Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

Holding Transferees Liable Without a Transferee Assessment

We welcome back guest blogger Marilyn Ames my former colleague at Chief Counsel, IRS and my current colleague in updating the Saltzman and Book treatise, “IRS Practice and Procedure.”  You can find a detailed discussion of transferee issues in the treatise.  Keith

In yet another case involving an intermediary transaction tax shelter, the Eleventh Circuit Court of Appeals reaches back to a 1933 Supreme Court case to show how broad the government’s powers to reach transferees of a taxpayer’s assets are.  In United States v. Henco Holding Corp., 127 AFTR2d 2021-362, 2021 WL 165324 (11th Cir. 2021), the shareholders of a corporation arranged a transaction in which a third-party purchaser received the assets of a corporation, an intermediary received a fee for participating in the transaction, the shareholders received the net cash from the asset sale, and the government was left with an empty bag when the corporate taxpayer could not pay the capital gains tax on the sale, which occurred in 1997.  The Internal Revenue Service audited the return of the corporate taxpayer, Henco Holding Corporation, and after several extensions of the statute of limitations, issued a notice of deficiency to Henco in 2007 with respect to the sale transaction in an amount over $56 million. Henco defaulted on the notice of deficiency, but requested a collection due process hearing when the IRS began collection procedures. When the collection activity was sustained by Appeals and a notice of determination was issued, Henco then filed a petition with the Tax Court challenging both the collection action and the underlying tax liability. The Tax Court sustained both the assessments and the IRS collection action.


With Henco having no assets from which to pay, the IRS eventually filed suit against Henco to reduce the tax claim to judgment and against the shareholders as transferees. Henco, having formally dissolved in 2012, did not appear and a default judgment was entered against it by the district court for the amount of its unpaid tax, penalties and interest in 2019. A judgment on a tax claim extends the statute of limitations on collection pretty much indefinitely, see post here, giving the government further time to hunt for a way to collect on its tax debt. (This is how the United States was able to try to collect from Al Capone decades after his death.) In this case, the hunt extended to the shareholders who received the proceeds from the sale of the assets, as the suit filed by the United States sought to recover the debt from those assets based on the Georgia fraudulent conveyance statute in effect at the time of the transaction.

The shareholders moved to dismiss the complaint against them, arguing that the Georgia statute of limitations for a fraudulent conveyance suit was only four years, a period that had run long before the suit was filed (given that the essentially defunct Henco spent years dragging out the audit and collection due process cases). The defendants also argued that the only way to recover from a transfer to them was through the use of IRC § 6901, the transferee liability statute, and the statute of limitations on assessment under Section 6901 had also run. The district court agreed that the suit against the shareholders should be dismissed, holding that an assessment had to be made against the transferee in order to collect from the transferee, and that Congress did not intend for the period in which an assessment could be made by a transferee to extend ten years or more.

With the United States once again holding an empty bag, it appealed to the Eleventh Circuit. The Appeals Court easily resolved the issue of the state statute of limitations binding the United States, noting that it has long been held that the federal government does not become subject to a state statute of limitations when it is acting in its governmental capacity and asserting a claim under its rights as the federal government. Turning to the main issue in the case – whether an assessment against the shareholder/defendants was necessary in order to proceed against them, the Eleventh Circuit relied on the Supreme Court case of Leighton v. United States, 289 US 506 (1933) to reject the shareholders’ position. In Leighton, the Supreme Court discussed the predecessor to Section 6901, Section 280 of the Revenue Act of 1926, and noted that prior to the enactment of the predecessor to Section 280, the United States could proceed in an equity proceeding against transferees to recover from assets transferred by the taxpayer. Addressing the question of whether Congress had made Section 280 an exclusive remedy for recovery, requiring an assessment under the transferee procedures of Section 280, the Supreme Court noted that while the meaning of Section 280 was not without uncertainty, “the right of the United States to proceed against transferees by suit since the act of 1926 has been definitely recognized.” The Leighton court concluded that an assessment under Section 280 was not necessary to collect from transferees.

In Henco, the Eleventh Circuit reached the same conclusion, stating that the language of Section 6901 was nearly identical to the provisions of Section 280 of the Revenue Act of 1926. In addition to holding that the procedures under Section 6901 are not the exclusive means of collecting from transferees, the Henco court further supported its position with the case of United States v. Galletti, 541 US 114 (2004), which addressed the question of whether partners in a partnership had to be individually assessed for the United States to recover a tax debt owed by the partnership from the partners. In Galletti, the Supreme Court held that separate assessments were not required, as “it is the tax that is assessed, not the taxpayer.” Holding that it was bound by both Leighton and Galletti, the Eleventh Circuit stated that it was undisputed that there was a timely assessment made against Henco, and that the United States could attempt to collect from the shareholders as transferees of the taxpayer under the relevant state law.

This is not the end of this saga, however, as the Eleventh Circuit merely reversed the dismissal of the shareholder/defendants and remanded the case to the district court for further proceedings. The United States must still prove that the shareholders are transferees liable under the Georgia statute in effect at the time of the transaction, now more than two decades ago. Then, the United States must hope the shareholders still have the money and didn’t lose it in the great recession, the pandemic downturn or just having a good time. Given the propensity of these defendants to drag things out, at the end of all this, the United States may still be left with an empty bag.

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.