Transferee Liability: Another Vote for Substance Over Form Under State Law

midcoThe IRS uses transferee liability to make Peter pay Paul’s taxes.

To accomplish this, the government relies upon both federal and state law:

  • Section 6901 of the Internal Revenue Code authorizes the IRS to collect taxes from transferees who are liable “at law or in equity” and to do so “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.” I.R.C. § 6901(a). This permits the IRS to issue a tax assessment against a transferee who received a taxpayer’s property.
  • Section 6901 of the Code is simply a procedural device; it does not create liability.
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Tax Procedure: Transferee Liability and Interest

Transfer liabilityTransferee liability is an unpleasant surprise, as it means you are saddled with someone else’s tax bill.

Section 6901 of the Internal Revenue Code authorizes the IRS to assess a transferee for the liability of another taxpayer for a variety of taxes, including income taxes, estate taxes, and gift taxes. I.R.C. § 6901(a). The potential liability of a transferee is determined under a two-part test:

  • First, the IRS must establish that the potential target is a “transferee,” which is determined under federal law.
  • Next, the IRS must establish that the transferee is liable under relevant state law, typically a fraudulent conveyance or fraudulent transfer statute.
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