THE DOUGLAS FAMILY TRUST, GEORGE THIEL, TRUSTEE, and JAMES D. FISHER, TRUSTEE, Petitioner v. COMMISSIONER OF INTERNAL

REVENUE, Respondent

Docket No. 24591-82.

UNITED STATES TAX COURT

49 T.C.M. (CCH) 234; T.C. Memo 1984-629; T.C.Mem. (RIA)

84629

December 5, 1984.

CORE TERMS: certificate, transferor, insolvent, conveyance, fraudulent,

transferee liability, transferee, beneficial interest, holder, fair

consideration, transferred, assets transferred, insolvency, beneficial,

adequate consideration, certificate holder, plus interest, actual intent,

purchaser, grantor, matured, void, statute of limitations, personal income,

expiration, suspended, appealed, expired, community property,

applicable period

COUNSEL: George Thiel and James D. Fisher (trustees), for the petitioner.

Larry L. Nameroff, for the respondent.

OPINIONBY: COHEN

OPINION: MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: Respondent determined that petitioner is liable, as transferee,

for the following deficiencies and additions to tax, plus interest, due from

Floyd Douglas:

Additions to Tax Assessed

Year Deficiency Sec. 6651(a)(1) n1 Sec. 6653(a) Interest

1973 $999.13 $249.78 $49.96 $434.81

1974 2,380.52 595.13 119.03 893.14

n1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code of 1954, as amended and in effect during the years in issue.

The matters in dispute are (1) whether transfer to petitioner of all of the

assets of Floyd Douglas (a) was without consideration and (b) rendered the

transferor insolvent and (2) whether transferee liability is barred by the

statute of limitations.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of

facts and exhibits attached thereto are incorporated herein by this reference.

Petitioner is The Douglas Family Trust, James D. Fisher (Fisher) and George

W. Thiel (Thiel), Trustees. Fisher and Thiel both resided in Ohio at the time

the petition was filed herein.

On April 15, 1977, respondent sent to the transferor, Floyd Douglas

(Douglas), a statutory notice of deficiency for the years 1973 and 1974.

Petitioner was created on or about June 1, 1977, when a pre-printed document

entitled "Contract and Declaration of Trust of this Pure Trust Organization" was

executed by Jacqueline C. Douglas as Creator, Douglas as Grantor, and Fisher and

Thiel as Trustees. (The document was recorded in the Knox County, Ohio,

Miscellaneous records, on December 28, 1977.) On July 11, 1977, Douglas filed

with this Court a petition for redetermination of the deficiencies and additions

to tax. (Docket No. 7652-77) In June 1979, while his suit was pending before

this Court, Douglas transferred all of his assets to petitioner.On March 7,

1980, this Court entered its decision against Douglas determining deficiencies

in and additions to tax as follows:

Additions to Tax

Year Deficiency Sec. 6651(a)(1) Sec. 6653(a)

1973 $999.13 $249.78 $49.96

1974 2,380.52 595.13 119.03

On June 9, 1980, Douglas filed an appeal to the Sixth Circuit Court of

Appeals from the decision of this Court. No bond was filed by Douglas to stay

assessment, and, accordingly, assessments were made against him on July 1, 1980.

Notice and demand for payment were served on Douglas that same day. Our

decision was affirmed by the Sixth Circuit on September 14, 1981.Douglas v.

Commissioner, without published opinion 665 F.2d 1044 (9th Cir. 1981), affg. a

Memorandum Opinion of this Court. The notice of deficiency herein was mailed to

petitioner on July 27, 1982.

The Contract and Declaration of Trust provided in part as follows:

THE CREATOR hereby offers to bargain or exchange, in trade, all of the Trust

Certificates of Beneficial Interest in this Pure Trust Organization comprising a

total of One Hundred (100) Units of Beneficial Interest for all of the real

and/or personal property of the Grantor or Transferor of this Trust

Organization.

The Certificate Holders shall hold their Certificate of Beneficial Interest

Units as Tenants in Common and at the death of any Certificate Holder said

Certificate shall immediately become null and void. The then lawful successor

to the void Certificate may succeed to the same Beneficial or Distributional

Interest upon the surrender of the void Certificate to the Trustees of this

Trust for their reissuance of a new Certificate to the then lawful Holder or

Owner.

* * *

NO INTEREST under this instrument shall be transferable or assignable by any

Certificate Holder, or be subject during said Holder's life to claims of

creditors. Should an attempt be made by a creditor of a Holder to reach any

beneficial rights, a Trustee may apply the income or principal or both, to which

the Holder would be otherwise entitled, for his or her support or the support

and maintenance of those dependent upon said Holder, in such manner as the

Trustees in their sole discretion may decide.

THE DECLARED purpose of the Trustees of this Pure Trust Organization shall be to accept Rights, Title, and Interest in and to real and personal properties,

whether tangible or intangible, conveyed hereto to be the Corpus of this Trust

Organization for their Conservation, Preservation, Improvement, Increase and

Administration.

The trust instrument also providedthat a holder of a certificate of

beneficial interest had a beneficial and not a legal interest in the trust

assets and had no role in the management or control of the trust. The

certificates were nonnegotiable and of limited transferability. The duration of

the trust was 25 years, renewable for up to another 25-year term. The death,

insolvency or bankruptcy of a certificate holder, or the transfer of a

certificate did not operate to dissolve the trust.

In exchange for the transfer of all of his assets to petitioner, Douglas

received only certificates of beneficial interest. The fair market value of the

assets transferred to petitioner exceeded $100,000. Petitioner did not assume

any liabilities of Douglas.

Among the assets transferred to petitioner was a parcel of real estate

consisting of approximately 140 acres in Fredericktown, Ohio. At the time of

the transfer to petitioner, this property was subject to a mortgage dated

January 12, 1972, executed by Floyd E. Douglas and Jacqueline C. Douglas, his

wife, in the initial principal sum of $63,000. The mortgage was recorded on

January 14, 1972, in the Office of the Recorder of Knox County, Ohio. The

mortgage was not released until July 24, 1979.

As of the date of trial the deficiencies assessed against Douglas, plus

interest, remained unpaid.

ULTIMATE FINDINGS OF FACT

The transfers from Douglas to petitioner were made without fair and adequate

consideration. Douglas was rendered insolvent by the transfers, and the

transfers were in fraud of creditors, including the United States.

The statutory notice of transferee liability dated July 27, 1982, was sent to

petitioner within the applicable period of limitations.

OPINION

Fraudulent Transfers

Section 6901(a)(1)(A)(i) authorizes the assessment of transferee liability,

at law or in equity, in the same manner as the liability for income taxes. This

provision does not create a new liability, but rather provides a summary remedy

for enforcing the existing liability of the transferor. Coca-Cola Bottling Co.

of Tucson v. Commissioner, 334 F.2d 875, 877 (9th Cir. 1964), affg. 37 T.C. 1006

(1962). Mysse v. Commissioner, 57 T.C. 680, 700-701 (1972). Whether one is

liable under section 6901 as a transferee is a question of State law.

Commissioner v. Stern, 357 U.S. 39, 45 (1958); Scott v. Commissioner, 70 T.C.

71, 79 (1978); Pierce v. Commissioner, 61 T.C. 424, 432 (1974). Respondent has

the burden of proving all the elements necessary to establish transferee

liability except that the transferor was liable for the tax. Sec. 6902(a); Rule

142(d). n2

n2 Any reference to Rules is to the Tax Court Rules of Practice and

Procedure.

We must decide whether petitioner is liable as transferee under Ohio law for

the unpaid income tax liabilities of Floyd Douglas as a result of its receipt of

all of Douglas' assets. The parties stipulated that petitioner received all of

Douglas' assets, the fair market value of which exceeded $100,000.n3 It is

undisputed that, as of the date of trial, Douglas' liability for Federal taxes

remained unpaid. The parties disagree as to whether the transfer by Douglas to

petitioner rendered Douglas insolvent and whether the transfer was for adequate

consideration.

n3 On brief petitioner contends that the assets transferred were community

property and that Douglas' one-half interest therein was $50,000, less

indebtedness. The record contains no evidence to support this contention.

Moreover, Ohio is not a community property state.

Under the controlling Ohio statute, a conveyance made without a fair

consideration at a time when the transferor is or will be thereby rendered

insolvent is fraudulent as to creditors without regard to the transferor's

actual intent. Ohio Rev. Code Ann. sec. 1336.04 (Page 1979); n4 Squire v.

Cramer, 64 Ohio App. 169, 28 N.E.2d 516, 518(1940). A conveyance fraudulent as to creditors may be set aside. Ohio Rev. Code Ann. sec. 1336.09 (Page 1979).

n5 The United States is deemed a creditor from the date the transferor's

obligation to pay taxes arose. Short v. United States, 395 F. Supp. 1151, 1154

(E.D. Tex. 1975). n6

n4 Ohio Rev. Code Ann. sec. 1336.04 (Page 1979) provides:

Sec. 1336.04 Conveyances resulting in insolvency.

Every conveyance made and every obligation incurred by a person who is or

will be thereby rendered insolvent is fraudulent as to creditors without regard

to his actual intent if the conveyance is made or the obligation is incurred

without a fair consideration.

n5 Ohio Rev. Code Ann. sec. 1336.09 (Page 1979) provides:

Sec. 1336.09 Remedies for matured claims.

(A) Where a conveyance or obligation is fraudulent as to a creditor, such

creditor, when his claim has matured, may, as against any person except a

purchaser for fair consideration without knowledge of the fraud at the time of

the purchase, or one who has derived title immediately or mediately from such a

purchaser:

(1) Have the conveyance set aside or obligation annulled to the extent

necessary to satisfy his claim; or

(2) Disregard the conveyance and attach or levy execution upon the property

conveyed.

(B) A purchaser, who without actual fraudulent intent has given less than a

fair consideration for the conveyance or obligation, may retain the property or

obligation as security for repayment.

n6 See also Nicholson v. Commissioner, T.C. Memo. 1984-299; Hutcherson v.

Commissioner, T.C. Memo. 1984-165.

For purposes of the Ohio fraudulent conveyance statute, fair consideration

is given for property, or obligation:

(A) When in exchange for such property, or obligation, as a fair equivalent

therefor, and in good faith, property is conveyed or an antecedent debt is

satisfied; or

(B) When such property or obligation is received in good faith to secure a

present advance or antecedent debt in amount not disproportionately small as

compared with the value of the property or obligation obtained. [Ohio Rev. Code

Ann. sec. 1336.03 (Page 1979).]

Douglas transferred all of his assets to petitioner in exchange for

certificates of beneficial interest. Respondent asserts that the certificates

of beneficial interest received by Douglas were a "worthless fiction."

Petitioner argues that the certificates represent the interest of a beneficiary

under a trust which is an interest in land and, therefore, the transfer was

supported by adequate consideration.

Petitioner's argument is ingenuous and requires little sophisticated

analysis. No independent consideration accompanied the transfer. The

certificates may have represented a beneficial interest in the assets

transferred; but they were in reality merely a receipt.

The law does not permit the placing of property in trust in such a manner as

to leave the grantor insolvent and thereby prevent creditors from exercising

their right to pursue the property. Graydon v. Atlantic Phonograph Co., 17 Ohio

C.C. (n.s.) 236, 238 (1910). Because the transfer was made without fair

consideration, the question of whether the transfer was fraudulent turns on

whether the transfer rendered Douglas insolvent. Ohio Rev. Code Ann. sec.

1336.02 (Page 1979) defines insolvency as follows:

A person is insolvent when the present fair salable value of his assets is

less than the amount that will be required to pay his probable liability on his

existing debts as they become absolute and matured.

The deficiencies in tax and additions to tax due from the transferor are

liabilities to be considered in determining whether the transferor was

insolvent. Kreps v. Commissioner, 351 F.2d 1, 10 (2d Cir. 1965), affg. 42 T.C.

660 (1964); C.B.C. Super Markets, Inc. v. Commissioner, 54 T.C. 882, 899 (1970).

Respondent has thus shown a voluntary transfer of property lacking in

consideration at a time when Douglas was indebted. The burden of going foward

with the evidence regarding the solvency of the transferor is shifted to

petitioner upon such showing. Oliver v. Moore, 23 Ohio St. 473, 480 (1872). n7

No evidence was offered by petitioner to rebut the prima facie case of

insolvency made by respondent. Aside from its naked assertion that Douglas was

no more insolvent after the transfer than before, petitioner has failed to show

the existence of any other assets adequate to have paid Douglas' liabilities.

Petitioner merely asserts that personal income cannot be transferred to any

trust, citing Schulz v. Commissioner, 686 F.2d 490 (7th Cir. 1982), affg. a

Memorandum Opinion of this Court, and, therefore, concludes that Douglas was

not insolvent. Petitioner has not shown that Douglas had any personal income,

or that any such income created an asset.We have found as a fact, as stipulated

by the parties, that Douglas transferred all of his assets to petitioner in June

1979. Petitioner's present contention to the contrary is totally lacking in

merit.

n7 See also Morrison Industries, Inc. v. Commissioner, T.C. Memo. 1962-155.

Respondent also asserts that the transfer made by Douglas was actually

fraudulent. Due to our holding that the transfer rendered Douglas insolvent, it

is unnecessary to decide whether Douglas had an actual intent to defraud. n8

n8 Ohio Rev. Code Ann. sec. 1336.07 (Page 1979) provides:

Sec. 1336.07 Intent to defraud.

Every conveyance made and every obligation incurred with actual intent, as

distinguished from intent presumed in law, to hinder, delay, or defraud either

present or future creditors, is fraudulent as to both present or future

creditors.

Statute of Limitations

Petitioner contends that the determination of any liability in this

proceeding is barred by the expiration of the period of limitations upon

assessment. Because this issue was not raised in the original or amended

petitions, the statute of limitations is unavailable to petitioner as a defense.

Robinson v. Commissioner, 12 T.C. 246, 248 (1949), affd. 181 F.2d 17 (5th Cir.

1950). Even if the issue had been raised properly, petitioner's contention that

the period of limitations expired on July 1, 1981, is erroneous.

Section 6901(c)(1) provides that the period of limitations for assessment of

transferee liability against an initial transferee is 1 year from the last day

respondent could make an assessment against the transferor. Because Douglas

filed a petition with this Court, the period for assessment as to him was

suspended until 60 days after the decision of this Court became final. Sec.

6503(a); sec. 301.6503(a)-1(a), Proced. & Admin. Regs. Douglas appealed our

decision, entered on March 7, 1980, to the Sixth Circuit Court of Appeals. A

decision of this Court does not become final in cases appealed to a Circuit

Court until the expiration of the time for filing a petition for certiorari to

the United States Supreme Court. Sec. 7481(a)(2)(A). Although Douglas filed no

petition for certiorari, the time for filing a petition would have expired on

December 13, 1981, 90 days after the entry of the judgment of the Sixth Circuit

Court of Appeals on September 14, 1981. 28 U.S.C. sec. 2101 (1982). Thus, the

decision of this Court did not become final until December 13, 1981, and the

period for assessment as to Douglas was suspended until 60 days thereafter, or

February 11, 1982.

The filing of an appeal with the Sixth Circuit by Douglas did not operate as

a stay of assessment or collection of the deficiency determined by this Court.

Sec. 7485(a). Assessments were made against him on July 1, 1980.

The last day the Commissioner could have made an assessment against Douglas

was February 11, 1982. That date and not the date of the actual assessment

controls the running of the period of limitations for assessment with respect

to petitioner as transferee. Field v. Commissioner, 32 T.C. 187, 200 (1959),

affd. 286 F.2d 960 (6th Cir. 1960), cert. denied 366 U.S. 949 (1961). Thus, the

1-year period for assessment against petitioner did not begin to run until

February 11, 1982, and the statutory notice of transferee liability dated July

27, 1982, was therefore within the applicable period of limitations.

We have considered all other arguments of the parties and find them

unpersuasive. Accordingly, we hold that petitioner is liable as transferee for

the unpaid taxes, additions to tax, and interest of Floyd Douglas, transferor,

for the years 1973 and 1974, plus interest as provided by law.

Decision will be entered for the respondent.