United States: Transferees Beware: Statute Of Limitations Extended

On January 19, 2021, in United States v. Henco Holding Corp.,¹ the Eleventh Circuit reversed and remanded a district court decision that had granted taxpayers' motion to dismiss the Government's transferee claims because the Government had failed to timely assess tax liabilities under § 6501 against four defendants as transferees. The Eleventh Circuit held that the Government was not required to separately assess the defendants as transferees under § 6901 and that its transferee-liability suit was not barred under § 6501. Thus, the court held that the Government could timely assert transferee liability under state law without satisfying the requirements of §§ 6501 and 6901, so long as the IRS filed suit to collect the tax from the transferees within the ten-year limitation period under § 6502 after making an assessment against the transferor.

Factual Background

In December 1996, Henco Holding Corporation ("Henco"), a C corporation, was owned by the "Caceres Defendants" (Alfredo Caceres, Luis Alfredo Caceres, Luis Angel Caceres, and the Luis Angel Caceres Charitable Remainder Unitrust). Henco's sole asset was its interest in a subsidiary, Belca Foodservice Corporation ("Belca"), whose stock had significantly increased in value. Because of potential double taxation related to a liquidation of Belca shares and distribution of the proceeds to the Caceres Defendants, the Caceres Defendants decided to sell Belca for cash, which created a large capital gain, and then sell their Henco stock to a third party, Skandia. After the stock sale, Skandia, as the new owner of Henco, was liable to pay the large capital gain recognized on the sale of Belca. However, following the stock sale, Skandia sold Henco, and the tax on the capital gain recognized on the sale of Belca was never paid.

Henco later defaulted on a statutory notice of deficiency, and in October 2007 the IRS assessed taxes on Henco. Thereafter, in 2008 Henco filed a CDP request in response to the IRS's tax lien and intent to levy notice, which the Tax Court rejected in 2011.

Several years later, in June 2018, the Government filed a complaint against the Caceres Defendants, asserting that they had engaged in fraudulent transfers under Georgia's state fraudulent-transfer statute and that it was proceeding under § 6502(a), which provides for a ten-year limitation period for collection.

Motion to Dismiss

The Caceres Defendants moved to dismiss the Government's complaint. They argued that the applicable statute-of-limitations period under Georgia law and § 6501 was four years and that the Government's transferee claims, brought against the Caceres Defendants in 2018, therefore were time-barred. Specifically, the Caceres Defendants asserted that § 6901 exclusively governed claims against transferees and that the limitation period in which an assessment can be made against a transferee is one year after the period of assessment for tax liabilities against the transferor.² Because the tax liabilities were assessed against Henco in October 2007, the Caceres Defendants claimed that the IRS would have normally been required to assess taxes against them no later than the end of October 2008. But as Henco had contested the assessment in a CDP proceeding in April 2008, the Caceres Defendants conceded that the statute of limitations was tolled until the conclusion of that proceeding on October 19, 2011, giving the IRS until 2012 to assess taxes against them as transferees under § 6901. Because the IRS had not sought to collect against them as transferees until 2018, the Caceres Defendants asserted that the transferee claims should be dismissed.

Additionally, the Caceres Defendants claimed that § 6502 did not extend the time for making an assessment against them for Henco's tax liabilities. Although the Caceres Defendants did not dispute that the ten-year limitation period of § 6502 for collection of an assessed tax applied to Henco (the transferor), they argued that it was inapplicable to them because the Caceres Defendants were never assessed that tax liability by the IRS. The Government asserted that the timely assessment against Henco is applicable to the Caceres Defendants because the Government is not required to duplicate its efforts and separately assess the same tax against them. In essence, the Government asserted that it could seek to collect transferee liability from the Caceres Defendants without seeking to impose liability under § 6901.

District Court Ruled for the Taxpayers

The district court agreed that the Government was not bound by the state statute of limitations. However, the court dismissed the suit against the Caceres Defendants because the Government had not timely separately assessed the Caceres Defendants as transferees under §§ 6501 and 6901. According to the court, the three relevant statutes were §§ 6501, 6502, and 6901. Because the Government acknowledged that the time for making an assessment under § 6901³ against the Caceres Defendants had passed, the district court looked to § 6501(a). However, the court found that the language of § 6501(a) did not permit the Government to collect the tax from the Caceres Defendants because "the government never assessed the transferee defendants, and because the 'period' for when the defendants' tax liability 'should be assessed' had passed."⁴ Finally, the district court rejected the Government's claim that § 6502, which provides the IRS with the right to collect for ten years from the assessment of the tax, applied to unassessed transferees. Citing the Supreme Court's decision in Continental,⁵ the court said that the period for bringing suit against an unassessed transferee was the number of years allowed for assessing the transferee under § 6501. The court noted that the Government had failed to provide any analogous case supporting its position that it may proceed against an unassessed transferee-stockholder of a dissolved corporation after the time for bringing an assessment had passed.

Eleventh Circuit Opinion

On appeal, the Government asserted that it was not required to separately assess the Caceres Defendants under § 6901 in order to assert transferee liability and collect the tax owed by the transferor. The Eleventh Circuit agreed and concluded that the Supreme Court's 1933 decision in Leighton v. United States,⁶ a case cited for the first time by the Government on appeal, did not require that the Government obtain a separate assessment against each transferee under § 6901 for the Government to seek to collect from the transferee the tax liability assessed against a transferor.

Leighton is an interesting case, but it is not a statute-of-limitations case. The issue in Leighton was whether § 280 of the Revenue Act of 1926, the predecessor to § 6901, was the IRS's sole method to collect a transferor's outstanding tax liability from a transferee. In Leighton, the IRS assessed taxes against a corporation, which neither contested nor paid the assessment, and then proceeded in equity against the shareholders "to account for corporate property in order that it may be applied toward payment of taxes due by the company," although the IRS had not separately assessed those shareholders for the corporation's tax liability.

In analyzing the case, the Supreme Court began by noting that prior to the enactment of § 280, the Government, in an equity proceeding, could "recover from distributees of corporate assets, without assessment against them, the value of what they received in order to discharge taxes assessed against the corporation."⁷ The Supreme Court rejected the taxpayer's argument that § 280 was the "sole remedy available" to the Government. Accordingly, the Court held that the suit-in the form of a trust-fund claim against the shareholders-was properly brought against the shareholders without a separate assessment against them as transferees. Leighton has never been overruled.⁸ Thus, under Leighton, separate assessment of transferee liability under § 6901 is not required in order to collect tax liabilities assessed against a transferor-taxpayer. Several circuits have reached a similar conclusion.⁹ The court found further support in United States v. Galletti.¹⁰ In Galletti, the Supreme Court held that the Government was not required to "make separate assessments of a single tax debt against persons or entities secondarily liable" for that debt-i.e., "liability that is derived from the original or primary liability"-in order for the statute of limitations of § 6502 to apply to those persons or entities.¹¹

Accordingly, the Eleventh Circuit held that the Government did not need to separately assess the individual transferees under § 6901 and that the suit to collect against the defendants was timely because it had been brought by the Government within the ten-year period for collection under § 6502. The case has been remanded for further proceedings to determine whether the Caceres Defendants are liable under Georgia's fraudulent-conveyance law.

Footnotes

1. _{985 F.3d 1290 (11th Cir. 2021).}

2. Under § 6501(a) the applicable statutory period for assessment is three years (exceptions apply). Section 6901(c) extends the statutory period under § 6501(a) for assessment for an additional one year.

3. Section 6901(a) provides that a transferee's tax liability "shall . . . 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[.]"

4. Slip Op. and Order at *8 (May 14, 2019) (18-cv-3093).

5.United States v. Continental Nat Bank & Trust Co., 305 U.S. 398 at 403 (1939).

6. 289 U.S. 506 (1933).

7.Id. at 507-08.

8.See United States v. Geniviva, 16 F.3d 522, 524 n.2 (3d Cir. 1994) (examining § 280 and § 6901 and concluding that there were "no differences in language that would undermine the holding in Leighton").

9.See, e.g., Geniviva, 16 F.3d at 524 (applying the principle articulated by Leighton that "a failure by the [g]overnment to personally assess the shareholders of a defunct corporation did not bar an action to impose transferee liability against them"); Culligan Water Conditioning of Tri-Cities, Inc. v. United States, 567 F.2d 867, 870 (9th Cir. 1978) ("Section 6901 provides the [IRS] the power to use against a transferee the same summary collection procedures it may use against a transferor or any other delinquent taxpayer. But that section is not mandatory, as appellants suggest; rather, it adds to other methods available for collection.").

10. 541 U.S. 114 (2004).

11. 541 U.S. at 121-22 & n.4.

12. Annette Lynn Favetta - Admission Pending.

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