The prudent businessperson is always cautious when he or she is offered a great bargain on real estate, equipment, a business interest, or some other property that just might be too good to be true. Even in connection with ordinary business transactions but especially when considering taking over a property or business that in a bargain because of some legal wrinkle, you should consider whether there might be some tax liability attached to the bargain that could come back to haunt you down the road.
Transferee liability. An individual or a business entity that receives property from a taxpayer may be liable for the tax the taxpayer owes. The IRS may be able to assess and collect the tax from the new owner of the property even though the previous owner incurred the tax liability. This concept is referred to as "transferee liability" and its consequences are possible whether the transferred property was purchased or was a gift.
Who is a transferee? The term "transferee" includes an heir of an estate of a deceased person, the assignee or donee of an insolvent person, the shareholder of a dissolved corporation, the successor of a corporation, a party to a corporate reorganization, and all other classes of distributees. The IRS can assess and collect income, estate, gift, and other taxes, including excise taxes and withholding taxes from the transferee. Other taxes also subject to transferee liability include FICA and federal unemployment taxes where the tax liability arises when a partnership or corporation liquidates or a corporation reorganizes.
Federal tax lien. If a taxpayer fails to pay an assessed tax, the tax due amounts to an implicit lien in favor of the United States. This tax lien is effective against all of the taxpayer's property, including after-acquired property as well as property that the taxpayer transferred away for less than full consideration. Where there is a tax lien, the government can either bring an action to set aside the transfer for less than full consideration as a fraudulent conveyance, then foreclose on the property to satisfy the tax, or it can assert transferee liability and extract the tax due from the transferee.
Types of transferee liability. The IRS is not the only creditor that could seek satisfaction for a debt owed by the person who transferred away the asset. Other creditors may also have equitable, statutory and contractual rights regarding transferred property. Contractual transferee liability arises where there is an agreement among the parties regarding how debts will be settled. Statutory transferee liability is based on state or federal laws. Equitable liability arises, in general, where there is a fraudulent conveyance of property from the transferee.
IRS's power to collect. Generally, to hold a person or business liable for another taxpayer's delinquent taxes under the transferee liability rules, the IRS must show that (1) the transferee received assets from the transferor-taxpayer and (2) the transferor was insolvent at the time of, or was rendered insolvent by, the transfer. The IRS can impose liability on the transferee either through an administrative proceeding, or it can bring a lawsuit to set aside the property transfer as a fraudulent conveyance. And it is possible that the transferee's liability could be for more than the value of the transferred assets. As with most tax controversies, however, there may be an opportunity to reach a settlement with the IRS.
Before going forward with any contemplated transaction, especially one that involves a substantial sum, it is best to consider the potential hidden costs. Please contact your local UHY LLP professional if you need help in analyzing the potential tax liabilities involved in any upcoming business deal in which you may be involved.