The IRS, Fraudulent Transfers, and Transferee Liability

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Can you be held liable for a tax liability owed by another taxpayer?  Yes, under certain circumstances.  The IRS  uses fraudulent transfer law and “transferee” liability tools to collect unpaid taxes where a taxpayer has transferred property to a third party.  The third party, known as a “transferee” or “nominee,” may be liable to the IRS based on several legal theories, such as transferee liability, nominee liability, alter ego liability and other mechanisms.  This article provides a comprehensive overview of IRS third-party liability.

Third-Party Liability

Under federal tax law, a third party can be held liable for the tax liability of another person.  The IRS often uses the following legal theories to hold a third party liable for taxes that are owed by another person:

When invoking these legal theories, the IRS often alleges fraud.  Thus, taxpayers and third parties in this context typically face a higher risk of civil fraud penalties or criminal prosecution.

Levies and Seizures

The IRS may employ an administrative levy or seizure action against third parties where one or more of the following events have occurred:

Judicial Remedies

The Department of Justice may seek judicial action against a taxpayer or third party in this context as well.  For example, DOJ may assert the following common legal actions:

Transferee Theories

Transferee liability may arise under (i) a contract, (ii) federal statutes, or (iii) state law. Often, the IRS begins efforts to collect against a third party where it believes a fraudulent transfer occurred. It may employ a transferee theory under various circumstances:

          This theory is unavailable for a transferee qualifying as a bona fide purchaser. See IRC section 6323.

The successor corporation may be liable:

A nominee theory allows collection from property held in the name of the taxpayer’s nominee. That is, the third party holds the property nominally or holds it in name only. The nominee theory focuses on the relationship between the taxpayer and the property.

Collection from the Transferee is Secondary

Courts generally consider a transferee’s liability to be secondary to that of the transferor who is said to have primary liability. Secondary liability essentially means:

Generally, in order to pursue a transferee, the IRS must show that collection remedies against the transferor have been exhausted or would be futile.

Establishing Transferee Liability

A transferee may be liable for a tax either “at law” or “in equity.”

Transferee liability in equity is generally based on fraudulent conveyance laws.  Fraudulent conveyance laws were initially developed by courts based on the principle that debtors may not transfer assets for less than adequate consideration if they are left unable to pay their liabilities.

The Internal Revenue Code contains several provisions that impose direct liability on a transferee for the transferor’s tax.

Most states also have statutes that directly impose liability on a transferee in certain circumstances.

Transferee liability may also be directly imposed on a transferee if the transferee expressly or impliedly agreed to assume the transferor’s tax liability in a contract.

Transferee Liability Based on Fraudulent Transfers (“In Equity”)

A transfer is fraudulent when a taxpayer owes a debt to a creditor and real or personal property is transferred to a third party with the object or the result of placing the property beyond the reach of the creditor or hindering the creditor’s ability to collect a valid debt.

When fraudulent transfers are identified, the IRS may file a (special condition) NFTL identifying the third party receiving property and identifying specific property involved on a Nominee and/or Transferee NFTL to prevent clouding of title. Alter Ego and Successor in Interest NFTLs do not require that the specific property be identified. Depending on the facts of the case and the applicable state law, transferee liability based on fraudulent transfer may overlap with liability imposed under the trust fund doctrine, successor liability, and the liability of shareholder and corporate distributees.

Fraudulent Transfers Under Federal and State Law

Prior to the FDCPA, the United States relied on the creditor and debtor laws of the states to attack fraudulent transfers.

The FDCPA gives the United States a uniform federal procedure for setting aside a fraudulent transfer to aid in the collection of federal debts, including tax debts.

The United States is not, however, bound to use the FDCPA to collect its debts. It can proceed under any cause of action provided by state or federal law.

All states recognize a cause of action to set aside a fraudulent transfer. A majority of jurisdictions have adopted either the Uniform Fraudulent Conveyance Act (UFCA), 7A Pt. II ULA 246 (2 states & U.S. Virgin Islands) or its successor, the Uniform Fraudulent Transfer Act (UFTA), 7A Pt. II ULA 2 (43 states and the District of Columbia).

The FDCPA, the UFCA and the UFTA recognize both actual fraud and constructive fraud as grounds for setting aside a transfer.

Types of Fraud in a Fraudulent Transfer

Constructive fraud and actual fraud are the two principal types of fraud. The IRS must prove at least one type of fraud to set aside a transfer under a fraudulent-transfer theory:

Constructive Fraud. Constructive fraud occurs when property is transferred for inadequate consideration (or for less than the reasonably equivalent value) and the transferor either is insolvent when the transfer occurs or is made insolvent by the transfer. Notably, the transferor’s actual intent is immaterial if constructive fraud is proven.

Actual Fraud. Actual fraud occurs when property is transferred with the actual intent to hinder, delay, or defraud a creditor in the collection of a debt owed it.

Actual fraud is generally proven through circumstantial evidence known as the “indicators of fraud,” such as lack of adequate consideration or a transfer to insiders.

Proof of constructive fraud is sufficient to set aside a transfer that occurs after the debt arises.

Proof of actual fraud will defeat a transfer whether the debt arises before or after the transfer.

Constructive Fraud

Constructive fraud exists when a transferor does not receive reasonably equivalent value (FDCPA & UFTA) or fair consideration (UFCA) in exchange for the transfer, and the transferor was insolvent at the time of the transfer or became insolvent as a result of the transfer.

Reasonably equivalent value. The FDCPA 3303(b) defines the phrase reasonably equivalent value as “the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, non-collusive foreclosure sale or execution of a power of sale for the acquisition or disposition of such interest upon default under a mortgage, deed of trust, or security agreement.”

The concept of reasonably equivalent value does not exist under the UFCA; instead, the concept of fair consideration is used.  Fair consideration for purposes of the UFCA is given in exchange for property if:

A transferor is insolvent if the sum of the transferor’s debts exceeds a fair valuation (FDCPA & UFTA) or the fair salable value (UFCA) of the transferor’s assets. FDCPA 3302; UFTA 2; UFCA 2.

The FDCPA and the UFTA presume that a transferor who generally is not paying debts as they come due is insolvent.

Where insolvency results from a series of related transfers, some of which may have occurred before actual insolvency, all of the transfers can be set aside as fraudulent.

The FDCPA and the UFTA contain another category of transfers that are considered fraudulent as to a current creditor. A transfer is fraudulent if:

Such a transfer is commonly known as a preferential transfer to an insider. FDCPA 3304(a)(2); UFTA 5(b). Examples of insiders include:

Actual Fraud

Proof of actual fraud as to a debt owed to the United States is sufficient under the FDCPA, the UFCA, and the UFTA to set aside a transfer whether the debt arises before or after the transfer.

Actual fraud exists when a transferor actually intended to hinder, delay or defraud a creditor. Because it can be difficult to prove that a transfer was made with the actual intent to defraud creditors, use of circumstantial evidence—”indicators of fraud“—is often necessary.

A transferor’s actual intent is generally proven through indicators, or “badges,” of fraud. The commonly recognized indicators of fraud include:

Courts have recognized that a transfer made shortly before or after the tax is due may be evidence of fraud.

In attempting to set aside a transfer, the IRS will offer attempt to demonstrate that the transaction did not occur in the usual course of business. The IRS may point to a number of indicators, such as:

The IRS also maintains that fraud may be evidenced by the reservation of an interest in the transferred property that is inconsistent with a bona fide transfer.

The FDCPA, the UFTA, and the UFCA also deem a transfer of property without receipt of reasonably equivalent value (FDCPA and UFTA) or fair consideration (UFCA) to be fraudulent, whether the debt arises before or after the transfer, if the transferor:

Subsequent Transfers

A good-faith purchaser from a transferee of the transferred property generally takes the property free of the initial transferor’s fraud. The same holds true for a creditor who in good faith extends a loan to the transferee and takes a security interest in the transferred property.

A subsequent transferee with notice of the fraudulent transfer however, takes the property subject to the rights of the initial transferor’s.

Trust Fund Doctrine

Courts have created the so-called trust fund doctrine.  Under this doctrine, when a transfer leaves the transferor without sufficient assets to pay debts, the transferee is deemed to hold the transferred property “in trust” for the benefit of the transferor’s creditors.

The trust fund doctrine generally requires that the IRS demonstrates that –

  1. the alleged transferee received property of the transferor;
  2. the transfer was made without consideration or for less than adequate consideration;
  3. the transfer was made during or after the period when the tax liability of the transferor accrued;
  4. the transferor was insolvent prior to or because of the transfer of property or that the transfer of property was one of a series of distributions of property that resulted in the insolvency of the transferor;
  5. all reasonable efforts to collect from the transferor were made and any further collection efforts would be futile; and
  6. the value of the transferred property.

The trust fund doctrine is most commonly used to impose transferee liability on a shareholder for taxes incurred by a corporation when the shareholder receives assets from a corporation prior to its dissolution. Recovery under the doctrine is limited to the value of the property transferred.

Successor Liability of a Corporation

Successor liability for a transferee may arise under two different scenarios:

Successor liability may be a primary liability if a state statute provides that a corporation surviving or resulting from a merger or consolidation assumes by operation of law all of the liabilities of the constituent corporations.

State successor-liability law generally imposes liability under the following circumstances:

Where these circumstances exists, the IRS may rely on the successor liability doctrine to hold a successor corporation liable for the tax debts of its predecessor.

Whether a de facto merger or mere continuation exists generally depends on whether:

If the surviving corporation may be held liable for the transferor’s debts as a successor under state law, the IRS may collect the transferor’s tax liability from the successor using the Section 6901 procedures.

Transferee Liability of a Shareholder or Distributee of a Corporation

Shareholders/distributees who receive assets from a corporate liquidation can be subject to transferee liability for the unpaid corporate income taxes, penalties, and interest.

Shareholders who receive a corporation’s assets on its dissolution and who are liable as transferees are jointly and severally liable to the extent of the assets transferred to them. As such, the IRS is not obligated to pursue all of the shareholders for collection of the corporation’s unpaid income taxes. The liability of a shareholder, however, is generally limited to the value of the assets received from the corporation.

Shareholders/distributees may also be liable as transferees when assets are distributed but the corporation is not liquidated or dissolved. Examples include the following scenarios:

A corporation or person who acquired the stock or any asset of a corporation may be liable as a transferee.

The IRS may also assert transferee liability in Notice 2001-16, 2001-09 I.R.B. 730, Intermediary Transactions Tax Shelter and Notice 2008-111, 2008-51 I.R.B. 1299, Intermediary Transaction Tax Shelters. These listed transactions are basically intended to avoid the payment of taxes on a corporate stock or asset sale. The participants to the transaction — the seller’s shareholders, the buyer, the intermediary, and the transaction’s facilitators — may all be possible transferees.

Extent of Transferee Liability

The amount of the transferee’s liability for the transferor’s unpaid tax, penalties, and interest depends on whether transferee liability is based “in equity” or “at law.”

When transferee liability is based “in equity,” the transferee’s liability is generally limited to the value of the property transferred. For example, liability of shareholders under the trust fund or similar doctrine is generally limited to the value of property received. Transferee liability in equity is equal to the value of transferred property at the time of transfer. However, if the value has decreased since the transfer, the liability may be equal to the value of the property at the time a court finds the transfer to be fraudulent.

Generally, transferee liability “at law” results in full liability, regardless of the value of the assets received, unless limited by state or federal law or by agreement.

When transferee liability is “at law” because the transferee has agreed to assume the transferor’s liability, the transferee is liable for the full amount of the transferor’s liability, regardless of the value of the assets transferred.

Where transferee liability is based on state law, state law determines the extent of liability.

Liability is not limited to the value of the assets transferred if there is a reorganization, merger, consolidation, or the successor corporation is the result of a de facto merger or a mere continuation of the taxpayer.

Shareholder liability is limited to the value of the distribution to the shareholder where a state statute imposes liability upon distribution of assets upon dissolution of a corporation if creditors have not been paid.

Similarly, a transferee’s liability for gift taxes and estate taxes, based on the Internal Revenue Code, is limited to the value of the gift or the property distributed from the decedent estate.

Each transferee is jointly and severally liable for the transferor’s unpaid taxes to the extent of the value of assets received at the time of transfer. The IRS therefore is not required to apportion liability among transferees.

Generally, a transferee is liable for the transferor’s total tax liability, including interest that accrues on that tax liability before the transfer, but only to the extent of the value of the assets transferred. If the value of the transferred assets is less than the transferor’s liability, interest is determined under state law.

Fiduciary Liability

Pursuant to 31 USC section 3713(b), a representative of a person or an estate (except a trustee acting under the Bankruptcy Code, Title 11) paying any part of a debt of the person or estate before paying a debt due to the United States is personally liable to the extent of the payment for unpaid claims of the United States.

A fiduciary is not liable, however, unless the fiduciary knows of the debt or had information that would put the fiduciary on notice that an obligation was owed to the United States.

Personal liability under 31 USC section 3713(b) only applies where the United States has priority under 31 USC 3713(a), the applicable insolvency statute.

The priority generally applies where the person or estate is insolvent.

The priority is superseded by interests that would have priority over the federal tax lien under IRC section 6323.

Personal liability is limited to the value of the assets that the fiduciary distributes in violation of federal priority.

IRC section 6901(a)(1)(B) permits the IRS to impose personal liability on a fiduciary under 31 USC section 3713(b) by way of a procedure that begins with the issuance of a notice of fiduciary liability. The fiduciary may then contest the proposed liability in the Tax Court.

Methods of Collecting from a Transferee or Fiduciary

IRC Section 6901 is a procedural statute that does not by itself create liability.  Applicable state or federal law determine the existence or extent of a transferee’s or fiduciary’s liability.

Other Administrative Remedies.

NFTL is filed prior to transfer: If the IRS properly filed a Notice of Federal Tax Lien “NFTL” prior to the transfer, the federal lien will generally take priority over any subsequent transferees, purchasers, or other interests. See IRC section 6323. In that, the IRS can enforce the federal tax lien by levy/seizure without resorting to IRC procedures or filing suit in federal district court.

Statutory lien does not exist prior to transfer: There is generally no administrative remedy available to the IRS in this situation. If legal title to property has been transferred by the transferor or fiduciary and no lien attached prior to the transfer, the IRS generally may not levy or seize the property without first making an assessment against the transferee under IRC section 6901 or filing suit in district court. This general rule is subject to an exception:

To hold a transferee or fiduciary liable for another’s tax, the IRS mails a notice of transferee or fiduciary liability to the transferee or fiduciary’s last known address. Then if a Tax Court petition is not filed or if the liability is sustained by the Tax Court, the IRS can assess the tax against the transferee under the authority of IRC section 6901.

Assessing Liability Under IRC 6901

Under IRC Section 6901, the IRS can assess and collect the unpaid taxes, penalties, and interest from a transferee, or from a fiduciary liable under 31 USC section 3713.

Section 6901 is a procedural statute – it does not create substantive liability.  A transferee’s liability is, instead, determined by other state or federal law.

A transferee is defined under IRC section 6901(h) to include a donee, heir, legatee, devisee, and distributee, and with respect to estate taxes, any person who, under IRC section 6324(a)(2), is personally liable for such tax.

The regulations add the following examples to the definition of a transferee: a distributee of an estate of a deceased person, 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 section 368, all other classes of distributees, and with respect to the gift tax, a donee. Treas. Reg. section 301.6901-1(b).

These definitions are not all-inclusive, but are merely examples of transferees.

The procedures for establishing transferee and fiduciary liability under Section 6901 are similar to standard deficiency procedures.

A notice of transferee or fiduciary liability must be mailed to the last known address of the transferee or fiduciary.  The transferee or fiduciary may then petition the Tax Court within 90 days.

Once the liability is assessed, and after notice and demand and a refusal to pay, a statutory lien is created and attaches to all property of the transferee or fiduciary.

The period for collection of the assessment against the transferee is the IRC section 6502 collection statute of limitations (10 years running from the assessment against the transferee).

Assessments against a transferee can be made under IRC 6901 for a transferor’s:

Assessments against a fiduciary can be made under IRC section 6901 for the income tax, estate tax or gift tax due from the estate of a taxpayer, decedent or donor.

Periods of Limitation and Extensions for Assessment Under IRC 6901

Period of Limitations.  An assessment under IRC section 6901(c) for the liability of a transferee or fiduciary  is limited to one year after the assessment period against the transferor ends.  However, for an assessment against a transferee or a transferee, the limitation period is one year after the period for assessment against the preceding transferee ends, but not more than three years after the period for assessment against the transferor ends.

Fiduciary: An assessment may be made up to one year after the fiduciary liability arises or the period for collection of the tax ends, whichever is the later.

Statutes of limitations for state fraudulent transfer statutes do not apply to IRC section 6901.

Extensions of the Period of Limitations:

The statute of limitations may be extended under several provisions:

By agreement: Under IRC section 6901(d) prior to expiration of the assessment period a transferee may agree to extend the period of limitations; however, in the case of a transferee of a transferee, execution of an extension agreement by the initial transferee is not effective to extend the overall three-year limitations period discussed above in paragraph (b)(9) of this subsection.

IRC 6901(f): If a notice of liability has been mailed to a transferee or fiduciary, the running of the statute of limitations for assessment is suspended for the period during which an assessment is prohibited by IRC section 6213 and for 60 days thereafter.

IRC 6501(c): Where the statute of limitations on assessment with respect to the transferor is open because of the transferor’s tax fraud or his failure to file a tax return, then the statute of limitations remains open as to the transferee.

Burden of Proof Under IRC 6901

Transferor’s Deficiency: A transferor’s deficiency is presumed correct, but a transferee may prove otherwise. The transferee, not the IRS, has the burden of proof on this issue. IRC section 6902(a). The transferee may not , however, relitigate a transferor’s tax liability when a court has already decided the issue.

Transferee Liability: In a proceeding before the United States Tax Court under Section 6901, the burden is on the IRS to prove that a transferee is liable for the tax of the transferor taxpayer. IRC section 6902(a).

Fiduciary Liability: The IRS has the burden to prove that the fiduciary paid a debt of the person or estate for whom the fiduciary is acting before paying the debts due the United States to establish fiduciary liability under 31 USC Section 3713(b). The fiduciary is not liable unless the fiduciary knew of the tax debt or had information that would put a reasonably prudent person on notice that an obligation was owed to the United States.

Establishing Transferee or Fiduciary Liability by Suit

The United States may establish transferee or fiduciary liability by filing a suit in district court pursuant to IRC Section 7402 and 28 USC  Sections 1340 and 1345. Such a suit is brought against the transferee or fiduciary and results in a judgment against the third party, permitting collection from any of the transferee’s or fiduciary’s assets.

A suit to impose transferee liability may be necessary when the procedures of IRC section 6901 are not available because the statute of limitations to create a federal tax assessment for the transferee or fiduciary has expired.

Since a suit to establish transferee or fiduciary liability is a collection suit based on the taxpayer/transferor’s federal tax liability, the ten-year statute of limitations in IRC 6502 for suits to collect taxes applies. The ten-year statute of limitations provided by Section 6324 applies for collection of estate and gift taxes if the suit is based on Section 6324 transferee liability.

A suit to establish transferee or fiduciary liability is not limited to certain types of taxes as are the assessment procedures of IRC 6901. All types of taxes, including employment and excise taxes, can be collected in a transferee suit.

A suit to impose transferee liability may be preferable to assessment when:

Burden of Proof:

The burden of proof is on the United States as the petitioning party, where liability is sought to be imposed on a third-party for another’s tax by way of a suit brought by the United States in a district court.

The burden of proof remains with the transferee, when a transferee files a refund suit.

Alternatively: The IRS may also bring a suit to set aside a fraudulent transfer, allowing collection from property transferred into the hands of the transferee.

Defenses to Transferee or Fiduciary Liability

Transferor’s Liability Paid: The transferor’s liability should be collected only once. Proof by the transferee that the transferor’s tax liability has been paid is a valid defense to transferee liability.

A transferee’s liability is extinguished once the tax liability is paid by the transferor or other transferee, and either the transferor waives any right to a refund or the period of limitations for seeking a refund has expired.

Because a transferee’s liability is secondary to the primary liability of the transferor, a compromise of the transferor’s liability may either reduce or extinguish the liability of the transferee.

A transferee may contest the liability of the transferor.

No liability is imposed on the transferee if it is proven that the transferor is not liable for any tax.

A prior decision on the merits of a tax liability of a transferor fixes the amount of the tax for purposes of a transferee’s liability. The transferee is barred from litigating the transferor’s liability, just as the transferor would be barred from re-litigating the transferor’s liability in another forum.

Acceptance of an offer to compromise a transferee’s liability has no effect on the transferor’s primary liability or on the liability of other transferees. Any payment by the transferee, however, reduces the transferor’s liability and, thereby, the liability of other transferees.

Other potential defenses include:

Suit to Set Aside a Fraudulent Transfer

Rather than a suit to impose liability on the transferee, the United States may commence a civil lawsuit against the transferor and the transferee in a United States district court when the original taxpayer transferred property in fraud of a tax debt owed to the United States. Ordinarily, the suit requests that the court set aside the transfer. If successful, ownership of the property is reinstated in the transferor, and the transferor’s tax is collected from the property. This approach is generally preferable when the value of the property has increased since the transfer.

The Federal Debt Collection Procedures Act (FDCPA) provides a federal cause of action for setting aside a fraudulent transfer in a federal district court, other than the United States Tax Court. 28 USC 3301 et seq.

The United States may also use remedies available to a private creditor under applicable state law to defeat a fraudulent transfer. Generally, the law of the state in which the transfer occurs will govern.

Burden of Proof: The burden is on the United States to prove that the transfer of the property was in fraud of a debt owed the United States. Depending on the circumstances, the United States must prove that the transfer was the result either of the transferor’s actual fraud or constructive fraud.

Statute of Limitations for a Fraudulent Transfer Suit

A fraudulent transfer suit brought by the United States under IRC Section 7402(a) to impose transferee liability on a transferee to collect on an assessment against the transferor is subject to the 10-year collection statute of limitations.  See also FDCPA, 28 USC 3003(b)(1) (FDCPA does not impose time limits on actions to collect taxes brought under provisions outside the FDCPA).

The majority of courts have found that the United States is not bound by state statutes of limitation, including the UFTA. Thus, in a fraudulent transfer suit brought by the United States pursuant to IRC 7402(a) and a state statute, the limitations period under IRC 6502 generally controls.

Defenses for the Transferee in a Fraudulent Transfer Suit

A transferee who takes property in good-faith and for a reasonably equivalent value is not affected by a transferor’s actual fraud. The transferee’s rights in the transferred property are superior to the transferor’s creditors, and the transfer will not be set aside.

To be considered a good-faith purchaser, the transferee must have been without knowledge of the fraudulent purpose of the transferor at the time of the transfer.

To qualify as a purchaser for reasonably equivalent value, the transferee must have exchanged property for the transfer. A promise to pay or payment with a nonnegotiable note is not sufficient.

If the transferee is not a good faith purchaser for reasonably equivalent value, then the transferee may be required to surrender the property or an equivalent amount of money. The transferee may also be required to provide an accounting for any rents or profits generated by the transferred property.

Even though a transfer is set aside as fraudulent, a good-faith transferee is allowed a credit for any consideration given to the transferor. The credit may be in the form of a lien on the transferred property or a setoff against any money judgment entered against the transferee. The transferee also will receive a credit for amounts expended to preserve the transferred property.

Another defense available to a transferee is a claim that he has paid other creditors of the transferor to the extent of the value of the transferred property.

Successor Liability as Primary Liability

Many state corporate merger and consolidation statutes provide that a surviving corporation is liable for the debts of a predecessor corporation when the surviving corporation results from a formal merger or consolidation of two corporations. In these cases, the surviving corporation is primarily liable for the tax debts of the predecessor corporation as a successor in interest. The successor in interest becomes the “taxpayer” and is primarily liable for the predecessor’s tax liability.

The IRS will generally assert primary liability against the successor. The IRS may also, however, seek to hold the successor liable as a transferee under the Section 6901.

Like nominee or alter ego scenarios, a taxpayer’s liability may be collected from the successor in interest through administrative collection procedures.

Nominee, Alter Ego, and Transferee Elements

Nominee and alter ego liability is distinguishable from a Special Condition Transferee NFTL and transfers for which transferee liability may be asserted, including fraudulent transfers. Nominee and alter ego often share common facts, but are different from fraudulent transfers.

Simulated Transfer Versus Actual Transfer:  Often, a nominee and alter ego is based on a  simulated transfer to a fictitious entity owned and controlled by the taxpayer. The simulated transfer is not intended to divest the transferor of any rights to the property.

Transfer of Legal Title Not Required: A transfer of legal title is not necessary to prove a nominee or alter ego relationship exists.  Sometimes the transfer by the taxpayer is indirect.

Nominee: A tax liability may be collected from the taxpayer’s property held by a nominee.

Typically, a taxpayer places the taxpayer’s assets(s) in the name of another person or entity, but control of the asset(s) and other incidents of ownership remain with the taxpayer. The transfer is “in name only.” In other words, in a nominee situation, a separate person or entity, such as a trust, holds specific property for the exclusive use and enjoyment of the taxpayer.

Alter Ego: A tax liability may also be collected from the taxpayer’s alter ego.

The alter ego theory focuses on the relationship between the taxpayer and alleged alter ego entity.

The taxpayer usually establishes an entity (often a corporation) and transfers assets to it, but there is such unity of ownership and interest between the taxpayer and the entity that the entity is not considered a genuine separate entity.


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