- 4.11.52 Transferee Liability Cases
- 18.104.22.168 References
- 22.214.171.124 Overview
- 126.96.36.199 Types of Transferee Liability
- 188.8.131.52 Assessment Statute of Limitations (SOL)
- 184.108.40.206.1 Consent To Extend The Transferee's SOL
- 220.127.116.11 Burden of Proof
- 18.104.22.168.1 Documentation Required For Transferee At Law
- 22.214.171.124.2 Documentation For Transferee In Equity
- 126.96.36.199 Administration Procedures
- 188.8.131.52.1 Transferee Case File
- 184.108.40.206.2 Forms
- Exhibit 4.11.52-1 ASSETS TRANSFERRED
- Exhibit 4.11.52-2 Analysis of Transferor's Liability
- Exhibit 4.11.52-3 Example Of A Transferee Report
Part 4. Examining Process
Chapter 11. Examining Officers Guide (EOG)
Section 52. Transferee Liability Cases
References for Transferee Liability Cases.
IRM 220.127.116.11 - Transferor / Transferee Assessments
IRM 18.104.22.168.16.1 - Statute of Limitations - Transferees
IRM 22.214.171.124 - Transferee and Fiduciary Liability
IRM 126.96.36.199 - Quality Measurement - Transferee Liability
IRM 4.14.1 - Statutory Notice of Deficiency, Transferor - Transferee Liability Cases
Rules Of Practice And Procedure Of The United States Tax Court - Rule 142 as to burden of proof in transferee cases
IRC 6901 - Transferred Assets
IRC 6902 - Provisions of Special Application to Transferees
The following discussion concerning Transferee Liability Cases is only meant to provide an overview and to provide examiners with information which will enable them to recognize actual or potential transferee assessment situations. As with other areas of the tax law, transferee liability cases can be very complex in nature. This discussion cannot and should not replace independent research predicated upon the facts of the specific case. Examiners are encouraged to contact the local Area Transferee Liability Coordinator (listing at http://sbse.web.irs.gov/CF/TechServProgAssign.asp − search on "transferee" or Area Counsel for additional guidance if presented with a potential transferor-transferee situation.
"Transferee liability" is a tool used by the IRS to collect a transferor taxpayer's tax liability. IRC Section 6901 governs transferee assessments.
A transferee case is developed to collect the liability from the person/entity who received the taxpayer-transferor's assets for less than full, fair and adequate consideration or to collect the liability from the person/entity who is legally responsible for paying the taxpayer-transferor's liability. This person/entity is the "transferee" . The person/entity whose tax liability the government is seeking to collect is the " transferor" .
Examiners are required to consider collectibility in every examination. As such, they must be able to identify situations in which the taxpayer has intentionally or inadvertently placed assets out of the legal reach of the IRS. Additionally, they must be able to identify situations in which asset transfers may not be conducted in a "normal business manner " (not at arm's length) because of the close relationship of the parties involved.
During the initial interview the examiner is told the corporate taxpayer dissolved during the preceding year. The examiner should follow-up with questions concerning the disposition of the corporate assets to determine if a transferee assessment situation exists. The examiner should initiate a transferee liability case if the transferor corporation has an unpaid tax liability and the transferee criteria have been met. See the Burden of Proof discussion at IRM 188.8.131.52.
A distribution by a corporation upon its dissolution 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 sale context, where the sale is in economic substance a "sham" .
The purchase of the stock of a corporation, followed by the subsequent liquidation of the corporation, may render the purchaser liable as a transferee.
Transferee cases are also identified during the collection process. Revenue Officers refer potential transferee cases to Examination personnel via Form 3031, Report of Investigation of Transferee Liability.
Income, Estate, Gift and certain other taxes can be collected through a transferee liability case. "Other taxes" are defined as any other tax (employment, excise, withholding), but only if such liability arises as the result of a liquidation of a corporation, partnership or a reorganization within the meaning of IRC Section 368(a).
There are two types of transferee liability, both of which can be asserted under IRC Section 6901. The two types of transferee liability are " transferee at law" and "transferee in equity" .
Transferee at law arises when a person/entity is responsible for the transferor's tax liability because of a contractual agreement with the transferor. In this situation, a valid contract must exist and the government must prove that the tax liability was within the terms of the contract (i.e., an assumption or guarantee agreement). Statutory mergers where the surviving corporation is primarily liable for the debts of the merged corporation do NOT result in a transferee situation. Consult the contracts and agreement affecting the merger and applicable state law.
Transferee at law may also arise under state statutes other than the fraudulent conveyance statutes. For example, statutes relating to corporate mergers and consolidations, bulk sales of assets, liability of officers, directors and shareholders of certain types of distributions and transactions may create a transferee at law. Similarly, transferee at law may arise under federal statute, such as the liability of representatives of persons/estates who pay other debts before paying federal tax debts (31 USC 3713(b)).
Transferee in equity is the most common form of transferee liability. This situation arises when a person/entity receives the transferor's assets for less than full, fair and adequate consideration, leaving the transferor insolvent and unable to pay the tax liability.
Transferee in equity cases are based on the state or federal fraudulent conveyance statutes. In these cases, the transferee liability is limited to the value of the assets received from the transferor.
Examiners must properly determine and control the transferee statute of limitations (SOL), since there is no record of the transferee SOL on Masterfile. A transferee assessment SOL is based upon the transferor's SOL and therefore, an account transcript for the transferor should be obtained immediately. The SOL for the transferee is as follows:
The initial transferee - one year after the expiration of the period of limitation for assessment against the transferor.
A transferee of a transferee - one year after the expiration of the period of limitation for assessment against the preceding transferee or 3 years after the expiration of the period of limitation for assessment against the transferor, whichever expires first; except that if, before the expiration of the period of limitation for the assessment of the liability of the transferee, a court proceeding for the collection of the tax or liability in respect thereof has been begun against the initial transferor or the last preceding transferee, respectively, then the period of limitation for assessment of the liability of the transferee shall expire 1 year after the return of execution in the court proceeding.
A fiduciary - not later than one year after the liability arises or not later than the expiration of the period for collection of such tax, whichever is later.
In the case of a fraudulent return, tax may be assessed at any time. Thus, if fraud is established on the part of the transferor, an assessment may be made against the transferor at any time.
If the transferor's tax may be assessed at any time because of fraud, the period of limitations against a transferee remains open indefinitely. (Bartner Automatic Self Ser. Laundry Inc. v. Commissioner, 35 T.C. 317 (1960); Forehand v. Commissioner, T. C. Memo 1993-618; Harvey M. Pert v. Commissioner, 105 T.C. 370 (1995). ) IRC 6501(c) holds the statute open.
However, DO NOT allow the normal transferee four-year period of limitations to expire if at all possible. Instead, obtain a consent agreement from the transferee (as discussed below). In the event the fraud issue is not sustained, the transferee statute will be open because a transferee consent was obtained and the IRS can still pursue the tax and alternative (to fraud) penalty liabilities against the transferee.
Note: CASES SHOULD BE COMPLETED WITHIN THE NORMAL TRANSFEREE SOL TO THE EXTENT POSSIBLE. CONSENTS TO EXTEND THE TRANSFEREE SOL SHOULD BE SECURED ONLY IN LIMITED CIRCUMSTANCES. APPROVAL OF THE CONSENT AGREEMENT SHOULD BE OBTAINED FROM AREA COUNSEL BEFORE THE CONSENT AGREEMENT IS EXECUTED BY THE DELEGATED OFFICIAL.
The following forms can be used to extend a transferee SOL:
Form 977 - Used to extend the transferee assessment period for income, gift, and estate tax.
Form 4016 - Used to extend the transferee assessment period for employment and excise tax.
Again, please note that a merger or consolidation, where the successor corporation is primarily liable for the debts of the merged corporation, does NOT result in a transferee situation. Therefore, a merger or consolidation does not provide the extra one year period on the SOL that applies in transferee situations. In situations involving a dissolved corporation, the corporate officer's ability to represent the dissolved corporation (transferor) and execute consents/waivers on behalf of the dissolved corporation-transferor is dependent on the law of the state where the corporation was organized. Thus, the corporate officer may be unable to legally execute a consent agreement or waiver of the restriction on assessment, depending on the applicable state law. In these situations, Area Counsel should be consulted for advice and guidance.
The government has the burden of proving all elements necessary to establish a transferee liability. Documentation must be contained in the case file to support each requirement, since many transferee cases go to court. If the required documentation is not contained in the case file, the government will not likely be sustained.
All transferee cases, whether at law or in equity, require documentation showing that the transferor transferred assets to the transferee. The documentation should detail the dates of transfer, what assets were transferred, the value of each individual asset, and any liabilities assumed by the transferee. Exhibit 4.11.52-1 is a sample worksheet for summarizing assets transferred.
For transferee at law cases, the file must contain documentation showing that the transferee assumed the tax liability because of either a contractual agreement or a state or federal statute.
For transferee at law established by a contractual agreement, the examiner must show that a valid contract exists and that under the contract, the transferee assumed the transferor's tax liability. The case file should include a copy of the contract.
For transferee at law established by statute, the case file should include a copy of the applicable state or federal statute on which the IRS is relying.
In addition, the case file should include a transcript of the transferor's account to establish that the transferor's tax liability was for a tax period ending prior to the transfer. If the transfer of property to the transferee was made during the tax period under consideration, consult Area Counsel as to whether or not the tax liability of the transferor had accrued on the date of the transfer.
There are five required elements to show a transferee in equity.
First, the government must prove that the transferor became insolvent when the asset transfer occurred, or was rendered insolvent because of a series of asset transfers. Documentation should show that the sum of the transferor's tax and other liabilities (i.e., mortgages, debts payable, etc.) exceeded the transferor's assets at the time of the transfer. For example, a copy of the transferor's balance sheet at the time of insolvency, bankruptcy documents, corporate dissolution documents, documents showing how the assets in a decedent's estate were distributed, etc., should be obtained and included in the case file.
In some states, depending on state law, insolvency may not be necessary for a transferee in equity proceeding. Consult Area Counsel if there in transferor-transferee situations when the transferor was not insolvent at the date of or rendered insolvent by the transfer of property.
Second, the government must prove that the asset transfer was for less than adequate or full consideration. Documentation must show:
The asset was transferred (i.e., deed, balance sheets, canceled check(s), title transfers, etc.).
The value of the asset transferred on the transfer date.
The consideration, if any, paid for the asset(s). Who received the asset(s). The documentation must show the current legal title.
A transferee is rarely a joint entity. For example, if a corporation made one check payable to the shareholder husband and one check to the shareholder wife, there would be two separate transferee cases - one for the husband, and one for the wife. One transferee case in the joint names would not exist since the checks were not made out in joint names. If, however, land was transferred to husband and wife jointly (i.e., joint ownership such as tenancy by the entireties) there would be only one transferee - the husband and wife as joint tenants.
Third, the government must prove that the asset transfer was made after the liability for the taxes accrued. Documentation must be included to show the date the tax liability accrued and the date the transfer occurred. The tax accrues by the last day of the tax period, not on the due date of the return. There is no requirement that the tax liability has been assessed at the time of the asset transfer in order to proceed against the transferee.
Different courts have reached various conclusions as to when the tax liability of the transferor accrues, so Area Counsel should be consulted when determining on what date the liability of the transferor for the tax debt accrued.
Fourth, the government must show that the transferor was liable for the tax. Documentation must be included to show the tax liability. If the tax has been assessed, a transcript of the transferor's account should be included. If the liability is the result of an examination, a copy of the examination report or notice of deficiency should be included, although transferee assessments can be made without having issued an examination report or notice of deficiency to the transferor.
Fifth, the government must prove that a reasonable attempt was made to collect the tax liability from the transferor or that it would be futile to pursue collection from the transferor such as in the case of a corporation which has dissolved and distributed its assets. Documentation should show that the transferor is in bankruptcy, has dissolved, or has distributed all the assets and collection from the transferor is not possible or that collection activity was unsuccessful. A TXMOD will show the action taken by Collection.
The first order of business for a transferee liability case is to determine the transferee SOL, as discussed earlier, and document the case file. Complete Form 895, Notice of Statute Expiration, if the transferee assessment statute expiration date is within 210 days.
If the transferee liability case is not already on ERCS, the examiner should control each transferee on Non-Masterfile (NMF) AIMS, using the MFT code and activity code of the transferor return. This should be separate from the regular tax examination for the transferee individual/entity.
ERCS will not allow both a Masterfile and a Non-Masterfile control for the same person/entity. In addition, AIMS will not allow an SSN with a BMF MFT code. Therefore, a dummy file must be established for the transferee case. It should use the transferee's TIN with a "-D" (dummy) and "Transferee" after the name to indicate transferee status. Using the "-D" eliminates the other dashes in the TIN, so both ERCS and AIMS will accept the number with the NMF MFT of the transferor (Example: Smith, John, Transferee, 123456789-D, MFT 80, or Big Trucks, Transferee 123456789-D, MFT 80). Each transferee is controlled separately.
The examiner should then schedule an appointment to interview the transferor and to obtain documentation to support the burden of proof, as discussed above. The transferee, as well as other individuals associated with the transfer, can also be contacted to obtain information necessary to support the burden of proof.
Sample Transferor Questions 1. Transferor's financial history - when and how did the transferor become insolvent? When did they file bankruptcy? Was there a dissolution? 2. What are the most current financial statements prior to becoming insolvent? Ask for copies. If there are no financial statements, ask the transferor to reconstruct financial statements and attach any documentation he relied on. 3. What assets did you have prior to insolvency and how were they disposed of? What consideration was paid? Obtain copies of any sales agreements. What was the FMV at the time of the transfer? How was this FMV determined? Was there any debt associated with the asset? 4. List all bank accounts and brokerage accounts prior to insolvency. Did you take out any loans within 3 years of your insolvency? With whom? 5. When did you become aware of your income tax liability? Corporate Transferor 6. Prior to insolvency, did the corporation have any outstanding loans to shareholders? To whom? Were they repaid? When? 7. What salaries and bonuses were paid to the corporate officers in the last three years? 8. What dividends were paid in the last three years? How much? To whom? DECEDENT - Interview the Personal Representative 9. Who is the personal representative? Obtain documentation. 10. Obtain a copy of the will. 11. Have the assets been distributed yet? To whom? 12. Did you have knowledge of the tax liability of the decedent? 13. Has the estate been closed? 14. Was the IRS notified of the transferor's death? Was a proof of claim filed by the IRS? 15. Did you file the decedent's final return? DIVORCE - The examiner needs to determine if the divorce was fraudulent or was it a bona fide divorce. 16. What is the current address of the taxpayers? 17. When did the spouse receive the assets? 18. Who negotiated and drafted the divorce decree? Obtain a copy. 19. Were both spouses represented by Counsel? Did they know of the transfer of the assets? 20. Did the spouse receiving the assets have knowledge of the other spouse's unpaid tax liability? SAMPLE TRANSFEREE QUESTIONS GENERAL QUESTIONS 1. When did you become aware of (transferor) __ unpaid tax liability? 2. Are you in any way related to __(transferor)__? QUESTIONS FOR TRANSFEREE IN EQUITY 3. What assets did you receive from ____(transferor)? 4. What consideration did you pay for the asset(s)? 5. Whose name is the asset titled? Was title legally transferred? 6. Why did _____(transferor) give the asset to you for little or no consideration? 7. Are you aware of any other assets of ______(transferor) that were transferred to others? To whom? What was transferred and what was paid? 8. When did _____(transferor) become insolvent (liabilities exceeding assets) and/or when did _____(transferor) stop doing business? QUESTIONS FOR TRANSFEREE AT LAW 9. Was a fiduciary or personal representative involved in distributing the assets? Who? What was his/her capacity, i.e., personal representative, trustee, receivor in bankruptcy? Ask for documentation appointing him/her to this position. 10. Are there any contracts which you entered into in which you agreed to assume _____(transferor's) liability? After all information/documentation is secured, the examiner should solicit an agreement and payment from the transferee. If there is more than one transferee, the transferor's liability is not allocated between the transferees. Each transferee is assessed the full amount of the transferor's liability to the extent of the fair market value (FMV) of the assets received. The most common forms used include: - Form 870, Waiver of Restrictions on Assessment and Collection (for income tax) - Form 2504, Agreement to Assessment and Collection (for employment tax) - Form 2045, Transferee Agreement See the Forms discussion later in this section at 184.108.40.206.2.
Each transferee is a separate entity. As such, each transferee should have a separate case file established. The transferee individual/entity will have the title "Transferee" after the transferee's name.
Transferee liability cases that originate in Collection should have a transferee report prepared on Form 3031. Transferee liability cases that originate in Examination should have a transferee report that includes the same information as Form 3031 but in memorandum format. See the forms discussion at 220.127.116.11.2.
The case file documentation and workpapers should be attached to the transferee report. As with regular examination files, the workpapers should be properly numbered and indexed.
The transferor's original tax return(s) should be included for those tax periods for which a liability is unpaid.
Area Counsel reviews all transferee statutory notices of deficiency (90-day letters).
Close agreed case to Case Processing Support for assessment. The Form 3210, Document Transmittal, should be annotated "Agreed Transferee Case" .
For unagreed cases, the 30-day letter is issued at the group level, using Letter 955, modified as necessary. If the case is not protested to the Office of Appeals, the unagreed case file is forwarded through Case Processing to Technical Services, for preparation and issuance of the Transferee Notice of Deficiency. Form 3210, Document Transmittal, should be noted " Unagreed Transferee Case - Issue SNOD" .
Form 870, Waiver of Restriction on Assessment and Collection (for income tax), Form 890, Waiver of Restriction on Assessment and Collection of Deficiency and Acceptance of Overassessment − Estate, Gift and Generation−Skipping Transfer Tax (for estate and gift taxes) and Form 2504, Agreement to Assessment and Collection (for employment and excise taxes) can be used to secure agreement to the transferee assessment.
Add the following wording to Form 870, Form 890 or Form 2504:
If the assets transferred exceed the transferor's total liability - "This represents the undersigned's liability as transferee of the assets of (name and address of the transferor) for (type of tax), penalties, and interest thereon as provided by law due from said transferor."
If the transferor's total liability exceeds the assets transferred - "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 extent 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)."
This form is used only if the transferor is a corporation. By signing this form, the transferee admits liability as transferee of the assets received from the transferor, assumes and agrees to pay the tax liability of the transferor. Thus, by signing this form, the transferee has relieved the government of the burden of proving transferee liability.
It should be noted that this form provides the transferee with the opportunity to agree to the status as a transferee only. The form does not obligate the transferee to a specific amount of tax liability - that is reserved for Forms 870, 890 and 2504. In other words, a transferee may agree that he is a transferee, but may disagree with the amount of liability that must be assumed/paid.
To protect the government's interest, the examiner should solicit Form 2045 from each transferee receiving property from a corporate transferor. Although not the best approach, Form 2045 can be obtained from only one transferee provided that the assets received by that transferee are sufficient in amount to cover the transferor's total liability. A copy of the minutes of the board of directors authorizing the corporate officer (of a corporate transferee) to enter into this agreement should be attached to the Form 2045.
A clear explanation to the transferee as to the effect of executing the agreement should be attached to the Form 2045.
This report/memorandum will list the name, address, and TIN of the transferee and the transferor. It must also contain the following:
A list of all of the transferor's tax periods and their respective unpaid tax liabilities and penalties.
How the transferor's unpaid tax liability was determined (i.e., from originally filed tax return, from an income tax examination, etc.). Whether the transferee is a transferee at law or in equity or both.
A complete background and reasons for recommending the transferee action, with reference to the documentation used to determine who the transferee is.
A list of all of the burdens of proof for transferee at law or in equity and how they have been met. Reference the page/index number of the documentation that supports each burden of proof.
An analysis of all of the transferor's assets and their disposition. Usually, the transferor will need to be questioned as to the asset disposition and documentation will need to be requested to support this. The memorandum will list the specific amounts that were transferred to each transferee. It should include a description of each asset, its value on the transfer date, and the date each asset was transferred. Exhibit 4.11.52-1 can be used for this purpose. How the date of insolvency was determined and information relating to Examination's involvement in the case.
Any attempts to conceal assets and evade payment of the taxes.
|Description of Asset||AC or LAC||Cost||Mortgage or Debt||FMV at date of Transfer||Date and Manner of Disposition|
|AC = Adequate consideration given|
|LAC = Less than adequate consideration given|
|For the tax year ended _________|
|Tax per Return (TC 150)||$0.00|
|Less: Payments (TC 670)||$0.00|
|Fed. Tax Deposits (TC 650)||$0.00|
|Tax Balance Due||$0.00|
|Delinquency (TC 166 & 160)||$0.00|
|Estimated Tax (TC 176)||$0.00|
|Fail to Deposit (TC 180 & 186)||$0.00|
|Fail to Pay (TC 276)||$0.00|
|Negligence (TC 350)||$0.00|
|Interest (TC 196 & 190)||$0.00|
|Total Transferor's Liability||(A)||$0.00|
|Total Assets Transferred||(B)||$0.00|
|If (A) exceeds (B), the transferee's liability is limited to the amount at (B).|
|John Jones, Transferee of the assets|
|Fat Chance Corporation, Transferor|
|Return Form: 1120|
|Years or Periods: 9603 & 9303|
|Articles of Dissolution were granted by Superior Court of Fulton County to Fat Chance Corporation on October 1, 1997. See Workpapers 503.04 for copy of such dissolution order of the court.|
|The balance sheet of the corporation as of 03/31/1996 (last tax year prior to the dissolution) disclosed the following financial condition (if filed with workpapers show workpaper(s) and page(s).|
|LIABILITIES & CAPITAL|
|Miscellaneous Liabilities||$ 6,000|
|Capital Stock - 100 shares||80,000|
|On July 31, 1996, the miscellaneous liabilities were paid in full.|
|On July 31, 1996, the corporation received a $40,000 tax refund from the Service resulting from the allowance of a tentative carryback adjustment based on a carryback loss to the fiscal year ended March 31, 1993 from the fiscal year ended March 31, 1996. See the transcript on WP 503.05.|
|While the corporation was being liquidated, it maintained a bank account and made the following distributions to it's shareholders from said account in the C & S National Bank - Account # 12-34567. See copies of the checks in WP's 503.07 to 503.11.|
|Check #||Date of Check||Checks made payable to stockholders|
|There was no balance left in the bank account and the corporation retained no assets of any nature for payment of possible tax liabilities. Each of the above checks endorsed by payees and deposited in their respective bank accounts, each account located at C&S National Bank.|