Sunday, March 27, 2011

The U.S. Tax Court has shielded a former business owner from transferee liability for his former company's unpaid taxes after the owner sold its business

In Douglas R. Griffin, T.C. Memo 2011-61 (Tax Ct. Memo 2011), the Tax Court held that a business owner who sold a substantial portion of the assets of his business was not responsible as a transferee for the prior taxes of the business.  Mr. Griffin had deposited a portion of the sale proceeds into his individually held account in exchange for a promissory note to the company.  He then sold his stock in a separate and unrelated transaction.  In the subsequent transaction, some of his promissory note to the business was canceled in exchange for a redemption of a portion of the shares of his stock. The Tax Court found that the facts and circumstances of the case revealed that the transactions were entered into separately and that they were not entered into fraudulently.

Transferee liability is codified in Section 6901 of the Internal Revenue Code and provides that the liability of a transferee of a taxpayer's property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.”  What this means is that the Internal Revenue Service may assess and collect from the transferee of property the transferor's existing liability in accordance with the fraudulent transfer law of the state where the transaction occurred.  In Griffin, the transfer occurred in Florida which applies the Florida Uniform  Fraudulent Transfer Act (UFTA).

The Tax Court declined to apply the substance over form doctrine, finding that each transaction was separately arranged and had independent legal significance.

Griffin reminds us that proper planning may avoid transferee liability

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