Transferee Liability: When Are Shareholders Transferees?

Under Section 6901 of the Internal Revenue Code, a transferee can be held liable for the taxes of someone else. To determine whether someone is liable for taxes as a transferee, courts apply a two part test that the Supreme Court developed in Commissioner v. Stern, 357 U.S. 39, 42, 44-45 (1958). Under this two part test, courts first ask whether the person sought to be held liable is a “transferee.” This is a question that is governed by federal law, specifically, Section 6901(h) of the Code. Salus Mundi Found. v. Comm’r, 776 F.3d 1010, 1017 (2014). The second prong asks the question whether the “transferee” is liable under relevant state law.… Read More

Transferee Liability: The Seventh Circuit Weighs In.

The Government won another MidCoast transferee liability case last week, this time in the Seventh Circuit. Feldman v. Comm’r, 2015 U.S. App. LEXIS 3014 (7th Cir. Feb. 24, 2015).

The fact pattern is by this time a familiar one: shareholders of a corporation, Woodside Ranch Resort, Inc., are contemplating a liquidation. Their corporation will face substantial tax liabilities due to capital gains that will be triggered on sale of the corporate assets, and those taxes will ultimately reduce the amount the shareholders can recoup on the sale. Feldman, 2015 U.S. App. LEXIS 3014, slip op. at *4-*6. Then MidCoast Credit Corp.… Read More

Transferee Liability: Taxpayers Win a MidCoast Case, Part I.

The government’s MidCoast transferee liability cases have been fairly successful: following a loss in Starnes v. Commissioner, 680 F.3d 417 (4th Cir. 2012), the government rallied for wins in Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 519 (1st Cir. 2013) (decision on remand, Frank Sawyer Trust of May 1992 v. Commissioner, T.C. Memo 2014-56 (April 3, 2014)) and in Diebold Foundation v. Commissioner, 736 F.3d 132 (2d Cir. 2013); the government then leveraged its Diebold victory for a second win in a related case, Salus Mundi Foundation v. Commissioner, 2014 U.S. App. LEXIS 24240 (9th Cir. Dec. 22, 2014).… Read More

The Ninth Circuit Rules that Transferee Liability Must Be Determined Under State Law.

When the IRS is confronted with a taxpayer who cannot pay the taxes due, it can turn to Section 6901 of the Internal Revenue Code, which authorizes the IRS to issue assessments of those tax liabilities against direct and indirect transferees of the taxpayer’s property.

Section 6901 does not establish transferee liability, it merely establishes a procedure that permits the IRS to issue a tax assessment against a transferee instead of filing a law suit.

Courts have construed Section 6901 to require an examination of two issues:

  • Whether a party is a transferee, which is decided under federal law;
  • Whether that party is liable as a transferee, which is decided under applicable state law governing fraudulent transfers.
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