4.11.52. Transferee Liability Cases

(1) This IRM serves as a quick reference guide for procedures on examinations. It acts as an index, providing a guide to actions needed for a given examination activity, and refers the reader to supporting references. This section provides guidance for examiners working cases with potential transferee assessment issues.

(2) As part of an examiner’s pre-contact responsibilities under IRM 4.10.2.4.1, Collectibility, consideration must be given to the taxpayer’s financial status (collectibility). Examiners must identify if it appears taxpayers have intentionally or inadvertently placed assets out of the legal reach of the government through asset transfers not conducted at arm’s length. This issue is known as transferee liability under IRC 6901, Transferred Assets.

(3) "Transferee liability" is a tool used by the IRS to collect a taxpayer-transferor's tax liability. A transferee case is developed to collect the liability from the person/entity who received the taxpayer-transferor's assets for less than full, fair and adequate consideration or to collect the liability from the person/entity who is legally responsible for paying the taxpayer-transferor's liability. This person/entity is the "transferee". The person/entity whose tax liability the government is seeking to collect is the "transferor".

(4) Transferee cases are also identified during the collection process. Revenue officers refer potential transferee cases to Examination personnel via Form 3031, Report of Investigation of Transferee Liability. The referrals will be assigned by PSP as detailed in IRM 4.1.1.6.11.2, Collection Referrals-Form 3031, Report of Investigation of Transferee Liability, and IRM 4.10.13.3.1.1, Referral From Collection Function.

(5) Income, Estate, Gift and certain other taxes can be collected through a transferee liability case. "Other taxes" are defined as any other tax (employment, excise, withholding), but only if such liability arises as the result of a liquidation of a corporation, partnership or a reorganization within the meaning of IRC 368(a), Reorganization.

(1) Authority - IRC 6901, Transferred Assets governs transferee assessments.

(1) The Director, Headquarters Examination, is the executive responsible for providing policy and guidance for Field employees and ensuring consistent application of policy, procedures, and tax law to effect tax administration while protecting taxpayers’ rights.

(2) The Director, Examination Field and Campus Policy (formerly known as the Director, Examination AUR/Policy), reports to the Director, Headquarters Examination, and is responsible for the delivery of policy and guidance that impacts the Field examination process.

(3) Field Examination Special Processes, which is under the Director, Examination - Field and Campus Policy, is the group responsible for providing oversight and policy and procedural guidance on specialized examination processes to SB/SE Field examiners and group managers.

(1) The following table lists commonly used acronyms and command codes with their definitions as used throughout this IRM.

(1) The following table lists commonly used terms with their definitions as used throughout this IRM.

(1) The following table contains related resources which cover additional procedures that examiners may reference for Transferee Liability Cases.

(2) The IRS adopted the Taxpayer Bill of Rights (TBOR) in June 2014. Employees are responsible for being familiar with and acting in accordance with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For additional information about the TBOR, see Taxpayer Bill of Rights FAQs.

(1) Transferee at law arises when a person/entity is responsible for the transferor's tax liability because of a contractual agreement with the transferor. In this situation, a valid contract must exist and the government must prove that the tax liability was within the terms of the contract (for example, an assumption or guarantee agreement). Statutory mergers where the surviving corporation is primarily liable for the debts of the merged corporation do NOT result in a transferee situation. Consult the contracts and agreement affecting the merger and applicable state law.

(2) Transferee at law may also arise under state statutes other than the fraudulent conveyance statutes. For example, statutes relating to corporate mergers and consolidations, bulk sales of assets, liability of officers, directors and shareholders of certain types of distributions and transactions may create a transferee at law. Similarly, transferee at law may arise under federal statute, such as the liability of representatives of persons/estates who pay other debts before paying federal tax debts (31 USC 3713(b), A representative of a person or an estate (except a trustee acting under title 11)).

(1) Transferee in equity is the most common form of transferee liability. This situation arises when a person/entity receives the transferor's assets for less than full, fair and adequate consideration, leaving the transferor insolvent and unable to pay the tax liability.

(2) Fraudulent transfers in equity are generally proven by showing either constructive fraud or actual fraud.

1. Proof of constructive fraud is sufficient to set aside a transfer that occurs after the debt arises. See 28 USC 3304(a), Debt Arising Before Transfer; Uniform Fraudulent Transfer Act (UFTA) Section 5; Uniform Fraudulent Conveyance Act (UFCA) Sections 4 and 5. Constructive fraud exists 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 (28 USC 3304(a), Debt Arising Before Transfer; UFTA Sections 4(a)(2) and 5; UFCA Sections 6 and 7). A transferor’s intent is immaterial if constructive fraud is proven.

2. Proof of actual fraud will defeat a transfer whether the debt arises before or after the transfer (See 28 USC 3304(b), Transfers Without Regard to Date of Judgment; UFTA Section 4; UFCA Sections 6 and 7). 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 (28 USC 3304(b), Transfers Without Regard to Date of Judgment; UFTA Section 4(a)(1)). It can be difficult to prove that a transfer was made with the actual intent to defraud a creditor. A fraudulent transfer usually is made without any verbal or written expression of the reason for the transfer. Because of this, actual fraud is generally proved through circumstantial evidence known as the "indicators of fraud", such as lack of adequate consideration or a transfer to insiders.

(3) Transferee in equity cases are based on the state or federal fraudulent conveyance statutes. In these cases, the transferee liability is generally limited to the value of the assets received from the transferor.

(1) Cases must be completed within the normal transferee SOL to the extent possible. Consents to extend the transferee SOL must be secured only in limited circumstances.

(2) The following forms can be used to extend a transferee SOL:

1. Form 977, Consent to Extend the Time to Assess Liability at Law or in Equity for Income, Gift and Estate Tax Against a Transferee of Fiduciary.

2. Form 4016, Consent Fixing Period of Limitation Upon Assessment of Employment or Miscellaneous Excise Taxes Against a Transferee.

(3) Merger or consolidation, where the successor corporation is primarily liable for the debts of the merged corporation, does NOT result in a transferee situation. Therefore, a merger or consolidation does not provide the extra one year period on the SOL that applies in transferee situations. In situations involving a dissolved corporation, the corporate officer's ability to represent the dissolved corporation (transferor) and execute consents/waivers on behalf of the dissolved corporation-transferor is dependent on the law of the state where the corporation was organized. Thus, the corporate officer may be unable to legally execute a consent agreement or waiver of the restriction on assessment, depending on the applicable state law. In these situations, Area Counsel must be consulted for advice and guidance.

(4) Additional references for transferee liability statute of limitations procedures may be found in:

1. IRM 25.6.1.9.7.2, Fiduciaries and Transferees,

2. IRM 25.6.22.6.17.1, Transferee Liability,

3. IRM 4.10.13.3.3, Statutory Period and Consents.

(1) For transferee at law cases, the file must contain documentation showing that the transferee assumed the tax liability because of either a contractual agreement or a state or federal statute.

(2) For transferee at law established by a contractual agreement, the examiner must show that a valid contract exists and that under the contract, the transferee assumed the transferor's tax liability. The case file must include a copy of the signed contract.

(3) The case file must include a copy of the applicable state or federal statute on which the IRS is relying for transferee at law established by statute.

(4) The case file must include a transcript of the transferor's account to establish that the transferor's tax liability was for a tax period ending prior to the transfer and remains unpaid. If the transfer of property to the transferee was made during the tax period under consideration, consult Area Counsel as to whether or not the tax liability of the transferor had accrued on the date of the transfer.

(5) See IRM 5.17.14.3.3.1, Transferee Liability Directly Imposed on the Transferee (At Law), for more information.

(1) First, the government must prove the transferor became insolvent when the asset transfer occurred, or was rendered insolvent because of a series of asset transfers. Documentation must show that the sum of the transferor's tax and other liabilities (for example, mortgages, debts payable) exceeded the transferor's assets at the time of the transfer. For example, a copy of the transferor's balance sheet at the time of insolvency, bankruptcy documents, corporate dissolution documents, documents showing how the assets in a decedent's estate were distributed must be obtained and included in the case file.

(2) Second, the government must prove that the asset transfer was for less than adequate, or full consideration. Documentation must show:

1. The asset was transferred (for example, deed, balance sheets, canceled check(s), title transfers).

2. The value of the asset transferred on the transfer date.

3. The consideration, if any, paid for the asset(s).

4. Who received the asset(s). The documentation must show the current legal title. A transferee is rarely a joint entity. In the case of a transfer made by a jointly held asset (For example, land titled as tenancy by the entireties), the joint owners are considered a single transferee.

Reminder: Assets Transferred Template may be used to summarize the above information.

(3) Third, in some cases, but not all, the government must prove that the asset transfer was made after the liability for the taxes accrued. When required, documentation must be included to show the date the tax liability accrued and the date the transfer occurred. The tax accrues by the last day of the tax period, not on the due date of the return. There is no requirement that the tax liability has been assessed at the time of the asset transfer in order to proceed against the transferee.

(4) Fourth, the government must show that the transferor was liable for the tax. Documentation must be included to show the tax liability. If the tax has been assessed, a transcript of the transferor's account must be included. If the liability is the result of an examination, a copy of the examination report or notice of deficiency must be included, although transferee assessments can be made without having issued an examination report or notice of deficiency to the transferor.

(5) Fifth, the government must prove that a reasonable attempt was made to collect the tax liability from the transferor, or that it would be futile to pursue collection from the transferor such as in the case of a corporation which has dissolved and distributed its assets. Documentation must show the transferor is in bankruptcy, has dissolved, or has distributed all the assets and collection from the transferor is not possible or that collection activity was unsuccessful. A TXMOD will show the action taken by Collection.

(1) Forward all cases (agreed and unagreed) to Technical Services when the amount of tax of the transferor and the appropriate tax liability of the transferee has been determined (may not be the full amount of the tax due).

(2) Ideally, the transferor and the transferee cases will be closed together if the examiner has control of both cases. However, due to certain circumstances, including, statute considerations they may be separated.

(3) Examiners will complete normal closing documents for the transferor case.

• Form 5344: The whipsaw indicator will be "K".

(1) Each transferee is a separate entity. As such, each transferee must have a separate case file established. The transferee individual/entity will have the title "Transferee" after the transferee's name.

(2) Transferee liability cases that originate in Collection must have a transferee report prepared on Form 3031, Report of Investigation of Transferee Liability. Transferee liability cases that originate in Examination must have a transferee report that includes the same information as Form 3031, but in memorandum format. See the Forms discussion at IRM 4.11.52.5.3.2.

(3) The case file documentation and workpapers must be attached to the transferee report. The workpapers must be properly numbered and indexed.

(4) The transferor's original tax return(s) must be included for those tax periods for which a liability is unpaid.

(5) The case file must include the following:

1. Letter 955, 30 Day Letter - Straight Deficiencies of Both Deficiencies and Overpayments, is issued at the group level, and modified as necessary.

   Caution: Transferee liability is not a tax (In re W.J. Kardash, Sr., BC-DC Fla., 2017-2 USTC P 50,434; or IRS: 30,124 Transferee Liability for Taxes). Therefore, use of Letter 955 may not be appropriate. A modification of Letter 955 may be considered. Examiners may contact their local Technical Services Transferee Liability Coordinator for guidance.

2. If the case is not protested to the Office of Appeals, the unagreed case file is forwarded to Technical Services, for preparation and issuance of the Notice of Liability.

3. Form 3210, Document Transmittal must be noted Unagreed Transferee Case.

4. If applicable, Form 4665, Report Transmittal must include a clear statement of the present ability of the transferor and each transferee to pay, with names, addresses, amounts, and nature of property held by each that may be used in payment of tax.

5. Form 5344, Examination Closing Record. Transferor: The transferor whipsaw indicator will be "K". Transferee: Item 13 must have an examined disposal code. It cannot be Disposal Code 28 for NMF closings. Item 401 must reflect the whipsaw indicator "R".

6. Form 3198, Special Handling Notice for Examination Case Processing, is prepared for all transferee cases. Where applicable, remark, "Transferee Case Agreed/Unagreed, route to Technical Services".

(6) All transferee cases are closed to Technical Services for special handling. This applies to agreed cases, as well as, unagreed cases. Technical Services will complete the Form 1296, Assessment Against Transferee or Fiduciary. See IRM 4.10.13.3.4.7, Closing an Agreed Transferee Case.

(7) Area Counsel reviews all notices of liability (90-day letters) per IRM 4.8.9.9.2.1, Mandatory Area Counsel Review.

(1) This section covers the various assessment forms that may be used during a transferee liability case.

1. Form 870-T, Waiver of Restrictions on Assessment and Collection of Transferee or Fiduciary Liability and Acceptance of Overassessment (for income tax),

2. Form 890, Waiver of Restriction on Assessments & Collection of Deficiency & Acceptance of Overassessments - Estate, Gift, and Generation- Skipping Transfer Tax, and

3. Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessments (Employment Tax Adjustments Not Subject to IRC 7436).

(2) Add the following wording to Form 870-T, Form 890, or Form 2504:

1. If the assets transferred exceed the transferor's total liability - "This represents the undersigned's liability as transferee of the assets of (name and address of the transferor) for (type of tax), penalties, and interest thereon as provided by law due from said transferor."

2. If the transferor's total liability exceeds the assets transferred - "This, plus interest thereon, represents the undersigned's liability as a transferee of the assets of (name and address of the transferor) for (type of tax), penalties and interest thereon, to the extent of the net value of the assets received from the transferor, plus interest thereon as provided by law. It has been determined that the net value of the assets received is (value of the assets received)."