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5.1.30.8
(09-21-2007)
Strategic Approach Case Example – Successor Entities
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One problem encountered in complex business cases involves entities such as corporations, partnerships, sole proprietorships,
and Limited Liability Companies (LLCs), closing one business entity only to turn around and immediately start another business
under a new EIN. The new entity will essentially perform the same type of work, and have the same assets, location, and individuals
operating the new business.
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Once the assets and income of the taxpayer entity have been transferred, the "successor entity"
theory may be used to collect from the new entity. The successor entity theory is a legal theory that relies on fraudulent
conveyance and/or alter ego theories. Litigation may be required in order to collect against transferred assets or from the
income and assets of the new entity.
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In these cases it is imperative to:
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Move as quickly as possible to levy against any known assets of the taxpayer entity such as account receivables and bank accounts
before they are transferred to the successor entity.
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Determine what if any assets have been transferred to the successor entity.
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Determine the value of the transferred assets. Verify any claimed payments used to purchase the assets. Property Appraisal
and Liquidation Specialists (PALS) or IRS Engineers can assist with any valuation problems.
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If the assets were transferred in the face of the recorded lien, consult with PALS to determine the value of the assets. If
sufficient equity exists, use the pre-seizure analysis to determine if seizure is the next appropriate action.
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If assets of sufficient value and equity were transferred in the face of the statutory lien for less than full consideration,
seizure again should be considered. Secure all documents and facts related to the transfer and consult with Advisory and Area
Counsel to confirm the lien position in the property. Determine if the filing of a nominee, alter ego or transferee lien is
needed to ensure the lien interest in the assets is protected.
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If it is claimed that the assets were transferred for adequate consideration, the revenue officer should take a close look
at what consideration actually passed between the parties. Sometimes, when assets are transferred between related entities
payments may not actually have been made. This fact is very important in determining lien priority. As mentioned previously,
consult with Advisory and Area Counsel. This situation will most likely require the filing of nominee, alter ego or transferee
liens to ensure the lien interest in the assets is protected.
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If the property in question was transferred before the assessment lien arose, gather all of the pertinent facts regarding
the transfer and consult with Advisory and Area Counsel to discuss alternative collection tools that are available based on
the facts and the appropriate federal and state laws. These could include:
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Transferee assessment against successor entity
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Suit to establish transferee liability
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Alter ego or nominee liens and levies
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Suit to foreclose on the federal tax lien
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Suit to set aside a fraudulent transfer
Note:
Transferred property can be discharged from the effects of the lien if the successor party pays the fair market value of the
property less any senior encumbrances. This could be done in lieu of any of the above actions.
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If the amount owed and the estimated collection from the successor entity warrants the use of the successor entity theory,
determine what assets have been transferred by:
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Reviewing financial statements previously submitted by the taxpayer.
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Reviewing the most recent balance sheet on the Form 1120 or 1065.
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Summoning any recent loan applications by the taxpayer.
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Questioning current or ex-employees regarding the transfers.
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Questioning principals of the business under oath.
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Searching local locator sources for both entities for such things as vehicle records, real property records, UCC filings.
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Summoning insurance records.
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Summoning the last known bank account and trace the final funds from this account to see if monies where moved into the account
of the successor entity.
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Checking with accounts receivable of the taxpayer entity to see who they paid for work done by the taxpayer. Request copies
of payments in order to trace where they were deposited.
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Proving the "successor entity"
theory:
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Match Secretary of State records for both entities to determine if both are listing the same members or officers.
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Use state employment records to identify common employees of the taxpayer entity and the successor entity.
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Contact accounts receivable and accounts payable to determine if they were advised of the change by either entity. Often the
successor entity will send a letter telling the party that they have changed their name or the business reorganized. A copy
of this letter is excellent proof of the close relationship between the entities.
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Identify any contracts the taxpayer entity may have had such as lease agreements or contracts for specific jobs. Find out
if the contracts were changed to include the successor entity. If not, this may be evidence that the entities are essentially
the same.
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Check local business records such as fictitious names filings or business licenses to determine if they have formally registered
the new name and applied for licenses under the new name.
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Check for a business web page to see how and if the new entity is identified.
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Secure copies of payments of income earned by the taxpayer to determine if the monies were deposited in to the successor corporate
bank account.
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Summon the taxpayer’s bank account(s) to determine if expenses of the successor corporation were being paid from the income
of the taxpayer.
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Review basic information to see if it was changed when the new entity was created. This would include common nominee indicators
such as phone and fax numbers.
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Other utilities such as electricity and gas. Examine to see if deposits of the old entity were refunded or if the utilities
were actually changed.
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E-mail addresses and web pages.
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Service agreements for equipment such as photo copiers.
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Rental agreements.
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Collecting using the successor entity theory:
The income and/or assets of the successor corporation must be carefully evaluated.
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Consider the amount of the liabilities, the equity in any assets, and the amount of income being generated by the successor
entity. If the case will require litigation, the amount expected to be collected must equal or exceed the LEM amount for suit
recommendations.
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Consider any weaknesses in the case if it were to go forward to litigation.
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Consult with local Counsel. The successor entity theory requires approval from Counsel for any lien or levies against the
successor assets or income.
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