Introduction: How Transferee Liability Follows a Company Owner to Britain
Transferee liability is the rule that lets the IRS collect a company's unpaid federal tax from the people who received its money, and it routinely reaches founders who believe the company, its debts and the whole episode ended when they moved to London. You sold the business, paid yourself out, filed the dissolution papers and moved on. However, if the company never paid its final-year corporate tax, the IRS can treat you as the recipient of assets that belonged to the government first.
Most articles on the subject are short pieces for American lawyers. None of them deals with the questions a company owner in Britain actually asks. Can the IRS pursue you if you live in Surrey? Does HMRC help? What happens to the UK capital gains tax you already paid on the same money? Consequently, this guide covers the US rules in full and then follows them across the Atlantic, with current 2026 figures and a worked case study.
At TaxYork, we prepare US and UK returns for entrepreneurs, investors and senior executives with interests on both sides of the Atlantic. In our experience, transferee liability claims almost always start with something small: a final corporate return nobody filed, a Form 966 nobody knew existed, or a liquidation completed in a hurry before an overseas move.
What Transferee Liability Means Under Section 6901
Transferee liability is not a separate tax. Instead, it is a procedure that lets the IRS assess and collect an existing tax debt from someone other than the original taxpayer. The rule lives in section 6901 of the Internal Revenue Code, which allows the IRS to assess the liability of a transferee of property "at law or in equity" in the same manner as the original tax.
How Transferee Liability Works as a Collection Tool
The IRS uses transferee liability when the original taxpayer has no money left. Typically, that taxpayer is a corporation that has distributed its assets and dissolved. The statute defines a transferee broadly, and section 6901(h) expressly includes a distributee. Therefore, a shareholder who receives a liquidating distribution falls squarely within its reach.
Importantly, the IRS assesses the transferee directly. You receive your own notice, you get your own appeal rights, and once the assessment is final, the IRS can collect from you exactly as if the debt were your personal income tax. Furthermore, the debt includes the company's penalties and interest, not just the tax.
Transferee at Law Versus Transferee in Equity
The courts recognise two routes to transferee liability. A transferee at law is liable because a contract or statute makes them liable, for example where a buyer expressly assumes a seller's tax debts. A transferee in equity, by contrast, is liable because they received assets from an insolvent taxpayer without paying fair value for them.
Most shareholder cases of transferee liability are equity cases. Notably, equity limits your exposure to the value of what you received at the time of the transfer. Accordingly, if you received $500,000 and the company owed $2 million, the IRS can recover no more than $500,000 from you, plus interest in some circumstances. Contractual liability carries no such natural ceiling, which is why the wording of a sale agreement matters so much.
The Two-Part Stern Test and State Law
The leading authority is the Supreme Court decision in Commissioner v Stern, decided in 1958. The court held that section 6901 is purely procedural. It gives the IRS a way to collect, but whether you actually owe anything depends on the law of the state where the transfer took place.
In practice, that state law is usually the Uniform Voidable Transactions Act, formerly the Uniform Fraudulent Transfer Act, or a state's corporate dissolution statute. Consequently, the IRS must prove two things. First, you must be a transferee under the federal definition. Second, you must be liable under state law, typically because the company was insolvent, or became insolvent, when it paid you and received nothing of equivalent value in return.
The Transactions That Trigger a Transferee Liability Claim
Not every payment from a company creates exposure. Instead, transferee liability claims cluster around a handful of transactions, and each of them is common among founders who later relocate.
Liquidating Distributions From a Dissolved US Company
The classic case is simple. A US corporation sells its business, distributes the cash to its shareholders and files a certificate of dissolution. Meanwhile, the corporate income tax on the sale, charged at the flat federal rate of 21%, goes unpaid because nobody filed the final Form 1120.
The IRS regulations at Treasury Regulation 301.6901-1 confirm that a shareholder of a dissolved corporation is a transferee for these purposes. Moreover, state dissolution law often adds its own liability. For example, under Delaware's dissolution provisions, section 282 makes a stockholder liable for a claim against the dissolved corporation up to the lesser of their pro rata share of the claim and the amount distributed to them. Additionally, section 278 keeps a dissolved Delaware corporation in existence for three years to wind up and defend claims.
Asset Sales, Midco Deals and Pre-Exit Dividends
The second pattern involves so-called intermediary or "midco" transactions. A buyer offers a premium price for the shares of a company holding large untaxed gains, then strips the cash and leaves the corporate tax unpaid. The IRS has pursued selling shareholders in dozens of these cases, and the federal appeals courts have split on how much the sellers must have known.
The Seventh Circuit, in Feldman, allowed the IRS to recast such a deal as a liquidation without proving the sellers' knowledge. By contrast, the First, Second, Fourth and Ninth Circuits generally require the IRS to show actual or constructive knowledge that the tax would go unpaid. Nevertheless, the Ninth Circuit upheld liability against the seller in Tricarichi in 2018. In our experience, a large pre-sale dividend followed by a quick share sale to an unknown buyer is the single fact pattern most likely to produce a notice years later.
A UK Company With a US Tax Bill
Transferee liability is not confined to American companies. A UK private limited company can owe US tax too, for example on the sale of US real estate, on income effectively connected with a US trade, or under the withholding rules that apply to foreign sellers of US property. If that company pays its shareholders and is then struck off at Companies House under the voluntary strike-off procedure, the IRS can look to the shareholders.
Importantly, the federal definition does not care where the shareholder lives. The state-law element is harder for the IRS where a UK company and a UK transfer are involved, because the transfer may not be governed by any American state's law at all. However, the IRS can still assess, and any US-situated asset you own remains within reach.
Directors and the Federal Priority Statute
Directors and officers face a separate exposure that sits alongside transferee liability. The federal priority statute, 31 USC section 3713, gives federal claims priority when an insolvent debtor's affairs are wound up. Subsection (b) makes a representative personally liable if they pay other debts before the government's claim.
Consequently, a founder who, as the director handling the wind-up, pays trade creditors, bonuses and shareholders while a federal tax bill remains outstanding can be pursued in a fiduciary capacity. Section 6901 covers fiduciaries in the same way as transferees, so the procedure and time limits are similar.
Time Limits: How Long the IRS Has to Pursue Transferee Liability
The time limits are where most owners' assumptions break down. Many believe the IRS has three years and then the matter closes. In reality, the clock for transferee liability is attached to the company's own clock, and that clock often never started.
The One-Year Extension in Section 6901(c)
Section 6901(c) gives the IRS one extra year beyond the period for assessing the original taxpayer. Under the general rule in section 6501 of the Code, the IRS has three years from the date a return is filed to assess tax. Therefore, the period against an initial transferee is normally four years from the company's filing.
Furthermore, a transferee of a transferee, for example a spouse or family company that later received the money from you, faces one additional year beyond the period against the preceding transferee. That further period cannot exceed three years beyond the original period. Additionally, if the IRS starts a court proceeding against the company or an earlier transferee in time, the period runs to one year after the return of execution in that proceeding.
The Unfiled Return Problem
Here is the trap. Section 6501(c)(3) provides that where no return is filed, the tax may be assessed at any time. Accordingly, if the company never filed its final Form 1120, the period for the company never began, and the one-year extension for transferee liability is one year after a period that has no end.
In our experience, this is the most common reason owners in Britain receive notices five, eight or even twelve years after a liquidation. The company's books were closed, its accountant was dismissed, and the final return was simply never prepared. These are, in effect, missed US tax returns at the corporate level, and the Streamlined procedures cannot fix them because those procedures apply only to individuals.
Suspension, Waivers and Form 2045
The IRS issues a notice of transferee liability in the same way as a notice of deficiency. Once mailed, section 6901(f) suspends the limitation period while the IRS cannot assess, including throughout any Tax Court case, and for sixty days afterwards.
Separately, the IRS may ask you to sign Form 2045, the Transferee Agreement, which is the standard waiver in transferee liability cases and consents to assessment. Its internal guidance on fraudulent transfers and transferee and fiduciary liability, found in IRM 5.17.14, sets out how revenue officers build these cases. Above all, never sign Form 2045 or an extension of the limitation period without understanding exactly what you are conceding.
How Owners Shorten the Window Before Dissolving
There is a legitimate way to close the window early. A corporation that is dissolving, or contemplating dissolution, can file Form 4810 to request prompt assessment under section 6501(d). The IRS then generally has eighteen months from the request to assess, rather than three years.
Additionally, every corporation that adopts a plan to dissolve must file Form 966 within thirty days. Filing the final return, Form 966 and Form 4810 together, and paying the tax before distributing, is the cleanest way to ensure a liquidation never comes back.
Can the IRS Pursue Transferee Liability Against You in Britain?
This is the question every client in London asks first. The honest answer is that the IRS has fewer tools in Britain than in America, but far more patience than most people expect.
No Collection Article in the US-UK Treaty
The US-UK income tax treaty contains no general article on assistance in collection. Article 27 provides for exchange of information, which means HMRC can help the IRS locate your assets. However, it does not oblige HMRC to seize them, and Article 27(5) is limited to recovering treaty relief claimed by people not entitled to it.
Moreover, the United Kingdom is not one of the six countries the IRS lists as mutual collection partners in IRM 5.21.7. English courts also follow the long-standing rule that they will not enforce a foreign state's revenue claims. Our separate guide to IRS collection against UK assets explains these limits in detail.
What the IRS Can Still Do
Nevertheless, an assessment of transferee liability is a personal federal tax debt, and the IRS enforces it against everything within its reach. It can levy US bank and brokerage accounts, file liens against US property, seize US-source payments such as dividends and rents, and offset any future federal refund.
Above all, it can certify the debt to the State Department. Once a seriously delinquent tax debt exceeds $66,000 for 2026, the State Department can deny or revoke your US passport under the passport certification rules. For an American living in Britain on a visa that depends on a valid passport, that is an extraordinarily powerful lever. We explain the process in our article on passport revocation for tax debt.
The Ten-Year Clock Pauses While You Live Abroad
Once assessed, the IRS normally has ten years to collect. However, section 6503(c) suspends that collection period while the taxpayer is continuously outside the United States for six months or more. Consequently, for a long-term UK resident, the collection clock may barely move. Moving abroad therefore postpones the problem rather than ending it, and the debt grows with daily compounding interest the whole time.
The Double Tax Trap After You Pay Transferee Liability
Paying a transferee liability claim is rarely the end of the financial damage. Instead, a cross-border shareholder often discovers that the same money has now been taxed three times: once as a capital gain in Britain, once as a gain in America, and again as the company's unpaid tax.
Arrowsmith and the US Capital Loss
The US position follows the Supreme Court's 1952 decision in Arrowsmith v Commissioner. Because your original liquidating distribution produced a capital gain, a later payment of the company's tax as a transferee is treated as a capital loss, not an ordinary deduction.
Accordingly, the loss first offsets capital gains in the year of payment. After that, only $3,000 a year can reduce ordinary income, and the balance carries forward indefinitely. For a founder whose main gain was the liquidation itself, the US relief can therefore take many years to use.
Why HMRC Gives No Matching Relief
If you were UK resident when you received the liquidating distribution, Britain taxed it as a capital disposal of your shares. For distributions on or after 6 April 2025, the UK capital gains tax rates on shares are 18% and 24%.
However, the later payment to the IRS does not fit the closed list of deductible costs in section 38 of the Taxation of Chargeable Gains Act 1992. Consequently, the UK charge usually stands in full. Meanwhile, the US capital loss arrives years later, when there may be no US tax for it to reduce. This mismatch is why we treat the cross-border consequences as part of the claim, not as an afterthought.
Missed Reporting That Surfaces at the Same Time
A revenue officer building a transferee liability case reviews everything connected with you. Therefore, the investigation often exposes other gaps. Shareholders of a UK company who are US persons may have missed Form 5471 for every year they owned it, and that form carries a $10,000 penalty per form per year.
Similarly, the liquidation proceeds often sat in a UK account that triggered a missed FBAR or a missed Form 8938. Our team handles FBAR and FATCA reporting alongside corporate catch-up filings, because fixing one issue while leaving the others open invites a second enquiry.
Defending and Resolving a Transferee Liability Claim
A notice is not a final bill. Moreover, the IRS bears the burden of proof on the transferee element, which gives an informed shareholder real room to defend.
Contesting the Notice in the Tax Court
A notice of transferee liability follows the deficiency procedure. You can therefore petition the United States Tax Court before paying anything. Importantly, the normal ninety-day deadline extends to 150 days when the notice is addressed to a person outside the United States, which helps owners in Britain but should never be relied on casually.
Under section 6902, the IRS must prove that you are liable as a transferee. However, it does not have to prove that the company owed the tax in the first place. You can contest both, but the burden on the underlying tax sits with you.
Attacking the State-Law Element
Most successful defences to transferee liability focus on state law. For example, you can show the company was solvent when it paid you, that you gave reasonably equivalent value, or that the relevant state's limitation period had already expired before the IRS acted. Additionally, the equity cap limits exposure to the value you actually received, which matters where several shareholders shared the proceeds.
In our experience, the strongest early step is rebuilding the company's final-year accounts. Revenue officers frequently assess on gross sale proceeds because no return exists. Consequently, a properly prepared Form 1120 claiming the real deductions often reduces the underlying tax substantially before any argument about liability begins.
Settling Through an Offer or Instalment Agreement
Where transferee liability is clear, settlement is usually the efficient route. The IRS accepts offers in compromise where there is doubt as to liability or collectibility, and transferee cases often involve both. Alternatively, an instalment agreement can spread payments while stopping enforcement.
Penalties deserve separate attention. The company's failure-to-file penalty runs at 5% of unpaid tax per month up to 25%, and the failure-to-pay penalty adds a further 0.5% per month. A reasoned request for penalty relief, supported by the facts of the wind-up, can remove a significant share of the bill.
Case Study: A Delaware Consultancy Wound Up From London
The following illustrative transferee liability case study draws on the type of matter we see regularly. Names and some details are changed, and the figures are simplified.
The Background
James, a US citizen, owned 100% of a Delaware C corporation providing data consultancy services. In 2022, the company sold its client contracts and intellectual property to a competitor for $4.2 million. Its tax basis in those assets was $900,000, producing a corporate gain of $3.3 million.
In December 2022, the company distributed $3.6 million to James and filed its Delaware certificate of dissolution in March 2023. James had already moved to London with his British wife in September 2022, so he was UK resident when the money arrived. Nobody filed the company's 2022 Form 1120, Form 966 or Form 4810. James reported his own liquidation gain on his 2022 Form 1040 and also paid UK capital gains tax on the same distribution.
The Numbers
In 2026, the IRS assessed the company on the $3.3 million gain. The tax at 21% came to $693,000. Penalties for failure to file and failure to pay added a further $294,525, and interest added roughly $160,000. The total company debt was therefore about $1.15 million.
Because James received $3.6 million, the equity cap offered no protection, and the IRS issued him a notice of transferee liability for the whole amount. Meanwhile, his US passport was approaching the $66,000 certification threshold many times over.
What We Fixed
First, we prepared the missing 2022 Form 1120 using the company's actual records. Deductible transaction costs, final-year salaries and the write-off of obsolete equipment reduced the taxable gain to $3.09 million and the tax to $648,900. Next, we filed a Tax Court petition within the 150-day window, which stopped assessment and gave time to negotiate.
The IRS Independent Office of Appeals then accepted reasonable-cause relief on part of the penalties, reflecting the sudden death of the company's accountant during the wind-up. Consequently, the settled figure fell to about $935,000, a saving of roughly $210,000 against the original notice. Finally, we claimed the payment as an Arrowsmith capital loss on James's 2026 US return, where it offset a $410,000 share gain, and carried the balance forward. We also confirmed his UK position, so that no amended UK return created further exposure.
How TaxYork Can Help
TaxYork provides comprehensive tax preparation and compliance for company owners, investors and executives with US and UK obligations. For transferee liability matters, we reconstruct and file missing corporate returns, prepare the shareholder's US and UK returns on a consistent basis, and quantify the cross-border consequences before you agree any figure with the IRS.
Furthermore, we review the reporting that sits around the claim. That includes Forms 5471, 8938 and FBARs, final-year corporate filings, and the US tax returns for expats that must reflect any capital loss correctly. Where an owner is planning a wind-up now, we prepare the final return, Form 966 and the prompt-assessment request before any money leaves the company.
Conclusion
Transferee liability turns a company's unpaid tax into your personal debt. Section 6901 gives the IRS the procedure, state law supplies the substance, and the unfiled final return removes the time limit that most owners rely on. Moving to Britain does not end the exposure, because the treaty's lack of a collection article is offset by passport certification, US asset levies and a collection clock that pauses while you live abroad.
Above all, the solution is preparation. A correctly filed final return, Form 966 and a prompt-assessment request close the door before it opens. If a notice has already arrived, a rebuilt corporate return, a timely Tax Court petition and a coordinated US-UK filing position can cut the bill substantially.
Contact Us
If you have received a notice of transferee liability, or you are planning to wind up a US company from Britain, please book a consultation with our team. Email hello@taxyork.com or call 020 3488 8606. We will review your company's filing history, your personal US and UK returns, and the time limits that apply, and then set out a clear compliance plan.
Disclaimer
This article is for general information only and does not constitute tax or legal advice. US federal, US state and UK tax rules change frequently, and their application depends on your individual circumstances and on the law of the state governing any transfer. The case study is illustrative, and its figures are simplified. You should obtain professional advice tailored to your situation before acting on any information in this article. TaxYork accepts no liability for any loss arising from reliance on this content.