Passing Fiduciary Liability from Generation to Generation

The case of Estate of Kelley, 126 AFTR 2d 2020-5398 (D. N.J. 2020) does not break much new legal ground but presents a rare case of a two generation failure to pay tax liabilities before distributing estate assets.  You could say it is a case of like father like daughter.  The case also offers a chance to closely examine the statute of limitations for filing the suit.  Original documents were attached to the responsive pleadings filed here and the reply to those pleadings lays out the IRS position on the statute.  This is a difficult issue.  I take some time to analyze the statute.  The court does not address it.


Lorraine Kelley passed away on December 30, 2003.  Her brother, Richard Saloom served as a co-executor of her estate and was the sole beneficiary.  The IRS audited the estate tax return and determined an additional liability.  Despite the existence of the estate tax liability, Mr. Saloom distributed all of the property of the estate to himself and failed to fully pay the estate tax liability.  He received over $2.6 million in property at a time when the estate owed almost $700K.  He entered into an installment agreement and made some payments before his death but still owed over $400K.  His daughter made some payments on the installment agreement after his death.

Mr. Saloom passed away on March 21, 2008.  His daughter, Rose Saloom, served as executrix of his estate.  She was aware of the outstanding liability stemming from the audit of her aunt’s estate.  Her father told her of the death and estate tax liability prior to his passing instructing her to satisfy the debt.  She also listed the liability on an inheritance tax form filed with the state.  Nonetheless, Rose, the sole beneficiary of her father’s estate, distributed all of the property of her father’s estate to herself without satisfying the liability of her aunt’s estate.  His estate had property worth about $1 million although by the time the IRS brought the suit she no longer had any of the property of his estate.

The IRS decided that it would like to receive payment on the estate tax liability.  It brought an action against Rose seeking transferee and fiduciary liability in February of 2017 only 14 years after the aunt’s death and 9 years after her father’s death.  The timing of the suit so long after the death of the aunt at the end of 2003 raises questions about the statute of limitations regarding the collection of the liability.  The normal period for collecting a liability expires 10 years after assessment.  The return of the aunt’s estate was timely filed on September 23, 3004, within the nine month period for filing the return of an estate.  After an audit of the return an additional liability was assessed on August 7, 2006.  The assessment started the running of the statute of limitations on collection.  After filing suit the IRS filed a motion for summary judgment

On October 4, 2007, the estate requested an installment agreement.  (I pick this date based on the collection history statements included with Rose’s response but note that the IRS picks a date 13 days later in its response.)  The IRS approved the installment agreement on March 24, 2008.  It is possible to following the timing of the request because in her response to the IRS motion for summary judgment Rose includes 130 pages of case documents including the notices of federal tax liens, the account transcript and the collection history.  Because of her mostly hand-written response and the large group of attachments the true history of the case is laid out in the court filings.

The request for an installment agreement suspends the statute of limitations on collection pursuant to Treasury Regulation § 301.6159-1(g) which tolls the CSED while an installment agreement (IA) is pending.  This is an odd tolling provision because it appears in a regulation rather than the statute.  The regulation provides:

The statute of limitations under section 6502 for collection of any liability shall be suspended during the period that a proposed installment agreement relating to that liability is pending with the IRS … .

The National Taxpayer Advocate blogged about the high rate of IRS mistakes in calculating the statute of limitations in installment agreement cases here.  We have blogged about the difficulty of calculating the collection statute of limitations in a post collecting other posts here.  In the IRS reply to Rose’s response to the motion for summary judgment, it provides a relatively complete explanation of why its suit was timely filed:   

Under 26 U.S.C. § 6502(a)(1), the United States generally has ten years from the assessment of a tax to collect on the outstanding liability. This period of limitations, though, is suspended while an installment agreement request is pending, and an additional thirty days following termination of such an agreement. 26 U.S.C. § 6331(k). The Lorraine Kelley Estate’s estate tax liability, which is at the heart of this matter, was assessed on August 7, 2006. Absent tolling, the statute of limitations for these taxes would have expired at the earliest on August 7, 2016, However, as reflected in the account transcript and the United States’ exhibits, the Lorraine Kelley Estate requested an installment agreement on October 17, 2007, which was accepted on March 24, 2008, and then terminated on December 1, 2008. Together these circumstances suspended the running of the limitations period by 189 days, so that the complaint, filed February 10, 2017, is timely.  

Although the IRS brought the suit against the estate of Richard Saloom and Rose Saloom more than 10 years after the assessment of the additional liability against the aunt’s estate it relies on the suspension of the statute of limitations.  The IRS cites IRC 6331(k)(2) as providing the statute extension but that statute only provides that the IRS cannot levy.  Included in the period the IRS cannot levy pursuant to IRC 6331(k)(2)(C) is the period the installment agreement is pending.  Look to the regulation cited above for the actual statute suspension. 

In its calculation the IRS does not count the period the offer was pending but only counts the period it was considering the installment agreement and the 30-day period when the installment agreement terminated for failure to make the payments.  The period from October 17 to March 24 is 159 days and the additional 30-day period takes it to the 189 used by the IRS in calculating the extension of time to collect to be added onto the original expiration of the statute of limitations on August 7, 2016.  If you add 189 days to the original expiration date you get February 11, 2017 making the filing date timely by one day.  The Tax Division of the Department of Justice likes to cut it close when filing suits.  Based on the IRS records included with Rose’s response to the motion for summary judgment, I think the suit is timely, but it’s worth the effort anytime a suit is brought to make the calculation and satisfy yourself that a motion to dismiss for filing out of time will not succeed.  The suspensions based on installment agreement requests pose many issues not always easily resolved.  I have not discussed here the additional time period available to the IRS in a transferee case since the IRS did not rely on that additional time period.

To obtain a judgment against Rose it had a few tools in its arsenal.  First, the general insolvency statute found in 31 USC 3713(b) requires that individuals responsible for administering estates must, assuming assets exist in the estate, satisfy all federal taxes owed by the estate or become personally liable.   IRC 6324 creates a lien on property of the estate that attaches to property of beneficiaries.  The existence of this lien can aid the IRS in its quest to obtain payment from estates.  Finally, IRC 6901 can apply in these situations to assert transferee liability.  The IRS asserted all three in its effort to obtain a judgment in this case.

The complaint filed by the IRS sought several determinations that would allow it to pursue Rose: 1) it sought to reduce the assessment against the aunt’s estate to judgment; 2) transferee liability against her father’s estate; 3) fiduciary liability against the father’s estate; 4) fiduciary liability against Rose with respect to her father’s estate and 5) a personal judgment against Rose under New Jersey’s Uniform Fraudulent Transfer Act.  She filed an unsuccessful motion to dismiss the complaint.  The IRS eventually filed a motion for summary judgment which she opposed.  A consent judgment was entered on the first count which the IRS must have thought at the time would resolve the case (perhaps with payment) but it eventually came back to the court seeking a ruling on the last four counts and that’s what the court addresses here.

Rose presented no evidence or arguments why her father’s estate should not be held liabile as a transferee and the court held for the IRS.  With respect to the fiduciary liability of her father’s estate for failing to pay the taxes of the aunt’s estate the court quoted from the Third Circuit regarding the application of 31 URC 3713(b):

In recognition of the insolvency statute’s “broad purpose of securing adequate revenue for the United States Treasury, courts have interpreted it liberally.” [Coppola, 85 F.3d at 1020.] With respect to “the type of payments or ‘distributions’ from the estate for which an executor may be held liable,” “a fiduciary, e.g., an executor, may be held liable under the federal insolvency statute for a distribution of funds from the estate that is not, strictly speaking, the payment of a debt.” Id. (alteration and internal quotation marks omitted). He may, for example, be held liable for “stripp[ing]” an otherwise solvent estate “of all of its assets and render[ing] it insolvent” by “provid[ing] for the distribution of all of the estate assets” to the heirs of the estate. Id. (internal quotation marks omitted).

Here it found again that Rose presented no evidence to dispute the liability of her father’s estate for failing to pay the liability of the estate he administered.  In addition to other evidence he knew of the liability, the court pointed to his agreement to pay the liability through an installment agreement as conclusive proof as it granted summary judgment on the third count.

The court then moved to the fiduciary liability of Rose herself.  It applied the same tests applied to determine the fiduciary liability of her father’s estate namely the distribution of property to herself, the insolvency of the estate as a result and the making of the distributions despite knowing the liabilities.  Her defense seemed to be that both her father and she were in touch with IRS agents.  The fact that she was talking to the IRS has no benefit to her when her actions resulted in the distribution of the property to herself.

The IRS runs out of luck in its attempt to obtain a summary judgment based on the uniform fraudulent transfer act.  In New Jersey that act provides:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: a. With actual intent to hinder, delay, or defraud any creditor of the debtor, or b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

((1))  Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

((2))  Intended to incur or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due.

Here, the court finds that the IRS has the burden and has not proved that the conveyance of property from her father’s estate to Rose was fraudulent.  The transfer was the result of inheritance and not a fraudulent scheme.  The court also notes that the IRS can still reach Rose through the fiduciary liability.  It decides that this count does not fit the statute.

As I mentioned at the outset, this case is not groundbreaking, but I found the intergenerational aspect of it to be interesting.  It is not clear that Rose has money with which to satisfy the liability.  Usually, the IRS does not go to the trouble of bringing a suit unless there is collection potential.  Based on that norm, I will assume that there are assets available here.  If so and if Rose decides not to voluntarily pay, this may not be the last action.

Pursuing Donees for Unpaid Gift Taxes

We welcome first time guest blogger Brian Krastev, a 3L at Syracuse University College of Law and a student of past guest blogger Professor Robert Nassau. Christine

United States v. Estate of Sidney Elson, No. 2:18-cv-11325 (D. N.J. 2019) addresses the statute of limitations on collection of gift taxes from donees. The case involves a father who failed to pay the gift taxes on substantial gifts he made to his children (I hope my father knows that I’d gladly handle his gift tax return if he’d like to send me substantial gifts). The children acknowledge that their father did not pay the gift taxes but argue, inter alia, that the statute of limitations in IRC 6324(b) prevents the IRS from pursuing collection against them. The district court finds that, so long as the statute of limitations on collecting from the father has not expired, the IRS can still seek to obtain the taxes from the children. Unpaid gift taxes bear many similar traits to unpaid estate taxes. In both cases, when the donor or executor is unable to pay the tax, the donees or heirs are personally liable to the extent of the value of the property they were gifted or bequeathed.


Sidney Elson gifted two individuals each about $500,000 worth of property in 2004. He died in 2006 never having filed a return for either gift. Sheila Strauss, one of the two gift recipients and executrix of his estate, filed a gift tax return on behalf of the estate in 2009. This return included the gifts made in 2004, but it only reported $80,000 of tax liability. The IRS sent the estate a notice of assessment in 2011 for $375,000 in additional gift taxes. Despite the estate making payments toward the liability, the IRS alleged that as of December 4, 2017, $685,000 remained outstanding. The IRS brought a suit in 2018 to collect the taxes from, among others, the aforementioned two donees.

The two defendants filed a motion to dismiss which, although procedurally improper, the court decided to consider as a motion for judgment on the pleadings. The motion is based primarily on two issues: (1) That the IRS suit is untimely because the ten-year period of limitations on a gift tax lien under IRC 6324(b) had expired; and (2) that the IRS failed to individually assess them pursuant to IRC 6901, and any such assessment would now be untimely.

§ 6324(b) provides:

[Sentence 1] Unless the gift tax imposed by chapter 12 is sooner paid in full or becomes unenforceable by reason of lapse of time, such tax shall be a lien upon all gifts made during the period for which the return was filed, for 10 years from the date the gifts are made. [Sentence 2] If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift. [Sentence 3] Any part of the property comprised in the gift transferred by the donee (or by a transferee of the donee) to a purchaser or holder of a security interest shall be divested of the lien imposed by this subsection and such lien, to the extent of the value of such gift, shall attach to all the property (including after-acquired property) of the donee (or the transferee) except any part transferred to a purchaser or holder of a security interest.

§ 6901(a) provides, in pertinent part:

[Donee gift tax and certain other] liabilities shall…be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.

Section 6901 goes on to provide a statute of limitations on assessment, which is generally “within 1 year after the expiration of the period of limitation for assessment against the transferor.” IRC 6901(c).

The district court interprets IRC 6324(b) in accordance with U.S. v. Botefuhr, 309 F.3d 1263 (10th Cir. 2002), a practically identical case, which analyzes the “personal liability provision” (sentence 2) separately from and without reference to the “lien provision” (sentence 1). In doing so, the court determines that the 10-year period of limitations in sentence 1 does not apply to the personal liability provision of sentence 2. Instead, IRC 6501 (generally 3 years to assess after a return is filed) and IRC 6502 (generally 10 years to collect after assessment) provide the appropriate statutes of limitation. The court finds that the gift tax assessment against the estate, and the filing of this action against the estate and donees, were timely under sections 6501 and 6502.

This court also finds that a personal assessment under IRC 6901 is not a prerequisite to bringing an action against the donees under IRC 6324(b). It reaches this conclusion following U.S. v. Geniviva, 16 F.3d 522 (3d Cir. 1994), which held that a section 6901 assessment was not mandatory before the government could bring an action under IRC 6324(a)(2) (the estate tax sister to 6324(b)). The court notes that section 6901 was enacted after section 6324, and finds that in the later section Congress merely provided an additional tool for the government to collect against transferees. The court entirely rejects the donees’ view of section 6901 as a limitation on section 6324.

This court concludes that the action is timely against the donees because the statute of limitations under IRC 6502 on collection from the donor had not expired when the suit was filed. Additionally, the IRS was not required to personally assess the donees under 6901 to pursue collection from them in a suit under section 6324. Therefore, this court holds that the collection action against the defendants is timely and procedurally proper.

Something about this decision rubs me the wrong way. It seems unfair that donees—potentially oblivious to a donor’s neglect to pay taxes—can be on the hook for a tax liability many years down the line, a tax liability which has likely amassed penalties and interest far in excess of that originally due.

Specifically, in this decision I find troubling the following three points:

1. Botefuhr’s separate analysis of personal liability

The Tenth Circuit justified distinguishing sentence 1 and sentence 2 of IRC 6324(b) by referencing several cases dealing with collection of unpaid gift taxes from donees. However, the statute of limitations on collection was not at issue in these cases. In fact, the actions against the donees were all brought within 10 years from the date of the gifts at issue, while the “sentence 1 lien” was in effect. It seems more likely that the reason these cases independently addressed the personal liability sentence of IRC 6324 is because the donees disputed their personal liability altogether. For example, the court cites to the following:

  • La Fortune v. C.I.R., 263 F.2d 186 (10th Cir. 1958).
    • Primary issue is valuation of gifts. Secondary issue is whether the IRS can collect unpaid gift tax from donees where donor is solvent and where the gift tax liability arose from gifts made to other donees during the year.
  • Mississippi Valley Trust Co. v. C.I.R., 147 F.2d 186 (8th Cir. 1945).
    • Issue is whether the IRS can collect unpaid gift tax from donees where donor is solvent, failed to report taxable gifts, and was not assessed.
  • Baur v. C.I.R., 145 F.2d 338 (3d Cir. 1944).
    • Issues are whether the IRS can collect unpaid gift tax from donees where the the tax liability arose from gifts made to other, the statute of limitations on collection from the donor has expired, and the donor is solvent.
  • Tilton v. C.I.R., 88 T.C. 590 WL 39956 (1987).
    • Issue is whether the IRS can collect unpaid gift tax from donees in general.

2. Botefuhr’s application of IRC 6501 and 6502 to donee personal liability

The Tenth Circuit refused to apply the 10-year statute of limitations on the gift tax lien of sentence 1 to the personal liability of sentence 2 by referencing cases which found that IRC 6502 established the statute of limitations for collection from donees. However, would the court have done the same for the lien transfer of sentence 3? Sentence 3 directly refers to the gift tax lien created by sentence 1 and transfers it to all the donee’s property if the gift is transferred out of the donee’s possession. I speculate that the 10-year statute of limitations would surely carryover to sentence 3. In that case, it makes less sense to isolate the personal liability of sentence 2 and apply the donor’s statutes of limitations of IRC 6501 and 6502.

3. Geniviva’s treatment of IRC 6901 as an additional collection method

The Third Circuit in Geniviva found that an individual assessment under IRC 6901 was not required to collect unpaid estate taxes from donees. This decision was based on Leighton v. U.S., 289. U.S. 506 (1933), a case which dealt with personal liability of unpaid estate taxes in the context of corporate distributions. Additionally, the Supreme Court in Leighton was interpreting section 280(a) of the Revenue Act of 1926—the precursor to IRC 6901. The Third Circuit could have probably distinguished the case for these reasons.

In discussing these reasons with my tax professor, Professor Robert Nassau, he made a very compelling counterpoint which I initially overlooked. He raised the argument that the gift taxes in these cases are rightfully owed and it would be unfair to expect the IRS to track down every relevant donee whenever a gift tax deficiency is alleged. To hold otherwise might incentivize donors to gift all their assets, never pay the tax, and ignore the IRS in hopes that the statute of limitations expires on collection from the donees.

Ultimately, I think a more equitable approach would be to treat IRC 6324 as the additional method of collection, apply the 10-year statute of limitations of that section to the personal liability it imposes, and mandate assessment under IRC 6901. This would provide donees with the same procedural safeguards on assessment and collection available to taxpayers in every other instance. The IRS would still have ample time to collect from donees under IRC 6901—the downside being they would have to assess them much sooner.

The Sixth Circuit Sustains the IRS on Another MidCoast Transferee Liability Case

We welcome back occasional guest blogger Marilyn Ames. As I have mentioned before Marilyn and I worked together at Chief Counsel’s office for many years though I mostly worked in Richmond and she in Houston. In retirement she calls upon her deep knowledge of collection and tax procedure issues to assist in updating the treatise edited by Les, “IRS Practice and Procedure.” More specifically, one of the chapters she assists in updating is Chapter 17 involving transferee liability. The case she discusses in this post will soon make its way into the treatise as do many of the cases we write about in PT. By reading the post you receive a little more depth that usually goes into the treatise and you receive the information a little earlier but if you do not look at the treatise you can lose some of the context provided by the expanded discussion of the issue in general. Enjoy the post and remember that the treatise can assist you in obtaining a greater understanding of the issue. Keith

Prior to the creation of the intermediary transaction, Section 6901 of the Internal Revenue Code was a sleepy little backwater whose appearance in litigation was mainly in cases involving tax protesters trying to keep from paying taxes by transferring their property to various trusts and family members. Section 6901 is a procedural mechanism that permits the United States to collect unpaid tax liability from insolvent taxpayers by reaching transferees who have received property belonging to the taxpayer in a fraudulent conveyance. Because Section 6901 is solely a procedural statute, the government must show the transferee is liable by using some other federal statute, such as the Federal Debt Collection Procedures Act, or the relevant state fraudulent conveyance statute. Currently, the vast majority of states have fraudulent conveyance statutes based on the Uniform Fraudulent Transfer Act, which was approved as a uniform law in 1984. Prior to that time, most states passed fraudulent conveyance statutes based on the 1918 Uniform Fraudulent Conveyance Act.


In the last years of the last century and the first years of this one, a company called MidCoast caused the government to take a second look at the use of Section 6901 when MidCoast began marketing a tax transaction to help shareholders that sold privately held corporations to save on the income taxes that would otherwise be owed on the sale. To do this, MidCoast, in what the Internal Revenue Service named an intermediary transaction, combined an asset and a stock sale of the privately held corporation. The corporation would sell its assets to an unrelated third party, thus triggering a tax on the corporation for any gain realized on the assets. The shareholders would then sell their shares to MidCoast, which would resell the stock to another not so unrelated third party. Although MidCoast claimed to borrow the funds from the purchaser of the shares to pay the shareholders, in actually it would use the cash held by the corporation from its asset sale, leaving the corporation insolvent with no way to pay its tax liability. MidCoast would set the price of the shares at the amount of the cash held by the corporation, less a percentage of the estimated tax liability triggered by the asset sale. MidCoast marketed at least sixty of these transactions.

In 2001, the Internal Revenue Service issued Notice 2001-16 (2001-1 CB 730), designating the “intermediary transaction” tax shelter as a listed transaction. Litigation began as to whether the government could collect the corporations’ tax liability from the former shareholders who had walked away with cash for their shares as transferees under Section 6901. Initially, the Tax Court was not sympathetic to the government’s arguments, and held in favor of the shareholders under various arguments. Some of these cases can be found in the Tax Court’s opinion in Julia R. Swords Trust v. Comm’r, 142 TC 317 (2014), the citations for which are replete with little red flags as the various circuit courts reversed and remanded many of these cases to the Tax Court. After the initial flood of reversals, the Tax Court got the hint and began finding transferee liability existed in most of these cases, based on the relevant state law, with the courts of appeal affirming the later decisions entered in the Service’s favor. (The Julia Swords case is an exception, notable as it was decided under Virginia law, which is one of the few states that has not passed a version of the Uniform Fraudulent Transfer Act).

The latest opinion in the Section 6901 litigation is that of Hawk v. Commissioner, 924 F3d 821 (6th Cir. 2019), and with this opinion the Sixth Circuit drives another nail in the intermediary transaction coffin for those cases decided in states with law based on the Uniform Fraudulent Transfer Act. The former shareholders in Hawk argued that they should not be held liable as transferees under Tennessee law as they did not know that MidCoast’s scheme was fraudulent, and without such knowledge, there was no fraudulent conveyance. The Sixth Circuit rejected this argument, noting that the Uniform Fraudulent Transfer Act, upon which the Tennessee act is based, replaced the language that an exchange of property was made for fair consideration if it was made in good faith, with the language that the transfer had to be for “reasonably equivalent value.” The “good faith” language had been part of the Uniform Fraudulent Conveyance Act, and the court held that the drafters of the Uniform Fraudulent Transfer Act had made the change to “reasonable equivalent value” to eliminate any inquiry into the transferee’s intent when determining whether a transfer is constructively fraudulent. The bottom line, the court holds is that the transferees’ “ ‘extensive emphasis on their due diligence and lack of knowledge of illegality’ doesn’t shield them from the sham nature of the transaction and absolve them of transferee liability.”

Apparently tiring of intermediary transactions and Section 6901 litigation, the court goes further and asks “Was there a way to make this tax-reduction strategy work?” The court’s answer is “ ‘maybe’ in the abstract and ‘not likely’ here.”

With the Hawk opinion, it appears that the litigation involving intermediary transactions may be on the wane, and that Section 6901 may be on its way back to the quiet little backwater where it previously spent its days.

When Does Interest Start Running on a Transferee Liability

We welcome back guest blogger Marilyn Ames. Marilyn is retired from Chief Counsel’s office but works with us on IRS Practice and Procedure assisting with many chapters because of the breadth of her knowledge. She has done a lot of writing on transferee liability and provides insight on a recent case in that area. Keith

When a taxpayer has an unpaid income tax liability, the Internal Revenue Code is clear that interest on the unpaid tax accrues from the original due date of the return. However, when the Internal Revenue Service attempts to collect liability under Internal Revenue Code § 6901, the transferee liability section, questions arise as to the ability of the IRS to collect interest on the unpaid tax debt.  Because Section 6901 is merely a procedural law, the Internal Revenue Service must look to state law or other federal law for the substantive provisions that allow collection of taxes from a person who receives property from the taxpayer. The Internal Revenue Code provides that a transferee is liable for interest on the unpaid tax debt after the Internal Revenue Service issues a notice of transferee liability, but does state law govern the collection of interest before this date? The Ninth Circuit addressed this in the recent case of Tricarichi v. Comm’r, 122 AFTR2d 2018-6634 (9th Cir. Nov. 13, 2018). 


The transferee in this case, Michael Tricarichi, was the sole shareholder of West Side Cellular, Inc., which received a $65 million settlement in 2003. Before its return for 2003 was due, Mr. Tricarichi, who was then a resident of Ohio, sold his West Side stock in a “Midco” tax-shelter transaction, leaving West Side Cellular with insufficient assets to pay its corporate income taxes for 2003. Mr. Tricarichi received about $35.2 million in the transaction, and then moved to Nevada to enjoy the fruits of his labors. (The workings of the Midco transaction, which have been the subject of frequent litigation in the recent past, are outlined in Diebold Foundation, Inc. v. Comm’r, 736 F3d 172 (2d Cir. 2013)).

In 2012, the Internal Revenue Service issued a notice of transferee liability to Mr. Tricarichi, which was duly litigated in the Tax Court, the result being that the Tax Court determined that Mr. Tricarichi was liable for the full amount of West Side’s tax deficiency and the associated penalties and interest in the tidy total sum of about $35.1 million. In a separate opinion, the Ninth Circuit affirmed the Tax Court’s conclusion that Mr. Tricarchi was liable as a transferee under Internal Revenue Code § 6901 and the Ohio Uniform Fraudulent Transfer Act, leaving the question of when and whether a transferee is liable for the amount of interest due on the transferor’s tax liability before the notice of transferee liability is issued to this opinion.

Mr. Tricarichi, the transferee, argued that Ohio law determined his liability for any interest before the notice of transferee liability was interested. Under Ohio law, Mr. Tricarichi would have owed nothing instead of the nearly $13.9 million that accrued between the due date for the 2003 return and the issuance of the notice of transferee liability in 2012. He cited the Supreme Court’s decision in Commissioner v. Stern, 357 US 39 (1958), for the proposition that state law should determine the existence and extent of transferee liability, including the amount of the interest that can be collected on the underlying claim – which in Mr. Tricarichi’s view would be the tax and penalties owed by the taxpayer, but not the interest that accrued between the due date of the taxpayer’s 2003 return and June of 2012 when the IRS issued the notice of transferee liability.

The Ninth Circuit disagreed, holding that Internal Revenue Service’s claim is computed under the Internal Revenue Code, and will include statutory interest. The extent of the liability to be determined under state law is actually a question of the amount of the claim that can be recovered from the assets transferred. When the taxpayer transfers sufficient assets to pay the underlying claim, including the interest that has been accruing under the Internal Revenue Code for the unpaid tax liability, it is unnecessary to look to state law for the creation of a right to interest. It is only necessary to look to state law for interest when the assets transferred are insufficient to satisfy the total claim for the liability of the transferor/taxpayer. In that case, the relevant state law determines whether the Internal Revenue Service may recover any prejudgment interest beyond the value of the assets transferred. The Ninth Circuit adopted the “simple rule” formulated by the First Circuit in Schussel v. Werfel, 758 F3d 82 (1st Cir. 2014) that “the IRS may recover from [the transferee] all amounts [the transferor] owes to the IRS (including section 6601 interest accruing on [the transferor’s] tax debt), up to the limit of the amount transferred to [the transferee], with any recovery of prejudgment interest above the amount transferred to be determined in accord with [state] law.”

Under this relatively simple rule, because West Side’s tax deficiency, including interest and penalties was $35.1 million, and Mr. Tricarichi received $35.2 million in assets from West Side, an amount in excess of West Side’s tax liability, Mr. Tricarichi was liable for the full amount of the $35.1 million. The fact that Mr. Tricarichi will also be liable for interest as a transferee from the issuance of the notice of transferee liability in 2012 is irrelevant to the determination that he received more from West Side in assets than the tax claim against West Side. As a resident of Nevada, Mr. Tricarichi should understand that his attempt to break the bank in his litigation with the IRS has left him busted.





Are Alleged Alter Egos, Successors in Interest and/or Transferees Entitled to Their Own Collection Due Process Rights Under Sections 6320 and 6330? Part 4

Guest blogger Lavar Taylor continues his series on Collection Due Process and third parties. The series provides a deep dive into the jurisprudence of CDP cases and the rights of third parties to have an outlet to challenge the liens and levies made against these non-taxpayer parties held liable for the taxpayer’s obligations. Keith

This post looks at the question of how a putative alter ego, successor in interest or transferee of a taxpayer might pursue litigation in the Tax Court to raise the question of whether they are entitled to Collection Due Process (“CDP”) rights under §§6330 and 6320 of the Code, independent of the rights of the original taxpayer who incurred the liability. This discussion assumes, of course, that the IRS has the legal ability to pursue administrative collection action against a putative alter ego or successor in interest of the taxpayer, without first obtaining a judgment in District Court or without first making a separate assessment against the third party under section 6901.   As is explained in Part 3 of this series, such an assumption may not be correct.

This post also discusses how a putative alter ego/successor in interest/transferee might pursue litigation in the Tax Court to raise the issue discussed in Part 3, namely, whether the government can ever take administrative collection action against the putative alter ego/successor in interest/transferee in the absence of a District Court judgment holding that the putative alter ego/successor in interest/transferee is liable for some or all of the taxpayer’s tax liability.


  1. Existing Tax Court Jurisprudence Regarding Tax Court Jurisdiction

The Tax Court has stated on numerous occasions that a notice of determination under the CDP provisions is a taxpayer’s “ticket” to the Tax Court in CDP cases, see Weber v. Commissioner, 122 T.C. 258, 263 (2004), and that a failure to file a timely petition in response to a notice of determination requires the Court to dismiss the petition for lack of jurisdiction. Id. The Tax Court has also held that, in a situation where the IRS issued a notice of intent to levy under §6330 and the taxpayer failed to request a CDP hearing, the Court lacked jurisdiction because no CDP hearing had been requested and no notice of determination had been issued by the IRS. Offiler v. Commissioner, 114 T.C. 492 (2000).

Thus, in situations where the IRS takes levy action, whether against a taxpayer or against a putative alter ego/successor in interest/transferee, without first issuing a CDP notice of intent to levy under §6330, and the party against which levy action files a petition with the Tax Court to challenge the validity of the levy action as having been taken in violation of §6330, the IRS will likely argue that the Tax Court lacks jurisdiction over the petition. Indeed, that is exactly what the IRS did in the case in which we filed petition with the Tax Court on behalf of our client, an alleged alter ego/successor in interest, after the IRS levied on our client’s bank accounts without providing any notice or other advanced warning whatsoever to our client.

The IRS can take this position even if the failure to issue a §6330 notice of intent to levy is in clear violation of the law. Of course, even if the IRS were to “concede” that the Tax Court has jurisdiction over a petition in this situation, such a “concession” would not be binding on the Tax Court. The Court has an independent duty to determine whether it has jurisdiction over a petition, regardless of the positions taken by the parties. SECC Corp. v. Commissioner, 142 T.C. 225 (2014).

The Tax Court has never held that it lacks jurisdiction over a petition in this precise situation, however. In one case where the Tax Court concluded that the IRS improperly levied on a taxpayer’s bank account without first issuing a Notice of Intent to Levy, the Court held that it had jurisdiction over the case because the IRS made a de facto “determination” for purposes of section 6330 in response to which a petition was filed and thus formed the basis of the Court’s jurisdiction. See Chocallo v. Commissioner, T.C. Memo 2004-152, 87 T.C.M. (CCH) 1432 (2004). In Chocallo, the Court also held that it had the ability to order the IRS to refund to the Petitioner all funds which Respondent had improperly seized or levied from the taxpayer.

[Curiously, it is not possible to access the docket sheet in the Chocallo case electronically. The Tax Court’s website indicates that the case is filed under seal. This seems to me to be very strange.   I have a distinct memory, from a number of years ago, of reading another Memorandum Decision, the name of which I cannot recall, which seemingly was issued either in the Chocallo case or in another case involving facts that were very similar to the facts in Chocallo, prior to the date of 2004 Chocallo opinon. Since I have not able to locate any other Memorandum Decision with similar facts, it would be nice if the seal in Chocallo were somehow lifted. I would then be able to figure out whether my memory is correct about the existence of the other Memorandum Decision or instead be able to confirm that my memory has been completely corrupted from lead poisoning. (Most of my ill-spent youth was spent growing up on the site of a defunct lead-smelting plant in southern Illinois. I blame all of my mistakes on this fact.)]

The aspect of the Chocallo opinion dealing with the ability of the Tax Court to exercise jurisdiction in this situation has been discussed by the Tax Court in TC opinions, see Greene-Thapedi v. Commissioner, 126 T.C. 1, 9 n.13 (2006), and Bussell v. Commissioner, 130 T.C. 222, 245 (2008), but it has never been disavowed by the Court. Thus, it is an open question as to how the Tax Court would rule in a Reviewed Opinion or a TC Opinion by one Division of the Court on the issue of whether the Tax Court can acquire jurisdiction in the fact pattern that was faced by our clients. If the Tax Court does acquire jurisdiction, however, it would appear that it can exercise equitable powers to restore the status quo ante and order the IRS to undo the effects of an illegal levy. See Zapara v. Commissioner, 652 F.3d 1042 (9th Cir.2011), affirming 124 T.C. 223 (2005).

Notwithstanding this uncertainty, there is one step which practitioners can take to increase the chances that the Tax Court will hold that it has acquired jurisdiction in a case where the IRS has taken levy action against an alleged alter ego/successor in interest/transferee of the taxpayer without sending a separate notice of intent to levy to the alleged alter ego/successor in interest/transferee. That step is well illustrated by the opinion in Grover v. Commissioner, T.C. Memo 2007-176, 94 T.C.M. 28 (2007). In Grover, the taxpayer filed a petition asserting that the IRS had issued levies without first sending the taxpayer a §6330 Notice of Intent to Levy.   The IRS moved to dismiss for lack of jurisdiction, based on the grounds that no Notice of Determination had ever been issued to the taxpayer. The IRS also noted that it had previously issued a §6330 Notice of Intent to Levy to the taxpayer well before the taxpayer filed a Tax Court petition.

In dismissing the petition for lack of jurisdiction, the Tax Court stated as follows:

The parties agree that respondent issued no notice of determination. Petitioner does not contend that respondent otherwise made any section 6330 determination. Cf. Chocallo v. Comm’r, T.C. Memo 2004-152 (describing an order denying a motion to dismiss for lack of jurisdiction predicated on the nonissuance of any notice of determination, where the Court had found that the taxpayer had received a “‘determination’ within the contemplation of section 6330” on the basis of “various discrepancies” in the transcripts of account). But as suggested in Boyd v. Comm’r, supra at 303, even if we were to conclude that the notice of levy was “evidence of a concurrent section 6330 determination”, we would be required to dismiss this case for lack of jurisdiction because petitioner did not file his petition until November 17, 2006, which was more than 30 days after the October 9, 2006, notice of levy.

This quote makes clear that, if an alleged alter ego/successor in interest/transferee of a taxpayer wants to have a fighting chance to convince the Tax Court to take jurisdiction over a petition filed in a case where the IRS took levy action against an alleged alter ego/successor in interest/transferee of the taxpayer without first sending a separate §6330 Notice of Intent to Levy to the alleged alter ego/successor in interest/transferee, the alleged alter ego/successor in interest must file the petition within 30 days of the date of the initial IRS levy. In our now-settled Tax Court case, we made sure to file a petition within this 30 day period.

It is possible to argue that a petition filed under these circumstances is timely if filed within 30 days of the date on which the alleged alter ego/successor in interest/transferee receives notice of the levy action. But the prudent course of action is to file a petition within 30 days of the date of the initial levy action if possible.

Even then, it is possible that the Tax Court will end up holding that it lacks jurisdiction in this situation. In our case, we argued in the alternative that, even if the Tax Court lacks jurisdiction in this situation because there was no “determination,” the Tax Court can dismiss the petition for lack of jurisdiction in a way that makes clear that the IRS’s levy action was illegal. I now turn to those alternative arguments.

  1. Alternative Arguments- Getting the Case Dismissed for Lack of Jurisdiction for the Right Reasons

The Tax Court has issued opinions in a number of cases in which taxpayers filed petitions claiming that the IRS had failed to send a §6330 Notice of Intent to Levy to the taxpayer’s last known address before taking levy action. In these situations, the Tax Court has dismissed the petition based on lack of jurisdiction due to the failure of the IRS to send a valid notice of intent to levy prior to taking levy action. See, e.g., Buffano v. Commissioner, T.C. Memo 2007-32, 93 T.C.M. (CCH) 901 (2007). This approach is consistent with the Tax Court’s jurisprudence involving the failure of the IRS to issue a notice of deficiency to a taxpayer’s last known address. See King v. Commissioner, 88 T.C. 1042 (1987), aff’d,  857 F.2d 676 (9th Cir. 1988).

The Ninth Circuit has held that a failure of the Tax Court to explain the reasons for dismissing a petition for lack of jurisdiction where a taxpayer has alleged that the IRS failed to send a notice of deficiency to the taxpayer’s last known address is legal error. See Rosewood Hotel, Inc. v. Commissioner, 275 F.2d 786 (9th Cir. 1960).

In our now-settled case, we argued in the alternative that, if the Tax Court lacked jurisdiction over our petition, it should dismiss the petition for lack of jurisdiction on the grounds that the IRS was required to issue a separate §6330 Notice of Intent to Levy to our client prior to taking levy action and had failed to do so.   We cited to Rosewood and other case law involving for the proposition that the Court could not simply dismiss the petition for lack of jurisdiction without explanation in the face of an argument that the IRS had violated the law by levying on our client’s property without first issuing our client a separate §6330 Notice of Intent to Levy

We also argued in the alternative that the Tax Court should dismiss the petition for lack of jurisdiction on the grounds that the IRS could not pursue levy action at all against our client, because the Code does not permit collection action against an alleged alter ego/successor in interest/transferee in the absence of a judgment (or separate assessment) against the alleged alter ego/successor in interest/transferee. In essence, we raised the argument discussed in Part 3 of this series of blog posts, based on the fact that the IRS could not take administrative collection action against alleged transferees of a taxpayer prior to the enactment of the predecessor to what is now section 6901 of the Code, as another alternative argument.

In raising these arguments, however, we had to deal with the case of Adolphson v. Commissioner, 842 F. 3d 478 (7th Cir. 2016). Adolphson held that the Tax Court erred in cases such as Buffano v. Commissioner, supra, when the Court dismissed the petition for lack of jurisdiction while explaining that Respondent had failed to issue the Notice of Determination to the petitioner’s last known address. The Seventh Circuit held that this latter topic should not have been addressed at all when the Court dismissed the petition for lack of jurisdiction. Instead, per the Seventh Circuit, the Tax Court should have just dismissed the petition for lack of jurisdiction, without further comment.

Ironically, the Seventh Circuit, in reaching its conclusion, violated the very rule which it pronounced in its own opinion. The Seventh Circuit discussed the IRS’s failure to send the Notice of Determination to the petitioner’s “last known address” at length. Aside from the Seventh Circuit’s failure to adhere to its own holding in its opinion, my biggest concern about the Seventh Circuit’s holding is that it permits the IRS to unilaterally deprive taxpayers, along with putative alter egos/successors in interest, of the ability to challenge levy action in the Tax Court. This ruling forces parties to vindicate their CDP rights in District Court, a forum that, since 2006, has no familiarity whatsoever with these rights. The notion that only District Courts, and not the Tax Court, can decide the scope of the Tax Court’s jurisdiction in CDP cases where the IRS refuses or fails to issue a §6330 Notice of Intent to Levy seems to me to be utterly absurd and contrary to Congressional intent.

When we settled our case, we deprived the Tax Court of the opportunity to rule on whether it will continue to follow its prior holding in Buffano in cases which are not appealable to the Seventh Circuit. The Tax Court will face that issue in the not too distant future, and the Tax Court’s holding in that case will impact the ability of alleged alter egos/successors in interest to obtain a dismissal of a petition based on lack of jurisdiction with a discussion and analysis by the Tax Court of the IRS’s alleged procedural irregularities.

If the Tax Court holds that it lacks jurisdiction in these types of cases and, in doing so, follows the holding of the Seventh Circuit in Adolphson, alleged alter egos/successors in interest will be forced to litigate in District Court the question of whether they are entitled to their own independent CDP rights.

This concludes Part 4 of this series. Part 5 of this series will address how these issues can be raised in District Court litigation. Part 5 will also discuss why assertions by the IRS of “nominee” status require a different analysis regarding the potential applicability of the CDP procedures than assertions by the IRS of “alter ego,” “successor in interest” or “transferee” status.   I will also explain why virtually all “nominee” notices of federal tax lien that have been filed by the IRS, along with some “transferee” notices of federal tax lien filed by the IRS, are likely improper in one important respect, to the legal detriment of most, if not all of the persons/entities against whom/which these lien notices have been filed.



Today, guest blogger Lavar Taylor continues his discussion of the interplay of the laws regarding third parties liable for a tax debt and the ability of those third parties to obtain CDP rights. If you have not had the chance to read his initial post on this topic, you might want to take time to read that one before digging into this one. These posts not only explore the ability of these third parties to obtain CDP rights but help anyone not familiar with the various ways that the IRS can seek payment of a taxpayer’s liability to gain a better understanding of the collection process. Keith

In Part 1 of this series of blog posts, I explained how the relevant statutes and regulations, together with the rationale of the Court deciding Pitts v. United States in favor of the IRS, support the conclusion that persons/entities who are alleged by the IRS to be the alter ego, successor in interest, and/or transferee of the party who incurred the tax liability (“original taxpayer”) are entitled to their own independent Collection Due Process (“CDP”) rights under §§ 6320 and 6330 of the Code. In the present blog post, I explain why I believe that the IRS is speaking out of both sides of its mouth when it denies alleged alter egos, successors in interest, and transferees their own independent CDP rights under §§ 6320 and 6330.


The IRS, in the current version of the Internal Revenue Manual (“IRM”), instructs revenue officers to treat partners in a general partnership which incurred unpaid federal taxes as “persons liable for the tax” for purposes of administratively enforcing the partnership’s unpaid tax liability. Per the IRM, these general partners are to be given CDP Lien and Levy notices under sections 6320 and 6330, in addition to the CDP Lien and Levy notices provided to the taxpayer partnership. Thus, IRM section, titled CDP Hearing Requests, provides in section (5) as follows:

If the tax liability involves a partnership, a request for a CDP hearing under IRC 6330 would cover all partners in the partnership. Under IRC 6320, the partnership and partners listed on the NFTL receive the CDP hearing notice. A partner with authority to represent the partnership could request a hearing for the partnership or a partner listed on the NFTL could request a CDP hearing as an individual partner.

Similarly, IRM (03-29-2012), titled Determining Timeliness-Levy, provides that “[f]or partnerships, Collection may issue separate notices to individual partners as well as the partnership entity.” IRM Section (03-29-2012), titled Partnership Liability, states as follows:

1. Under state law, general partners in partnerships are liable for taxes assessed against the partnership. In United States v. Galletti, 541 U.S. 114 (2004), the Supreme Court held the Service’s assessment against a partnership serves to make the general partner liable for the tax. While the Supreme Court did not address administrative collection, Galletti is consistent with the Service’s long-standing legal position that it can enforce a tax lien and take administrative levy action against a general partner based on the assessment and notice and demand directed to the partnership. See Chief Counsel Notice 2005-003 at .

2. A partner’s individual CDP hearing request:

— DOES NOT affect Collection’s ability to collect from the partnership or other individual partners’ assets

— DOES affect Collection’s ability to collect from that partner’s individual assets.

Chief Counsel Notice 2005-003 explains in detail the rationale for the IRS’s position that the IRS may pursue administrative collection action against general partners personally for taxes incurred by and assessed against the partnership itself. Essentially, the IRS takes the position that it may take advantage of state law to pursue collection of a tax liability against someone other the person who incurred the tax liability. That concept is not a new one – it is the bedrock of the Supreme Court’s decision in Commissioner v. Stern, 357 U.S. 39 (1958), which deals with the assertion of transferee liability under what is now section 6901 of the Code. In the case of a general partner of a general partnership, the IRS is using the relevant state’s version of the Uniform Partnership Act, which provides that general partners are personally liable for partnership debts.

Why is the IRS speaking out of both sides of its mouth when it grants partners in general partnerships their own CDP rights under §§ 6320 and 6330 with respect to taxes incurred by the partnership but denies those same CDP rights to alleged alter egos, successors in interest and transferees of the original taxpayer? Simply put, the IRS, in seeking to hold third parties liable as the alleged alter ego, successor in interest, and/or transferee of the original taxpayer, is invoking state law to hold a third party liable for the taxes of the original taxpayer.

Conceptually, there is no difference between the IRS invoking state law to hold a general partner of a general partnership liable for the partnership’s tax liability and the IRS invoking state law in an effort to hold someone other than the original taxpayer liable for that tax liability as an alleged alter ego, successor in interest, and/or transferee of the original taxpayer. While determining whether a person or entity is a partner of a general partnership is normally a simpler task than determining whether a person or entity is an alter ego, successor in interest, or transferee of the original taxpayer, both types of determinations involve the application of state law to a given set of facts to determine whether a third party can be held liable for taxes owed by the original taxpayer.

It is clear that state law governs the question of whether a third party can be held liable as an alter ego, successor in interest, and/or transferee of the original taxpayer for taxes assessed against the original taxpayer. See, e.g., Commissioner v. Stern, 357 U.S. 39 (1958) (transferee), Wolfe v. United States, 798 F.2d 1241, (9th Cir. 1986) (alter ego), TFT Galveston Portfolio, Ltd. v. Comm’r, 144 T.C. 96 (2015) (successor in interest), see also Fourth Inv. LP v. United States, 720 F.3d 1058 (9th Cir. 2013) (nominee). It seems to me that, if the IRS’s assertion of liability under state law to enforce a general partnership’s tax liability against a general partner of that partnership is sufficient to trigger CDP rights for the general partner, the IRS’s assertion of liability under state law to enforce a taxpayer’s tax liability against a third party as an alleged alter ego, successor in interest, or transferee should also be sufficient to trigger CDP rights for the alleged alter ego, successor in interest, or transferee.

In the Tax Court cases which we recently settled, the IRS argued that it was not being inconsistent in denying our client (which was an alleged alter ego/successor in interest of the original taxpayer) its own independent CDP rights while allowing those same rights to partners of general partnerships that incur tax liabilities. The IRS argued as follows:

The alter ego doctrine is used in federal tax cases to collect the liability of a taxpayer from a separate corporate entity that is operating to impair the government’s ability to satisfy the taxpayer’s legitimate tax liability. See Oxford Capital Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000); Valley Fin. V. United States, 629 F.2d 162, 172 (D.C. Cir. 1980). Once respondent has determined that an entity is an alter ego, that entity’s assets may be levied upon for the debtor of the taxpayer because the law does not recognize the taxpayer and the alter ego entity as each having independent existence for purposes of debt collection. See Oxford Capital Corp., 211 F.3d at 284; see also United States v. Scherping, 187 F.3d 796, 801-02 (8th Cir, 1999).

There are two significant problems with the IRS’s argument (aside from the fact that the IRS’s argument fails to address successor in interest liability). First, there is both federal and California case law which makes clear that an entity is considered a valid, separate entity even when that entity is liable for a third party’s debt under the alter ego doctrine. In Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986), the Ninth Circuit upheld the application of the alter ego doctrine under Montana law against the shareholder of a corporate taxpayer. In doing so, the Ninth Circuit stated as follows:

Indeed, despite Wolfe’s contentions, it is not necessarily inconsistent to view a corporation as viable for the purpose of assessing a corporation tax, while disregarding it for the purpose of satisfying that assessment. Only those corporations that were established with no valid purpose are considered sham corporations, and thus not entitled to separate taxable status. See Moline Properties v. Commissioner, 319 U.S. 436, 439, 87 L. Ed. 1499, 63 S. Ct. 1132 (1943). A corporation could have a valid business purpose (giving it separate tax status), and at the same time be so dominated by its owner that it could be disregarded under the alter ego doctrine. Cf. National Carbide Corp. v. Commissioner, 336 U.S. 422, 431-434 & n. 13, 93 L. Ed. 779, 69 S. Ct. 726 (1949) (finding insignificant, for the purpose of determining whether a subsidiary corporation is entitled to separate taxable status, the fact that the owner retains direction of the subsidiary’s affairs, provides all of its assets, taxes all its profits, and exercises complete domination and control over its business). This view has been adopted by the Fifth Circuit. See Harris v. United States, 764 F.2d 1126, 1128 (5th Cir. 1985) whether or not [the corporation] was a separate taxable entity is not the same question as whether it was an alter ego for the purpose of piercing the corporate veil”).

Thus, Wolfe, and the cases cited in the Wolfe opinion, make clear that a corporation can be a valid, separate entity from the original taxpayer for purposes of the CDP procedures, even if the IRS is seeking to hold a corporation liable under the alter ego doctrine for the taxes owed by the original taxpayer.

Similarly, California law, upon which the IRS was relying in the now-settled cases we were handling in Tax Court, makes clear that a third party entity which is held liable as the “alter ego” of the original obligor remains a valid, independent entity for purposes of California law. In Mesler v. Bragg Management Co., 39 Cal. 3d 290 (1985), the California Supreme Court made this point very clear while holding that a parent corporation could be sued as the alleged alter ego of its subsidiary, even though the plaintiff had previously reached a settlement agreement with the subsidiary. The Court stated in relevant part as follows:

[W]hen a court disregards the corporate entity, it does not dissolve the corporation. “It is often said that the court will disregard the ‘fiction’ of the corporate entity, or will ‘pierce the corporate veil.’ Some writers have criticized this statement, contending that the corporate entity is not a fiction, and that the doctrine merely limits the exercise of the corporate privilege to prevent its abuse.” (6 Witkin, op. cit. supra, §5, at p. 4317; see, e.g., Comment, supra, 13 Cal. L.Rev. at p. 237.)


The essence of the alter ego doctrine is that justice be done. “What the formula comes down to, once shorn of verbiage about control, instrumentality, agency, and corporate entity, is that liability is imposed to reach an equitable result.” (Latty, Subsidiaries and Affiliated Corporations (1936) p. 191.) Thus the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require.


It is not that a corporation will be held liable for the acts of another corporation because there is really only one corporation. Rather, it is that under certain circumstances a hole will be drilled in the wall of limited liability erected by the corporate form; for all purposes other than that for which the hole was drilled, the wall still stands. 39 Cal. 3d at 300-301.

To the extent that state law is relevant in this context, California law supports the conclusion that an alleged alter ego is a separate entity which is entitled to its own independent CPD rights. (For taxpayers located outside of California, and outside of the Ninth Circuit, the relevant case law will obviously be different.)

The second problem with the IRS’s argument is that the two cases which it cited both pre-date the CDP procedures, which took effect in January of 1999, following the enactment of RRA 1998 in July, 1998. The resolution of the question of whether an alleged alter ego, successor in interest, or transferee of the original taxpayer is entitled their own independent CDP rights will likely depend on the statutory interpretation of the CDP provisions, §§ 6320 and 6330. There are no cases which address this issue. And as is explained in Part 1 of this series of blog posts, the question of how to interpret §§ 6320 and 6330 is likely to be influenced by looking to §§ 6321 and 6331.

Notably, § 6331 refers to the need to provide a “notice and demand” before levy action may be pursued. This is a reference to “notice and demand” as set forth in IRC § 6303(a), which requires the IRS to provide “notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.” This notice must be sent to the person’s “last known address” within 60 days of the date on which the tax is assessed. Id. Failure to give a valid notice and demand renders void any levy action by the IRS and requires the IRS to refund all monies collected by levy. See Martinez v. United States, 669 F.2d 568 (9th Cir. 1981) (IRS was required to return all funds received by levy where IRS failed to give taxpayer a valid notice and demand under § 6303(a) prior to issuing levies). Failure to give a proper notice and demand also prevents the IRS from taking future administrative enforcement actions such as filing lien notices and issuing levies. See United States v. Coson, 286 F.2d 453 (9th Cir. 1963) (failure to send proper notice and demand to putative partner of a general partnership rendered tax lien void), United States v. Chila, 871 F.2d 1015 (11th Cir. 1989), cert. denied, 493 U.S. 975 (1989) (failure of the IRS to send a valid notice and demand to the taxpayer precludes the IRS from taking administrative collection action with respect to the unpaid taxes but does not prevent a suit to reduce the assessment to judgment), Blackston v. United States, 778 F.Supp. 244 (D. Md. 1991) (Marvin Garbis, J.).

There is a further requirement that the IRS send a notice of intent to levy under IRC § 6331(d) at least 30 days before the IRS levies “upon the salary or wages or property of any person with respect to any unpaid tax.” This requirement, largely forgotten since the enactment of section 6330, has never been repealed. Its primary significance now is that the sending of this notice triggers an increase in the accrual rate of the failure to pay penalty under IRC §§ 6651(a)(2) and (a) (3). See IRC § 6651(d)(1).

The language of §§ 6303(a) and 6331(d) is similar to the language used in §§ 6320 and 6330. Yet we know that the IRS does not send a “notice and demand” for payment under § 6303(a) within 60 days of the date of assessment to alleged alter egos, successors in interest, or transferees who have not been separately assessed that tax liability. Similarly, we know that the IRS does not send § 6331(d) notices to alleged alter egos, successors in interest, or transferees prior to issuing levies against the property of alleged alter egos, successors in interest, or transferees. How is it that the IRS is able to take administrative collection action against alleged alter egos, successors in interest, and/or transferees without complying with §§ 6303(a) and 6331(d)?

The answer to that apparent conundrum may surprise you. While it is possible to argue that the IRS may take administrative collection action against alleged alter egos, successors in interest, and/or transferees who have not been separately assessed a tax liability without complying with the requirements of §§ 6303(a) and 6331(d), it is far from clear that this argument carries the day. There are other arguments, some of which, in my view, have not been properly articulated in recent years. Perhaps Pitts was incorrectly decided, and the IRS is not entitled to take administrative collection action against alleged alter egos, successors in interest, or transferees at all. That topic will be explored in greater detail in Part 3 of this series.




Priority Status of Transferee Liability in Bankruptcy

Two types of claims exist in bankruptcy – secured and unsecured. Every creditor wants to be a secured creditor. In theory, secured creditors pass through bankruptcy unaffected. That theory has many notable exceptions but, nonetheless, it is best to be a secured creditor.

If you cannot be a secured creditor, the next best thing is to be a priority creditor. Congress has looked at the type of debts that exist in the United States and decided that certain of those debts, about ten, deserve recognition above all the rest. It lists these special “priority” debts in section 507 of the bankruptcy code. If your debt makes it onto this list, your debt gets paid before general unsecured claims receive payment. The higher you are on the list, the better you are. Think of the list of priority debts as a cruise ship with the best cabins at the top and the worst at the bottom. Then think of general unsecured claims as steerage existing in the hold of the ship below all of the priority claims. Depending on when the money in the estate runs out, only certain creditors get paid. All of the creditors in the first priority must be paid before any payments go to the next level down, and so on through each level. Wherever the money runs out, the creditors in the group where it runs out get paid pro rata and any creditors below that level go home empty handed.

It is in this context that the fight in In re Kardash, No. 8:16-bk-05715 (September 21, 2017) takes place. The IRS convinced the Tax Court to hold in T.C. Memo 2015-51 and T.C. Memo 2015-197 that he owed about $4.3 million as a result of fraudulent transfers, and the 11th Circuit affirmed the Tax Court’s decisions at 866 F.3d 1249 (11th Cir. 2017). For more background on the Tax Court aspect of this case see Steve’s prior post here and a subsequent post about the case by Peter Reilly here. The IRS seeks to have the transferee liability of Mr. Kardash treated as a priority claim in his bankruptcy case (although he is married Mr. Kardash filed a chapter 11 bankruptcy individually and his wife did not file). Mr. Kardash objected to treating the transferee liability as a priority claim. Usually, it is the trustee who cares more than the debtor, but there is a second importance to priority status for tax claims because any tax claim entitled to priority status is excepted from discharge if it does not get paid in the bankruptcy case. Tax debts not entitled to priority status can also be excepted from discharge but the rules for those debts are more restrictive. So, the classification of the claim makes a big difference both to the other creditors of the estate and, potentially, to Mr. Kardash.


Mr. Kardash was an employee and minority shareholder with an 8.65 share of a company that was defunct by the time of the bankruptcy case. He managed the operations of the company but was not a responsible person under IRC 6672. (If he did owe any money as a responsible person, such a debt would always be entitled to priority status under bankruptcy code 507(a)(8)(C)). During the relevant period, the company had revenue in excess of $450 million but paid no income taxes. The IRS subsequently audited the company and determined that it owed over $120 million for these years. The two controlling shareholders siphoned substantially all of the cash out of the company. Mr. Kardash received about $3.5 million during the years 2005-2007, and he reported the distributions as dividends and paid tax on it.

The IRS sent him a notice of transferee liability regarding these dividends as well as bonuses he received in 2003 and 2004. He petitioned the Tax Court, which ruled that the dividends paid to him in 2005-2007 were fraudulent transfers under applicable Florida law because they were not made in compensation for his services and the company was either insolvent at the time it paid him or became insolvent as a result of the payments.

The IRS can file a priority claim under bankruptcy code 507(a)(8)(A) for unsecured claims for “a tax on or measured by income or gross receipts for a taxable year ending on or before the date of the filing of the petition….” The bankruptcy court states that the transferee liability under IRC 6901(a) (the basis for Mr. Kardash’s liability) does not by its terms impose a tax. While this is a true statement, the transferee liability provisions seek to provide the IRS with a basis for collecting tax that has otherwise gone unpaid. The bankruptcy court quotes from the Tax Court’s description of the case:

“Section 6901(a) is a procedural statute authorizing the assessment of a transferee liability in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the transferee liability was incurred. Section 6901(a) does not create or define a substantive liability but merely provides the Commissioner a remedy for enforcing and collecting from the transferee of the property the transferor’s existing liability.”

The bankruptcy court points to an 11th Circuit decision in Baptiste v. Commissioner, 29 F.3d 1533 (11th Cir. 1994), holding that “any liability to which section 6901(a) applies is not a tax liability, but rather an independent liability.” The 11th Circuit found that IRC 6901(a) is purely a procedural statute. The Baptiste case was not a bankruptcy case; however, in In re Pert, 201 B.R. 316, 320 (Bankr. M.D. Fla. 1996), a bankruptcy court in the same jurisdiction as the court deciding Mr. Kardash’s case relied upon Baptiste in determining that a transferee liability was not entitled to priority status. The bankruptcy court states that the Baptiste and Pert decisions control the decision here. I do not necessarily agree with that statement as the Circuit Court decision addresses a different aspect of a transferee liability and a bankruptcy court is not bound by decisions of bankruptcy judges at the same level. Nonetheless, these cases provide support for the decision that the transferee liability is not entitled to priority status.

The Court disagrees with the decision of the 10th Circuit in McKowen v. Internal Revenue Service, 370 F.3d 1023 (10th Cir. 2004). The McKowen case involved the issue of discharge and not directly the issue of priority status, though the two can be linked. The McKowen case adopted a functional approach to the classification of the transferee liability claim which is the approach sought by the IRS. A middle ground here would be to treat the debt as non-priority but excepted from discharge similar to debts where a fraudulent return has been filed. Such treatment would allow other creditors of the estate to take before the payment of the derivative liability created by 6901(a), but would also allow the IRS to have the opportunity to collect on a debt that the actions of the company owing the debt has prevented the IRS from collecting. Neither the priority provision of bankruptcy code section 507 nor the discharge provisions of bankruptcy code section 523 neatly address the circumstances of a transferee liability. It is surprising that almost 40 years after the passage of the bankruptcy code, an issue of this type remains unresolved.

In arguing that the court should apply a functional analysis in determining whether the transferee liability receives priority status the IRS cited to United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996) in support of its position that a bankruptcy court must look to the basis for a liability in determining the liabilities status. In CF&I the Supreme Court determined that a liability labeled a tax was really a penalty just as in Sotelo v. United States, 436 U.S. 268 (1978)(in a case involving the trust fund recovery penalty) the Supreme Court found a liability labeled a penalty was really a tax. See a post by Bryan Camp discussing this issue for further details. As you can see from the fact that cases have twice gone to the Supreme Court to classify tax claims, this is a serious issue. The parties’ briefs are excellent and set out the issue in great detail if you are seeking more understanding of the issue. See Debtor’s Response and Opposition to the IRS’S Motion for Summary Judgment and the Reply to Debtor’s Response and Opposition to the United States’ Motion for Summary Judgment.


I look for the IRS to appeal this decision unless it determines that the 11th Circuit precedent controls the issue. The decision here does not directly address discharge but only the priority of the IRS claim. Depending on the amount of money in the estate, the priority status of the claim may not matter as much as the discharge issue. From the pleadings it appears that the efforts of the IRS to collect from Mr. Kardash partially involves its ability to reach property held as tenancy by the entireties based on the decision in United States v. Craft, 535 U.S. 274 (2002) and a subsequent 11th Circuit case, United States v. Offiler, 336 F. App’x 907, 909 (11th Cir. 2009) interpreting Craft. I wrote about the Craft case here.

A part of the fight in the bankruptcy case involves use of the proceeds of a house that the taxpayer and his wife jointly owned. The IRS objected to certain uses of those proceeds because the debtor’s proposed use would reduce its recovery. The debtor is 75 and now on social security. The prospects for recovery here will come from existing property and not future income but the IRS may determine that its ability to collect from Mr. Kardash is less important than establishing the principle regarding the classification of transferee liabilities in bankruptcy cases. If it does, Mr. Kardash will not only have selected bad business partners but also a bad issue to litigate since the IRS may push the litigation without his concern for the cost vs. benefit.





Tax Court Petitioners in Transferee Cases Cannot Extract Themselves from the Case Once the Petition is Filed

Section 7459 contains an important feature of Tax Court that gets little attention. In Schussel v. Commissioner, 149 T.C. No. 16, the Court provided another glimpse at the importance of this section. Here, as in earlier cases involving section 7459, the Court must determine whether its jurisdiction over transferee liability cases invokes the restriction on dismissal contained in that section. In Schussel, a case of first impression, the Tax Court finds that transferee cases like deficiency cases, and generally unlike cases in which the Tax Court’s jurisdiction comes through a notice of determination, require a decision regarding the amount of the liability which prevents a taxpayer from voluntarily dismissing the case in hopes of starting over later or starting elsewhere.


We have previously discussed this issue in the context of collection due process (CDP).   CDP cases start with a notice of determination. In Wagner v. Commissioner, 118 T.C. 330 (2002), the Tax Court held that a taxpayer who brings a CDP petition can request a dismissal of the case without having the Court reach a decision. The Wagner case distinguished Estate of Ming, 62 T.C. 519 (1974), which held that a taxpayer petitioning the Tax Court under IRC 6213 may not withdraw the petition in order to avoid the entry of decision. In other words, once a taxpayer is properly in a Tax Court case caused by a notice of deficiency, the only door out of the Court is a door that says how much the taxpayer owes.

Over the years, I have had a number of taxpayers rejoice at the dismissal of their case because they thought dismissal meant that did not owe any taxes. In the Tax Court, in a deficiency case, it means just the opposite. If jurisdiction attaches and the Tax Court dismisses the case, the taxpayer owes the full amount of the deficiency. This result may seem harsh or counterintuitive, but it puts the taxpayer in the same place the taxpayer would be if the taxpayer did not file a Tax Court petition. The result comes directly from the language of IRC 7459 which provides:

If a petition for redetermination of a deficiency has been filed by the taxpayer, a decision of the Tax Court dismissing the proceeding shall be considered as a decision that the deficiency is the amount determined by the Secretary. An order specifying such amount shall be entered in the records of the Tax Court unless the Tax Court cannot determine such amount from the record in this proceeding, or unless the dismissal is for lack of jurisdiction.

The decision of the Tax Court in Wagner holding that section 7459 did not apply in CDP cases was extended to stand alone innocent spouse cases, in Davidson v. Commissioner, 144 T.C. 273 (2015), and to whistleblower award cases, in Jacobson v. Commissioner, 148 T.C. 4 (Feb. 8, 2017). Mr. Schussel argued that the Tax Court’s jurisdiction under IRC 6901(a) for transferee liability cases more closely resembled the cases finding section 7459 inapplicable than it did deficiency cases.

Section 6901(a) provides that:

The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred:

  • Income, estate, and gift taxes.-
  • – The liability, at law or in equity, of a transferee of property –
  • Of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes),
  • Of a decedent in the case of a tax imposed by chapter 11 (related to estate taxes), or
  • Of a donor in the case of a tax imposed by chapter 12 (related to gift taxes),

In respect of the tax imposed by subtitle A or B.

(b) Liability. – Any liability referred to in subsection (a) may be either as to the amount of tax shown on a return or as to any deficiency or underpayment of any tax.

(f) Suspension of Running of Period of Limitations. – The running of the period of limitations upon the assessment of the liability of a transferee or fiduciary shall, after the mailing to the transferee or fiduciary of the notice provided for in section 6212 (relating to income, estate, and gift taxes), be suspended for the period during which the Secretary is prohibited from making the assessment in respect of the liability of the transferee or fiduciary (and, in any event, if a proceeding in respect of the liability is placed on the docket of the Tax Court, until the decision of the Tax Court becomes final), and for 60 days thereafter.

The language of the statute and the language of the regulations under the statute make transferee cases very much like deficiency cases. The Court also cited several cases going back to 1930 holding that the review in transferee cases is similar to the review in deficiency cases. The history of transferee liability places in back in time to the creation of the Tax Court, unlike the types of jurisdiction given to the Tax Court in 1998 and 2006, with respect to the types of cases that do not implicate section 7459.

The Court rejected petitioner’s argument that the parties had reached an agreement regarding the amount of his transferee liability which allowed the parties to move on without the need for a Tax Court decision. The Court stated that “it is incumbent upon them [the parties] to stipulate a decision reflecting that amount.”  The decision here places transferee cases on the same footing with deficiency proceedings.  If a taxpayer timely files a petition in a deficiency or a transferee case such that the Tax Court has jurisdiction over the case, the taxpayer must recognize that the end result of filing that petition will be a decision document determining the taxpayer’s liability, or lack of liability, with respect to the periods at issue in the case.


The importance of IRC 7459 in the Tax Court’s responsibility toward cases coming before it has importance in determining what is jurisdictional. We have blogged before about cases in which the Harvard Tax Clinic argues that time periods for filing Tax Court petitions are not jurisdictional but are claims processing rules. The cases in which Harvard has made this argument have been CDP cases and stand alone innocent spouse cases where section 7459 does not apply. If section 7459 applies, the dismissal of a case can have immediate tax consequences for a taxpayer. The Seventh Circuit case, Tilden v. Commissioner, which examined the Supreme Court legislation regarding time periods and applied it sua sponte to a deficiency case, did not mention this issue. Before arguing that the time period for filing a petition after receipt of a notice of deficiency or a notice of transferee liability is not jurisdictional but only a claims processing rule, the petitioner must carefully think through the implications of section 7459 on the outcome of the cases in which the Tax Court finds no basis for equitably tolling the statute.