Transferee Liability

A taxpayer becomes liable when a person or entity with an anticipated or existing tax liability transfers property subject to such a liability to the taxpayer. Upon completion of the transfer, the taxpayer then becomes a transferee. Generally, this practice is most commonly asserted by the government when the delinquent taxpayer’s transfer of assets to a third party renders the delinquent taxpayer insolvent; thereby, leaving the federal tax liability unplayable. Nevertheless, the government need not prove insolvency in certain circumstances.

Elements of the Transferee Liability 

In generally, liability arises when the transferee holds property, in which the transferor’s creditor has interest, because the transfer results in the transferor’s insolvency.  The government may seek to impose liability upon the transferee of the property for the transferring delinquent taxpayer’s income, gift or, incase of a decedent, estate taxes. Assessment and collection of a transferee liability for taxes other than income, gift or estate taxes is allowed when the liability arises on the liquidation of a partnership or a corporation or on a reorganization of a corporation.  The government may proceed at law or in equity, but three common elements of proof must be established:

• The transferee has received assets (real, personal or intangible) from the transferor.
• The transferor must be or have been primarily liable for the tax and
• The tax remains unpaid by the transferor-taxpayer.

When these elements exist, transferee liability could be sought at law or in equity.

Proving transferee liability at law: seeking relief under a theory of transferee liability at law could be based on state law, common law contractual between transferor and transferee.

 Questionnaire:

• What is transferee liability? Who is a transferee?
• What are the elements in the transferee liability and explain.