A recent Tax Court decision has upheld an IRS determination that a son had transferee liability of $41,000 plus interest, arising from his father's transfer to him of a Florida condo. The son moved from his home in New Jersey to live with his parents in Florida in 1989. The son’s mother passed away in 1993 and the son remained with his father to help care for him. There was no agreement for the son to be compensated for the care of his father.

In March 2002, the father bought a condo in Delray Beach, Florida for $35,000. In February,
2003, the father transferred the condo to his son by warranty deed for stated consideration of $10 and “other good and valuable consideration.” The fair market value of the condo was then $41,000. As of the day of the condo transfer, the father was insolvent and unable to pay his debts and the son knew of
this situation. The father's debts included $112,420 that he owed to the IRS for unpaid federal income taxes, penalties, and interest for his tax years 1994 through 2002.

On May 13, 2002, the father had submitted to the IRS an offer-in-compromise of $10,000 to settle his income tax liabilities for taxable years 1994 through 2001. IRS had rejected the offer on the ground that it was less than the father's reasonable collection potential (RCP) of $34,475. In calculating the father's RCP, the IRS had determined that his “Net Realizable Equity” in the condominium was zero. Eighteen months after the father had transferred the condominium to the son, IRS filed, for the first time, a notice of federal tax lien with respect to the father's unpaid assessments for income taxes, penalties, and interest for the years 1994 through 2002.

Subsequent to that an IRS notice dated October 17, 2005, showed that the IRS had determined that the son had a liability of $44,681 (later reduced to $41,000 by agreement of the parties as to the condo's value on the date of transfer), plus interest as provided by law, as father's transferee of the condo, with respect to the father's unpaid income tax, penalties, and interest for tax years 1998 through 2002.

The Tax Court applied Code Sec. 6901(a), which 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.” It doesn't create or define a substantive liability, but merely provides IRS a procedure to assess and collect from the transferee of property the transferor's existing liability. The existence and extent of the transferee's liability are determined by the law of the State in which the transfer occurred, in this case Florida. The Tax Court held that insofar as the condo was subject to judicial process for collection by IRS of the father's federal income tax liabilities, it is properly considered to be an asset for purposes of the Florida's Uniform Fraudulent Transfer Act. The Court found the condo was clearly subject to judicial process by IRS to collect the father's taxes, notwithstanding any homestead exemption. IRS could have reached the condo by bringing a lien-foreclosure suit in U.S. District Court under Code Sec. 7403(a) or by an administrative levy under Code Sec. 6331(a). The Tax Court also held that the care that the son provided for his father did not constitute “reasonably equivalent value” for the condominium within the meaning of the Uniform Fraudulent Transfer Act, and that the transfer was constructively fraudulent under the Act. In addition, the court held that the IRS was not equitably estopped from asserting transferee liability by virtue of having previously determined that the condo had zero net equity value as to the father for purposes of calculating his reasonable collection potential.

Our firm has helped numerous taxpayers resolve their federal tax liabilities. Should you have a problem with federal or state taxes, please do not hesitate to contact me at thughes@lavellelaw.com or directly at (847) 705-9698.