CCA 200851087: Interest on a transferee liability turns on whether the property value exceeds the tax

Plain-English summary

A working through of how interest accumulates when the Service collects a transferor's tax from someone who received the transferor's property. The writer reframes the question before answering it, and the reframing is the most useful part.

Transferee liability lets the Service collect an unpaid tax from a person who received assets from the taxpayer who owed it, using the same assessment and collection machinery that applies to the taxpayer. The liability is derivative and it is capped: the transferee is on the hook only up to the value of what they received. That cap is what makes interest complicated, because interest keeps running on the transferor's unpaid tax whether or not there is room left under the cap.

The colleague had sorted the problem into three time periods. The writer, who says plainly that they are not that familiar with transferee liability and is confused by that division, proposes a different first question: does the value of the property transferred exceed the tax liability? Everything else follows from the answer.

If the property value exceeds the liability. There is room under the cap, so interest and penalties can be collected from the transferee as they accrue against the transferor under section 6601, running from the date the return was due. The transferee effectively stands in for the transferor up to the value received.

If the property value is less than the liability. The value of the transferred property is exhausted, and the section 6601 interest accruing on the transferor's unpaid liability can no longer be collected from the transferee, because there is nothing left under the cap to collect it against. Two possibilities remain, both outside the Code. State law may allow interest for the transferee's use of the transferred assets from the time of transfer, or may allow collection of interest to continue past the point where the value has been exhausted for section 6601 purposes.

After assessment against the transferee. Once the transferee liability is itself assessed, section 6601 interest accrues on that assessment, beginning on the date of assessment and notice and demand for payment, generally the same day. At that point the liability has nothing to do with the value of the property transferred or with state law. It is interest on an unpaid assessment, collected as against any other taxpayer.

On the follow-up questions, the writer says the timing of the transfer is not significant, though it has one effect: a transfer before the return due date does not change that section 6601 interest starts running against the transferor only on that due date. What is determinative is the value of the property measured against the liability.

The closing point answers the worry that prompted the inquiry. There is no true gap in interest accrual. Interest keeps accruing against the transferor for as long as the liability is unpaid. What happens instead is that the transferee's exposure is capped at the exhaustion point, the moment the liability plus accruals reaches the value of the property, and a fresh interest stream starts on the new assessment once the capped amount is assessed against the transferee.

The release is candid about its own limits. The writer is filling in for an absent colleague, disclaims familiarity with the subject, frames the analysis as how it makes sense to them, uses "I think" and "may be able to" at the points where state law is doing the work, and closes by offering to discuss further.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the greeting running into the text where the name is redacted, "Hi---------- had asked me to get back to you"; the double hyphens used as dashes throughout, as in "significant--rather the value"; the quotation marks around "exhausted the value" and "use" and "gap"; and section 6601 cited as "6601" without a section symbol.

Ruling snapshot

• Question: How does interest accrue, and what can be collected from a transferee, across the periods before and after a transferee liability is assessed?
• Outcome: Advice given, with the writer disclaiming familiarity with the area. The controlling question is whether the value of the property transferred exceeds the tax liability. If it does, section 6601 interest and penalties accruing against the transferor can be collected from the transferee up to that value. If it does not, the value is exhausted and that interest cannot be collected, though state law may allow interest for the use of the assets. Once the transferee liability is assessed, section 6601 interest runs on that assessment from the date of assessment and notice and demand, independent of the property value and state law. There is no gap in accrual, because interest continues to run against the transferor throughout.
• Key authorities: IRC section 6901 (transferee liability); IRC section 6601 (interest on underpayments); state law governing interest for the use of transferred assets.

Full text (IRS public release)

ID: CCA-929151-08 Number: 200851087
Office: ----------- Release Date: 12/19/2008

UILC: 6901.00-00; 6601.00-00

From: -----------------------
Sent: 9/29/2008
To: --------------------
Cc: --------------------------------------
Subject: FW: Transferee Interest; ----------------------

Hi---------- had asked me to get back to you on your follow-up questions, since ---- is on vacation. I'm not that familiar with transferee liability, and I am somewhat confused by the way ---- designates the 3 different periods below. This is how it makes sense to me: I think rather than classifying by the first 2 time periods the first inquiry should be whether the value of the property transferred exceeds the tax liability.

1. The amount of transferee liability is limited to the value of the property. So if the property value
   exceeds the tax liability, interest and penalties can be collected from the transferee as they accrue against the transferor per 6601 (e.g., from date return is due).

2. If the property value is less than the tax liability, we've "exhausted the value" of the transferred
   property and can't collect the 6601 interest accruing against the unpaid liability of the transferor. However, we may be able to collect interest under state law for the "use" of transferred assets from the time of transfer, or state law may also allow us to continue to collect interest at some point after we've "exhausted the value" for purposes of collecting 6601 interest.

3. The third period of interest then is the 6601 interest that accrues on the transferee liability assessment
   against the transferee. At this point, the liability no longer has anything to do with the value of the property transferred or state law. We are just collecting interest under the IRC accruing on an unpaid assessment, as we would against any taxpayer.

So to address your follow-up questions:

1. I don't think the timing of the transfer in your scenario is significant--rather the value of the property vis-
   a-vis the tax liability is determinative. If the transfer is before the return due date, interest under 6601 does not start to accrue until that date against the transferor. But with respect to collecting from the transferee--if the property value is less than the tax liability, we can't collect the 6601 interest and accruals. We may be able to collect interest under state law. If the property value exceeds the tax liability, we can collect the section 6601 interest and accruals up until the property value.
2. The third period is addressed in -------- e-mail--interest begins to accrue on the transferee assessment
   on the date of assessment and notice and demand for payment (generally, same day).

There is not exactly a "gap" in interest accrual; it keeps accruing against the transferor as long as the liability remains unpaid. But the amount of transferee liability can be capped at that exhaustion point (whenever the liability plus accruals reaches the property value amount). Then when the liability amount is assessed against the transferee, interest will begin to accrue on the new assessment.

Please let me know if you wish to discuss further. Thanks.

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