Cross Border Joint Venture Tax Lien Indemnity Basics
Cross-border tax lien indemnities protect joint venture equity by pairing pre-closing liability carve-outs with liquid escrows and unilateral set-off rights.
IRC Section 6901
Meaning
Provisions within the United States tax code allow the government to collect unpaid taxes from the buyers or recipients of a taxpayer’s assets. Under IRC Section 6901, the Internal Revenue Service can hold a transferee liable for the tax debts of the transferor if the transfer of property left the original taxpayer insolvent. This provision establishes that the government can use the same collection procedures against the recipient as it would against the original taxpayer.
It prevents parties from avoiding taxes by simply transferring their wealth to another entity.
Transferee Liability
Application of this rule requires the government to prove that the transfer was made for less than fair market value. Under IRC Section 6901, the liability can be either at law, based on a contractual assumption of debt, or in equity, based on state law fraudulent transfer principles. The most common scenario involves a corporation distributing its assets to shareholders during liquidation without leaving enough cash to pay its taxes.
In such cases, each shareholder can be held liable up to the value of the assets they received. This means that a buyer of assets must conduct thorough tax due diligence to ensure that they are not buying into a major tax dispute.
Collection Window
Enforcement of these claims operates under an extended timeframe compared to standard tax assessments. The statutory period for assessing liability against a transferee under IRC Section 6901 is one year after the expiration of the period of limitation for assessment against the transferor. This extra year gives the tax authorities sufficient time to trace the assets and establish the liability of the recipient.
This timeline can be extended further if the original taxpayer engaged in fraud or failed to file a return.
Risk Mitigation
Buyers in corporate transactions use specific protective measures to avoid unexpected tax liabilities under this section. During a purchase of assets, the buyer must ensure that the purchase price is fair and that the seller remains solvent after the transaction. Escrow accounts are frequently used to hold back a portion of the purchase price until the tax clearance certificates are obtained.
These funds are then released only after the seller’s tax liabilities have been settled.