Case — Fraudulent Transfers and Transferee Liability

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TL Case Summ

THE QUESTION

Was a transfer of homestead property fraudulent and does a federal tax lien follow the property, making the person who received the property liable for unpaid taxes?

THE DISPUTE

Taxpayer Says: The property qualified for homestead exemption under Florida law and is exempt from the Uniform Fraudulent Transfer Act. Therefore, the transfer was not fraudulent, and the value of the property cannot be used to collect unpaid income tax.

Internal Revenue Service Says: The transfer was fraudulent, and the federal tax lien follows the property. The facts surrounding the transfer allow collection of the unpaid tax liability from the taxpayer.

THE LAW

From Internal Revenue Code Section 6901(a): 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”.

From Sawyer Trust v. Commissioner, 133 T.C. __, __ (2009) (slip op. at 20): For purposes of this case, the existence and extent of the transferee’s liability are determined by the law of the State in which the transfer occurred (Florida).

From Fla. Stat. Ann. sec. 726.106: When certain conditions are met, these provisions treat a “transfer” by an insolvent debtor as constructively fraudulent; i.e., without regard to the actual intent of the parties.

From Fla. Stat. Ann. sec. 726.106(1): Provides in pertinent part that a transfer by a debtor is fraudulent as to a creditor if: (1) The creditor’s claim arose before the transfer was made; (2) the debtor did not receive a “reasonably equivalent value” in exchange for the transfer; and (3) the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.

From Fla. Stat. Ann. sec. 726.102(12); UFTA sec. 1(12), 7A (Part II) U.L.A. 15 (2006): Defines a “transfer” as a mode of disposing of or parting with an “asset”.

From Ries v. Wintz Props., Inc. (In re Wintz Cos.), 230 Bankr. 848, 860 (Bankr. 8th Cir. 1999): If the term “asset” does not apply to property that has been conveyed, then there is no “transfer”.

THE CAUSE OF THE DISPUTE

In some circumstances, the IRS can collect taxes from someone other than the taxpayer who owes them, using a procedure called “transferee liability”. For instance, if property is transferred to you for less than a reasonable amount, you may be liable for paying federal income tax liens related to that property.

In this case, the taxpayer received a condominium from his father. The property was transferred to the taxpayer in 2003 for $10 and “other good and valuable consideration” via a warranty deed. At the time of the transfer, the fair market value of the condominium was $41,000. The taxpayer knew his father was insolvent, and also knew his father owed $112,420 for unpaid federal income taxes, penalties, and interest for taxable years 1994 through 2002.

Eighteen months after the transfer, the IRS filed a lien for the unpaid amounts.

The IRS says the taxpayer, as a transferee of the property, is responsible for paying the tax lien (up to the value of the condominium plus interest). The IRS argues the transfer of the condominium was constructively fraudulent because: 1) the tax liability arose before the transfer was made, 2) the taxpayer’s father did not receive a “reasonably equivalent value” in exchange for the transfer, and 3) the taxpayer’s father was insolvent at the time of the transfer.

The taxpayer says transferee liability cannot be assessed because the condominium is homestead property under Florida law, and is therefore not considered an asset under the Florida Uniform Fraudulent Transfer Act. Alternatively, the taxpayer says the services he rendered while acting as his father’s caregiver during the ten years they lived together in the condominium is “fair consideration” for the condominium.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 35KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. The condominium is within the reach of the courts for collection of federal income tax liabilities and therefore is an asset under Florida law. In addition, no property was transferred for the condominium. Since Florida law presumes a parent is not obligated to pay a child for services the child might perform while living with the parent at home as one of the family, the care provided gave rise to no debt on the father’s part. Pursuant to IRC section 6901(a), taxpayer has transferee liability of $41,000 plus interest for unpaid tax liabilities, penalties, and interest owed by his father, the transferor, for taxable years 1998 through 2002.
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