Research Tax Memo

Research Memo A:

Hint: Both fact patterns are based on a recently decided tax caseFact Pattern #1The legislature in the State of Red enacted a new law requiring out-of-state sellers to collect andremit sales tax on the retail sales of goods and services in the State. Sellers are required to collectand remit the tax to the State, but if they do not then in-state consumers are responsible forpaying a use tax at the same rate. The Act covers only sellers that, on an annual basis, delivermore than $150,000 of goods or services into the State or engage in 200 or more separatetransactions for the delivery of goods or services into the State. Your client is a B-etsy onlineretailer with no employees or offices in the State of Red and, therefore, has not collected anysales tax under the new Act. Your client has received a notice from the State of Red requiringyour client to register for a license to collect and remit the sales tax. A refusal to do so will resultin your client being prohibited from online sales of any goods or services in the State. Yourclient wants to know if the business must comply with the sales tax requirements of the State ofRed. Also, what implications might this have in other states where your client does businessonline?Prepare a tax memorandum for use in advising your client. State the issue(s) to be resolved andmake sure to identify the specific authorities (code, statutes, case law etc.) that address yourclient’s tax issues. Make sure to weigh authorities both for and against your client’s position.The memo should be 2 pages, double spaced, one-inch margins, 12pt.Hint: search engine words “online seller” “sales tax” “court decision”Fact Pattern #2Your client, Smartbucks, a U.S. corporation conducts a major part of its coffee business throughits wholly owned international subsidiary, Trader Jobs, located on the Turks and Caicos Island.As Smartbuck’s accountants, your firm does the tax planning for these two related companies tominimize or avoid the payment of taxes by Smartbucks in the US which is a higher taxjurisdiction than Turks and Caicos jurisdiction.In the past Smartbucks sold industrial coffee equipment to Trader Jobs. Trader Jobs then sold thesame equipment for profit. The profits from those sales were reported and taxed in the Turks andCaicos, which resulted in significant tax savings for Smartbucks. Your firm explained to yourclient that this transaction, known as “transfer pricing,” allows Smartbucks to shift profitsthat would otherwise be subject to U.S. tax offshore to avoid tax. Your firm wants to use thesame method to identify and shift costs between Smartbucks and Trader Jobs.Specifically, Smartbucks has formulated a new latte coffee recipe with Trader Jobs and bothcompanies would benefit taxwise if the research and development costs could be shared betweenthem. To document the transaction, Smartbucks and Trader Jobs entered into a research anddevelopment (“R&D”) cost-sharing agreement which allows Trader Jobs the authority to licensethe new recipe internationally. You previously advised your client that the interplay of cost andincome allocation between the two companies in this transaction will result in significantlyreduced taxes for Smartbucks.You also advised your client that there is some risk in engaging in multinational corporate taxavoidance because the tax laws grant the IRS authority to allocate income and costs betweenrelated parties if it determines that any particular transaction fails to satisfy the arm’s lengthstandard. As part of the R&D cost sharing agreement, your firm did not share the cost of certainemployee stock options resulting in a substantial tax savings to Smartbucks in association withover $100 million in income. The IRS has reviewed the transaction and contends that theallocation of stock compensation costs between the companies must be appropriate to reflecteconomic reality and that the allocation of the employee stock compensation costs under the costsharing arrangement fails the arm’s length standard. On behalf of Smartbucks, your firmcontends that the IRS has exceeded its authority under the arm’s length standard because the costsharing methodology used in the R&D cost sharing agreement established “parity withuncontrolled taxpayers” and the actual results or economic reality is irrelevant under the arm’slength standard. Methodology controls over result.Prepare a tax memorandum for use in advising your firm’s managing partner assigned toSmartbucks. State the issue(s) to be resolved and make sure to identify the specific authorities(code, statutes, case law etc.) that address your client’s tax issues. Make sure to weighauthorities both for and against your client’s position.The memo should be 2 pages, double spaced, one-inch margins, 12pt.Hint: search engine words: “related entities” “cost sharing” “court decision”the new recipe internationally. You previously advised your client that the interplay of cost andincome allocation between the two companies in this transaction will result in significantlyreduced taxes for Smartbucks.You also advised your client that there is some risk in engaging in multinational corporate taxavoidance because the tax laws grant the IRS authority to allocate income and costs betweenrelated parties if it determines that any particular transaction fails to satisfy the arm’s lengthstandard. As part of the R&D cost sharing agreement, your firm did not share the cost of certainemployee stock options resulting in a substantial tax savings to Smartbucks in association withover $100 million in income. The IRS has reviewed the transaction and contends that theallocation of stock compensation costs between the companies must be appropriate to reflecteconomic reality and that the allocation of the employee stock compensation costs under the costsharing arrangement fails the arm’s length standard. On behalf of Smartbucks, your firmcontends that the IRS has exceeded its authority under the arm’s length standard because the costsharing methodology used in the R&D cost sharing agreement established “parity with  Tax Research Memo
Sample Format
Your Firm
Your Town and State
Date
Relevant Facts
Specific Issues
Conclusions
Support
Actions to Be Taken
________ Discuss with client. Date discussed ________
________ Prepare a memo or letter to the client
________ Explore other fact situations
________ Other action. Describe:___________________________
_______________________________________________________
Preparer ________
Reviewer ________
Partner ________
3/25/24, 9:58 AM
Checkpoint | Document
4.10.13 Certain Technical Issues
Internal Revenue Manual (RIA)
Internal Revenue Manual
4.10.13 — Certain Technical Issues
[Last Revised: 07-27-2023]
Internal Revenue Manual
4.10.13.1 — Program Scope and Objectives
[Last Revised: 07-27-2023]
(1) Purpose: This IRM Section provides information on various topics as shown in the table of
contents.
(2) Audience: LB&I and SB/SE personnel.
(3) Policy Owner: SB/SE HQ Director, Examination Quality and Technical Support
(4) Program Owner: SB/SE EQTS
(5) Primary Stakeholders: LB&I and SB/SE personnel
(6) Program Goals: To assist examiners working cases involving a variety of specialized issues.
Internal Revenue Manual
4.10.13.1.1 — Background
[Last Revised: 07-27-2023]
(1) This IRM provides information for general examination procedures that examiners should
understand and apply in the performance of their duties.
(2) The topics covered, and their subsections are listed below:
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
1/115
3/25/24, 9:58 AM
Checkpoint | Document
IRM Subsection
Topic
IRM
4.10.13.2
Accumulated Earnings Tax (
IRM
4.10.13.3
Transferor-Transferee Liability Cases
IRM
4.10.13.4
Related Party Transactions (
IRM
4.10.13.5
Adjustments Between Correlative Taxpayers (also
known as Whipsaw Issues)
IRM
4.10.13.6
Activities Not Engaged in For Profit – Hobby Loss (
IRC 183)
IRM
4.10.13.7
Change in Accounting Method
IRM
4.10.13.8
Real Estate Developers: Alternative Treatment of
Common Improvements Under Rev. Proc. 92-29
IRM
4.10.13.9
Self-Rented Property and Renewable Options
IRM
4.10.13.10
Personal Holding Company Deficiency Dividends
IRM
4.10.13.11
Economic Substance Doctrine
IRC 531)
IRC 482)
(3) Additional information on certain topics in this IRM may be found in the following Examining
Officers Guide (EOG) IRMs:
IRM
4.11.5, Allocation of Income and Deductions Under
IRM
4.11.6, Changes in Accounting Methods; and
IRM
4.11.52, Transferee Liability Cases.
IRC 482;
Internal Revenue Manual
4.10.13.1.2 — Authority
[Last Revised: 07-27-2023]
(1) By law, the IRS has the authority to conduct examination under Title 26, Internal Revenue
Code, Subtitle F – Procedure and Administration, Chapter 78, Discovery of Liability and
Enforcement of Title, Subchapter A, Examination and Inspection.
(2) The following are some of the Internal Revenue Code sections and published guidance that
governs the topics covered.
Reference
Description
IRC 332
Complete Liquidations of subsidiaries
IRC 905(c)
Adjustments To Accrued Taxes
IRC 6501
Limitations on Assessment And
Collections
IRC 6532
Periods of Limitation on Suits
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
2/115
3/25/24, 9:58 AM
Reference
Checkpoint | Document
Description
IRC 6662
Imposition of Accuracy Related Penalty
on Understatements
IRC 6662A
Imposition of Accuracy-Related Penalty
on Understatements With respect to
Reportable Transactions
IRC 6664
Definitions and Special Rules
IRC 6676
Erroneous Claim for Refund or Credit
IRC 6901
Transferred Assets
IRC 7121
Closing Agreements
IRC 7405
Action for Recovery of Erroneous
Refunds
IRC 7430
Awarding of Costs and Certain Fees
IRC 7605
Time and Place of Examination
Notice 2014-58
Additional Guidance Under the Codified
Economic Substance Doctrine and
Related Penalties
Rev. Proc. 64-22
Statement of Some Principles of
Internal Revenue Tax Administration
Rev. Proc. 2005-32
Examination of Returns and Claims for
Refund, credit, or Abatement;
Determination of Correct Tax Liability
Rev. Proc. 2010-11
Forms and Instructions
Rev. Proc. 2012-18
Ex Parte Communications Between
Appeals and Other Internal Revenue
Service Employee
Rev. Proc. 2016-22
Appeals Function
Internal Revenue Manual
4.10.13.1.3 — Responsibilities
[Last Revised: 07-27-2023]
(1) The Director, Headquarters Examination, is the executive responsible for providing policy and
guidance for SB/SE Examination employees and ensuring consistent application of policy
procedures and tax law to effect tax administration while protecting taxpayer rights. See IRM
1.1.16.5.5, Examination Headquarters, for more information.
(2) The Director, Examination Quality and Technical Support, reports to the Director, Headquarters
Examination, and is responsible for implementing strategies to prevent abusive and offshore tax
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
3/115
3/25/24, 9:58 AM
Checkpoint | Document
noncompliance, provide technical guidance and support Field, Campus, and Specialty Exam
Quality. See IRM
1.1.16.5.5.4, Exam Quality and Technical Support, for more information.
(3) The Technical Support Group, which is under the Director, Examination Quality and Technical
Support, is the group responsible for promoting fair, consistent, and effective administration of
income tax examinations by implementing new tax legislation, supporting communication office,
managing tax forms and publications by educating SB/SE examiners, SB/SE taxpayers, and
practitioners through education, outreach and enforcement. See IRM
1.1.16.5.5.4.3, Technical
Support Group, for more information.
(4) All examiners must perform their professional responsibilities in a way that supports the IRS
Mission. This requires examiners to provide quality service and to apply the law with integrity and
fairness to all.
(5) Income tax examiners and their managers should thoroughly acquaint themselves with the
examination procedures and information contained in this IRM, as well as other resources, such as
those listed in IRM
4.10.13.1.5 , Related Resources, below.
Internal Revenue Manual
4.10.13.1.4 — Acronyms and Abbreviations
[Last Revised: 07-27-2023]
(1) The following table lists commonly used acronyms and their definition used throughout this
IRM:
Acronym
Definition
AC
Activity
AIMS
Audit Information Management System
ATG
Audit Technique Guide
CCP
Centralized Case Processing
EOG
Examining Officer’s Guide
ERCS
Exam Return Control System
FDCP
Federal Debt Collection Procedures
PHC
Personal Holding Company
PSP
Planning and Special Procedures
TCS
Tax Compliance Specialist
TCJA
Tax Cuts and Jobs Act
TEFRA
Tax Equity and Fiscal Responsibility Act
TIN
Taxpayer Identification Number
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
4/115
3/25/24, 9:58 AM
Checkpoint | Document
Acronym
Definition
TS
Technical Services
Internal Revenue Manual
4.10.13.1.5 — Related Resources
[Last Revised: 07-27-2023]
(1) Additional information can be found in the following Examining Officer’s Guide (EOG) IRMs:
IRM
4.11.5, Allocation of Income and Deductions Under
IRM
4.11.6, Change in Accounting Methods, and
IRM
4.11.52, Transferee Liability Cases
IRC 482
Internal Revenue Manual
4.10.13.2 — Accumulated Earnings Tax (IRC 531)
[Last Revised: 07-27-2023]
(1) The purpose of the accumulated earnings tax is to prevent a corporation from accumulating its
earnings and profits beyond the reasonable needs of the business for the purpose of avoiding
income taxes on its stockholders.
(2) Liability for the accumulated earnings tax is based on the following two conditions:
a. The corporation must have retained more earnings and profits than it can justify for the
reasonable needs of the business
b. There must be an intent on the part of the corporation to avoid the income tax on its
stockholders by accumulating earnings and profits instead of distributing them.
(3) The term earnings and profits is not defined in any of the revenue acts. The amount of
earnings and profits for a taxable year usually is computed by adjusting taxable income in
accordance with
26 CFR 1.312-6.
(4) Any corporation within a chain of corporations can be subject to the accumulated earnings tax.
A subsidiary corporation can be subject to the accumulated earnings tax even though the parent
corporation is not subject to the accumulated earnings tax and vice versa.
(5) The accumulated earnings tax is computed on the corporation’s accumulated taxable income
(defined in
IRC 535(a)) for the taxable year or years in question.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
5/115
3/25/24, 9:58 AM
Checkpoint | Document
(6) The accumulated taxable income is the corporation’s taxable income with various adjustments,
minus the dividends paid deduction and the accumulated earnings credit. These adjustments are
made primarily for the purpose of arriving at an amount that corresponds more closely to financial
reality and thus, measures more accurately the corporation’s dividend paying capacity for the year.
(7) The tax is 20% of the accumulated taxable income.
(8) To calculate accumulated taxable income
IRC 535(c) allows a minimum accumulated
earnings credit. In general, the minimum credit is the amount by which $250,000 exceeds the
accumulated earnings and profits at the close of the preceding year.
a. An accumulation in excess of the $250,000 minimum credit is not an indication of an
unreasonable accumulation.
b. There is no statutory maximum credit that can be allowed. The maximum credit allowed is
the amount of current earnings and profits retained for the reasonable needs of the business
(adjusted for net capital gains)
(9) The Virtual Library has useful information including recent guidance. See Corporate/Business
Issues & Credits Knowledge Base.
Internal Revenue Manual
4.10.13.2.1 — Considerations in Computing Accumulated
Earnings and Profits
[Last Revised: 03-16-2015]
(1) In order for the examiner to make a determination on the corporation’s accumulated earnings
and profits, the following items should be considered:
a. Book “earned surplus” should be analyzed. The book account may have been reduced by
the transfers to capital, or other accounts, in the form of stock dividends or reserves.
b. Some accounting write-offs of surplus might not qualify as write-downs of earnings and
profits for tax purposes.
c. It is generally helpful to reconcile the surplus shown in the books to earnings and profits
available for tax purposes.
d. Life insurance proceeds are a part of earnings and profits and are available for dividend
distribution.
e. Excess of percentage depletion over cost depletion constitutes a part of earnings and
profits.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
6/115
3/25/24, 9:58 AM
Checkpoint | Document
f. At some time during the history of the corporation, surplus may have been reduced by
writing down purchased goodwill or other intangible assets. For this reason, the examiner
should prepare a careful analysis of the earned surplus account for the year under
examination and at least the five preceding years, and the amount and date of any cash
dividends paid shortly after the close of the year under examination. If any distribution of
dividends in reorganization was made, full details of such distribution should be stated.
Internal Revenue Manual
4.10.13.2.2 — Indicators of Intent
[Last Revised: 03-16-2015]
(1) A prerequisite to imposition of the
IRC 531 tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax on its shareholders. As purpose involves a
state of mind or intent, it is necessary to look at the surrounding facts and circumstances in each
individual case to determine whether the purpose of the accumulated earnings was to allow the
shareholders to avoid the income tax or for some other purpose.
(2) The following factors should be considered in determining whether the tax avoidance purpose
was present (this list is not exclusive and no one factor is determinative of the intent to avoid
shareholder tax):
a. Dealings between the corporation and its shareholders, including loans to shareholders and
expenditures of corporate funds for the personal benefit of the shareholders – note that
corporate loans to or expenditures on behalf of shareholders tend to show that the corporation
has the capacity to distribute these funds as dividends, particularly if there is a pattern of these
transactions, the loans or expenditures are substitutes for dividends and show that corporate
earnings are diverted, and The examiner should include an analysis of amounts, if any,
withdrawn by the stockholders in the form of loans or advances and reflected in the asset
accounts at the close of the year under examination
b. Investments of undistributed earnings in assets having no reasonable connection with the
corporation’s business. An inference may arise if the corporation has invested its funds for
purposes which are not reasonably related to the business. Such unrelated investments
evidence the liquidity and dividend-paying capacity of the corporation, as well as an inference
that the failure to distribute such funds as dividends was for the purpose of avoiding
shareholder taxes.
c. The corporation’s dividend history – note that a failure to distribute dividends or minimal
payments indicates that earnings may have been accumulated to avoid shareholder taxes, a
failure to distribute dividends or minimal payments indicates that earnings may have been
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
7/115
3/25/24, 9:58 AM
Checkpoint | Document
accumulated to avoid shareholder taxes, the examiner should include a statement showing
the amount of taxes actually avoided by the principal stockholders through the failure of the
corporation to distribute all of its earnings for the year under consideration, and even if the
corporation has a good dividend record and pays liberal officer-stockholder salaries, this does
not in itself serve to rebut the tax avoidance factor.
Internal Revenue Manual
4.10.13.2.3 — Holding or Investment Company
[Last Revised: 03-16-2015]
(1)
IRC 532(a)states that the accumulated earnings tax imposed by
every corporation (other than those described in subsection
IRC 531 shall apply to
IRC 532(b) formed or availed of for
the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any
other corporation, by permitting earnings and profits to accumulate instead of being divided or
distributed.
(2)
IRC 532(b), Exceptions, states that the accumulated earnings tax imposed by section 531
shall not apply to a personal holding company (as defined in
IRC 542 , Definition of personal
holding company),
(3) However, a Personal Holding Company (PHC) tax is a penalty tax which discourages excessive
accumulation of passive income. Regulations under
IRC 547, Deduction for Deficiency
Dividends, provide a method (absent fraud) for a corporation to eliminate its personal holding
company tax liability for a prior year by making a distribution of a deficiency dividend. The benefits
of
IRM
IRC 547 are applicable when an examination results in an agreed deficiency in PHC tax. See
4.8.8.4 for additional information.
(4) The examiner should set forth the basis for concluding why a corporation does not qualify as a
personal holding company, and why it is a mere holding company or investment company that was
formed or availed of for the purpose of sheltering its shareholders from income taxes.
Internal Revenue Manual
4.10.13.2.4 — Reasonable Needs of the Business
[Last Revised: 03-16-2015]
(1) Examiners should consider that
IRC 543 provides that earnings permitted to accumulate
beyond the reasonable needs of the business shall be “determinative” of the purpose to avoid
shareholder’s income taxes unless the corporation shall prove to the contrary by a preponderance
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
8/115
3/25/24, 9:58 AM
Checkpoint | Document
of the evidence. By virtue of this provision, most cases have been won or lost on the battleground
of reasonable business needs.
4.10.13.2.4.1 — Effect of Prior Accumulations
[Last Revised: 03-16-2015]
(1) In determining whether current earnings were accumulated for reasonable business purposes,
the examiner must make a determination on whether prior accumulations were, in fact, sufficient to
meet the taxpayer’s then current and reasonably anticipated future needs. See
26 CFR 1.537-
1(a).
(2) In making this determination, it is necessary to examine the character of the corporation’s
assets, since earnings used for the expansion of business plant or equipment, inventories, or
accounts receivable cannot be readily distributed to the stockholders no matter how large the
corporation’s earned surplus may be.
(3) This issue requires a thorough analysis of the corporation’s business and financial status for
each year, including:
a. Balance sheet position – meaning the size, character, and relationship of its various asset,
liability, and surplus accounts
b. Profit and loss statement
c. Liquidity and cash flow position
d. Type of business
e. Economic conditions prevailing in the taxpayer’s business
4.10.13.2.4.2 — Factors to be Considered in Determining
Reasonable Needs
[Last Revised: 03-16-2015]
(1) The term “reasonable needs of the business” includes the reasonably anticipated future needs
of the business.
(2) The following items, while not exclusive, may indicate that the earnings and profits are being
accumulated for the reasonable needs of the business and should be used as guides:
a. Bona fide expansion of business or replacement of plant
b. Acquisition of a business enterprise through purchasing stock or assets
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
9/115
3/25/24, 9:58 AM
Checkpoint | Document
c. Retirement of bona fide indebtedness created in connection with the trade or business,
such as the establishment of a sinking fund for the purpose of retiring bonds issued by the
corporation in accordance with obligations incurred on issue
d. Necessary working capital for the business
e. Investments or loans to suppliers or customers
(3) Apart from the grounds specifically mentioned above, accumulations may be justified by a
range of business needs. Among these are the following:
a. Redemption of stock held by minority stockholders
b. Need to meet competition
c. Reserves for various business risks and contingencies such as self-insurance against
casualties, potential liability from litigation, and unsettled business conditions
d. Need to finance pension or profit-sharing plans for the employer
e. Possible loss of principal customer
f. The
IRC 303 redemption needs of the business. Examiners should thoroughly investigate
the facts and circumstances in the case with a view toward determining whether the
redemption was for a corporate purpose or was primarily for the benefit of the stockholders in
a redemption of the stock of a minority or a majority stockholder
g. Need to redeem excess business holdings of shareholders under
IRC 4943, Taxes on
excess business holdings.
4.10.13.2.4.3 — Contingencies
[Last Revised: 03-16-2015]
(1) Accumulations have been justified as a result of various forms of contingencies including the
following:
a. An actual or potential lawsuit
b. A possible liability arising out of some contractual obligation
c. A possible business reversal resulting from the loss of a customer
d. Accumulations to guard against competition has been justified in some cases
e. An accumulation to provide funds to finance a self-insurance plan. This includes key
men/women, as well as the more common types of risk insurance
f. Accumulations to provide a retirement plan for employees
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
10/115
3/25/24, 9:58 AM
Checkpoint | Document
4.10.13.2.4.4 — Financing of Corporate Operations and
Debt Retirement
[Last Revised: 03-16-2015]
(1) A corporation cannot be required to resort to the borrowing of funds under any circumstances.
Therefore, the current operations of the business or planned expansion may be financed fully by
retained earnings.
(2) An accumulation to retire a corporate indebtedness has in most cases been determined to be a
reasonable need of the business, depending upon the reason the debt was created in the first
place.
(3) The examiner should determine if the debt to be retired by the accumulation was bona fide and
was incurred in connection with the trade or business.
4.10.13.2.4.5 — Effect of Subsequent Events
[Last Revised: 03-16-2015]
(1) Events subsequent to the end of the taxable year may not be used to show that retention of
earnings and profits was unreasonable at the close of such taxable year if all the events indicated
a reasonable accumulation at the close of the taxable year.
(2) Examiners may consider subsequent events to determine the taxpayer actually intended to
carry out or has actually carried out the plans for which the earnings and profits were accumulated.
(3) The fact that the corporation did not, in fact, use the accumulated funds as originally planned
does not necessarily mean that the accumulation was not reasonable when made.
(4) If the earnings are not used to accomplish the purpose for which they were to be used, this may
indicate that the earnings were not to be used for the indicated purpose in the first place and will
make any future accumulations more difficult to justify.
4.10.13.2.4.6 — Working Capital
[Last Revised: 03-16-2015]
(1) Working capital is defined as current assets minus current liabilities. Working capital is the
liquidity of a business that is used in its day-to day operations.
(2) The working capital needs of a business are justification of accumulating earnings and profits.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
11/115
3/25/24, 9:58 AM
Checkpoint | Document
Internal Revenue Manual
4.10.13.2.5 — Operating Cycle Approach
[Last Revised: 03-16-2015]
(1) The formula for calculating the working capital needs of a manufacturing concern or similar
business is set forth in the Bardahl Manufacturing Corp. v. Commissioner, T.C. Memo. 1965-200. In
that case, the Tax Court permitted the corporation to accumulate enough working capital to cover
the normal expenses of one operating cycle plus any anticipated extraordinary operating
expenses. This is known as the operating cycle approach, which uses a mathematical formula to
compute working capital needs.
(2) A normal operating cycle is the period of time required to convert cash into raw materials, raw
materials into inventory of finished goods, finished goods inventory into sales and accounts
receivable, and accounts receivable into cash.
4.10.13.2.5.1 — Selection of Appropriate Working Capital
Formula
[Last Revised: 07-27-2023]
(1) Inasmuch as the need for working capital has long been recognized as the main reason for
accumulating earnings and profits, the examiner should compute the Bardahl formula as modified
by the Empire Steel Casting, Inc. v. Commissioner, T.C. Memo. 1974-34, decision, on a preliminary
basis by using the figures shown on the return to calculate reasonable working capital needs. If the
taxpayer’s net working capital exceeds the calculated reasonable working needs, then further
analysis should be made following the procedures set forth in Exhibit
4.10.13-1. See also the
Virtual Library in the Corporate/Business Issues & Credits Knowledge Base which contains an
overview of accumulated earnings tax with links to published guidance and a Bardahl Formula
worksheet job aid.
(2) In an expanding business, the examiner should obtain the necessary financial information to
compute the corporation’s working capital needs in the years immediately preceding the year or
years under examination and the years immediately succeeding the year or years under exam.
(3) For seasonal business, the Bardahl International formula is considered more appropriate for
peak inventory and receivable months. For service business, the formulas should be modified to
consider the average length of time required to perform on a contract rather than use the operating
inventory turnover concept. The Apollo formula (stemming from a court case: Apollo Industries v
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
12/115
3/25/24, 9:58 AM
Checkpoint | Document
C.I.R, 358 F 2nd 867 (1966)) may have application to non-manufacturing businesses. See Exhibit
4.10.13-2.
Note: The exhibit does not include computations for accounts payable. Accounts payable may or
may not be relevant in the determination of the capital needs, depending on the facts and
circumstances.
(4) As noted above, the Bardahl formula is “one test” and is not necessarily applicable to every
IRC 531 case. Examiners who are considering
IRC 531 should analyze each case with respect
to specific facts before determining the type of operating cycle approach most appropriate.
(5) The latest criteria relied on in current court decisions should be considered.
Internal Revenue Manual
4.10.13.2.6 — Relationship to Other IRC Sections
[Last Revised: 03-16-2015]
(1) Consideration should be given to the relationship between
accumulated earnings tax,
IRC 531, Imposition of
IRC 541, Imposition of Personal Holding Company Tax and
IRC
545, Undistributed Personal Holding Company Income, since these sections consider the problem
of tax avoidance through undistributed earnings. An examiner may find that a potential
case is actually a good
IRC 541
IRC 531 case because the taxpayer does not qualify as a personal
holding company.
Internal Revenue Manual
4.10.13.2.7 — Data to be Furnished When Application of
IRC 531 is Recommended
[Last Revised: 03-16-2015]
(1) The examiner should weigh all available evidence before proposing to apply
it is determined that
IRC 531. When
IRC 531 should not be applied, the examiner will make a clear, concise
statement in his/her report transmittal or workpapers supporting the recommendation.
(2) If an examiner recommends application of
IRC 531, the examiner will include the data,
specified in (3) below, in the workpapers or in the report transmittal. Since disclosure of certain
information specified below might violate the disclosure provisions, the report will only include
information considered vital to the taxpayer’s understanding of the case.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
13/115
3/25/24, 9:58 AM
Checkpoint | Document
(3) The examiner will include in the report transmittal or workpapers the following data:
a. A history of the corporation from the date of its incorporation, fully setting forth the purpose
for which it was formed, including comments, if applicable, regarding assets transferred
thereto, capital stock issued in exchange for such assets, actual paid-in capital, and whether
represented by par or no-par stock, and if no-par stock, the stated value, in any ascribed
thereto and kind of business in which engaged.
b. Names and addresses of the principal or controlling stockholders and number of shares
held by each at the close of the year involved.
c. Names and titles of the officers of the corporation, stock ownership (if any) and amount of
compensation received if such information is not contained in the corporate return.
d. A statement of substantial amounts, if any, withdrawn by the stockholders in the form of
loans or advances and reflected in the asset accounts at the close of the year under
examination.
e. An analysis of the earned surplus account for the year under examination and at least the
five preceding years, which will show in particular both taxable and nontaxable income, the
amount of cash dividends paid during each of the respective years, and the amount and date
of any cash dividends paid shortly after the close of the year under examination. If any
distribution of dividends in reorganization was made, full details of such distribution should be
stated.
f. A statement showing the amount of taxes actually avoided by the principal stockholders
through the failure of the corporation to distribute all of its earnings for the year under
consideration.
g. Review of corporate minutes for a discussion on why the funds are being accumulated (e.g.,
plans for plant expansion, debt retirement, inventory increases, etc.).
h. Comparative balance sheets at the beginning and end of the year or years under
examination, and five prior years.
i. Whether or not, in the opinion of the examiner, the corporation is a mere holding or
investment company and the basis for such conclusion and why it does not qualify as a
personal holding company under the applicable revenue law.
j. Any other facts and circumstances deemed pertinent by the examiner, including a summary
of the material facts upon which the
IRC 531 recommendation is based.
Internal Revenue Manual
4.10.13.2.8 — Notification of Unreasonable Accumulation
of Earnings
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
14/115
3/25/24, 9:58 AM
Checkpoint | Document
[Last Revised: 03-16-2015]
(1) In any proceeding before the Tax Court involving the allegation that a corporation has permitted
its earnings and profits to accumulate beyond reasonable business needs, the burden of proof is
on the Commissioner unless a notification is sent to the taxpayer under
IRC 534(b), Notification
by Secretary, prior to issuance of a notice of deficiency. However, if such a notification is sent to
the taxpayer and the taxpayer timely submits the statement described in
IRC 534(c), the burden
of proof will be on the Commissioner as to the grounds given in the statement.
(2) Operating officials who hold delegations or redelegations of authority to sign notices of
deficiency pursuant to Servicewide Delegation Order
notifications under
IRC 534(b). See IRM
4-8 are also empowered to sign
4.8.8.2, Accumulated Earnings Tax, regarding
coordination with Technical Services.
(3)
IRC 534(b) requires that taxpayers be notified if a proposed notice of deficiency includes an
amount with respect to the accumulated earnings tax imposed by
IRC 531 so that the burden of
proof initially will be on a taxpayer.
a. Exam is responsible for notifying the taxpayer.
b. Letter 572 is used for this notification. The letter may be sent to the taxpayer prior to
issuance of the 30-day letter or concurrently with the 30-day Letter (in which case the purge
date will allow for 60 days rather than the normal 30 days).
c. Letter 572 should be mailed concurrently with the 30-day Letter in unagreed cases having
less than one year remaining on the statute of limitations.
d. If notification is sent to the taxpayer and (1) the taxpayer timely submits the statement of the
grounds on which the taxpayer relies to establish that there has been no accumulation of
earnings and profits beyond the reasonable needs of the business and, (2) such grounds are
supported by facts contained in the statement, then the burden of proof will be on the
Commissioner as to the grounds given in the statement. See
26 CFR 1.534-2(a)(2).
e. Officials and reviewers delegated to sign notices of deficiency pursuant to Servicewide
Delegation Order
4-8 are also empowered to sign Letter 572.
(4) A notice of deficiency will not be issued before expiration of the period of time granted for filing
the statement except when expiration of the period of limitation is imminent or other compelling
circumstances require earlier issuance.
(5) If a jeopardy assessment is made under
IRC 6861(a), a separate notification need not be
sent before a notice of deficiency is issued. In such instances the notice of deficiency, which must
be mailed within 60 days after the date of assessment, constitutes the notification providing it
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
15/115
3/25/24, 9:58 AM
Checkpoint | Document
informs the taxpayer that the deficiency includes the tax imposed by
IRC 531. The taxpayer’s
statement then may be included in the petition to the Tax Court.
(6) Notification under
IRC 534(b) will be issued on Letter 572, which must be manually signed,
and sent by certified mail (by registered mail if the taxpayer’s address is outside the United States).
The number and disposition of copies of Letter 572 usually will be the same as for a notice of
deficiency.
Internal Revenue Manual
4.10.13.2.9 — Rebuttal Statement by Taxpayer
[Last Revised: 03-16-2015]
(1) Treas.
Reg 1.534-2(d), (
26 CFR 1.534-2(d)) provides that a taxpayer has 60 days after a
notification is mailed in which to file a statement to justify the alleged unreasonable accumulation.
(2) If the taxpayer, for good cause, cannot submit the statement within the 60-day period, the
taxpayer may be granted an extension, not to exceed 30 days. The taxpayer must request the
extension before expiration of the 60-day period. SB/SE Delegation Order SB/SE
4-2-1 (IRM
1.2.65.4.40), Extension of Time for Filing Statement of Grounds for Earnings and Profits
Accumulation, states that Revenue Agent Reviewers Grade GS-13 in Technical Services are
delegated authority to grant an extension of time not to exceed 30 additional days.
(3) Letter 572 requires the taxpayer to submit an original and two copies of the statement. Upon
receipt, the original should be attached to the return of the earliest year in which the issue is
raised. One copy should be placed in the administrative file and the other copy should accompany
the administrative file for further association with the Area Counsel’s legal file.
(4) After consideration of the taxpayer’s rebuttal, the issue will be dropped if it is concluded that
earnings and profits have not been accumulated beyond reasonable business needs.
Internal Revenue Manual
4.10.13.3 — Transferor-Transferee Liability
[Last Revised: 07-27-2023]
(1) Transferee liability is a situation where a third party can be held liable for the tax liability of
another. The government may seek to collect a taxpayer’s unpaid tax, penalty or interest by
asserting transferee liability when a taxpayer (transferor) has transferred property to another
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
16/115
3/25/24, 9:58 AM
Checkpoint | Document
person or entity (transferee) and a substantive provision of the law provides the ability to assert
liability against the recipient based on the transfer.
(2)
IRC 6901 provides the Service an administrative mechanism to assert that a transferee is
liable for a transferor’s primary liability. For example, a case under
IRC 6901 can be used:
to collect a transferor-taxpayer’s tax liability from the transferee who received the transferortaxpayer’s assets for less than adequate consideration or
to collect the liability from the transferee that is legally responsible for paying the transferortaxpayer’s liability
(3) “Transferee” is defined in
IRC 6901(h), and includes a donee, heir, legatee, devisee, and
distributee and the person or entity whose tax liability the IRS is seeking to collect is known as the
“transferor”. See IRM
4.11.52.1.5 for a detailed definition.
(4) Transferee liability does not create a new liability. Instead, it provides a secondary method to
collect the transferor’s tax liability.
(5)
IRC 6901 is strictly a procedural statute that does not by itself create any liability. It provides
the IRS with an administrative mechanism to assert that a transferee is liable for a transferor’s
primary liability.
IRC 6901(a) states that generally, taxes owed by a transferee shall be
assessed, paid, and collected in the same way the IRS would pursue the transferor for those
amounts. The substantive elements establishing the existence or extent of a transferee’s liability
are determined by applicable state or federal law.
(6) The substantive basis of law for transferee cases is:
a. The applicable State fraudulent transfer or conveyance statute;
b. The Federal fraudulent conveyance statute, effective for transfers made on or after May 29,
1991, subpart D of the Federal Debt Collection Procedures (FDCPA) Act of 1990 (codified at
28 U.S.C. 3301 to 3308), which can be asserted instead of or in the alternative to the
applicable State fraudulent conveyance statute
c. An express or an implied contract
d. A state statute other than the state fraudulent conveyance statute; and
e. A federal statute (FDCPA, 28 USC 3001 et seq.)
(7)
IRC 6901 applies to income, estate, and gift taxes incurred by the transferor. It also applies
to all other taxes (e.g., employment taxes) incurred by the transferor if the transferee’s liability
arises as a result of the liquidation of a partnership or corporation, or a reorganization under
IRC
368(a).
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
17/115
3/25/24, 9:58 AM
Checkpoint | Document
(8) The Area Director having jurisdiction in the initial determination of the income, estate, and gift
tax liability of the transferor is responsible for proceeding, under
IRC 6901, against transferees
or fiduciaries regardless of their location, and is responsible for all administrative action required in
management and control of the case.
(9) IRM 4.8.9.19.5.1, Transferor-Transferee Liability Cases discusses the notice of liability issued
to a transferee and the three parts to that notice.
(10) See IRM
5.17.14, Legal Reference Guide for Revenue Officers, Fraudulent Transfers and
Transferee and Other Third Party Liability, for a discussion of the different legal theories and
methods of collection from third parties, including transferee liability.
(11) See IRM
4.11.52, Examining Officers Guide, Transferee Liability Cases, with respect to
examination processes. It is important to note the caution in IRM
4.11.52.1.6.
Internal Revenue Manual
4.10.13.3.1 — Origination of Transferee Cases
[Last Revised: 07-27-2023]
(1) Two sources from which a transferee case can be generated are:
a. As a referral from the Collection function, see IRM
5.17.14, Legal Reference Guide for
Revenue Officer – Fraudulent Transfers and Transferee and Other Third Party Liability, for
additional information and
b. As a related pick-up during an examination, see IRM
4.11.52, Examining Officers Guide
(EOG) Transferee Liability Cases.
4.10.13.3.1.1 — Referral From Collection Function
[Last Revised: 03-16-2015]
(1) In an attempt to collect a tax liability, the Collection function may refer transferee cases to the
Examination function for assistance.
(2) Collection prepares Form 3031, Report of Investigation of Transferee Liability, to recommend a
transferee assessment. The Advisory Section reviews the report to ensure that pertinent factual
data and adequate evidence are obtained to sustain assertion of the transferee liability. Once
approved, the original report is forwarded to Planning and Special Procedures (PSP) to establish
the transferee case on AIMS non-master file and to forward the case to an Examination group. See
IRM
5.1.14.2.1, Report of Investigation of Transferee Liability, which describes the preparation
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
18/115
3/25/24, 9:58 AM
Checkpoint | Document
and presentation of the report and IRM
4.1.1.6.11.2, Collection Referrals-Form 3031, Report of
Investigation of Transferee Liability, which discusses the PSP review.
4.10.13.3.1.2 — Transferee Case Initiated During a
Related Examination
[Last Revised: 03-16-2015]
(1) Examiners are required to consider collectibility in every examination. IRM
4.20.1,
Examination Collectibility Procedures, provides instructions and guidance to examiners for
considering collectibility during the examination process and for soliciting payment at the
conclusion of the examination.
(2) As such, they must be able to identify situations in which the taxpayer has intentionally or
inadvertently placed assets out of the legal reach of the IRS. Additionally, they must be able to
identify situations in which asset transfers may not be conducted in a normal “business manner”
because of the close relationship of the parties involved.
(3) If the taxpayer gives an indication of insolvency, the examiner should try to learn about the
disposition of the taxpayer’s assets and/or the transferee’s legal responsibility for payment of the
transferor’s tax liability. The examiner must consider whether the elements of a transferee
examination, as described below, have been met.
(4) A transferee case will be initiated once the examiner determines:
a. The taxpayer has, or will have, a tax liability that cannot be collected directly
b. The elements of a transferee case have been met (See IRM
Equity, and IRM
4.10.13.3.2.1 , Transferee in
4.10.13.3.2.2 , Transferee at Law), and
c. All or part of the tax liability could be collected from the transferee see IRM
4.10.13.3.2.1
(5) Examiners are responsible for the identification and development of potential transferee cases
that arise during their examinations. For identification purposes the examiners should fill out Form
2045 Transferee Agreement. Examiners should not assume that Collection will develop a
transferee case after the transferor’s examination is concluded. By the time a case is routed to a
Revenue Officer (RO) for collection, the transferee statute of limitations may prevent adequate
consideration.
Note: Filling out a Form 2045 does not conclusively establish transferee liability under
IRC
section 6901.
Internal Revenue Manual
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
19/115
3/25/24, 9:58 AM
Checkpoint | Document
4.10.13.3.2 — Types of Transferee Liability and Burden of
Proof
[Last Revised: 07-27-2023]
(1) There are two basic types of transferee liability. Both can be asserted under
IRC 6901;
however, the extent of the liability depends on the law underlying the two types of transferee
liability, the value of the equity in the transferred assets, and the amount of taxes due from the
transferor. The types of transferee liability are:
a. Transferee in Equity, and
b. Transferee at Law
(2) Historically, transferees responsible for the tax obligations of another person were described as
either ‘transferees at law’ or ‘transferees in equity’. This distinction has become less significant
since the adoption of uniform state laws relating to transferee liability, such as the Uniform Voidable
Transactions Act (UVTA). The IRS may pursue both transferee liability in equity and transferee
liability at law within the administrative structure of
these two sources of transferee liability see IRM
and IRM
IRC 6901; for a more complete description of
5.17.14.3.3, Establishing Transferee Liability,
5.17.14.3.3.2.1, Fraudulent Transfers Under Federal and State Law.
4.10.13.3.2.1 — Transferee In Equity
[Last Revised: 07-27-2023]
(1) Transferee liability in equity is the most common form of transferee liability and is based on
equity or fairness principles. A Transferee in equity is a person or entity who receives the
transferor’s assets for less than adequate consideration, leaving the transferor insolvent and
unable to pay the tax liability. Transferee in equity cases are predicated on state or federal
fraudulent conveyance statutes. See IRM
4.11.52.2.2, Transferee in Equity, and Hagaman v.
Commissioner, 100 T.C. 180 (1993) which indicates the specific state statutes must be consulted to
determine liability in equity for each particular case.
(2) The liability of a transferee in equity is generally limited to the value of the property transferred.
However, where transferee liability is based on state law, state law determines the extent of the
liability, which may also include penalties or interest. Commissioner v. Stern, 37 U.S. 39, 44-45
(1940).
(3) The Government must prove the value of the assets transferred. Where the assets transferred
are subject to existing liabilities or assumed by the transferee, the value of the property received
may be reduced by the associated liability in determining the limit of transferee liability.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
20/115
3/25/24, 9:58 AM
Checkpoint | Document
(4) It should be noted that the mere fact that the transferee uses assets which he receives to pay
debts of the transferor will not relieve him of transferee liability. The transferee must also show that
the debts paid had priority over the tax liability. A transferee does not cease to be a transferee
merely by selling the transferred property. Additionally, the price at which the transferee sells the
property is not an accurate measure of the transferee liability. Rather, the liability is measured by
the value of the property that was transferred on the date of transfer.
(5) Even though a taxpayer admits that the taxpayer is a transferee of assets of a dissolved
corporation, unless he admits the extent of this liability, the Government must still prove the value
of the assets so received in order that a court can determine the amount due from him.
(6) Although specific elements will vary depending on the substantive law relied upon, the IRS
generally must prove numerous things as delineated below.
(7) Generally, the IRS must prove the transfer of assets from the transferor to the transferee for
less than adequate consideration. In this regard, the Government must establish by evidence the
value of the assets transferred in order to show that the transfer was for less than full and
adequate consideration. Documentation must show:
The transferor transferred property to the transferee (i.e., deeds, balance sheets, cancelled
checks, title transfers, etc.)
The value of the transferred property at the date of transfer
The transfer was for less than adequate consideration, and
Who received the assets. The documentation must show the current legal title. A transferee is
rarely a joint entity
Example: If a corporation made one check payable to the shareholder husband and one check to
the shareholder wife, there would be two separate transferee cases – one for the husband and one
for the wife. One transferee case in the joint names would not exist since the checks were not
made out in joint names. If land was transferred to them jointly (i.e., joint ownership, such as
tenancy by the entireties) there would be only one transferee – the husband and wife as joint
tenants.
(8) Generally, the IRS must prove a transfer of assets from the transferor to the transferee for less
than adequate consideration. In this regard, the Government must establish by evidence the value
of the assets transferred in order to show that the transfer was for less than full and adequate
consideration. Documentation must show:
The transferor transferred property to the transferee (i.e., deeds, balance sheets, cancelled
checks, title transfers, etc.)
The value of the transferred property at the date of transfer
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
21/115
3/25/24, 9:58 AM
Checkpoint | Document
The transfer was for less than adequate consideration, and
Who received the assets. The documentation must show the current legal title. A transferee is
rarely a joint entity.
Example: If a corporation made one check payable to the shareholder husband and one
check to the shareholder wife, there would be two separate transferee cases – one for the
husband and one for the wife. One transferee case in the joint names would not exist since
the checks were not made out in joint names. If land was transferred to them jointly (i.e., joint
ownership, such as tenancy by the entireties) there would be only one transferee – the
husband and wife as joint tenants.
(9) Generally, the IRS must prove the transfer of assets must have been made after the liability for
taxes accrued. Transferee liability was developed based on the principle that debtors may not
transfer assets for less than adequate consideration if they are left unable to pay their liabilities.
The chance to satisfy the debt out of the asset(s) transferred never existed where the transfer was
made prior to the time the tax liability accrued. Therefore, no transferee liability can ordinarily arise
when the transfer is made before the period in which the tax liability is created. However, the tax
liability need not have been asserted prior to the transfer. In this connection, the tax liability need
only accrue. The examiner should consult with Technical Services and/or Area Counsel in unusual
circumstances. Documentation must show:
1. The date the tax liability accrued. The tax liability accrues at least by the last day of the tax
period, not the due date of the return. In some cases (such as lottery winnings), a transfer
during the tax year may be argued to include an anticipated tax liability since the income was
earned prior to the year end and the transfer was obviously fraudulent. There is no
requirement that the tax liability be assessed at the time of the transfer.
Note: Different courts have reached various conclusions as to when the tax liability of the
transferor accrues, so Area Counsel must be consulted when determining the date the liability
of the transferor for the tax debt accrued.
2. The date the transfer took place.
(10) Generally, the IRS must prove the transferor is liable for the tax at the time of the transfer, or
the transfer occurred in the year of liability, and the transferor remains liable for the tax. It would
appear to be self-evident that unless the transferor is liable for the tax, there could be no liability
asserted against the transferee.
IRC 6902(a) states, in part, that the Government does not have
the burden of proof in Tax Court proceedings to show that the transferor was liable for the tax
. There is a presumption of correctness in the Commissioner’s determination, and unless the
transferee offers evidence as to the transferor’s tax liability, the amount established by the
Commissioner will be sustained. If the transferee contends that the transferor owes no tax, the
burden of proving this rests on the transferee. If there has previously been a decision on the
merits, the transferee is collaterally estopped from raising the issue of the transferor’s tax liability.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
22/115
3/25/24, 9:58 AM
Checkpoint | Document
Under
IRC 6902(a), however, the Government does have the burden in the Tax Court of showing
that the petitioner is liable as a transferee of property of a taxpayer. Documentation must show the
tax liability (i.e., transcript of account, Revenue Agent’s Report (RAR), Notice of Deficiency, etc.).
(11) Generally, the IRS must prove all reasonable efforts have been made to collect the tax liability
from the transferor-taxpayer. Courts generally consider a transferee’s liability to be secondary to
the primary liability of the transferor. Secondary liability means the transferee derives its liability
from the transferor’s liability based on the receipt of property under circumstances that subject the
transferee to the liabilities of the transferor. Before pursuing a transferee, the IRS must generally
exhaust all legal remedies it may have against the transferor for collection of the tax. The general
rule is that the IRS must show that all reasonable collection remedies against the transferor have
been exhausted and that further collection efforts would be futile. See Gumm v. Commissioner, 93
T.C. 475, 480 (1989). The extent to which the IRS must proceed against the transferor depends on
the facts and circumstances. For example, the IRS need not pursue a corporate taxpayer that has
been stripped of its assets or a trust that has distributed its property to a beneficiary and
terminated. Documentation should show that the transferor is in bankruptcy, has dissolved, or has
distributed all of the assets and collection is not possible or that collection was pursued but could
not be secured. A TXMOD will show the action taken by the Collection function.
(12) Generally, the IRS must prove the transferor was insolvent when the transfer was made or the
transfer of assets left the transferor insolvent.
Note: Transferee in equity liability is highly dependent on the state or federal law upon which the
liability is based. In some states, depending on state law, insolvency may not be necessary for a
transferee in equity proceeding. Consult Area Counsel if there are transferor-transferee situations
when the transferor was not insolvent at the date of, or rendered insolvent by the transfer of
property.
a. As stated earlier, the mere fact that there has been a transfer of assets does not establish
transferee liability. Any individual may transfer property for little or no consideration, without
causing any liability to the transferee, provided the transferor was solvent at the time the
transferor transferred the property. In cases involving constructive fraud (transfers made
without actual intent to hinder, delay or defraud the government’s collection efforts, but efforts
to collect the transferor’s tax liability were hindered) the Government often must also prove
that the transferor was insolvent when the transfer was made or the transfer of assets left the
transferor insolvent. Insolvency need not be present in cases involving actual fraud (i.e.,
transfers made with specific intent to hinder, delay or defraud the government from collecting
the transferor’s tax liability). The transferor’s insolvency is an essential element of constructive
fraud, but it does not need to be established when actual fraud exists. The examiner will need
to look to the applicable state fraudulent conveyance statute and/or the fraudulent transfers
involving debt provision in 28 U.S.C. 3301-3308 for the basis on which actual fraud could be
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
23/115
3/25/24, 9:58 AM
Checkpoint | Document
found. If the transferor liabilities exceeded the transferor’s assets, the Government should be
able to show that the transferor was insolvent.
b. The liabilities should include liability for taxes, penalties, and interest to the date of transfer.
It should also include additional liabilities as a result of an examination (i.e., when it is found
that the transferor embezzled money, the legal duty to repay the embezzled money would be
included as an additional liability). However, in calculating the value of the transferor’s assets,
any assets the Government cannot reach to satisfy the tax debts will not necessarily be
considered. This means that assets exempt from levy may not have to be considered as
assets in determining insolvency of the transferor.
c. The fact that the transferor was insolvent at one time during the year does not establish
proof of insolvency at the time the transferor made the transfer and if several transfers were
made, the Government must make a separate determination of insolvency for each of the
transfers involved.
d. In many instances, the Government’s transferee suit occurs several years after the transfer
took place. It goes without saying that the greater the span of time between the transfer date
and the institution of the suit, the more difficult it becomes for the Government to prove
insolvency.
e. Documentation should show that the transferor’s tax liabilities and other liabilities
(mortgages, debts payable, etc.) exceeded the transferor’s assets at the time of transfer. For
example, a copy of the transferor’s balance sheet at time of insolvency, documents showing
bankruptcy, documents showing dissolution of a corporation (contact Secretary of State),
documents showing how the assets in a decedent’s estate were distributed, etc., should be
obtained to support this.
f. Where a transferee transfers assets to a third party without consideration, the third person,
who now becomes a transferee of the transferee, may be liable for the tax liability of the
original transferor. This liability is limited to the extent that the second transferee received
assets identified as originally belonging to the transferor. However, the transferee liability can
only be asserted against the transferee of the transferee if the first transferee was liable as
such, and the second transferee received the assets under circumstances making him/her
liable at law or in equity for the liabilities of the first transferee.
g. Many state corporate merger and consolidation statutes provide that a surviving corporation
is liable for the debts of a predecessor corporation when the surviving corporation is the result
of a formal merger or consolidation of two corporations. In these cases, the surviving
corporation is primarily liable for the tax debts of the predecessor corporation as a successor
in interest . The successor in interest can essentially become the taxpayer and therefore
primarily liable for the predecessor’s tax liability. See Southern Pacific Transportation Co. v.
Commissioner, 84 T.C. 387 (1985).
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
24/115
3/25/24, 9:58 AM
Checkpoint | Document
h. Where a transferee transfers to a third party for full and valuable consideration the assets
previously received from the transferor, the transferee does not thereby cease to be a
transferee, nor is the price at which the transferee sold the property the measure of the
transferee liability.
4.10.13.3.2.2 — Transferee At Law
[Last Revised: 07-27-2023]
(1) See IRM
4.11.52.2.1, Transferee At Law, IRM
5.17.14, Legal Reference Guide for
Revenue Officers, Fraudulent Transfers and Transferee and Other Third-Party Liability, and
particularly IRM
5.17.14.3.3.1, Transferee Liability Directly imposed on the Transferee (At Law).
a. Pursuant to 31 USC § 3713(b), a representative of a person or an estate (except a trustee
acting under the Bankruptcy Code, Title 11) paying any part of a debt of the person or estate
before paying a debt due to the United States is personally liable to the extent of the payment
for unpaid claims of the United States. See IRM
5.17.13.7, Personal Liability of the
Fiduciary Under 31 USC § 3713(b), for additional discussion.
(2) In determining the extent of the transferee’s liability at law, the value of the assets received by
the transferee is generally immaterial since the extent of such liability is determined by reference to
the amount of tax liability of the transferor that the transferee has agreed to pay (determined by
contract or statute). Some state statutes, however, may also limit liability to the value of assets
received.
(3) Documentation required for transferees at law must show:
a. The assets that were transferred and the fair market value at the date of transfer;
b. A transcript of account showing the tax liability of the transferor for a period which accrued
prior to the transfer and remained unpaid at the time of the assertion of transferee liability; and
c. At the time of transfer of the assets, the transferee assumed the tax liability of the transferor
by contract or statute. A copy of the contract and/or statute should be obtained.
(4) Transactions such as statutory mergers are not transferee situations in the typical sense, but
may result in liability for the successor corporation. See IRM
4.10.13.3.2.1 (6) and IRM
5.17.14.2.3.
Internal Revenue Manual
4.10.13.3.3 — Statutory Period and Consents
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
25/115
3/25/24, 9:58 AM
Checkpoint | Document
[Last Revised: 03-16-2015]
(1) A transferee is considered a separate entity. The statute of limitations for the transferee is
separate and distinct from the transferor’s statute of limitations.
(2) The period of limitation for the assessment of the liability of a transferee is as follows:
a. The initial transferee – one year after the expiration of the period of limitations for
assessment against the transferor as shown by the filing date of the original return or as
extended by Form 872 or other statute extension form.
Note: When the transferor’s statute has been extended using Form 872-A and the transferor’s
tax liability has been assessed, Form 872-A is terminated. The computation of the transferee’s
statute of limitation will be one year from the assessment of the transferor’s liability.
b. A transferee of a transferee – one year after the expiration of the period of limitation for
assessment against the preceding transferee, but not more than three years after the
expiration of the period of limitations for assessment against the initial transferor.
c. A fiduciary – not later than one year after the liability arises or not later than the expiration of
the period for collection of such tax, whichever is later.
d. Fraud –
IRC 6501(c)(1) provides that, where the transferor files a false or fraudulent
return with the intent to evade tax, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time. In such cases, the
statute of limitations on the transferee would also be indefinite, since the transferee’s statute is
open for one year after the transferor’s statute expires. However, unless the transferor’s fraud
penalty has been definitively established by judicial decision or otherwise (such as by
agreement on Form 870) the transferee’s statute of limitations should be protected by a
consent form. Where the transferor’s fraud penalty has not been definitively established, do
NOT rely on fraud to keep the transferee’s statute of limitations open. Securing a statute
extension by consent from the transferor will protect the Government’s interest in the event
that the fraud issue against the transferor is lost.
(3) When it is necessary to extend the statute of limitations of transferees who are not primarily
liable, the consent form used is Form 977, Consent to Extend the Time to Assess Liability at Law or
in Equity for Income, Gift, and Estate Tax Against a Transferee or Fiduciary, or Form 4016,
Consent Fixing Period of Limitation Upon Assessment of Employment or Miscellaneous Excise
Taxes Against a Transferee. The extended date on Form 977 or Form 4016 may not be equal to or
shorter than the statutory period prescribed by
IRC 6901(c). The consent will be secured in
duplicate.
(4) When a Form 977 or Form 4016 is executed and no Form 2045, Transferee Agreement, has
been secured, the transferee may subsequently raise the defense that the transferor is liable (by
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
26/115
3/25/24, 9:58 AM
Checkpoint | Document
claiming that the transferee is not a transferee). In this situation, the IRS may only be able to
proceed against the transferor if a Form 872 has been secured. To be safe, it is wise to secure
consents from both the transferee (Form 977 or Form 4016) and the transferor (Form 872) until it
has been determined who is liable for the tax.
Note: Filling out a Form 2045 does not conclusively establish transferee liability under
6901. Also see
26 CFR 301.6901-1(c) and
IRC
26 CFR 301.6901-1(d).
4.10.13.3.3.1 — Trust Fund Doctrine
[Last Revised: 07-27-2023]
(1) If the period of limitations for assessment against a transferee has expired, action against the
transferee under the trust fund doctrine for the collection of the unpaid tax assessed against the
transferor should be considered.
(2) The trust fund doctrine is most commonly used to impose transferee liability on a shareholder
for taxes incurred by a corporation when the shareholder receives assets from a corporation. See
Starnes v. Commissioner, 680 F. 3d 417 (4th Cir. 2012) and Benoit v. Commissioner, 238 F. 2d
485, 491 (1st Cir. 1956). Recovery under the doctrine is limited to the value of the property
transferred. Many states have also enacted statutes to permit creditors of a corporation to sue
shareholders. See IRM
5.17.14.3.3.3 Trust Fund Doctrine.
(3) If timely assessments have been made against the transferor and the period for instituting a suit
for collection provided in
IRC 6502(a) has not expired, but the time for transferee proceeding
has expired, the case, accompanied by a report containing facts in support of the transferee’s
liability, should be forwarded to Area Counsel through Technical Services.
4.10.13.3.3.2 — Protecting the Transferor’s Statute of
Limitations
[Last Revised: 07-27-2023]
(1) In attempting to collect the transferor’s tax liability through a transferee case, the transferor’s tax
liability should always be assessed or a statutory Notice of Deficiency issued prior to the expiration
of the transferor’s statute of limitations unless one of the exceptions below has been met:
a. A valid consent (Form 872, Form 872-A, etc.) to extend the transferor’s statute of limitations
has been obtained;
b. A validly executed Form 2045, Transferee Agreement, has been secured in duplicate from
all transferees. Managerial involvement in this determination should be documented both on
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
27/115
3/25/24, 9:58 AM
Checkpoint | Document
Form 4318 and on the Form 895, Notice of Statute Expiration. If not secured from all identified
transferees, action should be taken to prevent the statute from expiring, such as issuing a
notice of deficiency to the transferor. Should there be doubt in a particular case as to whether
it would be advisable to accept an agreement from the transferee as a basis for not
proceeding against a dissolved corporation, advice should be requested from Area Counsel.
Form 2045 does not extend the transferor’s statute of limitations, butis an agreement between
the transferee and the Commissioner, that the Commissioner agrees to discontinue action
against the transferor in return for an admission by the recipient of the assets that the
transferee is the transferee. The transferee assumes and agrees to pay the amount of any and
all Federal income taxes finally determined or adjudged as due and payable by the transferor,
to the extent of such transferee’s liability at law or in equity. The transferee will not, in the
absence of the prior written consent of the Commissioner, sell, transfer, or assign without
adequate consideration all or any substantial portion of their assets. In the event of a
corporate transferee, the agreement will be accompanied by a copy of the minutes of the
corporate board of directors evidencing authorization of such agreement.
Note: Filling out a Form 2045 does not conclusively establish transferee liability under
IRC
6901.
c. The transferor has an indefinite statute of limitations (i.e., judicially determined fraud –
IRC
6501(c), no returns filed by the transferor etc.).
(2) If a liability in tax is determined in the case of the transferor and the statute of limitations has
expired, the deficiency should be asserted against the transferee(s) within the period of limitations
applicable to him or her.
(3) Although it may appear unlikely that the IRS will be able to collect from the transferor, the Tax
Court indicates that the IRS should attempt to exhaust its reasonable collection efforts before
attempting to collect from a transferee, or otherwise show that collection from the transferor would
be futile. Issuing a notice to the transferor helps establish this effort.
4.10.13.3.3.3 — How State Corporate Dissolution Law
Affects an Examination
[Last Revised: 03-16-2015]
(1) Transferee situations are common with dissolved corporations. If the corporation has been
dissolved, there may be no assets against which to collect any proposed assessments. In that
event, it may be necessary to utilize transferee liability provisions of
IRC 6901 to collect the
corporate liability. A transferee case will be developed concurrently with the corporate examination
if the elements needed to establish a transferee case are present. Otherwise, the examiner may
consider limiting the scope of the examination. See IRM
5.17.14, Legal Reference Guide for
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
28/115
3/25/24, 9:58 AM
Checkpoint | Document
Revenue Officer – Fraudulent Transfers and Transferee and Other Third-Party Liability for
additional information.
(2) Federal law, not state law, sets the statute of limitations on assessment and collection of federal
taxes for transferee liability cases, unless Congress provides otherwise. State corporate dissolution
law does not shorten the assessment limitations period provided by
IRC 6501. State law may,
however, adversely affect the capacity of a dissolved corporation or its last board of directors to
represent the dissolved corporation or to act on its behalf. This will affect the corporation’s ability to
extend the statute of limitations, to agree to tax liabilities or to litigate corporate liabilities.
(3) State corporate dissolution law governs how a corporation may dissolve. The state law may
provide a specific time period for a dissolved corporation to wind up its affairs. Some states have a
specific period in which to wind up affairs, while others do not. Only the individuals named in the
applicable state law are authorized to act for the dissolved corporation and only during the winding
up period. Such appointment may divest others (the officers prior to dissolution) of authority to act
on behalf of the corporation. A consent must be executed by the authorized officer of a
dissolved corporation on or before the last date of the winding up period in order to be valid
and to hold the period of limitations open after the end of the winding up period.
(4) Caution should be exercised in obtaining waivers of restriction on assessment and extensions
of the statutes of limitations in dissolved corporation and transferee cases. Examiners should not
rely on any such agreements without the approval of Area Counsel.
(5) The state law which governs the corporate dissolution is the law of the state in which the
corporation was incorporated.
Example: If a corporation has its offices in Florida, does business entirely in Florida, was
examined by the IRS in Florida, but was incorporated under Delaware law, authority to execute a
consent should be tested under Delaware law, not Florida law.
(6) Examiners should consult the applicable state corporate dissolution law and identify which
individuals (corporate officers, board of directors, etc.) are legally authorized to act for the
dissolved corporate entity. Area Counsel may be contacted to request an opinion on whom is
authorized to act for the corporation.
(7) The examiner will also ensure that the individuals authorized to represent the dissolved
corporation have been appointed to these duties by the corporation. Documentation will be
obtained to satisfy this requirement and will be attached to any consent or waiver that the
authorized individuals sign. A provision should be added below the signatures of the appointed
individuals stating their title
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
29/115
3/25/24, 9:58 AM
Checkpoint | Document
Example: Trustee of X corporation, a dissolved corporation. Also, a provision should also be
added that the corporation has dissolved, but is continuing as a corporate body under (name the
section of state law).
(8) The corporation and its authorized officers/directors may perform the following acts up to the
end of the winding up period:
a. Execute a valid extension of the statute of limitations (i.e., Form 872, Form 872-A, etc.);
b. Execute a valid assessment agreement (i.e., Form 4549, Form 870, etc.). Otherwise the
corporation will be unable to agree to the adjustments; and
c. Institute litigation on behalf of the corporation.
(9) Precautions that should be taken in obtaining waivers of restriction on assessment and
extensions of the statute of limitation in transferee and dissolved corporation cases.
a. Obtain the transferee’s agreement to the liability prior to the expiration of the transferor’s
limitation period, if at all possible;
b. Clearly explain (and document) the effect of executing a Form 2045, Transferee Agreement;
and
c. Clearly explain (and document) the extent of a transferee’s monetary liability.
Note: Filling out a Form 2045 does not conclusively establish transferee liability under
IRC
6901.
(10) Some state corporate dissolution law provides that the dissolution of a corporation may be
revoked within stated periods. If this occurs, this may affect the authority of the corporation or its
directors. Examiners should always inquire if a revocation of dissolution has occurred.
(11)
IRC 6901 is only applicable to income, estate, and gift taxes. Transferee liability procedures
are not available to employment, excise, and other types of taxes in the Code unless they are
involved in the liquidation of a corporation, partnership, or upon the reorganization of a corporation
pursuant to
IRC 368(a). See also
26 CFR 1.507-1(b)(8) regarding transferee liability for
chapter 42 excise taxes in the case of reorganizations and transfers between private foundations
described in
IRC 507(b)(2). A liquidation is deemed to have occurred if the business entity has
ceased to do business and the assets of the entity have been distributed to the owners.
4.10.13.3.3.4 — Consents to be Used in Mergers and
Consolidations
[Last Revised: 03-16-2015]
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
30/115
3/25/24, 9:58 AM
Checkpoint | Document
(1) Many state corporate merger and consolidation statutes provide that when a corporation is
dissolved, the successor corporation is not a transferee. In states with such laws, the new or
surviving corporation assumes primary liability for the debts of the merged or consolidated
corporation. Action to assess the primary liability against the new/surviving corporation should be
taken within the statutory period of limitations for assessment against the merged or consolidated
corporation. If the period of limitations needs to be extended in order to make this assessment,
Form 872 or Form 872-A must be executed by the new/surviving corporation before the expiration
of the period of limitations for assessment against the merged or consolidated corporation. The
corporate name on Form 872 or Form 872-A will be completed and signed as: “B Corporation, Inc.,
Successor in interest to A, Inc.”
(2) The examiner should ensure that the successor corporation is solely responsible for the
liabilities of the dissolved entity. Many merger and consolidation agreements allocate some or all of
the liabilities to other parties, including the sellers, with respect to the dissolved entity. Documents
verifying the terms of sale should be scrutinized where possible to resolve any discrepancies.
Internal Revenue Manual
4.10.13.3.4 — Administrative Procedures
[Last Revised: 03-16-2015]
(1) If the transferee case is originated through a related examination, the examiner will initiate
control of the transferee examination. The transferee will be controlled using a “dummy” TIN on
non-master file. See IRM
4.4.23 Aims Procedures and Processing Instructions, Openings, for
more detailed information on master file and non-master file procedures.
(2) Form 5354, Examination Request Non-Master File, will be completed.
(3) PSP will initiate non-master file controls on all transferee cases referred from the Collection
function.
(4) IRM
8.7.5.9(1) Issuing a Notice of Liability on an Unagreed Transferee Case says Tax
Computation Specialists (TCS) are generally responsible for the preparation of Notices of Liability
in transferee/transferor cases.
(5) Each individual or entity that is a transferee will have a separate case file. A Form 895, Notice
of Statute Expiration, will be attached to the transferee case file for each tax period. Form 895 will
be completed with the transferee’s name as transferee and taxpayer identification number. The
return form and taxable year or period will be that of the transferor. If the transferee case was
originated as referral from Collection function, the transferee statute of limitations will be computed
by reference to an Individual Master File On-Line (IMFOL) with definer code -T (Tax Module) or M
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
31/115
3/25/24, 9:58 AM
Checkpoint | Document
on the transferor, as no returns will be contained in the file from Collection. See IRM
2.3.51.2 ,
Command Code IMFOL, for more information.
4.10.13.3.4.1 — Developing the Elements of a Transferee
Case
[Last Revised: 03-16-2015]
(1) If the transferee case was received from Collection, the examiner will determine whether all of
the elements required in a transferee case have been documented by the Revenue Officer (RO) on
Form 3031 Report of Investigation of Transferee Liability. If the elements required, as outlined
earlier, have not been documented, the examiner will contact the transferee (and if needed, the
transferor), to interview and obtain additional documentation to support the elements required in
the transferee case.
(2) If a transferee case is initiated during the examination of a transferor, the examiner will develop
the elements required in a transferee case and obtain documentation to support each of the
elements. The transferee will be advised that they are under examination as a transferee. An
interview with the transferee will need to be scheduled and conducted in order to develop all
elements and to obtain supporting documentation.
(3) The examiner will charge time to activity code (AC) 812 – detail to the Collection function.
4.10.13.3.4.2 — Transferee Waivers
[Last Revised: 03-16-2015]
(1) When all of the elements have been fully developed and documented, the examiner will
prepare the applicable waivers, solicit an agreement and payment from the transferees, and hold a
closing conference.
(2) Form 870-T, Waiver of Restrictions on Assessment and Collection of Transferee or Fiduciary
Liability and Acceptance of Overassessment (for income tax cases), or Form 2504, Agreement to
Assessment and Collection of Additional Tax and Acceptance of Overassessment (Employment
Tax Adjustments Not Subject to
IRC 7436), modified with special language, should be used to
solicit an agreement from the transferee for the amount of the transferor’s tax, penalties, and
interest. The waiver will be completed as follows:
1. The name and address block will be completed with the name of the transferee as
transferee;
Example: Joe Smith, Transferee
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
32/115
3/25/24, 9:58 AM
Checkpoint | Document
2. The social security or employee identification number will be that of the transferee;
3. The tax period ended, tax, and penalties blocks will be completed with the tax period and
unpaid balance of the transferor’s tax and penalties. For transferee cases originated from an
examination, the amounts will be taken from the examination report net of any payments. For
transferee cases referred from Collection, a transcript of account will be obtained using
command code IMFOL-T and will be analyzed by summarizing the total amount of tax (net of
any payments) and each penalty for each tax period. These totals will be inserted on the
waiver (these amounts plus interest should reconcile to the modified balance per the IMFOLT). An index of all tax modules available will be obtained using command code IMFOL-I to
ensure that all tax periods with an outstanding tax are included on the waiver; and
4. A special paragraph will be added to the remarks section of Form 870-T or to the reverse
side of Form 2504. See all of section IRM
4.10.13.3. If the value of the assets transferred is
less than the transferor’s unpaid liability, the transferee’s liability is limited to the value of the
assets transferred. A special paragraph with language for the limited liability will be used. In
this case, Form 870-T will reflect the total transferor’s tax and penalty liability, but the
paragraph will state the amount to which the liability is limited.
(3) Form 2045, Transferee Agreement, will be solicited. By signing this form, the transferee admits
liability as a transferee of assets received from the transferor, and assumes and agrees to pay the
tax liability of the transferor. The government is then relieved of the burden of proof regarding the
transferee liability. To protect the government’s interest solicit Form 2045 from each transferee.
Form 2045 may be obtained from only one transferee provided that the assets received by the
transferee are sufficient in amount to cover the total transferor’s liability. If the transferee is a
corporation, a copy of the minutes of the board of directors authorizing an officer to enter into this
agreement should be attached to this form.
Note: Filling out a Form 2045 does not conclusively establish transferee liability under
IRC
6901.
4.10.13.3.4.3 — Transferee Case File and Report
[Last Revised: 03-16-2015]
(1) Each transferee should be a separate case file, as it is separate and distinct from the transferor
examination. Whenever the transferee’s name is written in the file, it should have the title
“Transferee” after it to distinguish it from an income tax examination of the same entity.
(2) Form 4665, Report Transmittal, should set forth all necessary facts of a confidential nature. This
will include a clear statement of the present ability of the transferor and each transferee to pay, with
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
33/115
3/25/24, 9:58 AM
Checkpoint | Document
names, addresses, amounts and nature of property held by each that may be subjected to use in
payment of the tax.
(3) Each transferee file will contain a transferee report, which is prepared in memorandum form.
The memorandum will be very detailed if the case is unagreed. It will list the name, address, and
Taxpayer Identification Number (TIN) of the transferee and the transferor. The memorandum will
contain the following:
a. A list of all of the transferor’s tax periods and the respective unpaid tax liabilities and
penalties
b. How the transferor’s unpaid tax liability was determined (i.e., tax returns that were filed but
the balance due was unpaid, income tax examination, etc.)
c. Whether the transferee is a transferee at law or in equity
d. A complete background containing the facts and reasons for recommending the transferee
action, with reference to the documentation used to support the facts
e. A list of the elements required to support the Government’s burden of proof and how they
have been met. The documentation that supports each element should be referenced
f. An analysis that lists all of the transferor’s assets prior to insolvency and their disposition. It
will include a description of each asset, its fair market value at the date of transfer, the date
each asset was disposed of, and who received the assets
g. How insolvency and the date of insolvency were determined
h. Information relating to Collection function’s involvement in collecting the transferor’s unpaid
liability; and
i. Any attempts to conceal assets and evade payment of taxes
(4) Documentation and workpapers will be attached to the memorandum. If it is voluminous, the
workpapers and documentation will be attached to a Form 4318-A, Continuation Sheet for Form
4318, Examination Workpapers Index, which will be used to index the workpapers.
(5) A Form 5344, Examination Closing Record, will not be completed for the transferee case file.
4.10.13.3.4.4 — Corporate Transferor – Information to
Include in the Transferee Report
[Last Revised: 03-16-2015]
(1) In cases in which the transferor is a corporation, the examiner will include the following
information in the transferee report:
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
34/115
3/25/24, 9:58 AM
Checkpoint | Document
a. Whether or not the corporation is insolvent, has been dissolved, or is in the process of
liquidation. If the corporation has been dissolved, information should be furnished showing the
date and manner of dissolution.
b. A description, including the amount and value of the property or assets of the corporation at
the time of dissolution or liquidation.
c. Whether or not any property or assets were retained by the corporation; and, if so, a
description, including the amount, present value, and location of such property or assets
should be furnished, together with the name and address of the person having custody
thereof. A list of the liabilities of the corporation should also be furnished. Mortgages,
judgments, and other liabilities which may take priority over tax liens by reason of being
recorded prior to the filing of notices of such liens as provided in
IRC 6323 should be listed
separately.
d. If subsequent to the taxable year or years being examined, any of the assets of the
corporation that have been transferred to another corporation through a sale or a
reorganization, consolidation or merger, a description, including the value of the assets
transferred, and a statement showing whether the consideration given for such assets were
cash, stock or both. If both cash and stock passed as consideration, a statement of the
amount of cash paid and the number of shares of stock transferred, both common and
preferred, and the value of such stock at the time of transfer. A statement should also be
furnished as to the present financial condition of the corporation taking over the assets,
together with the address of such corporation. If the reorganization, consolidation or merger
was made pursuant to a written agreement or under the provisions of a State statute, a copy
of such agreement should be secured and made a part of the report or reference made to the
State statute.
e. Whether the liabilities of the corporation were assumed by any other corporation or person:
and if so, a copy of the agreement under which such liabilities were assumed should be
furnished.
f. The full name of each stockholder who received assets of the corporation at the time of
liquidation, the present address of each of such stockholders, and the number and par value
of the shares of stock held by each at the time of liquidation.
g. Whether the stockholders of the corporation received both cash and other property in the
liquidation of the corporate assets. If so, the amount of cash received by each stockholder and
a description, including the amount and value of the property received by each stockholder
and the present financial condition of each should be furnished.
h. Whether any assets of the corporation were transferred without adequate consideration to
any other corporation or person. If so, a complete statement of all the facts and circumstances
pertaining to such transactions, particularly the name, present address, and financial status of
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
35/115
3/25/24, 9:58 AM
Checkpoint | Document
each transferee, should be furnished, together with a description of the assets transferred, the
consideration paid therefor, and the value of the assets received by each transferee.
i. A statement should also be furnished showing the name and present address of each
stockholder who has not paid in full the amount of his/her subscription to the capital stock of
the corporation and the amount owing thereon.
j. State specifically the source or sources from which the information was obtained; that is,
whether from the books and records of the corporation concerned, from public records, or from
statements of former officers, stockholders, employees, etc.
k. Copies of the records should be obtained if they are not too voluminous.
4.10.13.3.4.5 — Deceased Transferor – Information to
Include in the Transferee Report
[Last Revised: 03-16-2015]
(1) In cases in which the transferor is deceased, the examiner will include the following information
in the transferee report:
a. The correct name, late address, and the date of death of the decedent, the full name and
present address of the executor or administrator, and the title or name and the location of the
court having jurisdiction of the estate; also, whether or not the decedent left a will, and, if so, a
copy thereof.
b. Whether a proof of claim for the tax referred to has been filed and, if so, the date of filing
and with whom it was filed.
c. A copy of the inventory of the property and assets or any similar document filed by the
executor or administrator with the court.
d. Whether complete distribution has been made of all of the property and assets of the
estate, and, if so, a copy of the report of the executor or administrator or of the final order or
decree of the court showing the distribution in kind or otherwise of the property and assets of
the estate. The date of such report, order, or decree should be given.
e. Unless clearly and fully shown by the information called for above, a description, including
the actual amount or value in money, of all of the property and assets received by each
distributee, the dates such property and assets were received and whether received as a
specific bequest or whether the distributee is an heir at law or a residuary legatee, together
with the name and present address and financial status of each distributee.
f. A description, including the amount or value in money, of the undistributed property and
assets, if any, remaining in the hands of the executor or administrator as of the date of the
report.
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
36/115
3/25/24, 9:58 AM
Checkpoint | Document
g. If the executor or administrator has been discharged, or if the estate has been closed, a
copy of the final order or decree of the court discharging him/her or closing the estate should
be furnished, unless this is contained in or is clearly shown by any other documents called for
herein. The exact date of such order or decree should be shown thereon or in the report.
h. State specifically the source or sources from which such information was obtained; that is,
whether from the books and records of the taxpayer, from public records, or from a statement
of persons having knowledge of the facts, such books and records being identified and the
pages or folio numbers thereof indicated. Copies of the records should be obtained if not too
voluminous.
4.10.13.3.4.6 — Closing an Unagreed Transferee Case
[Last Revised: 03-16-2015]
(1) If the transferee case is unagreed, the examiner will prepare the 30-day letter using Letter 955,
30 Day Letter – Straight Deficiencies of Both Deficiencies and Overpayments, modified as
necessary.
(2) Special language will be inserted as the opening paragraph to Letter 955, depending on the
circumstances of the case. See IRM
4.10.13.3.6
4.10.13.3.4.7 — Closing an Agreed Transferee Case
[Last Revised: 03-16-2015]
(1) If the transferee case is agreed, the case will be forwarded to Technical Services for special
handling. Technical Services will prepare Form 1296, Assessment Against Transferee or Fiduciary,
see IRM
4.8.8, Technical Services, Miscellaneous Responsibilities.
(2) Technical Services will fax Form 1296 with agreement forms (Form 870-T, Form 2504) or Form
906, Closing Agreement On Final Determination Covering Specific Matters, and Form 3198 to
Centralized Case Processing (CCP). The case will not be updated to CCP. Technical Services will
also complete Form 10904, Request for Record Deletion from AIMS/ERCS, using disposal code 28
and include the form inside the case file. Technical Services will then forward the case file to their
Planning and Special Programs (PSP), Audit information Management System
(AIMS)/Examination Return Control System (ERCS) Analyst for deletion of the AIMS record.
4.10.13.3.4.8 — Closing a Transferee Case with less Than
Six Months Remaining on the Transferee Statute of
Limitations
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
37/115
3/25/24, 9:58 AM
Checkpoint | Document
[Last Revised: 03-16-2015]
(1) If the transferee examination is within six months of the statute expiration date or if the
transferee failed to file a valid protest to the 30-day letter (Letter 955), the transferee case will be
forwarded to Technical Services for issuance of a Notice of Transferee Liability.
Internal Revenue Manual
4.10.13.3.5 — Liability of Transferee for Interest
[Last Revised: 07-27-2023]
(1) When the value of assets transferred exceeds the transferor’s tax liability, the transferee may
be liable for interest for periods before and after the transferee received a notice of liability. See
IRM
5.17.14.3.4 for a detailed description of a transferee’s potential liability for interest.
4.10.13.3.5.1 — Limited Liability Where the Value of the
Assets Transferred Is Less Than the Transferor’s
Liability
[Last Revised: 03-16-2015]
(1) If the fair market value of the property transferred is less than the amount of the transferor’s
unpaid tax liability, the transferee may if state law so allows, be liable for interest on the use of the
property from the date the transferee receives the assets until the notice of transferee liability is
issued, but the transferee is not liable for
IRC 6601 interest or penalties on the tax itself. Interest
under state law does not extend beyond the date of the notice of liability.
(2) When closing a transferee case in which the assets transferred are less than the transferor’s
liability, Form 3198 should be annotated: “Transferee Case – Limited Liability”.
Internal Revenue Manual
4.10.13.3.6 — Transferee Letters
[Last Revised: 03-16-2015]
(1) The group prepares the preliminary 30-day letter for transferee cases. Technical Services
prepares the notices of transferee liability and notices of fiduciary liability in all transferee cases.
(2) The 30-day letter, the notice of transferee liability and the notice of fiduciary liability all have
three different parts:
https://checkpoint.riag.com/app/view/toolItem?usid=51ee98m216d62&cmpType=MAIN&feature=tfederal&lastCpReqId=5f123&searchHandle=CMPST.610
38/115
3/25/24, 9:58 AM
Checkpoint | Document
a. The letter to the transferee, which is modified by a paragraph for transferee/fiduciary liability.
The letter to be used as the 30-day letter is Letter 955
b. The letter to be used as a notice of transferee/fiduciary liability is Letter 902-T, Notice of
Liability
c. The attachment to the letter, lists the name, address, TIN, tax, penalty, and interest liability
of the transferor. It also lists the name, address, and TIN of the transferee followed by
statements as to the extent of the transferee’s liability and how the transferee’s liability arose.
See subsection IRM
4.10.13.3.6.1, for the paragraphs to use and how to prepare the
attachment to the letter.
d. The waiver/agreement on assessment and collection of additional tax, modified by a special
paragraph for transferee/fiduciary liability. Form 870-T will be used for income tax cases. Form
2504 will be used for employment or excise tax. Form 890-T, Waiver of Restrictions on
Assessment and Collection and Acceptance of Overassessment as to Transferee or Fiduciary
Liability for Estate, Gift and Generation – Skipping Transfer Tax will be used for estate tax
cases. Refer to subsection below for the paragraph to use to modify the waiver. The total
transferor’s unpaid tax and penalty liability will be inserted in the applicable blanks even if the
transferee’s liability is limited. If the liability is limited, the paragraphs modifying the waiver will
state the amount the liability is limited to.
e. Exhibits may be attached to the above letter package to aid the transferee in understanding
why the transferee is a transferee or any supporting computations. Examination reports will
not be sent with preliminary (30-day) letters asserting liability against transferees.
(3) Area Counsel will review all proposed notices of transferee liability prior to issuance. IRM
4.8.9.10.2.1 Mandatory Area Counsel Review, requires mandatory review by Area Counsel.
(4) No notices of transferee liability will be issued for employment or excise tax.
IRC 6901 states
that the liability will be assessed, paid, and collected in the same manner as in the case of the
taxes with respect to which the liabilities were incurred. Since no notice of deficiency is issued to a
taxpayer for employment or excise taxes, no notice of transferee liability will be issued to a
transferee for employment or excise taxes.
(5) If the 30-day letter or notice of transferee liability is issued for a transfer, it should be asserted in
the first paragraph of the letter that the substantive liability is founded.
(6) If in an estate tax case, a preliminary letter or a notice of liability is issued to a transferee,
trustee, or beneficiary of property includi…