If the IRS is unable to collect a tax liability from a taxpayer, state laws may allow the IRS to collect the liability from a third party in certain situations where the taxpayer has transferred assets to another person. Although liability of a transferee for a transferor’s tax debt is based on state law, the IRS is not bound by the state statute of limitations for collecting such a liability against a transferee.[i]
Summary Collection Procedures Under Section 6901. Section 6901 provides the IRS with procedural tools to use to collect a tax liability against a transferee, which allow the IRS to assess and collect the liability against the transferee in the same way that the IRS can assess and collect a tax deficiency against a taxpayer. Section 6901 provides, in pertinent part, that an income tax liability may generally “be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.”[ii]
Section 6901(c) sets forth an extended period of limitations for assessing a tax liability against a transferee compared to the period of limitations for assessing the liability against the original taxpayer. Section 6901(c)(1) provides generally that the period of limitations for assessment of a transferee liability against an initial transferee expires 1 year after the expiration of the period of limitation for assessment against the transferor; and Section 6901(c)(2) provides that the period of limitations for assessment against a transferee of a transferee expires 1 year after the expiration of the period of limitation for assessment against the preceding transferee, but not more than 3 years after the expiration of the period of limitation for assessment against the initial transferor.[iii] Since the period of limitations for assessment against a taxpayer is generally three years from the date the return is filed,[iv] the period of limitations for assessing a transferee liability against an initial transferee is generally four years from the date the return is filed (regardless of when or whether during that period the tax is assessed against the transferor).[v]
Judicial Proceeding to Collect a Tax Liability Against a Transferee. While Section 6901 gives the IRS the power to collect a tax liability against a transferee without going to court, it is not required to follow the procedures set forth in Section 6901 and may pursue its case against a transferee under state law in a judicial proceeding. The 9th Circuit has held that Section 6901 “is not mandatory”; “rather, it adds to other methods available for collection.”[vi]
As mentioned above, although a lawsuit is brought pursuant to state law, the Government is not bound by the state law statute of limitations – the Government instead has ten years from the date a tax is assessed to bring a suit to collect the tax pursuant to Section 6502.
Section 6502 provides, in pertinent part, that where the assessment of any tax has been made within the period of limitations properly applicable thereto, such tax may be collected by levy or by a proceeding in court within 10 years after the assessment of the tax. IRC § 6502(a). In the case of transferee liability, the Supreme Court has interpreted this statute to allow the IRS to collect a properly assessed tax against a transferee who is liable for the debt, even if the IRS has not assessed the liability against the transferee pursuant to Section 6901.[vii]
In United States v. Updike, the Supreme Court rejected the argument that the language “such tax may be collected . . . by a proceeding in court” in the predecessor to Section 6502 refers only to a direct proceeding against the taxpayer against whom the tax is assessed, explaining:
It seems plain enough, without stopping to cite authority, that the present suit, though not against the corporation but against its transferees to subject assets in their hands to the payment of the tax, is in every real sense a proceeding in court to collect a tax. The tax imposed upon the corporation is the basis of the liability, whether sought to be enforced directly against the corporation or by suit against its transferees.[viii]
More recently, the Supreme Court addressed the question of whether Section 6502 applies to persons liable for a partnership’s tax debt because they were general partners of the partnership who were jointly and severally liable for the debts of the partnership.[ix] The IRS had not assessed the tax against the individual partners and the issue was whether the IRS was required to in order for the statute of limitations in Section 6502 to apply. Because this case involved persons liable as general partners and not as transferees, Section 6901 was not relevant in this case.
The Court followed Updike and held that the “Government’s timely assessment of the tax against the partnership was sufficient to extend the statute of limitations to collect the tax in a judicial proceeding, whether from the partnership itself or from those liable for its debts.”[x] The Supreme Court reasoned that after analyzing the term “assessment” as it is used in the Code, “it is clear that it is the tax that is assessed, not the taxpayer.”[xi] The Court concluded: “Once a tax has been properly assessed, nothing in the Code requires the IRS to duplicate its efforts by separately assessing the same tax against individuals or entities who are not the actual taxpayers but are, by reason of state law, liable for payment of the taxpayer’s debt.”[xii]
Transferees of a transferee. The applicability of the ten-year statute of limitations under Section 6502 where there has not been an assessment against the transferee is less clear in the case of transferees of a transferee. The Supreme Court has held, in the case United States v. Continental Nat’l Bank & Trust Co., 305 U.S. 398 (1939), that the predecessor section to Section 6502 “is not broad enough” to impose a liability on a transferee of a transferee on account of an assessment against an initial transferee, based on its conclusion that a transferee of a transferee is not a “transferee of the property of the taxpayer.”[xiii] In Signal Oil & Gas Co. v. United States, 125 F.2d 476 (9th Cir. 1942), the 9th Circuit held that “Since appellant, a second transferee, is not a transferee of property of a taxpayer, the six-year period of section 278(d) [the predecessor to Section 6502] to sue the first transferee of the taxpayer after assessment of the taxpayer does not apply to appellant.”[xiv] The court noted that since there was no Supreme Court decision overruling Continental National Bank, the 9th Circuit was constrained to follow that decision.[xv]
As a result of these Supreme Court decisions, although the IRS is far more limited in its options for collecting a tax liability against a transferee after the statute of limitations in Section 6901 has passed for assessing a liability against a transferee, the IRS remains able to bring a lawsuit against a person who may be liable under state law as a transferee for the tax liability of the transferor. Even if the IRS has not timely assessed a transferee liability under Section 6901, it is important to remember that the IRS may be able to bring such a suit up to ten years after the IRS assesses the tax liability against the original taxpayer.
LACEY STRACHAN – For more information please contact Lacey Strachan at Strachan@taxlitigator.com. Ms. Strachan is a tax attorney at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.
[i] See Phillips v. Commissioner, 283 U.S. 589, 602-603 (1931) (holding that the United States is not bound by state statutes of limitations when proceeding under Section 6901); United States v. Decker, 241 F. Supp. 283, 285 (D. Ariz. 1965) (applying the holding of Phillips to transferee liability cases brought outside of Section 6901); Bresson v. Commissioner, 213 F.3d 1173, 1176 (9th Cir. 2000) (holding that the extinguishment provision in California Uniform Fraudulent Transfer Act does not bind the IRS when collecting a liability against a transferee on the basis of that statute).
[ii] IRC § 6901(a).
[iii] The statute provides that in both cases, if before the expiration of the period of limitation for the assessment of the liability of the transferee, a court proceeding for the collection of the tax or liability in respect thereof has been begun against the initial transferor or the last preceding transferee, respectively, then the period of limitation for assessment of the liability of the transferee shall expire 1 year after the return of execution in the court proceeding. IRC § 6901(c).
[iv] IRC § 6501(a).
[v] See Alexander v. Commissioner, 61 T.C. 278, 298 (1973).
[vi] Culligan Water Conditioning of Tri-Cities, Inc. v. United States, 567 F.2d 867, 870 (9th Cir. 1978).
[vii] United States v. Updike, 281 U.S. 489, 493-94 (1930); Leighton v. United States, 289 U.S. 506, 509 (U.S. 1933) (following the holding in Updike).
[viii] Updike, 281 U.S. at 493-94.
[ix] See United States v. Galletti, 541 U.S. 114 (2004).
[x] Id. at 116.
[xi] Id. at 123.
[xiii] See United States v. Continental Nat’l Bank & Trust Co., 305 U.S. 398, 404 (1939).
[xiv] Signal Oil & Gas Co. v. United States, 125 F.2d 476, 480 (9th Cir. 1942) (internal citations and quotation marks omitted).