Legal Definitions - transferee liability

Transferee liability refers to a legal principle, primarily in tax law, where a person or entity who receives an asset (the transferee) becomes responsible for certain unpaid tax debts of the person or entity who transferred the asset (the transferor). This responsibility is generally limited to the fair market value of the asset received by the transferee.

Here are some examples illustrating transferee liability:

• Business Acquisition: Imagine a small manufacturing company, "Widgets Inc.," which has accumulated significant unpaid sales taxes. The owner, facing financial difficulties, sells all of Widgets Inc.'s assets (machinery, inventory, customer lists) to a larger competitor, "Global Manufacturing." Shortly after the sale, Widgets Inc. declares bankruptcy, leaving the sales tax debt unpaid.

  In this scenario, the tax authorities could pursue Global Manufacturing (the transferee) for Widgets Inc.'s (the transferor's) unpaid sales taxes. Global Manufacturing's liability would be capped at the value of the assets it acquired from Widgets Inc. This illustrates transferee liability because Global Manufacturing, by acquiring the business assets, might inherit the tax debt associated with those assets, even though it wasn't directly responsible for accruing the debt initially.

• Inheritance of Property: Consider a situation where a daughter inherits a rental property from her deceased mother. Before her death, the mother had failed to pay income taxes on the rental income generated by that specific property for several years. The mother's estate has insufficient other assets to cover these outstanding income tax debts.

  In this case, the daughter (the transferee) could be held responsible for the unpaid income taxes that her mother (the transferor) owed on the inherited rental property. The daughter's liability would be limited to the value of the property she inherited. This demonstrates transferee liability because the daughter, as the recipient of the asset, becomes responsible for the tax debt directly linked to that asset, which the original owner failed to pay.

• Transfer to Avoid Creditors: Suppose a wealthy individual, Mr. Smith, owes a substantial amount in federal income taxes. Realizing he cannot pay, he quickly transfers ownership of his luxury yacht to his adult son, Mark, for a price significantly below its market value, hoping to shield the asset from the tax authorities. This transfer is later determined to be a fraudulent conveyance because it was made to evade creditors (in this case, the tax authority).

  If Mr. Smith (the transferor) remains unable to pay his income tax debt, the tax authorities could pursue Mark (the transferee) for the taxes, up to the value of the yacht he received. This is an example of transferee liability because Mark, as the recipient of an asset transferred under circumstances designed to evade tax collection, can be held accountable for his father's tax obligations to the extent of the asset's value.