In Meyer, Transferee v. Commissioner, T.C. Memo. 2024-15 (2/5/24), TC Dkt Entry # 44, here, TN here, and GS here, the Court denied the petitioner’s motion for summary judgment in a transferee liability case. The petitioner argued that (i) the statute of limitations for the IRS’s transferee liability claim was not timely under the statute of limitations, (ii) collateral estoppel precluded the IRS claim, and (iii) judicial estoppel precluded the IRS claim. The estoppel claims denials are straightforward. I focus here on the first claim about the statute of limitations.
The underlying transaction at issue was a typical Midco abusive tax shelter transaction (I have often called abusive tax shelter transactions bullshit tax shelters). I assume readers are familiar with Midco transactions. An example with a good discussion is in Tax Court (Judge Lauber) Rejects Shareholders' Attempts to Reduce Transferee Liability (Federal Tax Procedure 2/10/22). I will offer a high level overview of the Midco transactions (which have variants but with common result of an empty corporation with a very large tax liability). A Midco transaction involves a third party purchasing, directly or indirectly, stock of a corporation with very large built-in gain from shareholders for a price exceeding what they would obtain if the corporation sold the assets and distributed the cash. After the purchase, the buyer sells the assets and enters an abusive tax shelter transaction (such as the Son-of-Boss involved in this case) to supposedly offset the gain, and then strips out to assets (mostly cash) to leave the corporation empty when the IRS audits and disallows the tax shelter transaction. The supposed tax “savings” is shared by the shareholders (through the purchase price) and the promoters, leaving the IRS (and the country’s taxpayers) holding the bag in the empty corporation. Remember for the balance of this discussion that all of this hinges on the fraudulent Son-of-Boss transaction. In other words, the initial corporate transferor with the unpaid tax liability engaged in fraudulent reporting.
In Meyer, Transferee, the IRS asserted transferee liability under § 6901 by treating the corporate-level transactions as including a deemed transfer to the petitioner as transferee (rather than as a seller of the stock to a third party). For an initial transferee, such as the petitioner, the statute of limitations for transferee liability does not expire until one year “after the expiration of the period of limitation for assessment against the transferor.” § 6901(c)(1).
As posited by the Court, the first step is to establish when the statute of limitations expired on the deemed transferor—the sold corporation engaging in the Son-of-Boss transaction and fraudulently reporting the transaction to zero out the gain on the return. Normally, the limitations period is 3 years. And, the Court worked on the assumption that the 3-year period would have applied and counted certain other extensions or suspensions that extended the corporate transferor’s limitations period. The Court’s analysis is fairly straightforward, so I won’t rehash that here.
I question why the worry about the statute of limitations was even necessary. Why would not the corporate transferor’s reporting of that transaction invoke the unlimited statute of limitations in § 6501(c)(1) or (2)? Remember, that the Tax Court recently reaffirmed its holding in Allen v. Commissioner, 128 T.C. 37 (2007) that fraud on the return is sufficient to invoke the unlimited statute of limitations whether or not the taxpayer (here the corporation) committed the fraud. See Tax Court Again Declines to Reconsider Its Holding that the Preparer's Fraud without the Taxpayer's Fraud Invokes Unlimited Statute of Limitations (Federal Tax Procedure Blog 1/25/24), here. With an unlimited corporate statute of limitations, the transferee liability would derivatively be unlimited as well.
If that is right, then it would appear that all Midco transactions involving abuse transactions that involve fraud have unlimited statutes of limitations. I understand that there are some, perhaps many, Midco transactions that escaped because of the wrong focus on the transferor corporation's statute of limitations.
Added 2/6/24 2:30pm:
Of course, even if Allen were incorrectly decided and the taxpayer's fraud is required for the unlimited statute of limitations, the taxpayer in these prototypical transactions was controlled by the promoter of the abusive transaction and thus the taxpayer would have had the relevant fraudulent intent. The IRS should open up all of those cases where the statute of limitations would have otherwise lapsed.
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