What Does It Mean to Be an IRC 965 Transferee?

The Tax Cuts and Jobs Act of 2017 introduced a one-time tax under Internal Revenue Code (IRC) Section 965. This “transition tax” applied to the untaxed foreign earnings of certain foreign corporations as if those earnings had been brought back to the United States. For many U.S. shareholders with interests in these foreign entities, this resulted in a significant tax obligation. The law recognized that this immediate liability could be substantial, so it established rules for how the liability is managed, paid, and, in some cases, transferred. The possibility of transferring this tax obligation is a key feature of the law, giving rise to the role of a transferee.

Defining an IRC 965 Transferee

An IRC 965 transferee is an individual or entity that becomes responsible for paying an IRC 965 net tax liability that was originally owed by another taxpayer, known as the transferor. This situation typically arises when an S corporation shareholder, who has elected to defer their 965 tax payment, transfers their stock. The person or entity receiving the stock may then assume the tax debt, provided certain conditions are met.

Transferee status is established through specific types of transactions, most commonly the transfer of S corporation stock by sale, gift, or inheritance. For instance, if a parent who is a shareholder in an S corporation with a deferred 965 liability gifts their shares to a child, the child may become a transferee. Similarly, if a shareholder passes away, their heir who inherits the stock could assume the liability. The core principle is that the liability follows the shares that generated it.

The relationship is not limited to individuals. Trusts, estates, partnerships, and other corporations can also become transferees. For example, if an S corporation shareholder contributes their stock to a newly formed partnership in exchange for a partnership interest, the partnership itself could become the transferee. The key element is the receipt of S corporation stock from a transferor with an outstanding and deferred IRC 965 tax liability.

Scope of Transferee Liability

Once an individual or entity qualifies as a transferee, they assume the transferor’s entire unpaid net tax liability. The transferor and transferee become jointly and severally liable, meaning the IRS can seek collection of the full remaining tax from the transferee, the original taxpayer, or the S corporation itself. The IRS is not required to first attempt collection from the original shareholder before pursuing the transferee.

This gives the IRS flexibility in its collection efforts. For example, if a shareholder transfers stock to three different individuals, the IRS could pursue any one of those transferees for the full amount of the deferred tax. It would then be up to that transferee to seek contribution from the other liable parties.

This framework highlights the importance of due diligence in transactions involving S corporation stock where a Section 965 liability might exist. A potential buyer must investigate whether the transferor has a deferred tax liability. This is because the new owner could be held responsible for a pre-existing tax debt, which directly impacts the value and risk of the shares.

The Transferee Agreement

To formalize the assumption of an IRC 965 tax liability, the transferor and transferee must execute a transfer agreement. This agreement is a binding contract with the government that clarifies who is responsible for the remaining tax payments. Its primary purpose is to allow the transfer of S corporation stock to occur without automatically triggering an acceleration of the entire deferred tax liability.

The agreement must contain precise information to be considered valid by the IRS. It requires the complete identification of both the transferor and the transferee, including their names, addresses, and taxpayer identification numbers. The document must explicitly state the transferee’s consent to assume liability for the specific amount of the unpaid Section 965 tax attributable to the shares being transferred.

Furthermore, the agreement includes a waiver of the normal statute of limitations on collection. The transferee must agree that the time period for the IRS to collect the tax will not begin until after a “triggering event” occurs. This provision is necessary because the underlying tax liability may be paid in installments over many years, potentially extending beyond the standard collection period.

To formalize this arrangement, the transferor and transferee must execute and file Form 965-D, “Transfer Agreement Under Section 965.” The agreement must be signed by both parties and filed with the IRS according to its procedures, as detailed in guidance like Treasury Regulation §1.965. A properly executed and filed agreement prevents the stock transfer from becoming an event that makes the entire remaining tax bill immediately due.

Fulfilling Transferee Obligations

After a transferee agreement is filed with the IRS, the transferee’s primary obligation is to continue making any remaining installment payments on the Section 965 tax liability. If the original shareholder had elected under IRC 965(h) to pay the tax over eight years, the transferee steps into that payment schedule. The transferee is responsible for making these annual payments on time and for the correct amount until the liability is fully satisfied. Payments should be clearly designated as being for the IRC 965 liability to ensure they are applied correctly by the IRS.

Transferees must also adhere to ongoing reporting requirements. A shareholder with a deferred liability is required to report the status of that deferred tax on their annual income tax return until the amount has been fully paid. The transferee assumes this annual reporting duty. This typically involves attaching a statement to their tax return that details the remaining deferred liability, ensuring continued transparency with the IRS.