CCA 200851072: Transferee interest mapped into three periods, with state law filling the middle one

Plain-English summary

When assets leave a taxpayer who owes tax, the recipient can be pursued for that tax as a transferee. Interest is the harder part of such a case, because it accrues over a span in which the liability changes hands and changes character. This release answers a request to lay out the periods, the type of interest in each, and what affects them.

The answer divides the timeline into three.

The first period runs from the due date of the transferor's return to the date of transfer, where the transfer came after that due date. Interest here is section 6601 interest on the transferor's own liability. Nothing about it is peculiar to the transferee; it is the interest the transferor was already running up, for a stretch ending when the assets moved.

The third period is equally clean. It runs from the date the transferee's liability is demanded to the date of payment, and it is section 6601 interest again, this time on the transferee's own demanded liability. Once the Service has demanded payment from the transferee, the transferee is an ordinary debtor of a federal tax liability and interest runs accordingly.

The second period is the difficult one, and it is where the release does its real work. It covers the gap between the transfer and the demand, and the interest in it may be either federal or state. Which one depends on value. Where the value of the transferred assets exceeds the transferor's total liability at the date of transfer, section 6601 interest may be imposed for this period until the value of the assets is exhausted, running from the later of the return due date or the date of transfer. Where the value is less than the liability, or where the excess has been used up, state law may supply interest for the period or for what is left of it, running from the date of transfer or from the date the value was exhausted.

The logic is that transferee liability is capped by what was received. Federal interest can keep accruing only while there is still value to absorb it. Once the assets are exhausted, the federal claim has nowhere further to go, and whether interest continues becomes a question for the law that made the transferee answerable in the first place, which is state creditor law.

Three footnotes carry the authority for the state law half, and they show it is fact-sensitive rather than automatic. State law may impose interest from the date of transfer to the date of the notice of liability under rules relating to creditors, for example where the transferee participated in the transfer or knew of the transferor's liability beforehand. The release cites a Tenth Circuit decision holding transferees liable for interest from the date of transfer even though the value transferred was less than the transferor's liability, because the transferees caused the transfer; a general counsel memorandum on a transferee who knows of the transferor's purpose to hinder or defraud creditors; and a Tax Court memorandum decision where state law provided pre-judgment interest. A separate footnote deals with a successor in interest who assumed the debt by contract, where interest may run from the due date of the predecessor's return until the debt is paid and the liability is not limited by the value of the assets received. That last point is the mirror image of the cap: a contractual assumption is not bounded by what was received, so the value ceiling that shapes the second period does not apply.

Two of the cited decisions were confirmed against public court records: Bos Lines, Inc. v. Commissioner, 354 F.2d 830 (8th Cir. 1965) and Stansbury v. Commissioner, 102 F.3d 1088 (10th Cir. 1996). The remaining references, a general counsel memorandum and a Tax Court memorandum decision, are reproduced as the release gives them. The release also cites the memorandum by a commercial database number; this corpus does not draw material from such sources, and the number is reproduced only because it is in the text.

One structural caution. The text sets out a framework in the abstract, without applying it to figures, and it opens by reciting that this is the context of an intermediary tax shelter, so the framing is that of a specific case whose facts are not in the released portion. A related release in this same batch, CCA 0851087, reaches the same value-ceiling point from the other direction, and was written by someone who disclaimed familiarity with the area.

This is a clean digital release rather than a scan, so no OCR correction was needed. One feature of the released text should be flagged rather than silently repaired: the superscript in the circuit designations has been extracted onto its own line, so "8th Cir. 1965" appears in the full text below as a line reading "th" followed by "(8 Cir. 1965)". The same happens for the Tenth Circuit citation. That is an artifact of how the page was laid out, not a misreading, and the text is left as extracted. Also kept as released: "See, Bos Lines" with the comma after See; and the footnote markers separated from the passages they annotate.

Ruling snapshot

• Question: Over what periods may a transferee be liable for interest, of what type, and what affects that liability?
• Outcome: Advice given. Three periods. First, section 6601 interest on the transferor's liability from the due date of the transferor's return to the date of transfer. Second, from the later of that due date or the date of transfer to the date interest begins on the transferee's demanded liability, which may be section 6601 interest while the value of the transferred assets lasts, or state law interest from the date of transfer or the date the value is exhausted. Third, section 6601 interest on the demanded liability from demand to payment. Where the value transferred exceeds the transferor's total liability, section 6601 interest may run for the second period until that value is exhausted; where it is less, or the excess is exhausted, state law may supply the interest.
• Key authorities: IRC section 6601; Bos Lines, Inc. v. Commissioner, 354 F.2d 830, 837 (8th Cir. 1965); Stansbury v. Commissioner, 102 F.3d 1088 (10th Cir. 1996); GCM 34474; Borg v. Commissioner, T.C. Memo. 1987-596.

Full text (IRS public release)

ID: CCA_2008091614103734 Number: 200851072
Office: ---------------------------- Release Date: 12/19/2008

UILC: 6601.01-02

From: -----------------------
Sent: Tuesday, September 16, 2008 2:10:38 PM
To: --------------------
Cc: ------------------------------------------
Subject: Transferee Interest; ----------------------

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In the context of imposing transferee liability for interest in respect of an intermediary tax shelter, you asked us to state the periods in which a transferee may be liable for interest, the type of interest, and factors affecting that liability.

A transferee may be liable for interest in three periods. The first period involves section 6601 interest on the transferor’s tax liability and runs from the due date of the transferor’s tax return to the date of transfer (where the transfer is after the due date). The second period may involve interest under either section 6601 or state law: if under section 6601, it runs from the later of the due date of the transferor’s return or the date of transfer to the date interest begins to run on the demanded liability of the transferee; if under state law, it runs from the date of transfer, or the date of exhaustion of the value of the transferred assets, to the date interest begins to run on the demanded liability of the transferee. The third period involves section 6601 interest running from the date the transferee liability is demanded to the date of payment.

Additional factors that may affect a transferee’s liability for interest are:
· Where the total value of the transferred assets exceeds the transferor’s total liability on the date of transfer, 6601 interest may be imposed for the second period until the value of the assets is exhausted. Where the value of the transferred assets is less than the transferor’s total liability, or where the excess in value of assets transferred has been exhausted, state law may impose interest for the second period or remainder of the second period.

1 Where there are multiple transferees.
2 Where the transferee is a successor-in-interest liable for interest on the federal tax debt of the predecessor, interest may be imposed from the due date of the predecessor’s return until the debt (including interest, additions and th penalties) is paid. See, Bos Lines Inc. v. CIR, 354 F.2d 830, 837 (8 Cir. 1965) (on primary holding of successor liability through assumption by contract, liability was not limited by the value of the assets received).

3 When the value of the assets received is less than the transferor’s liability, state law may provide for interest from the date of transfer to the date of the notice of liability, under rules relating to creditors. State law may, for example, impose interest if the transferee participated in the transfer, or knew of the transferor’s liability before assets were transferred. See Stansbury v. CIR, 102 th F.3d 1088 (10 Cir. 1996) (transferees were liable for interest from the date of transfer, even though the value of transferred assets was less than the transferor’s liability, where the transferees caused the transfer); GCM 34474, 1971 WL 28963 (where the transferee knows of the transferor’s purpose to hinder or defraud creditors, the transferee may be held liable under state law to 2

pay interest on the value of the assets received from the date of transfer). See also Borg v. CIR, T.C. Memo. 1987-596 (state law provided for pre-judgment interest).

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