Transferee liability under Sec. 6901

By Joe Marchbein, CPA, CGMA, Ellisville, Mo.

Editor: Valrie Chambers, CPA, Ph.D.

Sec. 6901 provides that the IRS can collect a taxpayer's unpaid tax, penalty, and interest when a taxpayer transfers property to another person or entity for less than full, fair, and adequate consideration. The transferor is still primarily liable for the amount due, and the transferee is secondarily liable.

This discussion does not cover Sec. 2204, which concerns a fiduciary's discharge from personal liability to pay estate and gift taxes.

Examples of transferee liability

Some examples of where transferee liability may occur are the following:

  • Upon its liquidation to a shareholder, a corporation distributes a dividend or payment of a debt owed to a shareholder;
  • A shareholder is also an officer of a corporation and receives a salary that is unreasonable — the shareholder may be treated as a transferee on the theory the excessive salary is the equivalent of a distribution of corporate assets; or
  • An individual gives property away or sells assets for less than fair value.
Types of transferee liability

Two types of liability can be asserted under Sec. 6901: (1) transferee at law and (2) transferee in equity.

A person or entity can be a transferee at law when it is responsible for the transferor's tax liability because of a contractual agreement with the transferor. It may also arise under federal or state statutes. To establish at-law liability, the IRS must show the property was transferred, the transferor was liable for the tax when the property was transferred, and the transferor remained liable. Generally, a transfer at law results in the transferee being fully liable regardless of the value of the assets received.

A person or entity may be a transferee in equity when it receives the transferor's assets for less than full, fair, and adequate consideration, leaving the transferor insolvent and unable to pay the tax liability. The government must prove the transferor was liable for the tax. This is the most common form of transferee liability. A transferee in equity is generally liable to the extent of the value of the property received.

Statute of limitation

The statute of limitation for assessing tax against an initial transferee is one year after the expiration of the period of limitation for assessment against the transferor. If the transferee has transferred the property to another (a transferee of a transferee situation), an additional one-year period can be added to the period of limitation against the preceding transferee or three years after the expiration for assessment against the transferor, whichever expires first. But the maximum statute of limitation for a transferee (except as noted below), regardless of the number of transferees, is six years.

There is one key exception to the above rules for the statute of limitation. If, before the period of limitation for assessment of the transferee's liability expires, a court proceeding for collection of the liability has begun against the initial transferee or the last preceding transferee, the statute of limitation for assessment against the transferee will expire one year after the return of execution in the court proceeding.

Burden of proof

As stated above, the government has the burden of proving all elements necessary to establish transferee liability. All transferee cases require documentation to support transferee liability. The IRS will schedule interviews with the transferee and transferor to obtain information necessary to support the burden of proof. Questions that might be asked of the transferee by the Service include the following:

To a transferee in equity:

  • When did you become aware of the transferor's unpaid liability?
  • Are you related to the transferor?
  • What assets did you receive from the transferor?
  • What consideration did you pay for the assets?
  • Why did the transferor give the assets to you for little or no consideration?
  • Do you know the details of any of the transferor's other assets that were transferred to others, such as the names, what was transferred, and what was paid for the assets?

To a transferee at law:

  • Was a fiduciary or personal representative involved in distributing the assets? What was his or her capacity?
  • Did you enter into any contracts in which you agreed to assume the transferor's liability?

If a transferor is a corporation, the IRS may ask the transferee to sign Form 2045, Transferee Agreement. By signing the form, the transferee admits liability as a transferee of the assets received from the transferor and assumes and agrees to pay the transferor's tax liability. Therefore, the government is relieved of the burden of proving transferee liability. Whether the transferee should agree to the liability depends on the facts of the situation, such as the amounts involved and the nature of the issues; if it is worth the time and possible costs of representation to contest a possible assessment; and the likelihood any assessment could be sustained. In some instances, counsel should be sought.



Valrie Chambers is an associate professor of accounting at Stetson University in Celebration, Fla. Joe Marchbein, CPA, CGMA, is with Rice Sullivan LLC in Ellisville, Mo. Mr. Marchbein is a member of the AICPA Tax Practice & Procedures Committee. For more information about this column, contact


Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.