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.

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.

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.

The authorities for the legal theories discussed in this IRM are found in the following United States Code and Regulation sections.

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

Director, Field Collection, has executive oversight for all Field Collection programs.

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

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

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.

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

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

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

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

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

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

Listed below are resources for suits to establish a transferee liability.

Listed below are resources for assessing a transferee using IRC 6901.

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:

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.

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:

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.

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.

Fiduciary liability is discussed more fully in

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.

The successor corporation may be liable:

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.

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.

The transfer from the taxpayer / transferor to the transferee can be direct or indirect:

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

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.

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

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).

Establishing Transferee Liability At Law: The IRS must prove:

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

Establishing Transferee Liability In Equity: The IRS must prove:

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.

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.

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:

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.

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.

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.

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.

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

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)

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

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.

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.

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

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).

A transferee’s liability may be established

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

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.

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

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).

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).

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).

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).

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).

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.

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.

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.

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:

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.

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.

A transferee may contest the liability of the transferor.

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

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.

Other defenses include:

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

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 relief requested from the court is:

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

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.

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).

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.

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.

The advantages of using IRC 6901 procedures are:

The advantages of a district court suit are:

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).

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.

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.

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.