COLLECTION FROM THIRD PARTIES
IRC §6901 is utilized where the taxpayer has conveyed title to property after the accrual of a tax liability but prior to the creation of an assessment lien, and said transfer is fraudulent under state law. The procedure involves the issuance of a notice of deficiency to the transferee. The transferee has the right to challenge the notice of deficiency by filing a petition with the United States Tax Court within 90 days of the issuance of the notice.
Section 6901 can only be utilized as a collection device for income, gift, estate and other taxes related to the reorganization or dissolution of a corporation or partnership and fiduciary liability under 31 USC §192. Therefore, this procedure cannot be utilized in relation to a trust fund recovery penalty pursuant to IRC §6672.
If the IRS successfully asserts a §6901 liability, said liability is personal and the assessment lien attaches to all real and personal property owned by the transferee, not just the transferred property. §6901 provides only the procedure for proceeding against an alleged transferee. State law controls whether or not the transferee is the recipient of a fraudulent transfer. Commissioner v. Stern, 357 U.S. 39 (1958).
New York Debtor Creditor Law §§272 and 276 address constructive and actual fraud, respectively. Constructive fraud results when a transferor is insolvent and makes a conveyance for less than fair consideration, or makes a transfer for less than fair consideration that renders him/herself insolvent . Actual fraud results when a transferor conveys property with the intent to hinder, delay or defraud creditor(s). Badges of actual fraud include, but are not limited to, lack of consideration, less than arms length transaction and knowledge of liability.
If there are successive transfers, the statute of limitations against a transferee of a transferee is one year after the expiration of the statute against the preceding transferee, to a maximum of three years after the expiration of the assessment period of the initial transferor (the taxpayer). If the taxpayer’s assessment period is tolled (i.e., failure to file, fraud or voluntary extension), the corresponding period against the transferee is also tolled.
Administrative Collection Against
Property Titled to Third Parties
Nominee Lien:
Where it can be shown that property is nominally held by one other than the taxpayer and that true ownership belongs to the taxpayer, administrative collection action against such property is authorized. Al-Kim, Inc. vs. U.S., 610 F2d 576 (9th Cir. 1979).
Transferee:
As with an assessment pursuant to IRC §6901 where the IRS can show that a transfer was fraudulent under state law, the Service can pursue administrative collection against such property.
Alter Ego:
Where an entity holding property is deemed the “alter ego” of the taxpayer, the Service can pursue administrative collection against such property. G.M. Leasing Corp. vs. U.S., 429 U.S. 338 (1977). Alter ego usually involves a corporate entity that is disregarded as a sham.
Suit for Fraudulent Conveyance
IRC §7401 grants authority for the United States Department of Justice to commence a court action for the collection of taxes, if authorized by the Secretary. This would include a suit for fraudulent conveyance, which is often utilized in lieu of administrative collection action against a transferee/nominee/alter ego. The IRS prefers a judicial remedy because it provides the benefit of clear title, thereby maximizing the return upon sale.
Statute of Limitations
The IRS has one year after the expiration of the applicable statute of limitations for assessment of the taxpayer to administratively assess transferee liability. IRC §6901( c). Alternatively, the IRS can commence an action to impose transferee liability under state or federal fraudulent conveyance acts. The IRS’s position is that statutes of limitations under state law do not apply to the Service with respect to such action. Thus, the IRS’s position is that the Department of Justice can commence such an action anytime within the 10 year collection period (including any extensions) provided for in §6502.
Bluestein & Muhlbauer, P.C.
333 International Drive
Williamsville, NY 14221
716.633.3200
