IRS Transferee Liability Under IRC 6901: When Someone Else's Tax Becomes Yours

Most people assume that if they did not owe a tax, the IRS cannot make them pay it. Usually that is true. Transferee liability is the exception. If you received property from someone who owed federal tax, and state or federal law makes you answerable for that debt because of the transfer, the IRS can come after you for it.

In Texas, this shows up in predictable places: a family business that distributed its cash to the owners before closing, a parent who deeded property to a child while owing the IRS, an estate distributed to heirs before taxes were paid, or a company sold in a way that moved assets out of reach.

IRC 6901 is procedure, not liability

IRC 6901 lets the IRS assess and collect a transferee's liability in the same way it assesses tax against a taxpayer, using a notice and an assessment rather than a lawsuit. But 6901 does not itself make anyone liable. The Internal Revenue Manual, at IRM 5.17.14.5.2, says so expressly, citing Commissioner v. Stern, 357 U.S. 39 (1958): the existence and extent of a transferee's liability is determined by applicable state or federal law.

So every transferee case has two layers. First, is there a substantive basis for liability under some other law? Second, did the IRS follow the 6901 procedure and deadlines?

Where the substantive liability comes from

IRM 5.17.14 describes two broad categories. Liability "at law" arises from a contract, such as a buyer who expressly assumed the seller's tax debts, or from a statute that directly imposes liability. Liability "in equity" usually arises under fraudulent transfer law.

For Texas transfers, the state-law basis is usually the Texas Uniform Fraudulent Transfer Act, Business and Commerce Code chapter 24. In general terms, it allows a creditor to undo transfers made with actual intent to hinder, delay, or defraud creditors, and transfers made for less than reasonably equivalent value while the debtor was insolvent or became insolvent as a result. My guide on Texas fraudulent transfers and the IRS covers those standards.

IRM 5.17.14.3.4 explains how much a transferee can owe. In equity, liability is generally limited to the value of the property received. At law, for example where someone contractually assumed the debt, liability can be the full amount.

Common Texas fact patterns

• Liquidating distributions. A corporation or LLC owes payroll or income tax, sells its assets, and distributes the cash to its owners. IRM 5.17.14.3.3.5 identifies shareholders who receive assets on dissolution as potential transferees.
• Excessive compensation. An owner-employee of an insolvent company takes an unreasonably large salary or bonus. The manual notes this can be treated as a distribution of corporate assets.
• Gifts to family. A taxpayer who owes the IRS gives a house, cash, or a vehicle to a child or spouse for little or nothing.
• Estates. Heirs or beneficiaries receive estate property before the decedent's income or estate taxes are paid.
• Partitions of community property after a tax debt arises, which courts have treated as fraudulent conveyances.

The procedure and the deadlines

The procedure resembles a deficiency case. IRM 5.17.14.5.2 describes it: the IRS mails a notice of transferee liability to the transferee's last known address. The transferee can petition the United States Tax Court within 90 days. If the transferee agrees, defaults, or loses in Tax Court, the IRS assesses the liability and can then collect from the transferee with its normal tools, including liens and levies.

The deadline for the IRS is in IRC 6901(c). For an initial transferee, the IRS generally has one year after the assessment period against the transferor expires. For a transferee of a transferee, it is one year after the period against the preceding transferee expires, but not more than three years after the period against the original taxpayer expires. Court proceedings against the transferor can extend these periods, and a transferee can agree to extend them under 6901(d).

Those deadlines are based on the assessment period, not the collection period. That gives transferees a real defense in some older cases, because the window can close long before the transferor's collection statute does.

The IRS has the burden on transferee status

Here is the part most people miss. In a Tax Court case under 6901, IRC 6902(a) puts the burden on the IRS to prove that the petitioner is liable as a transferee. That is the opposite of a normal deficiency case, where the taxpayer usually bears the burden.

The transferee does carry the burden on one point: the transferor's underlying tax is presumed correct, and a transferee who wants to challenge it must prove it wrong. If a court already decided the transferor's liability, the transferee generally cannot relitigate it.

Defenses worth examining

• Limitations. Did the IRS mail the notice within the 6901(c) period?
• No transfer. Was it actually the transferor's property, or did you own it all along?
• Reasonably equivalent value. Did you pay fair value? A real purchase at a fair price defeats constructive fraud claims.
• Solvency. Was the transferor solvent at the time and not made insolvent by the transfer?
• Amount. In equity, liability is generally capped at the value of what you received.
• The underlying tax. Is the transferor's liability correct?

The IRS also has a second route: suing in federal district court under IRC 7402 to set aside the transfer, which uses the collection statute rather than 6901's assessment deadlines. And it may use nominee or alter ego theories when the property never really left the taxpayer's control. Which route the IRS picks affects deadlines and defenses.

If you received a notice of transferee liability, the 90-day Tax Court deadline is the first thing to protect. If you are about to receive assets from someone who owes the IRS, or about to distribute a closing company's cash, the time to think about this is now. Let's talk: 813-229-7100.