11th Circuit Holds That IRS Is Not Required to Separately Assess Corporation's Tax Liabilities Against Its Shareholders as Transferees.

The Eleventh Circuit Court of Appeals, in Henco Holding Corp., (CA 11, 1/19/2021) 127 AFTR 2d 2021-362,  a published opinion, reversed and remanded a district court holding that the IRS must separately assess a transferor corporation’s tax liabilities against its transferee shareholders in order to collect the corporation’s tax liability from the transferees.

IRC Sec. 6901 provides that the liability of a transferee of a taxpayer’s property may 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.” The period of limitations for assessment of any such liability of a transferee is, in the case of the liability of an initial transferee, within one year after the expiration of the period of limitation for assessment against the transferor. (Code Sec. 6901(c)(1))

Generally, Code Sec. 6502(a) provides that when the assessment of any income tax has been made within the proper limitation period, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun within 10 years after the assessment of the tax. 

Three members of the Caseres (“Caseres”) family owned all the stock in Henco Holding Company (“Henco”), which was organized in Georgia as a C corporation. Henco’s sole asset was a 50.5% stake in Belca Foodservice Corp (“Belca”).  

In 1997, Henco sold its greatly appreciated stock in Belca to a third party, leaving Henco with cash and a $13 million capital gains tax liability. The Caseres then sold their stock in Henco to a separate third party in a series of transactions that resulted in Henco having a paper capital loss that completely offset its capital gain from the sale of the Belco stock.

After auditing Henco’s 1997 return, the IRS issued a deficiency notice disallowing the loss. When Henco didn’t contest the deficiency notice, the IRS assessed taxes, interest, and penalties against Henco.

Several Years Later, Without Separately Assessing The Caceres As Transferees, The IRS Filed Suit To Reduce To Judgment The Assessment Against Henco. In The Same Suit, The IRS Brought Claims Against The Caseres As Transferees Of Henco. The IRS Sought To Recoup Amounts Henco Transferred To The Caseres.

In the district court, the Caseres argued that the IRS’s suit should be dismissed because it was time-barred. The Caseres claimed that, in order to collect Henco’s tax liability from them as transferees, Code Sec. 6901(c)(1) required the IRS to separately assess Henco’s tax liability against them as transferees within one year after the statute of limitations for assessing the liability against Henco expired, which the IRS didn’t do.

In addition, while the Caceres admitted that Code Sec. 6502’s ten-year limitation period for collection of an assessed tax applied to Henco, they argued that it didn’t apply to them because the IRS never separately assessed them for Henco’s tax liability.

The IRS argued that it could proceed against the Caceres under Code Sec. 6502 based on the assessment against Henco without separately assessing them as transferees under Code Sec. 6901.

In 2019, A District Court Dismissed The IRS’s
Suit Against The Caceres.

The district court held that in order to collect from the Caceres as transferees, Code Sec. 6901 required the IRS to separately assess Henco’s liability against them within one year after the statute of limitations for assessing the liability against Henco expired. Since the IRS failed to timely assess Henco’s liability against the Caceres, Code Sec. 6502 didn’t apply.

The Eleventh Circuit reversed and remanded the district court’s dismissal of the IRS’s suit against the Caceres. The Eleventh Circuit found that the district court misinterpreted Code Sec. 6901 and agreed with the IRS that it was not required to separately assess Henco’s tax liabilities against the Caceres as transferees.

The Eleventh Circuit noted that it’s the tax that is assessed, not the taxpayer, and the government timely assessed the tax liabilities against Henco.

In its holding, the Eleventh Circuit cited to Leighton v. U.S., (S Ct, 1933) 12 AFTR 62, in which the Supreme Court held that the IRS properly brought a collection suit against the shareholders of a tax delinquent corporation without making a separate assessment against them as transferees.

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