Give IRS credit, they’ll keep trying. They’re still pushing the two-step transferee liability theory for Section 6901 cases, even after being repeatedly rebuffed; see my blogposts “A Good Day For Taxpayers”, 3/15/11 and “The Rappers’ Tale”, 5/29/14.

Judge James S. (“Big Jim”) Halpern has even more reasons why the two-step doesn’t work in William Scott Stuart, Jr., Transferee, et al, 144 T. C. 12, filed 4/1/15. It’s no April Fools’ joke, either for IRS or for W. Scott and the als, his fellow shareholders in Little Salt Development Corp.

The Little Salties were unloading their saline ponds, basis of naught and FMV of $472K. The buyer sent them a letter from (drumroll) Mid-Coast Financial. You know the rest. Mid-Coast bought the stock, resold it, put money in a Little Salt account overnight (but not in escrow as they claimed), took it out and gave Little Salt a note for the money, which Little Salt took as a bad debt, wiping out the gain. Then Mid-Coast deactivated Little Salt. Of course there was a promise to pay the tax, but the promise was that Mid-Coast “would cause Little Salt to pay the tax”, but Mid-Coast didn’t guarantee payment.

The Little Salties argue statute of limitations, but State law said Little Salt remained alive while its affairs were wound up. IRS claimed substance-over-form based on Federal tax cases, but that didn’t fly.

“While the definition of persons considered transferees for purposes of section 6901 is extensive, the section does not independently impose tax liability upon a transferee but provides a procedure through which the Commissioner may collect unpaid taxes owed by the transferor of the property from a transferee if an independent basis exists under applicable State law or State equity principles or, in some cases, Federal law for holding the transferee liable for the transferor’s debts.” 144 T. C. 12, at p. 20.

So the Starnes case and the Swords case, each cited in my respective blogposts hereinabove aforementioned, control.

However, as they say on late-night infomercials, wait, there’s more.

“Before the enactment of the original predecessor provision to section 6901, the rights of the Federal Government as creditor of a tax debt were enforceable against someone other than the taxpayer only through procedures cumbersome in comparison to the summary administrative remedy allowed against the taxpayer himself.  The purpose of the change in the law was to provide for the enforcement of such third-party liability to the Government by the procedures already in existence for the enforcement of tax deficiencies. H.R. Conf. Rept. No. 69-356, at 43 (1926), 1939-1 C.B. (Part 2) 361, 371. The procedures were to be effective against a transferee of property of the taxpayer, but ‘[w]ithout in any way changing the extent of such liability of the transferee under existing law’. Id. at 43, 1939-1 C.B. (Part 2) at 371. Moreover, notwithstanding Congress’ enactment of a summary method for collecting a transferee’s liability, section 6901 is not the exclusive method for the Commissioner to collect a transferee’s liability. For example, the section does not replace the older judicial remedies of instituting proceedings to collect a corporate tax from its shareholders or to set aside a fraudulent conveyance.” 144 T. C. 12, at pp. 33-34. (Footnote omitted).

Judge Big Jim goes on: “Nothing in section 6901 accords the Commissioner any right not enjoyed by other creditors seeking to use the judicial enforcement mechanisms if the Commissioner proceeds outside of section 6901 to set aside a fraudulent transfer or to enforce against a transferee of property the transferor’s liability for tax. And if the Commissioner so proceeds, the question of whether the person against whom the Commissioner proceeds is a transferee within the meaning of section 6901 is moot. Section 6901 merely identifies those persons (transferees of property) against whom the Commissioner may employ the summary collection authority afforded to him by section 6901(a) once, independent of that section, he has fixed the person’s substantive liability under State or Federal law as a transferee of the taxpayer’s property. If without invoking section 6901 he could not fix that liability, then he cannot resort to his summary collection authority to obtain a different result.” 144 T. C. 12, at pp. 34-35.

But The Little Salties aren’t off the hook.

Judge Big Jim cruises through the Nebraska fraudulent transfer statutes, with a side trip to Bankruptcy Court, and decides The Little Salties are on the hook, but not for the entire unpaid tax. Under State law, they are liable for any benefit they received or that inured to them arising out of the fraudulent transfer.

That’s the difference between what they got once Mid-Coast got its cut for facilitating the charade, and what they would have had had they played the game straight. That’s less than the entire amount IRS wanted.

See 144 T. C. 12 at pp. 56-57, as Judge Big Jim does the numbers.