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Stepping into the Shoes of the IRS to PursueOtherwise Time-Barred Avoidance ActionsUnder Fraudulent Transfer Statutes

By Corali Lopez-Castro and David A. Samole

One of the rare legal issues in which bankruptcy practitioners usually are able to speak to clients in absolute terms to provide clear legal advice is the limitations period concerning the pursuit of avoidable transfers in bankruptcy proceedings. Section 546 of the Bankruptcy Code is clear that a trustee has two years after the order for relief to bring an avoidable transfer action. Section 548 of the Bankruptcy Code equally is clear that the trustee maypursue avoidable transfers that occurred within two years prior to the filing ofa bankruptcy petition. And Section 544(b) of the Bankruptcy Code provides thetrustee with “strong-arm” powers to avoid a transfer that is voidable “under applicable law” by a creditor holding an unsecured claim.

This means that the trustee may look to non-bankruptcy law (usually state law)and deploy any avoiding power that the trustee finds there. The most commonuse of Section 544(b) is to give the trustee a right of action under state fraudulenttransfer law. These are most often useful to the trustee because of the longerreach-back period available under state law, which generally range from three tosix years prior to the petition date.

So, for avoidable transfers that occurred outside the state law avoidable transfer period, generally the wisdom imparted to clients is that those are outside thereach of trustees and the bankruptcy court. That is, unless the Internal RevenueService is a creditor at the time of the transfer and has filed a proof of claim in thebankruptcy case. In such instances, the majority line of cases enable a trustee togo beyond the state law limitations period in order to use the IRS recovery period— which runs 10 years after the date of tax assessment — to pursue avoidabletransfers for the benefit of the bankruptcy estate.


This issue is not some drop in thebucket merely for academia to ponder its theoretical implications. Theeffect is real and should be substantial to provide immediate improveddividends to creditors in bankruptcycases, as discussed in a recent bankruptcy case from the Southern District of Florida. Practice pointers alsoare relevant to discuss in relation tothis improved creditor recovery tooland potentially increased exposurefor debtors and their transferees.

Don’t Mess with the IRS

Section 6502(a)(1) of the InternalRevenue Code provides the IRS withauthority to collect taxes for 10 yearsafter the date of tax assessment. So,while the IRS may be owed money prior to the date of assessment for agiven tax year, this provision givesthe IRS that certain time frame topursue collection after assessment.In turn, Section 6901(a) of the Internal Revenue Code enables the IRSto pursue avoidance actions againsttransferees of the taxpayer’s property, subject to the same limitationsapplicable to collection from thetaxpayer; that is, subject to the same10-year post-assessment recoveryperiod. However, in order to establish transferee liability, the IRS mustrely substantively on applicable statelaw, since Section 6901 of the IRC only provides a procedural remedy.

This means the IRS has to showthat a transfer was actively or constructively fraudulent like any othercreditor. Still, the IRS is not limitedby state statutes of limitation topursue these recovery actions. U.S.v. Summerlin, 310 U.S. 414, 416(1940) (Summerlin) (holding it iswell settled that the United Statesis not bound by state statutes oflimitation whether the United States.

Corali Lopez-Castro and David A.Samole are partners at Kozyak Tropin &Throckmorton in Miami. Theyhandle local and national corporate bankruptcy litigation matters. Reachthem at clc@kttlaw.com and das@kttlaw.com, respectively.

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