transferee liability and the offer-in-compromise, and a few other things

Published On: 5th June 2012

A recurring issue with collection of employment taxes.  Corporation A owes employment taxes but ceases business.  Corporation A has one owner, Mr. B, who has been impoverished through the collapse of the business of Corporation A.  The IRS moves against the assets of Corporation A for payment.  The poverty of  Mr. B is irrelevant to collection and the IRS can seize the full assets of Corporation A in payment of the employment taxes.  If Corporation A had liquidated and distributed the assets to Mr. B, transferee liability would follow the assets, but Mr. B apparently would be able to raise his hardship against collection, and e.g. file an offer-in-compromise.  See, Rev.Rul. 72-436, which doesn’t directly hold that an offer-in-compromise can be done with respect to transferee liability, but assumes it, and do certain references in the Internal Revenue Manual.  But if the transfer is deemed sufficiently ephemeral by the IRS, and the IRS tries to seize the transferred assets under nominee theory, hardship again becomes irrelevant and no offer-in-compromise is possible.  PLR 199917020.

These fine distinctions trap many taxpayers in impossible-to-solve collection dilemmas with respect to unpaid employment tax of closely held corporations.