IRC Section 6901 and Transferee Liability

In a previous blog post,(HERE), I discussed a case involving the liability of an executor for unpaid federal estate taxes. In this blog post, I will discuss the basics of transferee liability for a transferor’s taxes.

Section 6901 provides that when a taxpayer who owes the taxes, penalties or interest to the IRS, transfers an asset to a third party, the outstanding tax liability may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations” with respect to the transferee as with respect to the taxpayer who owes the underlying taxes.  Two types of liability can be asserted under Sec. 6901: transferee at law and transferee in equity.   A person or entity can be a transferee-at-law when the IRS invokes creditor remedies available at law, such as third-party beneficiary under a contract theory or a specific statute imposing transferee liability such as upon dissolution of a corporation.  A person or entity can be a transferee-in-equity upon  receipt of the transferor's assets for less than full, fair, and adequate consideration, leaving the transferor insolvent and unable to pay the tax liability.  A transferee-in-equity’s liability is generally limited to the value of the property received.

The term “transferee” includes the heir of an estate of a deceased person, assignee or donee of an insolvent person, shareholder of a dissolved corporation, successor of a corporation, a party to a corporate reorganization and all other classes of distributees.  The IRS can assess and collect income, estate, gift and other taxes, including excise taxes and withholding taxes from the transferee. Other taxes subject to transferee liability include Federal Insurance Contributions Act and federal unemployment taxes where the tax liability arises when a partnership or corporation liquidates or a corporation reorganizes.

Using Section 6901, the IRS will pursue transferee liability in a manner similar to the way it pursues the underlying tax liability, i.e. examination, appeals and instead of notice of deficiency, a notice of liability.  Upon receipt of a notice of liability, the potential transferee may petition the Tax Court for redetermination or pay the liability, file a claim for refund and if the refund is denied, file an action in U.S. District Court.  The IRS has the burden of proving the existence and extent of transferee liability. 

The statute of limitations for assessment of tax and penalties against transferees is one year after the expiration of the period of limitation for assessment against the transferor. This period is tolled when the IRS sends a notice of liability to the transferee.   If the transferee has transferred the property to another person or entity, an additional one-year period can be added to the period of limitation against the preceding transferee or three years after the expiration for assessment against the transferor, whichever expires first. The maximum statute of limitation for a transferee, regardless of the number of transferees, is six years.  However, the statute of limitations for assessment of transferee liability can be extended by agreement. 

After the assessment of tax and penalties against the transferee, the IRS can use the same collection tools it has for collecting from the transferor.

For questions regarding this blog post or any other civil tax or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.