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8.7.5.6
(11-06-2007)
Settlement Computations in Transferee Cases
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This subsection covers the procedures followed by the Tax Computation Specialist (TCS) or other Appeals employee who prepares
settlement computations on transferee cases.
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Generally, the settlement computation in transferee cases shows a recomputation of the transferor’s unpaid liability, including
assessed tax and penalties.
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When preparing the recomputation of tax (on Form 5278, Form 4549, etc.) show the transferor’s name, SSN, and tax period
on all schedules since the recomputed tax is actually the transferor's.
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The following table is a guide to actions needed in each particular situation:
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Carefully check a current transcript to see if the transferor’s liability was assessed either against the transferor or against
other transferees, or if there are payments on the liability. There may be a need to secure NMF transcripts when working transferee/transferor
cases.
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If the transferor made payments to reduce the liability, the payments are netted against the tax, penalties and interest for
the earliest tax periods first.
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The payments are allocated to the tax, penalties and interest previously assessed against the transferor on the basis of the
ratio of the separate amounts of tax, penalties and interest to the aggregate amount assessed in each specific tax period
so as to reduce or eliminate the earliest tax periods’ total liability first.
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The net remaining unpaid liability is reflected on the settlement computation.
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See IRM 8.7.5.9. This section entitled, Issuing a Notice of Liability on an Unagreed Transferee Case, has additional information about transferee
cases, including a discussion of limited and unlimited liability. See also IRM 4.11.52, Transferee Liability Cases, for more
information.
8.7.5.6.1
(11-06-2007)
How to Prepare the Face Sheet (Form 3610)
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Procedures for preparing the face sheet ( Form 3610) of a transferee/transferor case is the same as those followed when preparing
a face sheet in any other case, except for the following.
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Show the name of taxpayer as follows:
John Q. Taxpayer, Transferee of the assets of
XYZ Corporation, Transferor
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Use the tax period of the transferor as the tax period of the transferee.
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For example, if the transferor is XYZ Corporation with a fiscal year ending 09/30/95, and the transferee is John Q. Taxpayer
with a tax year ending 12/31/95, show the tax year for John Q. Taxpayer as 09/30/95.
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In the reverse situation, if the transferor is John Doe with a tax year ending 12/31/96 and the transferee is ZZZ Company
with a fiscal year ending 08/31/96, show the tax year for ZZZ Company as 12/31/96.
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Unlimited liability cases: Value of the assets the transferee receives from the transferor exceeds the transferor's unpaid
tax liability, or deficiency. The liability of the transferee is the full amount of the unpaid tax or deficiency of the transferor.
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Show liability amounts once on Form 3610.
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Show name of taxpayer as discussed in paragraph (2) above.
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Modify Form 3610 to include a label titled "Liability of Transferee"
under the deficiency and overassessment columns.
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Limited liability case: Value of the assets transferred to the transferee is less than the transferor's unpaid tax liability,
or deficiency.
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Prepare the columns of the face sheet like the examples shown in the exhibits. See Exhibit 8.7.5-1.
See Exhibit 8.7.5-2.
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State law sometimes governs the interest liability of the transferee. In these cases, avoid misunderstandings by adding the
following to the face sheet:
"Plus interest at _% from ______(date)"
8.7.5.6.2
(11-06-2007)
Interest Computations in Transferee Cases
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Tax Court has jurisdiction of interest in transferee cases and may sometimes require computations of interest.
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Interest on a transferee liability is computed based on the state or federal law that governs the liability. State laws that
may apply, for example, are wrongful transfer or fraudulent conveyance statutes. IRC 6901 is strictly procedural as to the
assertion of transferee liability. O'Sullivan v. Comr, T.C. Memo. 1994-17 summarizes some of the principles.
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Interest on Unlimited Liability: Transferee is liable for interest under IRC 6601 from the due date of the tax of the transferor.
Lowy v. Comr., 35 T.C. 393 (1960) discusses this principle.
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See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 35.8.4.7.2.1, General Guidelines on Interest Issues,
for further information.
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Interest on Limited Liability: Amount of the transferee's liability is limited by the value of the transferred assets, except
to the extent the state law that gives rise to the transferee liability allows interest. Estate of Stein v. Comr., 37 T.C. 945 (1962) discusses this principle.
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The state law that governs the transferee liability also controls interest from the date of transfer of assets to the date
of the notice of transferee liability, which is the date the notice of liability is issued to the transferee. (See Estate
of Stein.) However after the date of the notice of transferee liability, the interest runs pursuant to IRC 6601. (Both the
O'Sullivan and Estate of Stein court cases note this principle.)
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In summary, in a limited liability situation consider the state where the assets were transferred, the date the assets were
transferred, and the date of the IRS notice of transferee liability. These two dates must be determined if computing interest
in a limited liability situation.
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IF
there is a state statute such as a wrongful or fraudulent transfer law on the books in the state the assets are transferred,
consider the rate of that state statute and apply it to the limited liability from the date of transfer of assets to the date
of the IRS notice of transferee liability. Stansbury v. Comr., 104 T.C. 486 (1995) discusses this principle. In a state where
pre-judgement interest is permitted, the IRS is entitled to interest applied to the limited liability at the state rate from
the date of the transfer of assets until the date of the IRS notice of transferee liability. (Merlino v. Comr., T.C. Memo 1995-208).
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Federal interest per IRC 6601 starts on the limited liability from the date of the IRS notice of liability to the transferee.
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Seek Counsel’s advice as to the State interest rate (if applicable) and the effective dates of both State and Federal rates.
See IRM 4.10.13.3.5, Liability of Transferee for Interest, and IRM 5.17.14.2.3, Fraudulent Conveyances under Federal Law
and State Law.
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Interest on Estate/Gift Tax Transferee Liability:
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State law has no bearing on transferee liabilities (limited or unlimited) resulting from a transferor’s estate/gift tax liability.
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IRC 6324(a) specifically governs the transferee’s estate/gift tax liability and together with IRC 6901 provides that interest
under IRC 6601 will apply from the due date of the tax of the transferor. See IRM 8.7.4, Appeals Estate and Gift Tax Cases,
for more information on estate and gift cases.
8.7.5.6.3
(11-06-2007)
Form 1296, Assessment Against Transferee or Fiduciary
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Form 1296, Assessment Against Transferee or Fiduciary, is used to make Non-Master File (NMF) transferee assessments. The form
is generally prepared at the time the settlement computations are prepared.
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Form 1296 is available in an Excel spreadsheet on the Appeals Tax Computation web site or as a fillable Adobe Acrobat form
on the Electronic Publishing Catalog web site.
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The transferee is controlled using a "dummy"
TIN on NMF.
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The transferee’s account is set up on NMF using the transferee’s Taxpayer Identification Number (TIN) with a "-D"
(dummy) and "Transferee"
after the name to indicate transferee status.
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Using the "-D"
eliminates the other dashes in the TIN. For example if our transferee is John Smith with a SSN of 123-45-6789, on NMF
the TIN is reflected as 123456789-D.
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The creation of the "Dummy"
TIN format is necessitated by the fact that our current ERCS / AIMS programs do not allow both a MF and a NMF control
for the same TIN. Therefore, establish a dummy TIN with a "-D"
for the transferee case.
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See paragraph (3) of IRM 4.11.52.6 for further information.
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Unlimited liability cases:
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In unlimited liability cases, prepare a separate Form 1296 for each taxable period and each kind of tax.
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Use the tax period of the transferor as the tax period of the transferee.
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Limited liability cases:
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If the value of assets received by the transferee is less than the unpaid liability of the transferor and more than one year
is involved, do not allocate the transferee’s liability to the various years. Instead, show the liability as one amount on
the Form 1296 of the earliest unpaid liability year of the transferor without identifying it with any particular year of the
transferee.
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Prepare a single Form 1296. Show total transferee liability on the right-hand side of Form 1296.
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Annotate the interest starting date and the interest rate on Form 1296 or the attachment to Form 1296.
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Itemize the liability of the transferor for each taxable year on an attachment, or in the remarks section of Form 1296, or
on a separate Form 1296, depending upon the preference of the processing office.
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An example of a completed Form 1296 and the attachment are found in the exhibits. See Exhibit 8.7.5-3.
See Exhibit 8.7.5-4.
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See IRM 8.7.5.9.1. This section contains more detailed information on transferee assessments.
8.7.5.6.4
(11-06-2007)
Statements of Account in Transferee Cases
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In some instances the Appeals Officer or Counsel Attorney requires a statement of account on a transferee case. See IRM 8.17.3,
Preparing a Statement of Account, for instructions for preparing a statement of account.
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