IRS Explains Who Is A Predecessor Employer For Employment Tax Levy Purposes

Program Manager's Tax Advice (PMTA) 2011-11

In program manager's tax advice (PMTA), IRS explains how to determine if a business that requested a collection due process (CDP) hearing for a prior employment tax quarter is a "predecessor" of the taxpayer against whose assets a disqualified employment tax levy (DETL) may be served. If a business is a "predecessor" of the taxpayer, then under Code Sec. 6330(h), the taxpayer is treated as having had a prior CDP hearing to resolve its employment tax liabilities.

Background. IRS is authorized to take various collection actions in order to ensure the payment and collection of employment taxes, including issuing federal tax levies. Before a tax levy can be issued, however, IRS must generally provide the taxpayer with notice and an opportunity for an administrative CDP hearing, and for judicial review.

Code Sec. 6330(f) allow levies to collect employment taxes without first giving the taxpayer a pre-levy CDP notice, if the levy is a "disqualified employment tax levy" (DETL). Code Sec. 6330(h) defines a DETL as a levy to collect the employment tax liability of a taxpayer, or predecessor, that requested a CDP hearing for unpaid employment taxes in the two-year period before the beginning of the tax period for which the levy is served. The purpose of requiring a prior CDP hearing request within this time period is to ensure that a taxpayer has had a recent opportunity to resolve the collection of employment tax liabilities in a CDP hearing. As a result, a taxpayer must have a sufficient identity with the predecessor so that the CDP hearing given to the predecessor may be imputed to the taxpayer.

Tests for determining a predecessor business under Code Sec. 6330(h). According to the PMTA, IRS should use the following factors to determine if a business that requested a CDP hearing for a prior employment tax quarter is a "predecessor" of the taxpayer against whose assets a DETL may be served:

(1) The taxpayer has substantially the same owner(s) or shareholder(s) and the same officer(s) as the prior business.

(2) The same individual(s) is (are) actively involved in running the taxpayer that were actively involved in running the prior business, regardless of whether they are officially listed as the owners/shareholders/officers.

(3) There is no evidence that the taxpayer's owner(s) or shareholder(s), if different than before, acquired the business in an arms-length transaction for fair market value.

(4) The taxpayer provides substantially the same product(s), service(s), or function(s) as the prior business.

(5) The taxpayer has substantially the same customers as the prior business.

(6) The taxpayer has substantially the same assets as the prior business.

(7) The taxpayer has the same location/telephone number/fax number, etc. as the prior business.

A business won't be treated as a predecessor if there has been a genuine change in control and ownership of the business. A genuine change in control and ownership of the business exists if: (a) it was acquired in an arms-length transaction for fair market value; and (b) the previous owner(s) has (have) ceased all involvement in running the business. If the previous owner serves for a limited period as a consultant to the new business solely in an advisory capacity, then the prior owner should not be treated as having any involvement in running the new business.

The PMTA provides three examples, one of which assumes ABX Co., in the business of selling equipment, was owned by Xavier. After ABX failed to pay employment taxes for several quarters in Year 1, IRS sent it a CDP notice, and ABX requested a CDP hearing. After the CDP hearing, Xavier formed XYZ Co., which used the same supervisors, sold the same equipment, was in the same location, and had the same phone number as ABX. The PMTA concludes that ABX is a predecessor of XYZ.

References: For no pre-levy IRS notice of right to disqualified employment tax levies, see FTC 2d/FIN ¶V-5257; United States Tax Reporter ¶63,304; TaxDesk ¶902,507; TG ¶71944.