5.17.14. Fraudulent Transfers and Transferee and Other Third Party Liability

(1) This section provides guidance on the methods the United States can use to collect an unpaid liability where an initially liable person, e.g., a taxpayer (the "transferor"), has transferred property to a third party (the "transferee") prior to or after the liability to the United States is incurred. However, it is not the source of procedural instructions. Revenue Officers and other Internal Revenue Service personnel must still look to the procedural Internal Revenue Manual (IRM) provisions outside this Handbook for such instructions.

(2) Whenever action or litigation involving collection matters is pending or the institution of affirmative legal action to effect collection is being considered, Revenue Officers will, in the main, be investigators of facts. They will be required to prepare reports concerning any facts ascertained. The reviewers, approvers, and lawyers charged with the responsibility of handling the cases must rely on those facts and reports when making case decisions.

(1) A request, for institution of an administrative or legal proceeding to effect or assist in the collection of a tax, generally originates with an individual Revenue Officer within a Field Collection Area Director’s organization.

• Specific policies related to collection work start with IRM 1.2.1.6, Policy Statements for the Collecting Process.

• Specific delegations of authority related to collection work are in IRM 1.2.2, Servicewide Delegations of Authority, and throughout IRM 1.2.65.3, SB/SE Functional Delegation Orders – Collection.

(2) The authorities for the legal theories discussed in this IRM are found in the following United States Code and Regulation sections.Table Listing Code and Regulations

(1) Director, Collection Policy is the executive responsible for the policies and procedures employed by Collection personnel.

(2) Director, Field Collection, has executive oversight for all Field Collection programs.

(3) Field Collection Area Directors, Territory Managers and Group Managers are responsible for ensuring compliance by Field personnel with these procedures.

(4) Revenue Officers are responsible for reading and implementing the procedures listed in this IRM.

(5) Field Collection Advisors review and advise Revenue Officers on work relating to the guidance and procedures described in this IRM. They also ensure compliance with IRM guidance.

(6) IRM 5.17.1, General Information, describes Counsel and Revenue Officer roles with suits.

(1) Program Effectiveness: Field Collection Group Managers use Document 12359, Embedded Quality Job Aid Field Collection, to complete:

• Annual case reviews IRM 1.4.50.5.2.2, Requirements for Annual Performance Case Reviews,

• Completed case work IRM 1.4.50-2, Criteria for Review of Completed Work, and

• eApproval recommendation reviews.

(2) Field Collection Advisory Group Managers use Document 12746, Embedded Quality Advisory - Litigation, and Document 12739, Embedded Quality Job Aid Advisory Lien Core, to complete:

• Annual and case reviews IRM 1.4.53.4.7, Reviews, and

• eApproval recommendation reviews for assignment.

(3) National Quality Review System (NQRS) reviewers also review case work for certain attributes. See Quality Knowledge Base - Home (sharepoint.com)

(1) Management and review when pursuing a third-party liability varies with the type of action:

• Initiating Special Condition Notice of Federal Tax Lien (NFTL) filing requires Group Manager, Advisory, and Counsel review and approval prior to filing.

  Note: IRM 5.12.7.6.5.2, Revenue Officer Request Actions, including its subsections discuss the elements of the request memorandum and required case essentials. IRM 5.12.7.6.5.4, Advisory Review Actions, discusses the elements needed when reviewing.

• Initiating suit to establish a transferee liability requires Group Manager, Advisory, Territory Manager, and Counsel review and approval prior to forwarding the recommendation to the Department of Justice.

  Note: Suits are individual to the case. The Collection employee provides a Narrative Report laying out the basis for the case identifying all pertinent facts. Narrative Reports are discussed in IRM 5.17.12, Investigations and Reports.

• Initiating an Internal Revenue Code (IRC) 6901 assessment requires Group Manager review prior to forwarding the case to Exam Planning and Special Programs (PSP) for assessment.

  Note: IRM 5.1.14.2.1, Report of Investigation of Transferee Liability, describes the preparation and presentation of the report. IRM 4.1.1.6.11.2, Collection Referrals-Form 3031, Report of Investigation of Transferee Liability, discusses the PSP review.

(1) Term Table

(2) Acronym Table

(1) Listed below are resources for Special Condition NFTLs (i.e. nominee, transferee, alter ego, and successor in interest).Resources for Special Condition NFTLs

(2) Listed below are resources for suits to establish a transferee liability.Resources for Establishing a Transferee Liability

(3) Listed below are resources for assessing a transferee using IRC 6901.Resources for Assessing Under IRC 6901

(4) The IRS adopted an additional https://www.irs.gov/taxpayer-bill-of-rights in June 2014. There are three previous TBOR, which have been incorporated into IRM instructions over the years. Employees are responsible for being familiar with and acting in accord with all taxpayer rights provisions and instructions including the 2014 TBOR. See IRC 7803(a)(3), Commissioner of Internal Revenue; other officials, Execution of duties in accord with taxpayer rights. For additional information about Taxpayer Bill of Rights see:

• TBOR 1: IRM 13.1.1.2(2), Evolution of the Office of the Taxpayer Advocate,

• TBOR 2: IRM 13.1.1.2(3), Evolution of the Office of the Taxpayer Advocate, and

• TBOR 3: IRM 13.1.1.2.1, IRS Adoption of Taxpayer Bill of Rights and IRC 7803(a)(3), also known as TBOR 3.

(1) The term transferee has many connotations when discussing third parties. For the purposes of this sub-section’s discussion, the term transferee refers to those areas where the term is used, either with an NFTL, a type of assessment, or a suit.

(2) The IRS may seek to collect a taxpayer’s unpaid tax, penalty or interest through pursuit of one of the transferee theories. An actual transfer occurred but there is a legal basis for collecting the tax liability from the transferee. A transferee liability may arise under a contract, under federal statutes, or under state law. Collection’s basis may arise on a finding that the transfer was fraudulent. Concepts for using a transferee theory include:

• Lien Tracing: A statutory federal tax lien attaches to property and the property has been transferred by the taxpayer through a gift, bequest, devise, or inheritance before an NFTL could be filed. There is no requirement that the taxpayer retain use of or a beneficial interest in the property IRM 5.12.7.6.3(1), Transferee NFTL. See instructions for filing a Special Condition Transferee NFTL in IRM 5.12.7.6.5, Special Condition NFTL Approval Process: Request, Advisory Review, and Post-Approval.

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

  Reminder: Using lien tracing to file a Special Condition Transferee NFTL, allows the IRS to collect through administrative or judicial remedies.

• IRC 6901: Legal title to property has been transferred and no statutory federal tax lien attached prior to the transfer. As defined by IRC 6901(h) a transferee includes a donee, heir, legatee, devisee, and distributee, and with respect to estate taxes, includes any person who, under IRC 6324(a)(2), is personally liable for any part of such tax. The liability is income, estate, or gift tax. It could also include other taxes, such as employment taxes through a liquidating partnership or corporation, or a corporate reorganization. The assessment is made within the limited timeframes described in IRC 6901(c) including any applicable extensions. See also IRM 5.17.14.5.2.

  Note: Using IRC 6901 and a substantive provision of the law to assert liability against the transferee allows the IRS to collect through administrative or judicial remedies. The liability of the transferee is secondary to that of the transferor similar to a trust fund liability’s relationship to the underlying corporate liability. Meaning the transferee liability is derived from the transferor’s liability. It does not create a new liability. Instead, it provides a secondary method to collect the transferor's tax liability.

• Litigation to Establish a Transferee Liability: Legal title to property has been transferred and no statutory federal tax lien attached prior to the transfer, and either the IRC 6901 time-frames or type of tax are unavailable. See IRM 5.17.14.3.3.1, Transferee Liability Directly Imposed on the Transferee (At Law).

  Note: Use when the value of the transferred property has decreased.

  Reminder: Using litigation and a substantive provision of the law to establish a transferee liability creates a judgment against the transferee for the amount determined by the court. If the abstract of judgment is filed, it creates a judgment lien. The judgment does not merge with the transferor’s liability. The judgment lien does not merge with the transferor’s federal tax lien nor does it create a federal tax lien against the transferee. Collection is judicial only.

• Litigation to Set Aside a Fraudulent Transfer: Legal title to property has been transferred and no statutory federal tax lien attached prior to the transfer, and either the IRC 6901 time-frames or type of tax are unavailable. See IRM 5.17.14.3.3.2, Transferee Liability Based on Fraudulent Transfers (In Equity).

  Note: Use when the value of the transferred property has increased.

  Reminder: Using litigation to set aside a fraudulent transfer places the asset(s) back into the taxpayer / transferor’s name and encumbered by the taxpayer / transferor’s federal tax lien. This type of litigation is generally done in conjunction with a suit to foreclose the federal tax lien, which has been protected by the filing of an NFTL.

(1) A representative of a person or an estate (except a trustee acting under the Bankruptcy Code of 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.

(2) A fiduciary is not liable 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.

(3) Fiduciary liability is discussed more fully in

• IRM 5.17.13.7, Personal Liability of the Fiduciary Under 31 USC 3713(b), and

• IRM 5.17.13.9.3, Fiduciary Liability of Personal Representatives.

(1) Under the successor liability theory, the IRS seeks to impose liability because the taxpayer sold or transferred assets to - or merged with -another corporation and the recipient or surviving corporation is liable under state law for the debts of the predecessor corporation. A successor liability is dependent on state law. Under certain circumstances, a successor in interest named on a Special Condition NFTL is entitled to Collection Due Process rights. See IRM 5.12.7.6.4(3), Successor-In-Interest NFTL.

(2) The successor corporation may be liable:

1. As a transferee, as more fully discussed in IRM 5.17.14.3.3.4, Successor Liability of a Corporation as a Transferee, or

2. As the successor corporation may be primarily liable, as more fully explained in IRM 5.17.14.6, Successor Liability as Primary Liability.

(1) The nominee theory allows collection from specified property held in the name of the taxpayer’s nominee. This theory is based on the premise that both -1- a third party holds specific assets for the taxpayer; and -2- at the same time the taxpayer retains benefit, use, or control over the specific assets. Terminology used includes, the third party holding the property nominally, or holding it in name only. Sometimes the property has been transferred, though a transfer is not a requirement of this theory. Thus, the nominee theory focuses on the relationship between the taxpayer and the property. A transfer of legal title may or may not have occurred. Whether or not that is the case, the IRS believes substantive control over the property remains with the taxpayer. See IRM 5.12.7.6.1, Nominee NFTL, and IRM 5.17.14.7, Nominee and Alter Ego Theory Elements.

(1) The alter ego theory allows collection from all the property of a taxpayer’s alter ego. This theory is based on the premise that the taxpayer and the alter ego are so intermixed that their affairs are not readily separable. Thus, the alter ego theory focuses on the relationship between the taxpayer and the alter ego. See IRM 5.12.7.6.2, Alter Ego NFTL, and IRM 5.17.14.7, Nominee and Alter Ego Theory Elements.

(1) The transfer from the taxpayer / transferor to the transferee can be direct or indirect: Comparison of Direct and Indirect Transfers

(1) Courts generally consider a transferee’s liability to be secondary to the primary liability of the transferor. Secondary liability means:

1. The transferee derives its liability from the transferor’s liability, and

2. Property is received under circumstances subjecting the transferee to the liabilities of the transferor.

(2) Before pursuing a transferee, the IRS must generally exhaust all legal remedies it may have against the transferor for collection of the tax. The general rule is that the IRS must show that collection remedies against the transferor have been exhausted or would be futile. See, Gumm v. Commissioner, 93 T.C. 475, 480 (1989). The extent to which the IRS must proceed against the transferor depends on the facts and circumstances. For example, the IRS need not pursue a corporate taxpayer that has been stripped of its assets or a trust that has distributed its property to a beneficiary and terminated.

(1) A transferee is liable for a tax either "at law" or "in equity."

(2) At Law: This is where the liability of the transferee is directly imposed by federal or state law or agreed to as part of a contract (either an express or implied agreement).

(3) Establishing Transferee Liability At Law: The IRS must prove:Transferee At Law Additional Proof

(4) In Equity: This is where the liability of the transferee is imposed by a court based on equity or fairness principles.

1. Transferee liability in equity is based on fraudulent conveyance laws that 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.

2. Although the doctrine was initially based on the common law (case law), both federal and state statutes now address setting aside transfers based on a fraudulent conveyance.

(5) Establishing Transferee Liability In Equity: The IRS must prove:Transferee In Equity Additional Proof

(6) The tax liability arises at the end of the tax year. However, a transfer occurring during the tax year may give rise to a contingent tax liability at the time of the transfer.

(7) For certain kinds of transfers (e.g., fraudulent transfers, gifts and testamentary distributions), the IRS must also prove the value of the transferred property at the time of the transfer, which generally determines the limits of the transferee liability. See IRM 5.17.14.3.4, Extent of Transferee Liability.

(8) The methods of establishing transferee liability, discussed below, are not mutually exclusive. Frequently, the facts in a particular case may support a number of different theories for imposing transferee liability. For example, depending upon applicable state law, the same set of facts could support imposing liability on the transferee under the following theories:

• fraudulent transfer

• trust fund doctrine

• successor liability

• transfer to shareholder or corporate distributee

(9) Additionally, states may use different terminology for these different theories. For example, not all states specifically recognize the doctrine of "successor liability" but instead will impose transferee liability under the same or a similar set of facts and call it something else (e.g., trust fund doctrine, fraudulent conveyance). For Field Collection, fully developing the facts of the case that support varying theories of transferee liability is more important than determining which specific legal theory applies. Consult with Area Counsel to determine the appropriate legal theory or theories under which suit may be brought in your state. See also IRM 5.17.14.3.3.3, Trust Fund Doctrine and IRM 5.17.14.3.3.5, Transferee Liability of a Shareholder or Distributee of a Corporation.

(1) 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."

(2) When transferee liability is based "in equity," the transferee’s liability is generally limited to the value of the property transferred.

1. For example, liability of shareholders under the trust fund or similar doctrine is limited to the value of property received. Phillips-Jones Corporation v. Parmley, 302 U.S. 233, 237 (1937).

2. 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 the transfer is found to be fraudulent by a court. See, United States v. Verduchi, 434 F.3d 17 (1st Cir. 2006).

(3) Generally, transferee liability "at law" is full liability, regardless of the value of the assets received, unless limited by state or federal law or by agreement.

1. 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. Bos Lines, Inc. v. Commissioner, 354 F.2d 830, 837 (8th Cir.1965) aff'g,, T.C. Memo.1965-71.

2. Where transferee liability is based on state law, state law determines the extent of liability. Commissioner v. Stern, 37 U.S. 39, 44-45 (1940).

3. 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. See, e.g., Atlas Tool v. Commissioner, 70 T.C. 86, 113-14 (1978), aff’d, 614 F.2d 860 (3d Cir. 1980).

4. 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. See, e.g., C.D. Const. Corp. v. Commissioner, 451 F.2d 470 (4th Cir. 1971), aff’g, T.C. Memo. 1970-297.

5. 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. IRC 6324(a)(2) and (b).

(4) 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.

(5) 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.

(6) Interest in transferee liability cases calculates based on two separate periods—pre-notice and post-notice. Notice refers to the notice of transferee liability. Before the issuance of the notice (pre-notice), if

1. The value of the assets transferred is less than the transferor’s total tax lability on the transfer date, the pre-notice period is measured from a point of time that would not be earlier than the date of transfer up to (but not including) the notice of liability issue date. The existence, starting date, and rate of interest are controlled by state law. Estate of Stein v. Commissioner, 37 T.C. 945 (1962).

   Note: The total liability imposed on the transferee may exceed the value of the transferred assets, however, if interest accrues under state law with respect to the assets. See Stansbury v. Commissioner, 102 F.3d 1033 (10th Cir. 1996).

2. The value of the assets transferred is more than the transferor's total tax liability on the transfer date, the pre-notice period would run from the date that the transferor's tax payment was due up to the date the notice of liability was issued. Interest would be determined under Federal law. Lowy v. Commissioner, 35 T.C. 393 (1960).

(7) Regardless of the value of assets transferred, federal law governs the imposition of interest once the notice of transferee liability is issued (i.e., post-notice). A transferee is liable for interest under IRC 6601 from the date of this notice to the date of payment. Patterson v. Simms, 281 F.2d 577 (5th Cir. 1960)

(8) A transferee of the initial transferee may be subject to liability for the tax of the transferor. A transferee of an initial transferee is liable if:

• the initial transferee is liable and

• there is a basis for transferee liability of the subsequent transferee (such as a fraudulent transfer from the initial transferee).

(9) The liability of a subsequent transferee is generally limited to the value of the property received (see (1) – (9) above).

(1) The following provisions describe how the IRS administratively imposes liability for the transferor's tax liability on a transferee or fiduciary. The liability may then be collected from any of the transferee’s or fiduciary’s property. This approach is generally preferable when the value of the property has decreased since the transfer.

(2) 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 6901. See IRM 5.1.14.2.1, Report of Investigation of Transferee Liability and IRM 4.8.8.13.4, Statutory Notice of Transferee Liability, for more information.

(1) IRC 6901 provides a procedure by which the IRS may assess and collect the unpaid taxes, penalties, and interest:

1. from a transferee, or

2. from a fiduciary liable under 31 USC 3713.

(2) IRC 6901 is strictly a procedural statute; it does not create the substantive liability of a transferee for the transferor’s tax debt. The existence of, or extent of, a transferee’s liability is determined by applicable state or federal law. Commissioner v. Stern, 357 U.S. 39 (1958).

(3) A transferee’s liability may be established

1. At Law: by contract, or under a state or federal law directly imposing liability on the transferee.

2. In Equity: based on fraudulent transfer statutes. IRC 6901(a). These types of transferees look to state or federal fraudulent conveyance statutes. Specific state statutes determine liability for a particular case. See Hagaman v. Commissioner, 100 T.C. 180 (1993).

(4) The procedures for establishing transferee and fiduciary liability under IRC 6901 are similar to the deficiency procedures.

1. A notice of transferee or fiduciary liability must be mailed to the last known address of the transferee or fiduciary.

2. The transferee or fiduciary may petition the Tax Court within 90 days.

3. The liability will be assessed against the transferee or fiduciary if:

   Example: An IRC 6901 Assessment Occurs After

   1	Transferee or fiduciary agrees to an assessment of the liability;
   2	Transferee or fiduciary defaults on the notice of liability; or
   3	Transferee or fiduciary petitions the Tax Court and it enters a decision against the transferee or fiduciary.

   Reminder: See IRM 4.4.17.4.2.1, Closing Instructions.

4. Once the liability is assessed, and after notice and demand and a refusal to pay, a lien is created which attaches to all property of the transferee or fiduciary. A Notice of Federal Tax Lien must be filed to protect the IRS’ interests under IRC 6323.

5. The assessment may be collected administratively or judicially from all property and rights to property of the transferee or fiduciary.

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

   Reminder: Procedural References for initiating an IRC 6901 transferee assessment.Reference List

   Location	Title
   IRM 5.1.14.2	Transferee Liability and Fraudulent Conveyances
   IRM 5.1.14.2.1	Report of Investigation of Transferee Liability
   IRM 4.10.13.3	Transferor - Transferee Liability
   IRM 4.8.9.17.5	Transferor-Transferee Liability and Fiduciary Liability Cases
   IRM 4.11.52	Examining Officers Guide (EOG), Transferee Liability Cases
   IRM 4.1.1.6.11.2	Collection Referrals-Form 3031, Report of Investigation of Transferee Liability
   IRM 4.10.13.3.1.1	Referral From Collection Function
   Form 3031	Report of Investigation of Transferee Liability

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

1. 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 368, all other classes of distributees, and with respect to the gift tax, a donee. Treas. Reg. 301.6901-1(b).

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

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

• Income tax, estate tax or gift tax; or

• Other taxes, such as employment taxes, if the transferee’s liability arises out of a liquidation of a partnership or corporation, or a corporate reorganization under IRC 368(a).

(7) Assessments against a fiduciary can be made under IRC 6901 for the income tax, estate tax or gift tax due from the estate of a taxpayer, decedent or donor. IRC 6901(a)(1)(B).

(8) The transferee or fiduciary may be assessed for any of the above-mentioned taxes shown on a return or for any deficiency or underpayment of these taxes. IRC 6901(b).

(1) 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 6902(a). The transferee may not relitigate a transferor’s tax liability when a court has already decided the issue. Jahncke Serv., Inc. v. Commissioner, 20 BTA 837 (1930).

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

(3) 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 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. United States v. Coppola, 85 F.3d 1015 (2d Cir. 1996).

(1) The United States may establish transferee or fiduciary liability by filing a suit in district court pursuant to IRC 7402 and 28 USC 1340 and 1345. This 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.

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

(3) 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 for in IRC 6324 from the date of death or the date of the gift applies for collection of estate and gift taxes if the suit is based on IRC 6324 transferee liability.

(4) 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.

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

• the transferred property has depreciated in value;

• the transferee has concealed, disposed of, or converted the transferred property; or

• the transferee has commingled the transferred property with other property.

Note: Where the value of the property has decreased following the transfer, the amount of any personal judgment against the transferee ordinarily cannot exceed the value of the property at the time of the transfer.

(6) Burden of Proof:

1. 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.

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

(7) 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. See IRM 5.17.14.5.6, Suit to Set Aside a Fraudulent Transfer.

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

1. 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.

2. 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.

(2) A transferee may contest the liability of the transferor.

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

2. 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.

(3) To determine whether there is a prior decision on the merits, requires obtaining specific information regarding the resolution of the litigation.

• Decision on the Merits

  Example: Determination by a court following a trial or an agreed stipulation of a tax liability.

• Not a Decision on the Merits

  Example: A voluntary dismissal prior to entry of court’s decision or a dismissal for lack of jurisdiction, allows the transferee to later litigate the transferor’s tax liability in another forum.

  Example: A defaulted notice of deficiency.

• A closing agreement between a transferor and the IRS binds the transferee.

(4) 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, though, reduces the transferor’s liability and, thereby, the liability of other transferees.

(5) Other defenses include:

1. the expiration of the statute of limitations;

2. return of all or a part of the transferred property;

3. any other defense that can be used for the type of liability asserted (e.g., that the IRS has not exhausted its remedies against the transferor).

(6) For defenses of a fiduciary, see IRM 5.17.13.8(5), Asserting Personal Liability Against a Fiduciary.

(1) 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.

(2) The relief requested from the court is:

• to set aside the transfer,

• to reinstate the transferor’s ownership of the property, and

• to order the property sold to pay the transferor’s debt.

(3) The right of the United States to set aside a fraudulent transfer is found in federal law and in state law.

1. 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.

2. The United States may also use all of the 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.

(4) 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.

(5) Focus of the Suit: Focus for the cause of action is generally the transferred property (an "in rem" action). Usually, a personal judgment is not rendered against the transferee. See FDCPA 3307(b).

(6) Generally, a suit to set aside a fraudulent transfer is combined with a suit to foreclose any liens for the transferor’s taxes which attach to the transferred property once the transferor’s ownership in the property has been reinstated.

(7) A suit to set aside a fraudulent transfer may also be combined with a suit to impose personal liability on a transferee if the transferred property has depreciated in value. See IRM 5.17.14.5.4, Establishing a Transferee or Fiduciary Liability by Suit. The extent of the personal liability would be the difference between the value of the property when transferred and the value of the property when it is sold by order of the district court.

(1) The advantages of using IRC 6901 procedures are:

1. Following the assessment, the IRS may use all administrative collection procedures and may file NFTLs against the transferee or fiduciary. The federal tax lien attaches to all the property of the transferee or fiduciary.

2. Use of IRC 6901 procedures is consistent with the general preference to attempt all administrative collection before pursuing judicial collection action.

(2) The advantages of a district court suit are:

1. The limitations period for bringing suit to assert transferee or fiduciary liability is generally longer than the limitations period for administratively asserting transferee liability.

2. Transferee liability can be asserted for any type of tax. The IRC 6901(a) limitations do not apply.

3. In one action, the IRS may reduce a liability to judgment, establish transferee or fiduciary liability (or, alternatively, set aside a fraudulent transfer) and foreclose a lien. If the court orders a sale, it will be able to give clear title, thereby increasing what a purchaser is willing to pay over what a purchaser would pay at an administrative sale of seized property.

4. If the property has increased in value, a suit to set aside a fraudulent transfer allows for recovery of the increased property value.

(1) Administrative collection of a taxpayer’s liability can come from the taxpayer’s property held by a nominee, alter ego, or lien tracing transferee. Documentation of the third party’s involvement in a purported transfer allows the IRS to ignore that transfer while relying on assessments made against the taxpayer and Special Condition NFTL filings naming the taxpayer and the third party. The Special Condition NFTL filing protects the priority of the statutory federal tax lien(s) against other creditors. It also puts other creditors on notice that property in in the hands of the named third-party is encumbered by the taxpayer’s federal tax lien(s). Area Counsel approves the issuance of Special Condition NFTLs and levies. See IRM 5.11.1.3.6, Approval of Alter-Ego and Nominee Notices of Levy and IRM 5.12.7.6 et seq., Special Condition NFTL (Nominee, Alter Ego, Transferee, Successor-in-Interest).

(2) Field Collection should always work to fully develop the factual background of each particular case, but it may not be possible to develop sufficient facts to establish which theory best fits the case, or the available facts may suggest the application of more than one theory. In these cases, the IRS may take the position that a taxpayer has transferred the property to a third party by means of a fraudulent transfer or, alternatively, that the taxpayer's property is held by a nominee or alter ego. Area Counsel is also available to assist in determining which legal theories apply given the specific facts of the case.

(3) A suit in federal district court pursuant to IRC 7402(a) and 7403 and 28 USC 1340 and 1345 may be advisable under some circumstances as an alternative to levy/seizure to establish that the property is held by the taxpayer’s nominee or that the legally separate entity is an alter ego of the taxpayer.

• For example, a suit is advisable if the IRS would like to maximize the sale of nominee or alter ego property, because a court will be able to give clear title to the property and potential buyers will pay more than if the property is seized and sold.

• Similarly, if the property is encumbered and there is likely to be a dispute about the priority of lien or security interests, a suit would probably be the most prudent approach.

• If the property to be collected from is a principal residence, a suit should be filed because judicial approval of the seizure of the residence would be required under IRC 6334.

• A suit may be in order if the expiration of the collection statute of limitations is near.

• If there is some uncertainty about whether there was a fraudulent transfer or a nominee situation, a suit should be filed.

(4) The ten-year statute of limitations under IRC 6502 for collecting the taxpayer’s liability applies to collect from nominees and alter egos, whether by levy or suit.