What are the Risks involved?

The absolutely most important factor is that the government approves of the plan BEFORE you start.  If you do not get their approval, you could face fraud charges, but in the very least you could be subject to a nominee, transferee or alter-ego tax lien.   If this happened then the business purchasing the assets could be assessed the old corporation’s tax liability and would effectively be in the same position as the old corporation.

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The company purchasing the old corporate assets must be fundamentally different.  Here is a checklist of the “badges of fraud” that the IRS will look for.  If you get the IRS’ approval beforehand, the plan you present to them will account for all of these.

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• Transfer of assets lacks fair consideration:  if you are going to transfer any assets, they must be transferred at a fair price.  You cannot give assets away to anyone, especially when a tax lien is attached to that asset.

• The transfer is to a closely related person:  transfers to and from family members or other shareholders in a company are seen as an inside trade and will raise suspicion on the activity.

• The transferor retains enjoyment, possession or control after the transfer:  if you sell your truck to a friend, but he still lets you drive it you will raise suspicion.

• The transfer was concealed:  if the transfer is not made in the usual manner, the government will question it.  For example if a security interest (UCC filing, Security Agreement) would normally be filed but was not then it might not look legitimate.

• Before the transfer, the transferor was sued or threatened with a suit:  if you are threatened with a lawsuit and you try to hide your assets after the fact, this is seen as fraud.  You are denying potential creditors their right to assets that they might have a claim to later.

• The transferor left the jurisdiction secretly:  if you sell an asset and run for Mexico the next day, chances are the transfer will be seen as fraud because you are probably evading creditors.

• The transferor concealed assets:  again, if you plan to move your fleet of trucks to Mexico until this tax debt is over this is fraud.  You must clearly report all assets and their value.

• The transferor was insolvent at the time of the transfer or shortly after:  insolvent means that your debt and expenses exceed your assets and income.  If you are subject to the insolvency laws of your state, selling or otherwise disposing of assets is illegal and considered fraud.

• The transferor conveyed the essential assets of a business to a lien holder who then transferred the assets to an insider:  some people think they are being clever with this one.  If you owe Joe money, sell him some business assets.  Then Joe can transfer the assets right back to one of the shareholders and the business can once again use that asset.  That is fraud and it is illegal.

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This list is not all-inclusive – in general the key points that the IRS is going to be looking for is that any assets are properly accounted for and if they are transferred the proper creditors are paid, with the senior secured creditor having priority.

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Transfers to insiders are shady at best – though many times through negotiation we can work around this argument (e.g.: if Joe wants to sell the assets of his business to his son, who plans to open and operate a similar business, we have successfully negotiated the government’s agreement to this without fraud becoming an issue).  The new business has to be a separate and distinct entity and the transaction acquiring the assets of the old must be an “arms length transaction”. 

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The key to understanding this strategy is that the IRS only has a claim to the assets based on their lien priority.  If someone else filed a lien first, they are senior to the IRS as a creditor.  With most corporations that owe back taxes there will be minimal assets most of which are subject to priority lien holders.  Meaning the IRS interest in such assets through their tax lien is nil or very small and they will not be paid much if anything when the corporation closes and these assets sell.  What isn’t paid through the sale of the assets will be placed in a currently not collectible status and provided the corporation has no income, other assets and is never reopened the debt will stay in this currently uncollectible status until the Collection Statute expires.