IRS Not Required to Separately Assess Transferees for Transferor Liability

(Parker Tax Publishing February 2021)

The Eleventh Circuit reversed a district court and held that the government is not required to separately assess a transferor's tax liabilities against a transferee under Code Sec. 6901 in order to collect those tax liabilities from a transferee. In reaching its decision, the court said it was bound by the Supreme Court's decision in Leighton v. U.S., 289 U.S. 506 (1933); however, it noted that it was taking no position on whether the assessment of tax liabilities against the transferor was sufficient to trigger liability against the transferees for interest and penalties without separate notice and demand to them. U.S. v. Henco Holding Corp., 2021 PTC 14 (11th Cir. 2021).

Background

Henco Holding Corp. (Henco) was organized in Georgia as a C corporation, and in 1996, was owned by Alfredo Caceres, Luis Alfredo Caceres, Luis Angel Caceres, and the Luis Angel Caceres Charitable Remainder Unitrust (collectively, the Caceres Group). As of December 1996, Henco's sole asset was its 50.5 percent interest in a subsidiary, Belca Foodservice Corporation (Belca). Because Belca's stock had increased substantially in value since the time Henco acquired it, Henco considered selling its shares. However, if Henco liquidated its Belca shares and directly distributed the proceeds to the Caceres Group, there would have been a capital gains tax on the liquidation and an additional tax on each distribution. To avoid this result, the Caceres Group came up with a plan to sell Henco's stock to an intermediary, Skandia Capital Group, which would use a "special purpose vehicle," referred to as UP Acquisitions (UP), to purchase Henco's stock. On January 31, 1997, Henco sold its Belca stock to an unrelated third party for approximately $37 million in cash. Henco was left with no assets other than that cash from the sale plus cash from the concurrent repayment of debt from Belca to Henco. The Belca stock sale triggered a capital gains tax liability of approximately $13 million against Henco, leaving Henco worth approximately $24 million.

Subsequent transactions involving the Caceres Group, Skandia, and UP resulted in Henco's stock being sold to a limited liability company formed under the laws of the Isle of Man, for $870,537. Another series of transactions occurred involving European currency options with other Skandia subsidiaries acting as tax shelters. As a result of these transactions, Henco became insolvent by April 10, 1997, as its liabilities were in excess of its assets. Henco subsequently reported a $34,917,500 tax loss on its 1997 federal income tax return, completely offsetting the capital gain from the sale of Belca stock.

The IRS audited Henco's 1997 tax return and, in 2007, issued a deficiency notice to Henco, disallowing the tax shelter losses used to offset Henco's capital gain on the sale of Belca stock. Henco failed to contest the notice of deficiency and the IRS assessed approximately $56.4 million of taxes, penalties, and interest against Henco, which Henco failed to pay. In 2008, Henco filed a Tax Court petition challenging the collection activity and underlying tax liabilities. The Tax Court sustained the liabilities assessed against Henco.

In 2018, the government filed suit against Henco and the Caceres Group for fraudulent transfers in violation of Georgia law. The government argued that the Caceres Group's sale of their Henco stock to Skandia was merely a disguise allowing Skandia to serve as an "intermediary" entity for what was, in substance, a distribution of Henco's cash to the Caceres Group. The government alternatively alleged that even if the Henco stock sale were not disregarded as a sham, the Caceres Group was still the recipient of fraudulent transfers under Georgia law because Henco made a fraudulent transfer to Skandia, which in turn made fraudulent transfers to the Caceres Group. The government sought the amounts transferred to each member of the Caceres Group plus pre- and post-judgment interest. In its claim against the Caceres Group, the government specifically alleged that it was proceeding under Code Sec. 6502(a), which generally provides a 10-year assessment period. The government took the position that, under the statute of limitations provisions of Code Sec. 6501(a), it could collect unassessed taxes from the Caceres Group at any point within the time where it could collect the assessed taxes against Henco.

The Caceres Group moved to dismiss the government's complaint, arguing that the statute of limitations under Georgia law was four years and the government's claims therefore were time-barred. Additionally, they claimed that Code Sec. 6502 did not extend the time for making an assessment against them for Henco's tax liabilities. Although the Caceres Group did not dispute that Code Sec. 6502's 10-year statute of limitations period for collecting and assessing tax applied to Henco, they argued that it was inapplicable to them because they were never assessed that tax liability by the IRS. They argued that Code Sec. 6901 exclusively governs claims against transferees and that the Code Sec. 6901 limitation period under which an assessment can be made against a transferee is one year after the period of assessment for tax liabilities against the transferor. Because the tax liabilities were assessed against Henco in October 2007, the Caceres Group claimed that the IRS would have normally been required to assess taxes against them no later than the end of October 2008. However, as Henco had contested the assessment on April 11, 2008, the Caceres Group conceded that the statute of limitations was tolled until the conclusion of those proceedings on October 19, 2011, giving the IRS until May 2012 to assess taxes against them. Because the IRS had not done so, the Caceres Group asserted that the claims should be dismissed.

The district court dismissed the government's complaint. The court first determined that the government was not bound by Georgia's statute of limitations. With respect to the Caceres Group's argument that the government was required to separately assess them as transferees under Code Sec. 6901, the court interpreted Code Sec. 6901(a), which provides that a transferee's tax liability "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," to mean that the transferee's liability is assessed and collected under the same rules that apply to the ordinary, pre-transfer tax liability of the transferor.

Turning to Code Sec. 6501(a), the district court rejected the government's position that it could collect unassessed taxes from the Caceres Group members at any point within the time where it could collect the assessed taxes against Henco under Code Sec. 6501(a) because the government never assessed the Caceres Group members as transferees and the period for when the tax liability "shall be assessed" had passed. The district court also rejected the government's argument that, once the government assessed Henco, it was not required to duplicate its efforts and reassess the same tax against the Caceres Group members.

The government appealed to the Eleventh Circuit, citing the Supreme Court's decision in Leighton v. U.S., 289 U.S. 506 (1933), which held that separate assessment of transferees under Code Sec. 6901 is not required in order to collect tax liabilities assessed against a transferor-taxpayer. The government also pointed to subsequent decisions relying on Leighton. The Caceres Group disagreed, arguing that because the time period for transferee assessment under Code Sec. 6901 - i.e., within a year after the expiration of the time period for assessing Henco, the transferor - had passed, the government's action against them could not proceed. Alternatively, they argued that Georgia's statute of limitations for claims of fraudulent transfers should apply to bar the government's action against them.

Analysis

The Eleventh Circuit reversed the district court and held that (1) the government was not bound by Georgia's statute of limitations, and (2) the government was not required to separately assess Henco's tax liabilities against the Caceres Group members under Code Sec. 6901 in order to collect those tax liabilities.

With respect to the Caceres Group's argument that the government was bound by the Georgia statute of limitations, the Eleventh Circuit cited the Supreme Court's decision in U.S. v. Summerlin, 301 U.S. 414 (1940) in finding that it was well settled that the United States is not bound by state statutes of limitations in enforcing its rights.

With respect to assessments under Code Sec. 6901, the court said that the Caceres Group's and the district court's interpretation of the relevant code provisions was foreclosed by the Supreme Court's decision in Leighton. In Leighton, a California corporation sold all its assets and distributed the sale proceeds to its shareholders, leaving nothing to satisfy its outstanding tax liabilities. The IRS assessed taxes against the corporation, which neither contested nor paid the assessment. The IRS then proceeded in equity against the shareholders "to account for corporate property in order that it may be applied toward payment of taxes due by the company," although the IRS had not separately assessed those shareholders for the corporation's tax liability. The district court determined that "the distributed assets constituted a trust fund" and that each shareholder should account for the amount received from the corporation and the Ninth Circuit affirmed. The shareholders in Leighton argued before the Supreme Court that Section 280 of the Revenue Act of 1926 - the predecessor statute to Code Sec. 6901 - read in connection with other provisions of that Act showed that Congress intended to require the government to separately assess them as transferees before it could sue them for restitution. The Supreme Court rejected that argument and others, stating that the right of the United States to proceed against transferees by suit had been definitely recognized. As such, the court said, based on the established rule of strict construction, the government's suit in Leighton was properly brought against the shareholders without a separate assessment against them as transferees. Leighton, the Eleventh Circuit noted, has never been overruled, and Section 280 of the 1926 Act contains language nearly identical to the language of Code Sec. 6901.

In holding for the government, the Eleventh Circuit also cited the Supreme Court's decision in U.S. v. Galletti, 541 U.S. 114 (2004), in which the Supreme Court held that the government was not required to make separate assessments of a single tax debt against persons or entities secondarily liable for that debt, i.e., liability that is derived from the original or primary liability, in order for Code Sec. 6502's statute of limitations to apply to those persons or entities.

For a discussion of the rules for transferee liability under Code Sec. 6901, see Parker Tax ¶262,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com