There are times when our tax laws draw distinctions that can seem unfair. The Tricarichi v. Commissioner, T.C. Memo. 2016-132, highlights one of these situations. Tricarichi is a transferee liability case in which the taxpayer was held liable for $13 million in interest on a tax liability owed by a third party even though the interest may not have been owed if the value of the transferred assets was $100 thousand less.
The Code authorizes the government to assess taxes against a party that receives assets from a taxpayer who owes an unpaid tax liability. This transferee liability provides the government with a remedy for enforcing and collecting from the transferee of assets the transferor’s existing tax liability. The tax liability includes the tax deficiency, applicable penalties, and interest computed the the taxes and penalties.
This can include interest that accrued on the tax prior to the time the transfer of assets occurred.
If the transferee receives assets with a value exceeding the transferor’s total tax liability, the government’s claim can be satisfied in full from the transferred assets. This includes interest on the tax liability that accrued prior to the time the assets were transferred. This is provided for by the Code.
If the transferee receives assets with a value less than the transferor’s total tax liability, the government’s claim cannot be satisfied in full from the transferred assets. The Code does not provide for recouping anything in excess of the value of the transferred assets. Thus, just reading the Code, one might concluded that the government cannot recoup interest on a tax liability that accrued prior to the time the assets were transferred in excess of the value of the transferred assets.
The Code is not the only law that can apply, however. State law can also apply. The law in many states says that a creditor can obtain interest in the situations. These laws refer to interest as “pre-judgment interest.” The idea is that the creditor is entitled to compensation for the transferee’s wrongful possession and use of the funds during the interim period.
Tricarichi v. Commissioner
In Tricarichi, the value of the assets that were transferred were $35,199,372 in Tricarichi and the tax liability was $35,086,437. The $35,086,437 included $13,887,090 of pre-notice interest. Because the value of the assets exceeded the tax liability by $112,935, the court concluded that the government was entitled to the $13,199,372 in pre-judgement interest. It did not have to resort to state law to make this determination.
Had the interest been $112,936 less, the court would have applied state law. Apparently the applicable state law would not allow pre-judgement interest or would not allow as much interest. Thus, the transferee would not be liable for the $13,199,372 in pre-judgment interest.