Transferee liability under IRC 6901: when the IRS can collect a taxpayer's debt from the people who received the taxpayer's property, what it must prove, the statute, and the defenses

What IRC 6901 does

IRC 6901(a) provides that the liability “at law or in equity” of a transferee, and of a fiduciary under 31 USC 3713(b), “shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.” The IRM is emphatic: “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.” The citation is Commissioner v. Stern, 357 U.S. 39 (1958).

Every transferee case therefore has two questions: is the recipient liable for the transferor's debt under some law outside the Code (a state fraudulent transfer act, a bulk sales statute, a contract, the federal priority statute), and has the IRS followed the 6901 procedure. The liability is derivative: “It does not create a new liability. Instead, it provides a secondary method to collect the transferor's tax liability.”

IRC 6901 is one of several tools against third parties. Lien tracing applies when the federal tax lien had already attached before a gift, bequest or inheritance; the IRS files a special condition transferee notice of lien and collects administratively. IRC 6901 applies when “Legal title to property has been transferred and no statutory federal tax lien attached prior to the transfer.” District court suits are used when the 6901 time frames or tax types are unavailable. Nominee and alter ego theories say the property never really left the taxpayer. See federal tax liens.

Who is a transferee and which taxes

IRC 6901(h) defines a transferee to include “a donee, heir, legatee, devisee, and distributee,” and, for estate tax, anyone personally liable under IRC 6324(a)(2). The regulation adds “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,” and other distributees. The usual fact patterns: a spouse who received assets in a divorce the IRS considers collusive, a child given the family home, a new corporation that took over the old one's business, and a shareholder paid a liquidating distribution.

The taxes that can be assessed against a transferee under 6901 are:

• Income, estate and gift tax of the transferor, for any transferee (IRC 6901(a)(1)(A)).
• Any other tax (employment and excise taxes included), but “only if such liability arises on the liquidation of a partnership or corporation, or on a reorganization within the meaning of section 368(a)” (IRC 6901(a)(2)). Employment taxes left behind by a corporation whose assets were distributed to its owner are the common example.
• Those same taxes against a fiduciary liable under 31 USC 3713(b) for paying other debts ahead of the United States (IRC 6901(a)(1)(B)).

The liability may be for tax shown on the return or a deficiency (IRC 6901(b)), and “transferee assessments can be made without having issued an examination report or notice of deficiency to the transferor.” Employment taxes outside a liquidation or reorganization cannot be assessed under 6901; the IRS must sue or use the trust fund recovery penalty.

At law and in equity

At law. A statute, case law or a contract imposes the transferor's debt directly on the recipient. For a contract, “a valid contract must exist and the government must prove that the tax liability was within the terms of the contract (for example, an assumption or guarantee agreement).” Statutory examples: distributees and donees under IRC 6324(a)(2) and (b); state bulk sales laws; state merger and dissolution-distribution statutes; and the de facto merger and mere continuation doctrines (Atlas Tool v. Commissioner, 70 T.C. 86 (1978)). A statutory merger where the survivor is primarily liable is not a transferee case at all.

In equity. The fraudulent transfer theory, “the most common form of transferee liability,” which “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.” The governing law is the state's fraudulent transfer or voidable transactions act, or the federal Debt Collection Procedures Act at 28 USC 3304. Two ways to prove it:

• Constructive fraud. A transfer for less than reasonably equivalent value while the transferor was insolvent or made insolvent, after the debt arose. “A transferor's intent is immaterial if constructive fraud is proven.”
• Actual fraud. A transfer “with the actual intent to hinder, delay, or defraud a creditor,” whether the debt arose before or after it, “generally proved through circumstantial evidence known as the "indicators of fraud", such as lack of adequate consideration or a transfer to insiders.”

The tax need not have been assessed when the transfer occurred: “The tax liability arises at the end of the tax year. However, a transfer occurring during the tax year may give rise to a contingent tax liability at the time of the transfer.”

What the IRS must prove

Under IRC 6902(a) and Tax Court Rule 142(d), the IRS bears the burden of proving the petitioner is a transferee; the transferee bears the burden of showing the transferor did not owe the tax. Examiners are told “The government will not likely be sustained if the required documentation is not contained in the case file.” The elements:

Exhaustion is the element most often missing. “Before pursuing a transferee, the IRS must generally exhaust all legal remedies it may have against the transferor for collection of the tax,” or show that they “would be futile” (Gumm v. Commissioner, 93 T.C. 475 (1989)); the IRS “need not pursue a corporate taxpayer that has been stripped of its assets.” Joint owners who received a jointly held asset are one transferee, and the examiner may not disclose the transferor's return information to the transferee despite the relationship.

How much a transferee owes, and interest

“When transferee liability is based "in equity," the transferee's liability is generally limited to the value of the property transferred.” The value is measured at the time of transfer, although if the property has lost value a court may use the value when the transfer is found fraudulent. “Generally, transferee liability "at law" is full liability, regardless of the value of the assets received, unless limited by state or federal law or by agreement.” A transferee who contractually assumed the liability owes all of it; a shareholder liable under a state dissolution statute owes up to the distribution; a distributee or donee under IRC 6324 owes up to the value received.

Multiple transferees are each liable for the whole debt up to what each received: “The IRS therefore is not required to apportion liability among transferees.” Payment by one reduces the others' exposure.

Interest runs in two periods. Before the notice of liability, if the property was worth less than the transferor's debt, state law decides whether interest runs, from when and at what rate; if it was worth more, federal interest runs from the transferor's due date. After the notice, “A transferee is liable for interest under IRC 6601 from the date of this notice to the date of payment.” A good-faith purchaser from a transferee generally takes free of the original fraud.

The procedure from referral to assessment

“The procedures for establishing transferee and fiduciary liability under IRC 6901 are similar to the deficiency procedures.” The steps as the IRM lays them out:

1. Referral. Most cases start in Collection: a revenue officer prepares Form 3031, Report of Investigation of Transferee Liability, and refers the case to Examination. See when a revenue officer is assigned.
2. Separate controls and development. Each transferee is a separate non-master-file case with the word Transferee after the name. The examiner interviews the transferor and transferee using the IRM's question lists (insolvency date, assets disposed of and consideration, shareholder loans and compensation, for a decedent the distribution, for a divorce whether it was bona fide) and controls the transferee statute from the transferor's transcript.
3. Solicitation of agreement. Form 870-T (income tax), Form 890 (estate and gift tax) or Form 2504 (employment tax), annotated to state that the amount is the signer's liability as transferee of the named transferor, in full or “to the extent of the net value of the assets received from the transferor.” For a corporate transferor the examiner also solicits Form 2045, Transferee Agreement, by which the transferee “admits liability as transferee of the assets received from the transferor” and “has relieved the government of the burden of proving transferee liability.”
4. 30-day letter. An unagreed case gets a modified Letter 955 with the transferee report (“Transferee liability is not a tax,” so the standard letter is adapted). A protest within 30 days sends the case to Appeals.
5. Notice of liability. With no protest, or less than six months left on the transferee statute, Technical Services issues the Statutory Notice of Transferee Liability, the 6901 equivalent of a notice of deficiency. “Area Counsel reviews all notices of liability (90-day letters),” and “The transferee or fiduciary may petition the Tax Court within 90 days.”
6. Assessment and collection. After agreement, default or a Tax Court decision, Technical Services prepares Form 1296, Assessment Against Transferee or Fiduciary. A lien then arises against the transferee's own property, and “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).” The transferee has the ordinary collection rights: CDP hearings, installment agreements and offers in compromise.

The statute of limitations and consents

IRC 6901(c) ties the transferee's assessment period to the transferor's:

• Initial transferee: “within 1 year after the expiration of the period of limitation for assessment against the transferor.” For an ordinary three-year transferor statute, that is four years from the transferor's return; the IRM calls it “the normal transferee four-year period of limitations.”
• Transferee of a transferee: one year after the preceding transferee's period ends, “but not more than 3 years after the expiration of the period of limitation for assessment against the initial transferor,” unless a court proceeding to collect was begun against the transferor or preceding transferee, in which case the period ends one year after the return of execution.
• Fiduciary: one year after the liability arises or the collection period for the tax ends, whichever is later.

Three rules extend it. Under 6901(e), a transferor's death or a corporation's termination does not shorten the transferor's period. Under 6501(c), if the transferor's period is open for fraud or failure to file, “the period of limitations against a transferee remains open indefinitely.” Under 6901(f), the notice of liability suspends the period while assessment is prohibited under IRC 6213 and for 60 days after. State fraudulent transfer limitation periods do not apply (Bresson v. Commissioner, 111 T.C. 172 (1998)).

Consents. IRC 6901(d) allows a written extension on Form 977 (income, gift and estate tax) or Form 4016 (employment and excise tax), with Area Counsel approval. The instruction to examiners: “Do not allow the normal transferee four-year period of limitations to expire if possible. Instead, obtain a consent agreement from the transferee.” “A consent signed by one transferee does not extend the period for assessment for another transferee or a succeeding transferee (a transferee of a transferee).” A transferee asked to sign has the same choices as a taxpayer asked to sign Form 872: sign, negotiate a restricted consent, or refuse and receive the notice of liability.

Defenses

IRM 5.17.14.5.5 lists the defenses the IRS itself recognizes:

• The transferor's liability has been paid. “The transferor's liability will be collected only once. Proof by the transferee that the transferor's tax liability has been paid is a valid defense to transferee liability.” The liability is extinguished once paid by the transferor or another transferee and the refund period has run or been waived.
• The transferor's liability was compromised. “a compromise of the transferor's liability may either reduce or extinguish the liability of the transferee.” A transferee's own offer does not affect the transferor or other transferees.
• The transferor owed nothing, or less. “A transferee may contest the liability of the transferor,” and the transferee bears the burden on that issue. The exception is a prior decision on the merits: a court determination or stipulated decision fixes the amount and “A closing agreement between a transferor and the IRS binds the transferee.” A defaulted notice of deficiency, a voluntary dismissal or a dismissal for lack of jurisdiction is not a decision on the merits, so the transferee can still litigate the underlying tax.
• Statute expired. Computed under 6901(c) as above, with the extensions noted.
• Return of the property. Returning all or part of the transferred property to the transferor is a defense to that extent.
• Failure of an element. Adequate consideration, solvency, a transfer before the liability arose, no exhaustion of remedies, or state law that does not reach these facts.

Because the IRS carries the burden on transferee status, the documentary gaps the IRM warns examiners about are the first thing to look for in the administrative file; see getting the examiner's file.

When the IRS sues instead

The IRS may instead sue the transferee in district court under IRC 7402, or sue to set aside the fraudulent transfer and foreclose its lien. A suit is preferred when the property has depreciated, been concealed, converted or commingled, or when the 6901 statute has run, and it reaches “All types of taxes, including employment and excise taxes.” The IRC 6502 ten-year collection statute governs. A judgment “does not create a federal tax assessment against the transferee,” so there is no federal tax lien or administrative levy; the Department of Justice collects under the Federal Debt Collection Procedures Act. The forum is the district court, with the burden on the United States, and the Tax Court is not involved.

Questions practitioners ask