The Issue of Transferee Liability

 

            All around the country, there are individuals who are selling pure trusts and other situations that claim to protect assets.  The problem with the approach is that the trust can be attacked from many angles and the most ignored weakness is the issue of transferee liability.  The politicians who run governments weren't born yesterday.  They have figured out every way that people might try to protect their assets.  In the case of Altmark, 331 F. Supp, 1346, the court ruled that although the taxpayers were not liable for the tax liability of the father, the trustee of the bank account was liable as a transferee.  In the case of Elias, 100 TC 510, the court ruled in favor of the IRS because the taxpayers failed to comply with the service and pleading requirements of 28 USC 2410(b) in the quiet title action brought in state court against the United States.  The quiet title judgment in state court did not cause the IRS to waive sovereign immunity and the state court had no jurisdiction against the IRS. the motion for summary judgment was denied because there were issues of material fact as to whether the taxpayers were liable as transferees. In the case of Borg, 54 TCM 1243, the court determined that the   taxpayer was liable for her son's tax liability to the extent of the property transferred to her.  The son had transferred property to the mother which rendered him insolvent and it was not transferred for adequate consideration.  In Rev. Rul 69-211, 1969-1 CB 305), the IRS ruled that a church was liable for taxes of a corporation that had given it a donation which rendered it insolvent.  In Coca Coca Bottling Co of Tucson, Inc. 334 F2d 875, the court ruled that a taxpayer was liable for the unpaid taxes of the corporation when assets were transferred to him without consideration by the corporation in spite of an indemnification agreement.  In Pittsburgh Reality Inv. Trust, 67 TC 260 (1976), an individual purchased stock from a company, liquidated it and received the assets. The IRS went after the individual for taxes triggered by a recapture of depreciation.  The court ruled that transferee liability applied.

 

            In Berlin, 65 TC 676 (1975), the court ruled that individuals were responsible under the transferee liability theories for taxes of the corporation. In Diamond-Gardner Corp, 38 TC 875 (1962) the court ruled that there was no transferee liability when the statute of limitations has expired. Shareholders can be liable for taxes under transferee theory.  In the case of Sellers, 592 F2d 227, the court ruled that the taxpayer was considered the corporate transferee as a result of receiving certain corporate funds from which the tax liability arose.  In Delia 362 F2d 400, the court ruled that liability existed against the transferee-taxpayer to the extent that corporate assets were transferred to him. In the case of Ginsberg, 305 F2d 664, the court ruled that transfer liability applied when a father transferred stock of his corporation to his son even though the son reconveyed the property to his father.  In Dillman, 64 TC 797 (1975), the court ruled that the United States can collect taxes owed by a dissolved corporation through an in rem action in equity against corporate assets that have passed to transferee stockholders and that right cannot be abridged by state low governing corporate dissolution. In Hine, 54 TC 1552 (1970), the court ruled that the taxpayer was liable as transferee for corporate taxes even though another corporation had agreed to assume liability for the tax.

           

In the case of Holmes, Transferee, 47 TC 622 (1967), the court decided that the filing of claims for a refund after the taxes had been paid kept the transferee liability open pending the outcome of the court action.  The IRS could continue, therefore, in its efforts to collect the tax from the transferee.  In the case, Estate of Stein, 37 TC 945 (1962), the court ruled that payments constituting taxable income in one accounting period can be the basis for transferee liability in a subsequent period.  Transferee liability was based on local law concerning a voluntary conveyance made by a debtor while he was indebted.

 

            In Sebok, 43 TCM 255, an individual transferred a corporate money mortgage to herself for $1.00.  Since she did not pay fair consideration she was liable for the debts.  Shareholders of dissolved corporations and donees are transferees for purposes of the tax law and are liable as transferees. 

 

            In Newsome, 35 TCM 335, the court ruled that under applicable state law, a transfer made without consideration that renders the transferor insolvent, subjects the transferor to liability on the conveyance.  The court ruled that there was a case a transferee liability because the corporation transferred its principal asset, a patent for cash which rendered it insolvent.

 

            In Brown, 34 TCM 583, an individual received funds in excess of salary and the corporations paid his personal expenses, he was liable for the corporations' tax deficiencies.  In Schneider, 92-2 USTC, the court ruled that the IRS must personally assess the taxpayer-transferee for estate taxes and their failure to do that prevented them from holding her liable as a transferee.  The time for assessment had passed. In Baptiste Jr, 100 TC 252 (1993), the court determined that each transferee was liable for interest under federal law on the amount of his personal liability for unpaid estate tax from the due date of the transferor's estate tax return.  In Gumm 93 TC 475 (1989), the court imposed transferee liability on the beneficiaries. In Illinois Masonic Home, 93 TC 145 (1989), the court ruled that there was no transferee liability where the period of limitations expired before the transfer of assets.  In Yagoda, 39 TC 170 (1963), the court ruled that the trust beneficiary was not liable as a transferee when the trust's liability for tax did not exist at the time of its termination.  

Tax Claims in Bankruptcy Court

 

            The court ruled in the case of Nordic Village Inc 112 S.Ct.1011 that Bankruptcy Code 106C does not waive the sovereign immunity of the United States from an action seeking monetary recovery in bankruptcy.  Congress has not empowered a bankruptcy court to order a recovery of money from the United States.  In the case of Beiger, Jr. 496 US 53, the court protected the trust fund payments that were paid by the debtor.  The court said that trust fund payments are not the property of the debtor but are transfers of property held in trust for the IRS. Although not defined by the Code "property of the debtor" is property that would have been part of the estate if it had not been transferred. In Energy Resources Co, 495 US 545, the court held that if the bankruptcy court determines the designation of which debt is to be paid off first is necessary to the success of a reorganization plan, then it has the authority to order the IRS to apply payments to trust fund liabilities first.  The court stated that it can issue orders designating how payments are to be applied to tax debts.  In Ron Pair Enters, Inc., 489 US 235, the court ruled that post-petition interest is collectable on a bankruptcy claim.  In Whiting Pools, Inc. 462 US 198, the IRS seized property and the taxpayer filed suit in bankruptcy court. The court ruled in favor of the taxpayer and ordered the IRS to return the property that it had seized.

 

            In the case of Sanford, 979 F2d 1511, the bankruptcy court reduced the IRS's claim for penalties by approximately two thirds and the district court affirmed when the debtor argued that he had shown good faith when failing to file or pay the tax.  The court of appeals vacated for the IRS and remanded because each penalty is fully enforceable or unenforceable depending on whether the taxpayer has reasonable cause not to comply.

 

            In the case of Wilson, 974 F2d 514 (4th Cir. 1992), the court ruled that the bankruptcy court had jurisdiction to resolve the debtor's  tax liability even though the automatic stay against the Tax Court proceeding had been lifted. In the case of Pinkstaff, 974 F2d 113, the court ruled that sovereign immunity did not prevent recovery of damages against the IRS for willfully violating the bankruptcy automatic stay by filing a notice of federal income tax lien after the taxpayers filed a bankruptcy petition.  In Schwartz, 954 F2d 569, the court ruled that a tax penalty which is assessed in violation of the Bankruptcy Code's automatic-stay provision is void.  The bankruptcy court's order granting the taxpayers' objection to the IRS  penalty assessment was correct and should not be disturbed.  In Fuller, 134 BR 945, the court ruled that a federal tax lien did not attach to post-petition inheritance that became property of the bankruptcy estate pursuant to Bankruptcy Code Section 541(a)(5)(A). When the taxpayers filed their bankruptcy petition, they had no interest in the inheritance so the federal tax lien had not attached and could not have been perfected.  By the time the inheritance was acquired, the automatic stay was in place and it prevented the attachment of the federal tax lien against the inheritance. 

 

            In the case of Roberts, 906 F2d 1440, the court ruled that a discharge in bankruptcy discharges tax penalties related to non-dischargeable tax liabilities incurred more than three years before the filing of a bankruptcy petition.  The court ruled that a tax penalty which is imposed with respect to a transaction that is more than three years old is also dischargeable in bankruptcy. 

 

            In Kroh, 98 TC 383 (1992), the court ruled that the IRS can assess a joint filer after a bankruptcy spouse's settlement.  The IRS is not precluded from litigating a joint tax liability with one spouse following a  settlement of that liability with the other spouse in bankruptcy.