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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Just Because You Say It’s Debt Doesn’t Mean It Is: Substance Over Form in Action

substance over formTax law focuses on substance, not form, so the labels applied to a transaction don’t control its tax treatment. Among the most common examples of this principle are cases in which debt is treated as an equity investment for tax purposes. Courts generally look at a variety of factors to determine whether what purports to be debt should be treated as an equity investment, and some of the cases are close calls. Others are not, as in Rutter v. Commissioner, No. 15840-14, 2017 U.S. Tax Ct. Memo LEXIS 174 (Sept. 7, 2017), which the Tax Court decided last week.

Rutter involved a prominent scientist who had a history of success in the biotechnology field.… Read More