the end of the paragraph: "We have assessed the liability under the Internal Revenue laws that apply to jeopardy assessments."

    3. These changes may be accomplished by generating Letter 3424 using APGolf. Select one of the six paragraphs listed in the APGolf Letter 3424 input screen under "Jeopardy Assessments" and the changes to the opening paragraph will be made when the letter is generated.

    Example:

    The full liability opening paragraph would read as follows: "The determination of the (type of tax) tax liability of (Transferor), (Address), discloses a deficiency, as shown above. The amount of the deficiency, plus interest as the law provides, constitutes your liability as transferee of assets of (Transferor). The enclosed statement shows how we figured the deficiency. We have assessed the liability under the Internal Revenue laws that apply to jeopardy assessments."

8.7.5.9.3  (10-01-2012)
Notice of Liability Statement

  1. A transferee notice contains a statement that is attached to the letter. Neither Form 4089 nor Form 4089-A is used for the statement. Prepare a separate schedule labeled "Notice of Liability Statement" . (See Exhibit 8.7.5-7 and Exhibit 8.7.5-8 for examples.)

  2. The Notice of Liability Statement is included as an attachment to the transferee letter and explains to the transferee where the proposed assessment originated. The Notice of Liability Statement is divided into two parts: the transferor section and the transferee section.

  3. The transferor's section lists the name, address and taxpayer identification number (TIN) of the transferor. In addition, the Notice of Liability Statement also includes a list of the transferor's unpaid income tax and penalties, if applicable, for each tax period.

    1. If the taxpayer/transferor has made payments to reduce the liability, the payments are netted against the tax, penalties and interest for the earliest tax periods first. The transferor's remittance (if not otherwise designated by the transferor) is allocated first to tax, then to penalties, and then to interest for the earliest year. Any excess is then applied in the same manner to the following year. This treatment is in accordance with Rev. Proc. 2005-18, 2005-1 C.B. 798.

    2. The net figures will be reflected on the Notice of Liability Statement and on the waiver.

    3. If the transferee's liability is limited, the list of the transferor's unpaid liability will reflect the transferor's total unpaid liability without regard to the transferee's limitation.

    4. Place a statement similar to the following below the listing of the unpaid liability: "Interest as provided by law will be charged on the unpaid liability until it is paid in full."

  4. The transferee's section lists the name, address and TIN of the transferee. This section also lists the extent of the transferee's liability and may include an explanation of why the transferee is the transferee.

    1. If the value of the assets received by a transferee is less than the unpaid tax liability of the transferor, include the following language:

    "Since the value of the assets you received amounted to $___, your liability as transferee is limited to that amount."

  5. See Exhibit 8.7.5-6, Notice of Liability Statements, for sample formats for transferee liability statements attached to the transferee letter.

8.7.5.9.4  (10-01-2012)
Explanations of Adjustments and Computation of Tax

  1. If available, include explanations of adjustments and all schedules showing the computation of the transferor's tax in the notice prepared for the transferee. This only applies if the notice involves deficiencies (not unpaid original assessment) of the transferor.

  2. A photocopy of these explanations and schedules can be used if the transferor's Notice of Deficiency has already been prepared.

  3. If the transferor's liability has been judicially determined, omit the adjustments to income, explanation of adjustments, and computation of tax of the transferor and insert the following type of paragraph on the statement:

    "The correctness of the amount of the deficiency due from John Doe, Transferor, has been determined by decision of the Tax Court of the United States, Docket no. XXXXX-XX."

8.7.5.9.5  (10-01-2012)
Waiver Needed

  1. Waiver - Prepare Form 870-T or Form 890-T. The forms include blocks for the transferee's and transferor's name, address and TIN.

  2. The total transferor's unpaid tax and penalty liability will be inserted in the applicable blanks on Form 870–T or Form 890–T, even if the transferee's liability is limited. If the liability is limited, the paragraphs modifying the waiver will state the amount to which the liability is limited.

  3. If the taxpayer/transferor has made payments to reduce the liability, see IRM 8.7.5.9.3(3) for information on how to allocate the payments and what amounts to include on the waiver.

  4. Special language is required on the waiver. The following paragraphs provide suggested language to use in various situations. If penalties are not applicable, then omit the penalty references in the paragraphs.

  5. In the case of full liability of a transferee (other than one liable under 31 U.S.C. section 3713(b)):

    "This represents the undersigned's liability as a transferee of assets of (Transferor), (Address), for (kind of tax), penalties plus interest as provided by law, due from said (Transferor)."

  6. In the case of limited liability of a transferee (other than one liable under 31 U.S.C. section 3713(b)):

    "The determination of the income tax liability of (Transferor), (Address), for the tax year ended ___discloses a deficiency in tax and penalties as shown above. $ ___of the amount of the deficiency represents the undersigned's liability as a transferee of assets of (Transferor), (Address), for (kind of tax), plus interest as provided by law, due from said (Transferor)."

  7. In the case of a transferee of a transferee:

    "This represents the undersigned's liability as a transferee of assets of (First Transferee), (Address), transferee of assets of (Transferor), (Address), for ( kind of tax), penalties plus interest as provided by law, due from said (Transferor)."

    Note:

    Modify the above paragraph in a manner similar to the example shown in paragraph (6) if there is limited liability.

  8. In case the liability is of a fiduciary under IRC 6901 and 31 U.S.C. section 3713(b):

    "This represents the undersigned's personal liability under 31 U.S.C. section 3713(b) for (kind of tax), penalties plus interest as provided by law, due from said (Taxpayer)."

    Note:

    Modify the above paragraph in a manner similar to the example shown in paragraph 3 if there is limited liability.

8.7.5.9.6  (10-01-2012)
Transferee Assessments

  1. Form 1296, Assessment Against Transferee or Fiduciary, is prepared by the same employee that prepares the computations and is used to provide information to Account and Processing Support (APS) for making assessments of income, employment, estate or gift tax against a transferee or a fiduciary. A separate Form 1296 is prepared for each transferee for each kind of tax for which a separate return was filed and for each taxable period of the transferor.

  2. If the value of the net assets received by the transferee is less than the unpaid liability of the transferor and more than one tax period is involved, the transferee's liability should not be allocated to the various years. Instead, the liability should be shown as one amount of the Form 1296 for the earliest year of the transferor, without identifying it with any particular year of the transferee.

  3. In limited liability situations such as the above, instructions should be included on Form 1296 for computation of the interest. The interest starting date and the interest rate should be noted on Form 1296.

    Note:

    See IRM 8.7.5.6.3 for more information about preparing Form 1296 for limited liability cases. See Exhibit 8.7.5-3 for an example of a completed Form 1296 in a limited liability case.

8.7.5.10  (11-06-2007)
Jurisdiction of Tax Court

  1. Tax Court has jurisdiction to redetermine the deficiency determined by the Service. In a case commenced in the Court by a transferee or fiduciary, jurisdiction depends upon the issuance by the Commissioner of a notice of liability to the transferee or fiduciary.

  2. Appeals may ask Counsel to prepare the settlement documents on cases involving transferee or fiduciary liability.

  3. If a transferee petitions the Tax Court, a "dummy" docket number is added to the transferor (key case). Update the AIMS to status 82 (if on AIMS). The transferee(s) carries the actual docket number, revised statute date, and notice of deficiency information. When appropriate, use closing code 43 to move the work unit to Part 3.

8.7.5.11  (10-01-2012)
APS Closing Procedures for Transferee/Transferor Cases

  1. If the transferee is on AIMS, prepare Form 5403 for the transferor following IRM Exhibit 8.20.7-1. Also make the following entries:

    1. Item 12 - Enter the assessment to be made against the transferor. If no assessment is to be made against the transferor, enter zeros.

    2. Items 800 through 811 - Show statistical data.

    3. Item A - cross reference to the transferee, where applicable, and enter "Total transferee liability exceeds transferor liability."

  2. If the transferees are not on AIMS, no Form 5403 is prepared. Instead, assess each transferee on NMF using the information provided on Form 1296 , Assessment Against Transferee or Fiduciary. See IRM 8.7.5.6.3.

  3. Forward the applicable Forms 1296 with the Form 5403 of the transferor to the Campus.

  4. Update ACDS using general closing instructions. In addition make the following entries:

    1. RevsdTax for the transferor case - enter the amount of tax to be assessed against transferor. If no tax is to be assessed against transferor, enter $ 0 (same as Form 5403).

    2. RevsdTax for the transferee cases - enter the amount from Form 1296 (amount of unpaid tax liability). If no tax is due (no Form 1296 is prepared) enter $ 0.

    Note:

    Information needed to complete Form 5403 can be found on Form 1296, which should be prepared by the same employee that prepares the computation.

8.7.5.12  (11-06-2007)
Authority for Asserting Transferee Liability

  1. Administrative assertion of transferee liability for income, estate and gift tax is provided by IRC 6901(a)(1).

  2. Administrative assertion of transferee liability for certain other taxes is provided by IRC 6901(a)(2).

  3. Administrative assertion of liability against a fiduciary under 31 U.S.C. 3713(b) is provided by IRC 6901(a)(1)(B).

Exhibit 8.7.5-1 
Form 3610, Audit Statement - Transferee with Limited Liability - One Year

Transferee with Limited LiabilityOne Year
Form 3610 Department of the Treasury - Internal Revenue Service
AUDIT STATEMENT
Symbols:
XX:XX
Name of Taxpayer
John Q. Public, Transferee of the assets of XYZ Corporation, Transferor
SSN/EIN:
XXX-XX-XXXX
Date Prepared:
Kind of Tax
Income
Docket Number:
  DEFICIENCY (OVERASSESSMENT)
(Increase or decrease in Tax and Penalties)
      Liability of Transferee
Tax Year Ended Tax IRC 6662(a) Transferee Liability Limited to:
12/31/1996 20,000.00 4,000.00 7,500.00*
         
         
         
         
         
         
   Interest for (year)will be computed under _____ of the Internal Revenue Code.     
   The deficiency shown above for (year) does not take into account a payment of $_______ made on (date).
   
* Transferee liability limited to $7,500.00, plus interest as provided for by law.
         
         
         
         
        Form 3610

Exhibit 8.7.5-2 
Form 3610, Audit Statement - Transferee with Limited Liability - Multiple Years

Transferee with Limited LiabilityMultiple Years
Form 3610 Department of the Treasury - Internal Revenue Service
AUDIT STATEMENT
Symbols:
XX:XX
Name of Taxpayer
John Q. Public, Transferee of the assets of XYZ Corporation, Transferor
SSN/EIN:
XXX-XX-XXXX
Date Prepared:
Kind of Tax
Income
Docket Number:
  DEFICIENCY (OVERASSESSMENT)
(Increase or decrease in Tax and Penalties)
      Liability of Transferee
Tax Year Ended Tax IRC 6662(a) Transferee Liability Limited to:
12/31/1993 15,000.00 3,000.00  
12/31/1994 10,000.00 2,000.00  
12/31/1995 5,000.00 1,000.00  
12/31/1996 4,000.00 800.00  
       
       
Totals 34,000.00 6,800.00 16,000.00*
   Interest for (year)will be computed under _____ of the Internal Revenue Code.     
   The deficiency shown above for (year) does not take into account a payment of $_______ made on (date).
   
* Transferee liability limited to $16,000.00, plus interest as provided for by law.
         
         
         
         
        Form 3610

Exhibit 8.7.5-3 
Sample Form 1296, Assessment Against Transferee or Fiduciary

Form 1296
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Exhibit 8.7.5-4 
Attachment to Form 1296 - Transferee with Limited Liability – Multiple Years

Form 1296Limited LiabilityMultiple Years
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Exhibit 8.7.5-5 
Sample Opening Paragraphs for Letter 3424

  1. The following opening paragraphs are generally used in letters addressed to transferees with respect to their liabilities for an unpaid deficiency of the transferor in income, estate and gift tax cases.

    1. Full liability:
      "The determination of the (type of tax) tax liability of (Transferor), (Address), discloses a deficiency, as shown above. The amount of the deficiency, plus interest as the law provides, constitutes your liability as transferee of assets of (Transferor), and will be assessed against you. The enclosed statement shows how we figured the transferor’s deficiency."

    2. Limited liability:
      "The determination of the (type of tax) tax liability of (Transferor), (Address), discloses a deficiency, as shown above. $______ of the amount of the deficiency, plus interest as the law provides, constitutes your liability as transferee of assets of (Transferor), and will be assessed against you. The enclosed statement shows how we figured the transferor’s deficiency."
      Note to Tax Computation Specialist - Modify the other paragraphs shown below in a similar fashion if there is limited liability of the transferee. This can be done in most cases by selecting the limited liability option in ACDS, so the opening paragraph generated by ACDS for the Letter 3424 is modified appropriately.

  2. Opening paragraphs for letters addressed to transferees or fiduciaries in the following unique situations are shown below:

    1. Transferees with respect to their liabilities when there is an unpaid deficiency of the transferor for one year in excess of an overpayment by the transferor for another year:

      "The determination of the income tax liability of (Transferor), (Address), for the tax years ended ___and ___, discloses a deficiency in the amount of $___ for the tax year ended ___, and an overassessment of $___ for the tax year ended ___, as shown in the attached statement. The amount of the deficiency, plus interest as the law provides, constitutes your liability as transferee of assets of (Transferor), and will be assessed against you. The overassessment, to the extent that it represents an overpayment of tax, will be refunded or credited as the law provides."

    2. Transferees with respect to their liabilities for an unpaid original tax of the transferor:

      "We will assess against you, for unpaid income tax, the amount of $___, plus interest as the law provides. This constitutes your liability as transferee of assets of (Transferor), (Address), for unpaid income taxes in the above amounts, plus interest as the law provides, due from (Transferor), for the tax year ended ___, as shown in the attached statement."

    3. Decedents’ estate when it is proposed to hold an estate liable for the payment of a deficiency due from a corporation of which the decedent was a transferee during his/her lifetime:

      "During his/her lifetime, (Taxpayer), Deceased, (Address), incurred an income tax liability in the amount of $___, as transferee of assets of (Transferor), (Address), for the tax year ended ___, as shown in the attached statement. This amount, plus interest as the law provides, will be assessed against the estate of the decedent."

    4. Transferee of a transferee with respect to their liabilities for an unpaid deficiency of the transferor:

      "The determination of the income tax liability of (Transferor), (Address), discloses a deficiency, as shown above. The amount of the deficiency, plus interest as the law provides, constitutes your liability as transferee of assets of (First Transferee), transferee of assets of (Transferor), and will be assessed against you. The enclosed statement shows how we figured the deficiency."

    5. Personal liability under 31 U.S.C. section 3713(b) if the fiduciary has paid debts and/or distributed assets of the estate without first having satisfied the tax due to the United States from such estate, in violation of federal priority. Insert the type of tax, i.e. income, estate or gift, in the first sentence. This can be done by selecting the appropriate opening paragraph when using ACDS to generate the Letter 3424:

      "The determination of the (type of tax) tax liability of (Transferor), (Address), discloses a deficiency, as shown above. $___ is the amount of your personal liability under 31 U.S.C. section 3713(b), as amended, as fiduciary of (Taxpayer), based on the amounts paid and/or distributed in violation of the federal priority afforded in 31 U.S.C. section 3713(a), plus interest as the law provides, which will be assessed against you. The enclosed statement shows how we figured the liability."

      Note:

      There is no need to have different paragraphs for full liability and limited liability if personal liability under 31 U.S.C. section 3713(b) is involved. Always use the paragraph format above and enter the appropriate amount of personal liability in the space provided.

    6. Transferee, trustee and/or insurance beneficiary of estate tax:

      "The determination of the estate tax liability of (Transferor), (Address), discloses a deficiency, as shown above. The amount of the deficiency, plus interest as the law provides, constitutes your liability as transferee, trustee, and beneficiary of assets of (Transferor), and will be assessed against you. The enclosed statement shows how we figured the deficiency."

      Note:

      "Trustee" is to be used pursuant to IRC 6324 and IRC 6901, Internal Revenue Code, if the property is included in the gross estate under sections 2035, 2036, 2037, 2038, 2040, 2041, or 2042, Internal Revenue Code. "Trustee" and/or "beneficiary" should be omitted if inapplicable. Such notice should be issued within the 3-year period under IRC 6501.

Exhibit 8.7.5-6 
Transferee Statements Attached to Letters

Examples of statements for transferee Notices of Liability most commonly used by Appeals are shown below.

If the value of the assets received by a transferee is less than the unpaid tax liability of the transferor, modify the paragraphs to include the following language:

"Since the value of the assets you received amounted to $___, your liability as transferee is limited to that amount."

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Exhibit 8.7.5-7 
Full Liability Transferee Notice

Notice of LiabilityFull Liability
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Explanation of Adjustment for Full Liability Transferee Notice (Cont)

John Q. Public, Transferor Schedule 2
Explanation of Adjustments
a) Schedule C Loss  
It is determined that the amounts of $33,670.00 for tax year ended December 31, 2000 and $33,100.00 for tax year ended December 31, 2001, claimed as losses from horse racing are not allowed. It has not been established that the losses from such activity constitute a bona fide business venture entered into for profit. Further, it has not been established that the claimed expenses were incurred or, if incurred, paid by you during the taxable years for ordinary and necessary business expenses, or that any claimed amount qualifies as a deduction under the provisions of the Internal Revenue Code. Accordingly, your taxable income is increased $33,670.00 and $33,100.00 for the taxable years 2000 and 2001, respectively.
   
Note to preparer of this Explanation of Adjustment schedule: Schedule 3 is not included in this exhibit. Schedule 3 is the RGS or Excel penalty computation.

Exhibit 8.7.5-8 
Limited Liability for Transferee- Notice Letter, Form 870-T, and Statement

Notice of LiabilityLimited Liability
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