UNITED STATES TAX COURT

Sob - Mp

144 T.C. No.12

UNITED STATES TAX COURT

WILLIAM SCOTT STUART, JR., TRANSFEREE, ET AL.,' Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 1685-11, 1686-11,

1687-11, 1688-11.

Filed April 1, 2015.

R issued notices of transferee liability to Ps to collect L's

unpaid Federal income tax pursuant to I.R.C. sec. 6901. R argues that

the following two-step analysis applies in determining whether Ps are

liable for L's unpaid tax: (1) applying doctrines pertinent to

interpreting the Internal Revenue Code, determine whether the form

of the subject transactions should be disregarded in favor of deciding,

on the basis of the substance of the transactions, whether Ps are

transferees for purposes of I.R.C. sec. 6901 and (2) apply State law to

the transactions resulting from the first step.

¹Cases of the following petitioners are consolidated herewith: Arnold John

Walters, Jr., Transferee, docket No. 1686-11; James Stuart, Jr., Transferee, docket

No. 1687-11; and Robert Edwin Joyce, Transferee, docket No. 1688-11.

sgED APR - 1205

-2Held: Following our report in Swords Trust v. Commissioner,

142 T.C. 317 (2014), R's two-step analysis is rejected; additional

reasons are stated.

Held, further, transferee liability is established under the

Nebraska Uniform Fraudulent Transfer Act (UFTA) because L's

transfer was constructively fraudulent as to R and the transfer was

made for the benefit of Ps.

Held, further, unmatured tax liabilities are "claims" within the

meaning of that term as defined in UFTA.

Held, further, Ps, for whose benefit the transfer was made, are

transferees within the meaning of I.R.C. sec. 6901.

Steven Spencer Brown and Denis John Conlon, for petitioners.

H. Barton Thomas, Jr. and George W. Bezold, for respondent.

HALPERN, Judge: These four cases have been consolidated for purposes

of trial, briefing, and opinion. Little Salt Development Co. (Little Salt or

company) is a Nebraska corporation. Petitioners were shareholders of Little Salt

in 2003 until, in August, they sold their shares. Respondent determined and

assessed a deficiency in Little Salt's 2003 Federal income tax of $145,923, along

with an accuracy-related penalty of $58,369. Little Salt did not pay those amounts

(together, unpaid 2003 tax). By separate notices of liability (notices), respondent

-3determined that petitioners, as transferees of Little Salt's property, were liable for

Little Salt's unpaid 2003 tax to the extent of the net value of the assets that each

purportedly received from Little Salt.2 Respondent calculated each petitioner's

respective liability as follows:

Petitioner

Liability

William Scott Stuart, Jr.

$119,609

Arnold John Walters, Jr.

59,804

James Stuart, Jr.

59,804

Robert Edwin Joyce

59,804

Petitioners assign error to respondent's determinations of their transferee liability.

Unless otherwise indicated, all section references are to the Internal

Revenue Code (Code) in effect at the time of the purported transfers in issue, and

all Rule references are to the Tax Court Rules of Practice and Procedure. All

dollar amounts have been rounded to the nearest dollar.

2A transferee's liability generally is limited to the value of the assets

received from the transferor. See Hagaman v. Commissioner, 100 T.C. 180 n.1

(1993).

-4FINDINGS OF FACT

The parties have stipulated certain facts and the authenticity of certain

documents. The facts stipulated are so found, and the documents stipulated are

accepted as authentic.

Petitioners

At the time they filed the petitions, all petitioners resided in Nebraska

except for William Scott Stuart, Jr. (Dr. Stuart), who resided in Minnesota.

Together with the Estate of Charles Craft (which is not a party), they owned all the

shares of Little Salt at the time of the stock sale discussed infra.

Little Salt

Little Salt, a so-called C corporation (subject to the tax on corporations

imposed by section 11), was organized under the laws of Nebraska in 1960. It is a

fiscal year taxpayer whose fiscal year ends on September 30. As of August 6,

2003, its shares were owned as follows:

-5Name

Number of shares

Percentage ownership

William Scott Stuart, Jr.

20

33.336

Robert Edwin Joyce

10

16.666

Arnold John Walters, Jr.

10

16.666

James Stuart, Jr.

10

16.666

Estate of Charles Craft'

10

16.666

¹Charles Craft died on June 24, 2003.

During 2003, Mr. Joyce was president of the company; Mr. Walters was

both secretary and treasurer. All of Little Salt's shareholders (shareholders), other

than the representative of Mr. Craft's estate, were directors.

Land Sale

Until June 11, 2003, Little Salt owned 160 acres of saline wetlands (land)

on the outskirts of Lincoln, Nebraska. On that date, it sold the land to the City of

Lincoln, Nebraska, pursuant to an assignment of contract by the Nebraska Game

and Parks Commission (commission) to the city. Before its sale, the land was used

for farming and for duck hunting. The land is a habitat for the Salt Creek tiger

beetle, a critically endangered species. The city purchased the land for $472,000,

and, after subtracting settlement charges, Little Salt received $471,111. After it

sold the land (land sale), Little Salt's only asset was cash. Little Salt realized a

-6gain of $432,148 on the land sale. After the land sale, the company did not engage

in any business activity.

Stock Sale

During Little Salt's negotiations with the commission leading up to the land

sale, one of the commission's personnel, Bruce Sackett, received a telephone call

and two letters from a representative of MidCoast Investments, Inc. (MidCoast).

In the first letter, MidCoast describes itself as a company interested in purchasing

the stock of C corporations that have sold their assets and that, as a result, have

realized a significant taxable gain. In both letters, MidCoast represents that it

would purchase the Little Salt shares from the shareholders and would pay them

significantly more than the shareholders would receive if they were to dissolve the

company and receive the proceeds of the sale in redemption of their shares. In the

second letter, MidCoast describes its post-share-acquisition plan as follows:

"[U]nder MidCoast's ownership, the company will re-engineer its operations into

the asset recovery business--i.e. the purchase and collection of delinquent account

receivables." Mr. Sackett delivered the two letters to Mr. Joyce, Little Salt's

president. Mr. Sackett had not investigated MidCoast, and he had no further

contact with MidCoast after delivering the letters to Mr. Joyce.

-7Subsequently, by letter dated April 23, 2003, addressed to the shareholders,

MidCoast proposed to acquire all of Little Salt's outstanding shares. The letter

specified that the price to be paid would be "equal to the cash in the Company as

of the * * * [closing date] reduced by sixty-four and 92/100 percent (64.92%) of

the Company's combined state and federal corporate income tax liability for its

current tax year (the 'Deferred Tax Liability')."

The letter contained an example showing net assets in Little Salt of

$472,000, which, when reduced by a combined Federal and State tax liability of

$171,040, resulted in a net Little Salt value of $301,788. The example added an

"Asset Recovery Premium" of $60,000 to Little Salt's net value, which resulted in

a price of $361,788 to be paid by MidCoast to the shareholders for their shares.

The letter also contained MidCoast's covenant "that it shall cause the

Company [i.e., Little Salt] to pay the Deferred Tax Liability to the extent that the

Deferred Tax Liability is due given the Company's post-closing business activities

and shall file all federal and state income tax returns on a timely basis related

thereto."

All of the shareholders signed a copy of the letter, agreeing to be bound by

its terms and conditions. Dr. Stuart testified that, before signing the letter, he

"may have very briefly skimmed it", because he "relied on * * * [his] partners in

-8this transaction." Mr. James Stuart, Jr. (Mr. Stuart), testified that he "probably

[did] not" read it before signing it. Mr. Walters "glanced through it." Mr. Joyce

testified that he is "sure that he probably did [read it]."

By mid-June 2003, the shareholders had determined to proceed with selling

their shares to MidCoast (sometimes, stock sale). They retained local attorney W.

Michael Morrow to represent them. Mr. Morrow was not hired to investigate

MidCoast or analyze whether the stock sale was a tax shelter. His investigation of

MidCoast was limited to his review of MidCoast's corporate documents.

MidCoast hired local attorney W. Scott Davis to represent it.

Through July and early August 2003, Messrs. Morrow and Davis (and their

clients) addressed the prerequisites for the stock sale. The Share Purchase

Agreement (agreement) identifies the purchasers as MidCoast Credit Corp. and

MidCoast Acquisition Corp. (which, collectively, along with MidCoast

Investments, Inc., we will also refer to as MidCoast) and provides that it is

between MidCoast, Little Salt, and the shareholders. It recites that the

shareholders are the owners of 100% of the shares of Little Salt and that MidCoast

desires to purchase those shares from the shareholders and that the shareholders

desire to sell their shares to MidCoast. It contains numerous premises, promises,

representations, warranties, and covenants, among which are the following.

_9_

042

MidCoast agrees to purchase from the shareholders their shares in Little

Salt, and the shareholders agree to sell to MidCoast those same shares.

042

The price for all of the shares is $358,826, to be paid by wire transfer to

Mr. Morrow's firm's trust account.

042

The combined Federal and State income tax liability of Little Salt

"resulting from the sale, conveyance or other disposition of its assets and * * *

[its] operations" for its current (2003) fiscal year as of the closing date "is

$167,737.00 ('the Tax Liability')".

042

After the closing date, it will have no liabilities other than the Tax

Liability.

042

MidCoast will cause Little Salt "to pay the Tax Liability, to the extent that

the Tax Liability is due given the Company's post-Share Closing business

activities, and shall file all federal and state income taxes on a timely basis related

thereto."

042

As a condition of MidCoast's obligations under the agreement, at or

before the closing date, "[Little Salt] shall have transferred all of its monies (which

monies shall be in an amount not less than $467,721) to * * * [Mr. Davis' firm's

trust account], as Escrow Agent under a separate escrow agreement entered into on

or about the date hereof."

- 10 042

Governing law is the law of the State of Nebraska.

The record contains no copy of the escrow agreement referred to in the

second immediately preceding paragraph, and Mr. Walters, secretary and treasurer

of the company, testified that he was aware of no escrow agreement or escrow

agent. On that basis, we find that there was no separate escrow agreement.

The price ($358,826) set forth in the agreement for the shares had been

determined by Little Salt's accountant, David A. Ellingson. He calculated Little

Salt's unpaid 2003 combined Federal and State tax liability as of June 30, 2003, to

be $167,737. He determined that 64.92% of that amount was $108,895, which he

subtracted from Little Salt's cash balance of $467,721, to arrive at the purchase

price of $358,826.

On July 31, 2003, Mr. Davis sent to Mr. Morrow a draft letter (draft letter)

regarding the exchange of funds to accomplish the closing of the stock sale. In

pertinent part, the draft letter states:

At closing, your clients will cause Little Salt to transfer all of

the cash in the account of Little Salt to this law firm's trust account.

Purchaser will then immediately provide funds to this law firm's trust

account for the entire purchase price. Upon receipt of the cash from

Little Salt into this firm's trust account, this law firm will direct the

purchase price be transferred to your law firm's trust account. * * *

You as the representative for the individual, selling shareholders will

receipt for the purchase price and make appropriate distribution of the

purchase price to your clients.

- 11 Neither your law firm nor this law firm undertakes any duties

of escrow agent * * *. However, both of our firms are obligated to

follow the instructions of our respective clients, and to that end, this

letter is intended to memorialize the instructions we have both

received in order to carry out the closing of the transaction. Under

the law of Nebraska, we are fiduciaries with respect to the funds that

we hold for the benefit of our clients in our respective trust accounts

in any event.

On August 5, 2003, Mr. Morrow sent to Mr. Davis a letter that, among other

things, discussed the cash payments. Mr. Davis was to confirm to Mr. Morrow

that he had on deposit in his firm's trust account the $358,826 share purchase price

and that he would transfer that amount to Mr. Morrow's firm's trust account

simultaneously with Little Salt's transfer of $467,721 to Mr. Davis' firm's trust

account. The letter contains language almost identical to the second quoted

paragraph of the draft letter.

On August 6, 2003, MidCoast transferred $358,826 into Mr. Davis' firm's

trust account.

The parties to the agreement executed it, and it was effective on August 7,

2003. Mr. Joyce signed it as president of Little Salt. On that date, Mr. Morrow

delivered instructions from Mr. Walters, Little Salt's secretary and treasurer, to

Wells Fargo Bank, Little Salt's bank, instructing the bank to transfer all of its cash

($467,721) to Mr. Davis' firm's trust account. Nine minutes later, Mr. Morrow

- 12 received in his firm's trust account from Mr. Davis' firm's trust account $358,826.

On August 8, 2003, Mr. Morrow sent the Little Salt shareholders their pro rata

shares of the $358,826 that he had received.

Little Salt's transfer of its cash to Mr. Davis' firm's trust account left it with

no cash and no tangible assets.

Disposition of Funds

On August 7, 2003, after the receipt in his firm's trust account of $467,721

from Little Salt, Mr. Davis, at MidCoast's direction, caused that amount to be

transferred to an account in the name of Little Salt at SunTrust Bank. On the next

day, August 8, 2003, $467,000 was transferred from Little Salt's SunTrust Bank

account to another account at that bank entitled "MidCoast Credit Corp. Accounts

Payable". Little Salt recorded the August 8 transfer on its books as a receivable

due from shareholder (shareholder loan). Little Salt's September 30, 2003

(yearend), balance sheet shows the amount due as $327,000, reflecting a reduction

of $140,000, apparently as credits for operating expenses and professional fees.

As of January 27, 2004, Little Salt's and MidCoast's records show the balance due

to Little Salt from MidCoast to be $394,429. MidCoast's files contain no

promissory notes.

- 13 Knowledge

When on August 7, 2003, Mr. Morrow delivered Little Salt's instructions to

its bank, Mr. Morrow did not know of any instructions that MidCoast may have

given to Mr. Davis with respect to Little Salt's cash delivered to his trust account,

nor did he know of MidCoast's plans with respect to Little Salt.

Dr. Stuart did not read the agreement before he signed it. He did not know

it required Little Salt to transfer all of its money out of the corporation before the

closing. He testified that he "knew nothing" about MidCoast.

Mr. Stuart testified that he could not recall ("I don't know") whether he read

the agreement. He could not recall seeing the provision of the agreement that

required Little Salt to transfer all of its money out of the company. He testified

that he was unaware of MidCoast's promise with respect to Little Salt's tax

liabilities.

Mr. Walters, Little Salt's secretary and treasurer, testified that he scanned

the agreement. He was aware of MidCoast's obligation to pay the Tax Liability,

but he did nothing to determine whether MidCoast would actually fulfill its

obligation; he accepted its word.

Mr. Joyce, president of Little Salt, testified that he knew MidCoast was

getting Little Salt's cash but, at the time of the sale, he did not know what it would

- 14 choose to do with the cash. He testified that MidCoast's statement in one of the

letters received from Mr. Sackett that it would re-engineer its operations into the

asset recovery business meant nothing to him. He added: "I had no idea what

MidCoast's intentions were with our corporation other than the little information

we got from letters and their brochures about wanting to merge them into their

operation. How that played into [our] operation, I didn't know and I wasn't privy

to that."

Tax Returns and Payments

On December 15, 2003, Little Salt filed its 2003 Form 1120, U.S.

Corporation Income Tax Return. It reported taxable income of $432,148, total tax

of $146,930, and tax due of $148,456. It made no payment with the return. It

reported on Schedule L, Balance Sheets per Books, that, as of the end of the year,

it had cash of $278, a loan of $467,000 due from MidCoast, and no other assets; it

reported no liabilities.

On February 18, 2005, Little Salt filed its 2004 Form 1120. It reported

interest income of $1,739, apparently from the shareholder loan, a bad debt

deduction of $450,370 resulting from the worthlessness of the shareholder loan,

and, taking into account certain other deductions, negative taxable income of

$483,970. It reported no gross receipts or cost of goods sold. The bad debt

- 15 deduction produced a net operating loss that Little Salt carried back to, and

deducted for, 2003. It reported on Schedule L that, as of the end of the year, it had

trade notes and accounts receivable of $903 and no liabilities.

Respondent examined both Little Salt's 2003 and 2004 returns and

disallowed both the 2004 bad debt deduction and the loss carried back to, and

deducted for, 2003. On October 5, 2007, he determined a deficiency in Little

Salt's 2003 Federal income tax of $145,923 and an accuracy-related penalty of

$58,369.

The parties stipulate that Little Salt was entitled to neither deduction.

Respondent issued to Little Salt a notice of deficiency within three years of

February 18, 2005, the date it filed its 2004 Form 1120. Little Salt failed to timely

petition the Tax Court, and, on April 21, 2008, respondent assessed the deficiency

in tax and penalty that he had determined for 2003. Respondent has attempted to

collect the unpaid 2003 tax from Little Salt, but he has not been successful. The

amount remains unpaid.

After Little Salt failed to file Nebraska income tax returns and other

required annual reports, the State of Nebraska Corporation Division placed Little

Salt into inactive status on April 16, 2004.

- 16 Notices of Transferee Liability

Respondent sent the notices in November 2010. In an attachment to each

notice respondent stated his rationale for concluding that the shareholders were

transferees of Little Salt's property and liable as such for its unpaid 2003 tax.

Respondent explained that he would recast the transaction by which the

shareholders disposed of their shares in Little Salt as he saw the substance of the

transaction; i.e., not as the shareholders' sale of those shares to MidCoast, but

rather, as a liquidating distribution of all of Little Salt's cash to its shareholders in

redemption of its outstanding shares, followed by the shareholders' payment of a

portion of that cash to MidCoast as an accommodation fee for its participation in

the assumed sale.

Petitions

Petitioners timely petitioned for review of the notices, each assigning as

error respondent's determinations that (1) Little Salt had a deficiency in tax for

2003 of $145,923 and incurred an accuracy-related penalty of $58,369 and (2)

petitioners are liable as transferees of Little Salt's assets. Each also raised as an

affirmative defense that the period of limitations for assessing transferee liability

had run when the notices were sent. Respondent denied petitioners' assignments

of error and defense.

-17OPINION

I.

Introduction

We must determine whether petitioners are liable as transferees of the

property of Little Salt for the unpaid 2003 tax. Although petitioners assign as

error respondent's determination of the unpaid 2003 tax, they make no objection

on brief to respondent's proposed finding of fact that Little Salt is liable for the

unpaid 2003 tax. We think that there is ample evidence to support that proposed

finding, and we so find. On that basis, there is no merit to petitioners' first

assignment of error. That leaves for discussion petitioners' affirmative defense of

the period of limitations and their remaining assignment of error, that they are not

liable as transferees of Little Salt's property. We will address those issues in turn.

II.

Period of Limitations

In general, the Commissioner must assess transferee liability within one

year after expiration of the period of limitations on the transferor. See sec.

6901(c). The applicable period of limitations may be extended by agreement. See

sec. 6901(d). When a petition is filed with the Court with respect to a notice of

transferee liability, the running of the period of limitations is further suspended,

from the date of mailing of the notice until 60 days after the decision of the Court

becomes final. See sec. 6901(f). The period of limitations on assessment and

- 18 collection of tax with respect to the transferor is set forth in section 6501.

Pursuant to section 6501(h), a deficiency attributable to a net operating loss

carryback may be assessed at any time before the expiration of the period within

which a deficiency for the taxable year of the loss that results in the carryback may

be assessed. The bar of the statutory period of limitations is an affirmative

defense, and the party raising this defense must specifically plead it and prove it.

See Rules 39, 142(a); Amesbury Apartments, Ltd. v. Commissioner, 95 T.C. 227,

240 (1990).

Respondent has set forth a chain of events, including extensions by the

shareholders pursuant to section 6901(d)(1) of the section 6901(c) period of

limitations, that appears to belie petitioners' claim that the period of limitations for

assessing transferee liability had run when the notices were sent. Petitioners' only

argument is that if, pursuant to respondent's theory in the notices, the shareholders

on August 7, 2003, received distributions in liquidation of their Little Salt shares

then, thereafter, "[Little Salt] could no longer exist for purposes of filing a tax

return for the year ended September 30, 2004 (claiming a net operating loss

carried back to the prior year) to extend the statute of limitations for the year

ended September 30, 2003 under I.R.C. § 6501(h)."

- 19 Petitioners are mistaken in their understanding of a corporation's obligation

to file a Federal income tax return. "A corporation in existence during any portion

of a taxable year is required to make a return." Sec. 1.6012-2(a)(2), Income Tax

Regs. Moreover: "For Federal income tax purposes, the annulment of a

corporation's charter does not necessarily have the effect of discontinuing the

corporate entity. * * * If a corporation retains assets, even though under State law

its legal existence has been terminated and the corporation is in the process of

liquidation, it will be treated as a continuing taxable entity." Hill v.

Commissioner, 66 T.C. 701, 705 (1976); see also sec. 1.6012-2(a)(2), Income Tax

Regs.3 If a corporation is in the process of liquidation and if its "affairs are

substantially unsettled, it will remain in existence for Federal income tax

purposes." Hill v. Commissioner, 66 T.C. at 705. There is evidence here of Little

Salt's activities through at least early 2005, when it filed its 2004 Form 1120 and

claimed a loss that it carried back to, and claimed for, 2003. Even crediting

respondent's theory that a liquidating distribution was made, petitioners have

3Under Nebraska law, the secretary of state is directed automatically to

dissolve a corporation subject to the State's Business Corporation Act that does

not timely pay its occupation (franchise) tax and file the required reports. See

Neb. Rev. Stat. Ann. sec. 21-323 (LexisNexis 2008). Nevertheless, a corporation

subject to such automatic dissolution "continues its corporate existence" as

necessary to wind up and liquidate its business and affairs. Il

- 20 failed to carry their burden of showing that Little Salt's existence discontinued or

its obligation to make a Federal income tax return ended before February 18, 2005,

when it filed its 2004 Form 1120.

Petitioners' affirmative defense relying on the statutory period of limitations

as a bar to respondent's collection of transferee liability from them fails.

III.

Transferee Liability

A.

Introduction

Section 6901 provides that the liability, at law or in equity, of a transferee of

property "shall * * * be assessed, paid, and collected in the same manner and

subject to the same provisions and limitations as in the case of the taxes with

respect to which the liabilities were incurred". By way of illustration, but not by

way of limitation, section 6901(h) provides that the term "transferee" includes

"donee, heir, legatee, devisee, and distributee".

While the definition of persons considered transferees for purposes of

section 6901 is extensive, the section does not independently impose tax liability

upon a transferee but provides a procedure through which the Commissioner may

collect unpaid taxes owed by the transferor of the property from a transferee if an

independent basis exists under applicable State law or State equity principles or, in

some cases, Federal law for holding the transferee liable for the transferor's debts.

- 21 See Commissioner v. Stern, 357 U.S. 39, 45 (1958); Hagaman v. Commissioner,

100 T.C. 180, 183 (1993). Thus, usually, State law determines the elements of

liability, and section 6901 provides the remedy or procedure to be employed by

the Commissioner as a means of enforcing that liability. See Swords Trust v.

Commissioner, 142 T.C. 317, 335-336 (2014). The Commissioner bears the

burden of proving that the transferee is liable as a transferee of property of the

taxpayer but need not prove that the taxpayer was liable for the tax. Sec. 6902(a);

Rule 142(d).

A transferee's liability for Federal taxes of the transferor of property

includes any additions to tax, penalties, and interest that have been assessed with

respect to the tax. See Kreps v. Commissioner, 42 T.C. 660, 670 (1964), affd, 351

F.2d 1 (2d Cir. 1965). Transferee liability is several, and the Commissioner is free

to proceed against one or more of any number of potential transferees. See

Phillips v. Commissioner, 283 U.S. 589, 603-604 (1931).

B.

Applicable State Law

1.

Uniform Fraudulent Transfer Act

The existence and extent of transferee liability is determined by the law of

the State where the transfer occurred. Estate of Miller v. Commissioner, 42 T.C.

593, 598 (1964); see Commissioner v. Stern, 357 U.S. at 45. In these consolidated

- 22 cases, that State is Nebraska. Nebraska has adopted the Uniform Fraudulent

Transfer Act (UFTA), Neb. Rev. Stat. Ann. secs. 36-701 through 36-712

(LexisNexis 2014), which provides creditors with certain remedies, including

avoidance, when a debtor makes a fraudulent transfer. See id. sec. 36-708(a)(1).

If avoidance of a transfer is established, a creditor, subject to certain limitations,

may recover judgment for the value of the asset transferred, or the amount

necessary to satisfy the creditor's claim, whichever is less. E sec. 36-709(b). The

judgment may be entered against:

(1) the first transferee of the asset or the person for whose

benefit the transfer was made; or

(2) any subsequent transferee other than a good faith transferee

who took for value or from any subsequent transferee.

Neb. Rev. Stat. Ann. sec. 36-705(a) establishes when a transfer is fraudulent

as to present and future creditors:

(a) A transfer made or obligation incurred by a debtor is

fraudulent as to a creditor, whether the creditor's claim arose before or

after the transfer was made or the obligation was incurred, if the

debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay, or defraud any creditor

of the debtor; or

(2) without receiving a reasonably equivalent value in

exchange for the transfer or obligation, and the debtor:

- 23 (i) was engaged or was about to engage in a business or a

transaction for which the remaining assets of the debtor were

unreasonably small in relation to the business or transaction; or

(ii) intended to incur, or believed or reasonably should have

believed that he or she would incur, debts beyond his or her ability to

pay as they became due.

Neb. Rev. Stat. Ann. sec. 36-706 establishes when a transfer is fraudulent

only as to present creditors:

(a) A transfer made or obligation incurred by a debtor is

fraudulent as to a creditor whose claim arose before the transfer was

made or the obligation was incurred if the debtor made the transfer or

incurred the obligation without receiving a reasonably equivalent

value in exchange for the transfer or obligation and the debtor was

insolvent at that time or the debtor became insolvent as a result of the

transfer or obligation.

(b) A transfer made by a debtor is fraudulent as to a creditor

whose claim arose before the transfer was made if the transfer was

made to an insider for an antecedent debt, the debtor was insolvent at

that time, and the insider knew or reasonably should have known that

the debtor was insolvent.

Fraud under UFTA may be either actual or constructive.4

4Neb. Rev. Stat. Ann. sec. 36-705(a)(1) (LexisNexis 2014) concerns itself

with "actual" fraud, requiring a creditor to show the debtor's intent, i.e., that he

"made the transfer * * * with actual intent to hinder, delay, or defraud any creditor

of the debtor." (Emphasis added.) Neb. Rev. Stat. Ann. secs. 36-705(a)(2) and

36-706(a), on the other hand, are essentially unconcerned with intent and focus,

instead, on economic effect, e.g., whether the creditor received "a reasonably

equivalent value in exchange for the transfer". Such intentless fraud is generally

described as "constructive" fraud. See, e.g., Wiand v. Lee, 753 F.3d 1194, 1199

(continued...)

- 24 The term "claim" means "a right to payment, whether or not the right is

reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,

unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." E sec.

36-702(3).

"Value is given for a transfer or an obligation if, in exchange for the transfer

or obligation, property is transferred or an antecedent debt is secured or satisfied,

but value does not include an unperformed promise made otherwise than in the

ordinary course of the promisor's business to furnish support to the debtor or

another person." E sec. 36-704(a).

A debtor is considered "insolvent" under UFTA "if the sum of the debtor's

debts is greater than all of the debtor's assets at a fair valuation." Id. sec.

36-703(a). The term "debt" means "liability on a claim." E sec. 36-702(5). With

exceptions not here relevant, the term "asset" means "property of a debtor". Id.

sec. 36-702(2).

The burden is on the creditor to prove by clear and convincing evidence the

elements necessary to show that a transfer made by a debtor is fraudulent as to the

creditor. See Dillon Tire, Inc. v. Fifer, 589 N.W.2d 137, 142 (Neb. 1999).

4(...continued)

(11th Cir. 2014); Cullifer v. Commissioner, T.C. Memo. 2014-208, at *49-*51.

- 25 An action under UFTA to declare a transfer fraudulent as to a creditor

invokes equity jurisdiction of a court. See id. at 141.

2.

Nebraska Business Corporation Act

The Nebraska Business Corporation Act provides that claims against a

dissolved corporation may in some circumstances and with limitations be enforced

against the corporation's shareholders when corporate assets have been distributed

in liquidation. See Neb. Rev. Stat. Ann. sec. 21-20,157(4) (LexisNexis 2008 &

Supp. 2014).

3.

Trust Fund Doctrine

Under the common law trust fund doctrine, "property of the corporation

constitutes a trust fund in the hands of its officers and directors, and a transaction

between them whereby the corporation's property is diverted from the corporation

to their own use and benefit will not be upheld." Elec. Dev. Co. v. Robson, 28

N.W.2d 130, 139 (Neb. 1947).

- 26 C.

Parties' Arguments

1.

Respondent's Arguments

a.

Two-Step Analysis

Respondent argues that, in determining whether, pursuant to section 6901,

he may use administrative procedures to collect Little Salt's unpaid 2003 tax

liability from petitioners, we should engage in a two-step analysis.

First, the court should determine under federal law whether the

transaction that gives rise to the liability was properly characterized

and whether the recipient was a transferee under section 6901(h).

Once that analysis is done, if the transaction is recast or otherwise

disregarded under federal tax law principles and the recipient is a

transferee, then the court should look to state law to determine

whether the transferees received fraudulent transfers.

To make the first step (i.e., to determine the proper character of the

transaction and to determine whether the shareholders are transferees within the

meaning of section 6901), respondent argues that we must disregard the form

chosen by the shareholders to liquidate their investments in Little Salt (i.e., a sale

of shares to MidCoast) and consider, instead, the substance of the transaction.

Respondent views that substance as follows: "The Little Salt shareholders are

each transferees of cash from Little Salt because the Stock Sale was in substance a

shareholder distribution of cash to them followed by payment of a fee or

commission to MidCoast." In support of his argument that substance should

- 27 govern over form, respondent invokes many familiar doctrines pertinent to

interpretation of the Internal Revenue Code (Code), along with supporting

authority.

Taxpayers generally are free to structure their business

transactions as they wish, even if motivated in part by tax reduction

considerations. Gregory v. Helvering, 293 U.S. 465 (1935); Rice's

Toyota World, Inc. v. Commissioner, 81 T.C. 184, 196 (1983), affd.

on this issue 752 F.2d 89 (4th Cir. 1985).

However, a transaction that lacks economic purpose and

substance other than sought-after tax avoidance may be treated as a

sham and disregarded for federal income tax purposes. Frank Lyon

Co. v. United States, 435 U.S. 561 (1978); Rice's Toyota World, Inc.

v. Commissioner, 81 T.C. at 196. The economic substance of a

transaction, rather than its form, controls. Commissioner v. Court

Holding Co., 324 U.S. 331 (1945); Gregory v. Helvering, 293 U.S.

465; Amdahl Corp. v. Commissioner, 108 T.C. 507, 516-17 (1997).

The "labels, semantic technicalities, and formal written

documents do not necessarily control the tax consequences of a given

transaction." Houchins v. Commissioner, 79 T.C. 570, 589 (1982).

For Federal income tax purposes a transaction may be

disregarded if the transaction was not entered into for valid business

purposes but rather for "tax benefits not contemplated by a reasonable

application of the language and purpose of the Code or its

regulations." Feldman v. Commissioner, T.C. Memo. 2011-297 slip

op. at 27 (quoting Palm Canyon X Inys., LLC v. Commissioner, T.C.

Memo. 2009-288). Even if a transaction is not treated as a sham, it

still may be recast in order to reflect its true nature. Gaw v.

Commissioner, T.C. Memo. 1995-531.

- 28 As respondent sees it, the simultaneous exchange of funds by Little Salt to

MidCoast, and by MidCoast to the shareholders, through Mr. Davis' firm's trust

fund, followed by MidCoast's transitory deposit of the funds received from Little

Salt into a new Little Salt bank account before their return to MidCoast in

exchange for its worthless promise to repay Little Salt served no purpose but to

put most of Little Salt's cash into the hands of the shareholders and, in exchange

for a fee paid to MidCoast, to give them a plausible basis to deny that they were

transferees of the company's property. As respondent puts it:

The Stock Sale is a subterfuge. In reality, it is nothing but a

liquidation of Little Salt and a distribution of its assets to its

shareholders making them transferees liable for Little Salt's income

tax liability.

*

*

*·

*

*

*

*

Little Salt had ceased all business operations as of the Asset Sale.

* * * There being no business, there was no apparent business reason

for the Stock Sale. In effect, * * * the parties simply exchanged

unequal amounts of fungible cash, and the difference represented

MidCoast's fee for assisting the Little Salt shareholders in avoiding

the incidence of Little Salt's deferred tax liability.

b.

Equitable Rules

Even were we to disregard antiabuse doctrines pertinent to interpreting the

Code, respondent believes that we would reach the same result by applying the

equitable rules pertinent to considering fraudulent transfer claims. See Dillon v.

- 29 Fifer, 589 N.W.2d at 141 ("Equity looks through forms to substance. Thus, a

court of equity goes to the root of the matter and is not deterred by forms."); see

also Boyer v. Crown Stock Distrib., Inc., 587 F.3d 787, 793 (7th Cir. 2009)

("'[F]raudulent conveyance doctrine . . . is a flexible principle that looks to

substance, rather than form, and protects creditors from any transactions the debtor

engages in that have the effect of impairing their rights[.]'" (citing Douglas G.

Baird, Elements of Bankruptcy 153-154 (4th ed. 2006))).

c.

State Law Liability

With respect to his satisfying the second step, i.e., showing State law

liability, respondent cites the following bases under which he may collect Little

Salt's unpaid tax and penalty from petitioners: (1) under the Nebraska Business

Corporation Act, as a claimant against a dissolved corporation's shareholders

having received corporate assets in a liquidating distribution, (2) under UFTA, on

account of the distributions' being fraudulent as to him within the meaning of Neb.

Rev. Stat. Ann. sec. 36-705(a)(2) or 36-706(a), or (3) under the trust fund doctrine.

Additionally, if we are to respect the form of the stock sale (and likewise the

transfer by Little Salt of its cash to MidCoast), respondent argues that,

nonetheless, the transfer to MidCoast was fraudulent as to him, and, pursuant to

- 30 Neb. Rev. Stat. Ann. sec. 36-709(b)(1), he is entitled to a judgment against the

shareholders, "the person[s] for whose benefit the transfer was made."

2.

Petitioners' Arguments

Petitioners view the facts as follows:

Little Salt sold land that it owned in Nebraska on June 11,

2003. It received proceeds from the sale which it deposited into its

bank account. The Petitioners thereafter each sold their stock in

Little Salt to MidCoast on August 7, 2003. At that time, and

immediately thereafter, Little Salt had $467,721 on hand at the bank.

Thus, Little Salt was solvent prior to, during and after the stock sale.

Petitioners' argument rejecting any liability under UFTA appears to proceed

as follows. Little Salt's proceeds from the land sale remained with it until the

shareholders sold their shares to MidCoast on August 7, 2003. Therefore,

notwithstanding that at some time thereafter Little Salt may have made transfers

fraudulent as to respondent, no judgment can be entered against them under Neb.

Rev. Stat. Ann. sec. 36-709(b)(1) since none of the proceeds from the land sale

were ever transferred to them. As they put in their answering brief: "As

established in the Petitioner's [sic] Opening Brief, there can be no transferee

liability under * * * [UFTA]. Most importantly, there were no transfers from

Little Salt to the Petitioners". For the same reason, they believe that they cannot

- 31 be held liable for Little Salt's tax debts under the Nebraska Business Corporation

Act or the trust fund doctrine.

They reject respondent's attempt to recharacterize the stock sale as a

payment by Little Salt to them of cash in redemption of their shares. They add that

the shareholders did not have the "requisite knowledge" (i.e., "that the Little Salt

taxes would not be paid by MidCoast") to support recharacterizing the stock sale.

D.

Discussion

1.

Two-Step Analysis

Recently, in Swords Trust v. Commissioner, 142 T.C. 317, we faced another

situation in which the shareholders of a corporation with a large unpaid Federal

income tax liability had sold their shares. In furtherance of collecting the unpaid

liability from the shareholders as transferees of the corporation's property, the

Commissioner sought to recharacterize the stock sale as a liquidating distribution

in which the shareholders received cash in redemption of their shares. The

Commissioner argued for the same two-step analysis that he argues for here.

Previously, we had not explicitly adopted or rejected that analysis although our

approach had been to recast a transaction only when State law allowed such

recasting. Id. at 340. Three U.S. Courts of Appeals had rejected the

Commissioner's two-step analysis. See Diebold Found., Inc. v. Commissioner,

- 32 736 F.3d 172, 184-185 (2d Cir. 2013), vacating and remanding T.C. Memo. 201261, 2012 WL 716191; Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 597,

604-605 (1st Cir. 2013), rev'g and remanding T.C. Memo. 2011-298; Starnes v.

Commissioner, 680 F.3d 417, 428-429 (4th Cir. 2012), a_ffg T.C. Memo. 2011-63,

2011 WL 894608.5 We found that the rationales of the three decisions were

similar, typified by the rationale of the Court of Appeals for the Fourth Circuit in

Starnes. Swords Trust v. Commissioner, 142 T.C. at 338-340. In Starnes v.

Commissioner, 680 F.3d at 428-429, the court, citing Commissioner v. Stern, 357

U.S. 39, held that the question of whether a person or an entity is a "transferee" for

purposes of section 6901 is separate from the question of whether the transfer was

fraudulent for State law purposes. It concluded that "Stern forecloses the

5Since we decided Swords Trust v. Commissioner, 142 T.C. 317 (2014), the

U.S. Court of Appeals for the Ninth Circuit has joined its three sisters in rejecting

the Commissioner's two-step analysis. See Salus Mundi Found. v. Commissioner,

776 F.3d 1010 (9th Cir. 2014), rev'g and remanding T.C. Memo. 2012-61. In

Feldman v. Commissioner, _ F.3d __, _, 2015 WL 759250, at *5 (7th Cir. Feb.

24, 2015), a_fffg T.C. Memo. 2011-297, the Court of Appeals for the Seventh

Circuit concluded that transferee liability cases under sec. 6901 proceed in two

steps: first, the Commissioner must establish that the target is a transferee within

the meaning of sec. 6901; second, he must establish the transferee's liability under

State law. The court acknowledged that the independent State law inquiry would

make a difference in outcome when there was a conflict between the applicable

Federal doctrine (applying antiabuse doctrines to restructure a transaction) and the

State law that determines substantive liability, but it found no such conflict on the

facts before it. Id. at _, 2015 WL 759250, at *9.

- 33 Commissioner's efforts to recast transactions under federal law before applying

state law to a particular set of transactions." Starnes v. Commissioner, 680 F.3d at

429. We held in Swords Trust v. Commissioner, 142 T.C. at 338, that, like the

three Courts of Appeals, we would reject the Commissioner's two-step analysis.

Our holding in Swords Trust on that point is controlling, and, for that

reason, we need say no more. Nevertheless, because in this Court and in other

courts, see, e.g., Salus Mundi Found. v. Commissioner, 776 F.3d 1010 (9th Cir.

2014), rev'g and remanding T.C. Memo. 2012-61, the Commissioner persists in his

two-step analysis, we offer an additional reason for rejecting that analysis. Before

the enactment of the original predecessor provision to section 6901, the rights of

the Federal Government as creditor of a tax debt were enforceable against

someone other than the taxpayer only through procedures cumbersome in

comparison to the summary administrative remedy allowed against the taxpayer

himself.6 The purpose of the change in the law was to provide for the enforcement

of such third-party liability to the Government by the procedures already in

existence for the enforcement of tax deficiencies. H.R. Conf. Rept. No. 69-356, at

43 (1926), 1939-1 C.B. (Part 2) 361, 371. The procedures were to be effective

6See Michael I. Saltzman & Leslie Book, IRS Practice and Procedure, para.

17.01, at 17-3 through 17-4 (rev. 2d ed. 2002).

- 34 against a transferee of property of the taxpayer, but "[w]ithout in any way

changing the extent of such liability of the transferee under existing law". Id. at

43, 1939-1 C.B. (Part 2) at 371. Moreover, notwithstanding Congress' enactment

of a summary method for collecting a transferee's liability, section 6901 is not the

exclusive method for the Commissioner to collect a transferee's liability. For

example, the section does not replace the older judicial remedies of instituting

proceedings to collect a corporate tax from its shareholders or to set aside a

fraudulent conveyance. See, e.g., Leighton v. United States, 289 U.S. 506 (1933)

(equity suit to compel shareholders to account for corporate property to satisfy

corporation's tax liability not foreclosed by failure to employ (now section 6901)

collection authority); United States v. Russell, 461 F.2d 605 (10th Cir. 1972)

(expiration of section 6901(c) period of limitations to assess section 6901(a)

transferee liability is no bar to civil action in debt to collect estate tax from

surviving joint tenant); United States v. Estate of Kime, 950 F. Supp. 950 (D. Neb.

1996) (executor's personal liability for estate tax imposed pursuant to 31 U.S.C.

sec. 3713(b); fraudulent conveyances of property necessary to satisfy tax debt set

aside under UFTA).7 Nothing in section 6901 accords the Commissioner any right

7In Saltzman & Book, supra, para. 17.01, at 17-6, the authors add:

(continued...)

- 35 not enjoyed by other creditors seeking to use the judicial enforcement mechanisms

if the Commissioner proceeds outside of section 6901 to set aside a fraudulent

transfer or to enforce against a transferee of property the transferor's liability for

tax. And if the Commissioner so proceeds, the question of whether the person

against whom the Commissioner proceeds is a transferee within the meaning of

section 6901 is moot. Section 6901 merely identifies those persons (transferees of

property) against whom the Commissioner may employ the summary collection

authority afforded to him by section 6901(a) once, independent of that section, he

has fixed the person's substantive liability under State or Federal law as a

transferee of the taxpayer's property. If without invoking section 6901 he could

not fix that liability, then he cannot resort to his summary collection authority to

obtain a different result. That is what is implied by the Supreme Court's

statements in Commissioner v. Stern, 357 U.S. at 44, that the predecessor of

7(...continued)

Similarly, the Service may institute an action to collect a fiduciary's

liability under 31 USC § 3713. The transferee may also be held liable

for the debts of the debtor under the Bankruptcy Code, which has its

own fraudulent conveyance statute,¹5 even if the issue of liability is

decided in the bankruptcy court, not the Tax Court, under Section

6901.

¹511 USC § 548.

- 36 section 6901 was "purely a procedural statute" and "we must look to other sources

for definition of the substantive liability."

Notwithstanding our rejection of respondent's two-step analysis, for the

reasons that follow we agree that respondent may proceed pursuant to section

6901 to summarily collect some of Little Salt's 2003 unpaid tax from petitioners.

2.

Liability Under UFTA

a.

Introduction

On August 7, 2003, Little Salt transferred all of its cash to Mr. Davis' firm's

trust account (sometimes, transfer). Respondent argues that Little Salt, a debtor,

made the transfer "without receiving a reasonably equivalent value in exchange for

the transfer", which, pursuant to Neb. Rev. Stat. Ann. secs. 36-705(a)(2) and 36706(a), was constructively fraudulent with respect to him, a creditor of Little

Salt's. Respondent makes no claim that Little Salt made the transfer "with actual

intent to hinder, delay, or defraud" respondent, so as to cause the transfer to be

actually fraudulent with respect to respondent and to bring into play Neb. Rev.

Stat. Ann. sec. 36-705(a)(1). Principally, respondent relies on Neb. Rev. Stat.

Ann. sec. 36-706(a).

- 37 b.

Neb. Rev. Stat. Ann. Sec. 36-706(a)

i.

Introduction

A transfer is fraudulent with respect to a creditor within the meaning of

Neb. Rev. Stat. Ann. sec. 36-706(a) where (1) the creditor's claim arose before the

transfer, (2) the transferor does not receive "a reasonably equivalent value in

exchange for the transfer", and (3) the transferor was insolvent as a result of the

transfer.

ii.

When the Claim Arose

Little Salt received $471,111 from the land sale and, on August 7, 2003,

transferred $467,721 to Mr. Davis' firm's trust account. On that date, the

shareholders sold their shares in Little Salt to MidCoast for $358,826, a price

determined by subtracting from the amount of Little Salt's cash in the bank

64.92% of the company's combined 2003 Federal and State tax liability. Mr.

Ellingson, Little Salt's accountant, had determined that, as of June 30, 2003, Little

Salt's estimated combined 2003 Federal and State tax liability was $167,737.

Little Salt's 2003 tax year ended on September 30, 2003. It filed its 2003 Form

1120 on December 15, 2003, showing a tax due of $148,456. It did not pay that

amount, and, on October 5, 2007, respondent determined a deficiency in Little

Salt's 2003 income tax of $145,923.

- 38 The term "claim" is expansively defined for purposes of UFTA. It means "a

right to payment" and includes, among others, a right to payment "whether or not

* * * reduced to judgment," "contingent," or "unmatured." Neb. Rev. Stat. Ann.

sec. 36-702(3). Many years ago, we said: "[T]ransferee liability extends to

after-accruing taxes in the sense of retroactive liability for taxes in the year of

transfer or prior years. In other words, the liability need not have been known

when the transfer was made." Wyche v. Commissioner, 36 B.T.A. 414, 419

(1937); see also Scott v. Commissioner, 117 F.2d 36, 38 (8th Cir. 1941), a_ffg

1939 WL 12120 (B.T.A.); 14A Mertens Law of Federal Income Taxation, sec.

53.40 (2014) ("A transferee is retroactively liable for the transferor's taxes in the

year of the transfer and also prior years, to the extent of the assets received from

the transferor. This rule applies even where the transferor's tax liability was

unknown at the time of the transfer."). In Estate of Glass v. Commissioner, 55

T.C. 543, 574-575 (1970), affd per curiam, 453 F.2d 1375 (5th Cir. 1972), we

rejected the taxpayer-transferee's argument that the corporate transferor's tax

liability for the year in which the transfer occurred could not be calculated and,

thus, did not accrue, until the corporation's yearend since, hypothetically, after the

transfer, the corporation could have incurred losses that would have reduced its

tax liability. We relied on the rule that "tax liability accruing at the end of the

- 39 taxable year in which the transfer occurred must be considered in determining the

transferor corporation's solvency immediately after the transfer." Id at 575; s

also LR Dev. Co., LLC v. Commissioner, T.C. Memo. 2010-203, 2010 WL

3604164, at *44 ("Even if during its short taxable year ended December 31, 2000,

* * * [transferor] might have engaged in additional transactions or activities that

might have reduced or eliminated the tax attributable to * * * [its] sale of certain

of its assets to petitioner, that tax nonetheless was a contingent liability as of and

immediately after that sale." (citing Illinois UFTA)).

The cited cases are authority principally with respect to determining

whether the transferor's tax liability for the year of the transfer should be

considered in determining whether the transferor was insolvent at the time of the

transfer or was made insolvent by the transfer. They are not specifically authority

with respect to the meaning of the term "claim" in Neb. Rev. Stat. Ann. sec. 36702(3). Nevertheless, the term "insolvency" means "[t]he condition of being

unable to pay debts as they fall due". Black's Law Dictionary 867 (9th ed. 2009);

see also Neb. Rev. Stat. Ann. sec. 36-703(a) ("A debtor is insolvent if the sum of

the debtor's debts is greater than all of the debtor's assets at a fair valuation.").

And the term "debt" means "[l]iability on a claim". Black's Law Dictionary 462;

accord Neb. Rev. Stat. Ann. sec. 36-702(5). Thus, the determination that a debtor

- 40 is insolvent subsumes the conclusion that his debts involve claims. We are

satisfied on the basis of the authority that we have cited that, because, generally,

unmatured tax liabilities are taken into account in determining a debtor's solvency,

they are "claims" and should be treated as such under the expansive definition of

the term "claim" in Neb. Rev. Stat. Ann. sec. 36-702(3).8 See United States v.

Exec. Auto Haus, Inc., 234 F. Supp. 2d 1253, 1257 (M.D. Fla. 2002) (finding, with

reference to Florida equivalent to Neb. Rev. Stat. Ann. sec. 36-706(a), that

Government's claim could be deemed to have arisen, even if taxpayer was unaware

of its tax liability at time of transfer).

On August 7, 2003, the day of the transfer, respondent had, within the

meaning of Neb. Rev. Stat. Ann. sec. 36-702(3), a claim against Little Salt for

unpaid taxes.

8Moreover, under Uniform Fraudulent Transfer Act (UFTA) sec. 1 cmt. at

10 (1984) the definition of the term "claim" for purposes of UFTA sec. 1(3) is

derived from sec. 101(4) of the Bankruptcy Code, Pub. L. No. 95-598, sec. 101(4),

92 Stat. at 2550. S. Rept. No. 95-989 (1978), 1998 U.S.C.C.A.N. 5787,

accompanied H.R. 8200, 95th Cong. (1978), which, as enacted, became Pub. L.

No. 95-598. The Senate report states with respect to the definition of the term

"claim" that the term is defined in the broadest possible sense, contemplating "all

legal obligations of the debtor, no matter how remote or contingent". S. Rept. No.

95-989, supra at 22, 1998 U.S.C.C.A.N. at 5807.

- 41 iii.

Reasonably Equivalent Value

Little Salt was a party to the agreement, and on August 7, 2003, pursuant to

the agreement, it transferred $467,721 to Mr. Davis' firm's trust account.

We must determine whether, in exchange for the transfer, Little Salt

received reasonably equivalent value. See Neb. Rev. Stat. Ann. sec. 36-706(a). In

relevant part, Neb. Rev. Stat. Ann. sec. 36-704(a) provides that value is given for a

transfer "if, in exchange for the transfer * * *, property is transferred". Value,

however, does not include an executory promise other than a promise made in the

ordinary course of the promisor's business to furnish support to the debtor or to

another. Id.

Pursuant to the agreement, MidCoast covenanted to cause Little Salt to pay

the Tax Liability (a defined term), "to the extent that the Tax Liability is due given

the Company's post-Share Closing business activities". And while that covenant

was executory, it is not for that reason excluded from the statute's definition of

value since it was not an unfilled promise to furnish support to any person. See

Gardner v. Tyson (In re Gardner), 218 B.R. 338, 346-347 (Bankr. E.D. Pa. 1998)

(only type of unperformed promise that does not constitute value, as a matter of

law (under Pennsylvania UFTA) is an unfulfilled promise to furnish support to the

debtor or another person); Manchec v. Manchec, 951 So. 2d 1026, 1028-1029

- 42 (Fla. Dist. Ct. App. 2007) (promise of future royalties was not an unperformed

promise excepted from the Florida UFTA definition of value because it was not a

promise of support); see also UFTA sec. 3 cmt. at 16-17 (1984) (act adopts view

of cases interpreting Uniform Fraudulent Conveyance Act that, in a variety of

circumstances, an executory promise (other than some promises of support)

constitutes value).

The agreement defines the Tax Liability as Little Salt's combined Federal

and State income tax liability resulting from the land sale and its operations to the

closing date, amounting to $167,737. Whatever value we might assign to

MidCoast's covenant to cause Little Salt to pay that amount (or some lesser

amount if Little Salt incurred 2003 post-closing-date tax losses), that value could

not exceed $167,737, which is far from being substantially equivalent to the

$467,721 that Little Salt transferred to Mr. Davis' firm's trust account. Also,

pursuant to the agreement, MidCoast did pay to the shareholders $358,826. The

general rule, however, is that a debtor does not receive reasonably equivalent

value if it makes a transfer in exchange for a benefit to a third party. E_.g, Official

Comm. of Unsecured Creditors of Crystal Med. Prods., Inc. v. Pedersen & Houpt

(In re Crystal Med. Prods., Inc.), 240 B.R. 290, 300 (Bankr. N.D. Ill. 1999). Little

Salt did not receive value reasonably equivalent to the $467,721 that it transferred

- 43 to Mr. Davis' firm's trust account on account of MidCoast's purchase of the

shareholders' shares.

Petitioners' argument is that "Little Salt did not transfer anything pursuant to

the Stock Sale." That, of course, is n_ot what the agreement says. Petitioners

continue, however: "[Little Salt] had $471,221 in the bank both before and after

the transaction." Petitioners cite in support of that proposition Starnes v.

Commissioner, T.C. Memo. 2011-63. Apparently, petitioners want us to find that

Little Salt received substantially equivalent value for the transfer because, at the

direction of MidCoast, Mr. Davis transferred $467,721 to a new Little Salt

account, where the funds sat for one day before being returned to MidCoast. In

Starnes, Tarcon (a corporation), sold all of its assets for cash. Two weeks later, its

shareholders sold their shares to MidCoast for a price determined in a manner

similar to how the price for Little Salt's shares was determined. Before the

closing, the Tarcon shareholders transferred all of Tarcon's cash to MidCoast's

attorney's trust account. The closing statement showed a disbursement of an equal

amount from that account to a "'post-closing' bank account" of Tarcon's. The

Commissioner argued that Tarcon received nothing because the share purchase

agreement between the Tarcon shareholders and MidCoast did not specifically

identify a money transfer to Tarcon with respect to the sale. While the Tarcon

- 44 shareholders and MidCoast may not have specifically agreed to a postclosing

return of Tarcon's cash to it, we found that the closing statement evidenced such

an intent. hL, 2011 WL 894608, at *8. Indeed, in affirming our Memorandum

Opinion, the Court of Appeals stated: "There was substantial evidence that the

Former Shareholders expected the funds to be transferred back to Tarcon, as of

course they were within a day of the closing." Starnes v. Commissioner, 680 F.3d

at 432 n.9.

Here the agreement is silent as to the disposition of Little Salt's funds

deposited into Mr. Davis' firm's trust account. Although the agreement specifies

that the funds are transferred to Mr. Davis' law firm "as escrow agent under a

separate * * * agreement entered into on or about the date hereof", there was no

escrow account. Mr. Walters, secretary and treasurer of the company, testified that

he was aware of no escrow agreement or escrow agent. Moreover, in

correspondence between Mr. Morrow (the shareholders' and Little Salt's attorney)

and Mr. Davis (MidCoast's attorney), each makes it clear that neither thought

either's law firm was undertaking any duties as an escrow agent. Nor is there here

a closing statement available to all parties to the agreement showing a

disbursement of Little Salt's cash to a new Little Salt account and from which we

might assume Little Salt's and the shareholders' knowledge of and agreement to

- 45 such a transfer. Indeed, the contrary is the case here. Mr. Davis' draft letter of

July 31, 2003, states that, in part, its purpose is to memorialize his instructions

received from MidCoast, but it contains no instruction with respect to the

disposition of Little Salt's cash. Mr. Morrow did not know of any instructions that

MidCoast may have given Mr. Davis with respect to Little Salt's cash delivered to

his trust account, nor did he know of MidCoast's plans with respect to Little Salt.

Mr. Joyce, president of Little Salt, who signed the agreement for the company,

testified that he knew MidCoast was getting Little Salt's cash but, at the time of

the sale, he did not know what it would choose to do with the cash.

Whatever instructions MidCoast gave Mr. Davis with respect to his

disposition of the Little Salt funds received into his firm's trust account, those

instructions and MidCoast's intended disposition of the funds were unknown to

Little Salt and to its shareholders on August 7, 2003, when they entered into the

agreement. Unlike the facts found in Starnes v. Commissioner, T.C. Memo. 201163, the record here does not support the conclusion that the shareholders expected

MidCoast to transfer the Little Salt funds back to it. And while MidCoast did

cause Mr. Davis to redeposit those funds into a new Little Salt bank at Sun Trust

Bank (where they remained overnight), MidCoast was not obligated by the

agreement to do so. MidCoast's transfer was gratuitous, in the sense that it was

- 46 voluntary and not in consideration of the shareholders' or Little Salt's

performances under the agreement. In Nostalgia Network, Inc. v. Lockwood, 315

F.3d 717, 720 (7th Cir. 2002), where one question was whether value was received

for purposes of section 160/4(a) of Illinois UFTA, 740 Ill. Comp. Stat. 160/(4)(a)

(West 2010), the court said: "[W]e think the inquiry should stop at the first stage

of analysis, that is, should stop after it is determined that the transfer was not

supported by consideration. If it was gratuitous, the fact that some or for that

matter all of it may later have seeped back to the debtor does not legitimize the

transfer."

Little Salt received no value, much less reasonably equivalent value, on

account of the transfer. See Neb. Rev. Stat. Ann. sec. 36-706(a).

iv.

Insolvency

Respondent argues that Little Salt became insolvent upon its transfer of all

its cash (its only asset) to Mr. Davis' firm's trust account: "As its liabilities

exceeded its assets (which were then zero) Little Salt was rendered insolvent

immediately before petitioners purportedly sold their shares." Petitioners answer:

"Little Salt had cash in the bank in the amount of $467,221 [sic] both before and

after the Stock Sale, more than sufficient to pay the tax liability in question."

- 47 A debtor is insolvent under UFTA "if the sum of * * * [its] debts is greater

than all of * * * [its] assets at a fair valuation." Id. sec. 36-703(a).9 Insolvency is

determined at the time of the allegedly fraudulent transfer. See id. sec. 36-706(a);

see also, e.g., Phongsisattanak v. Blue Heron, Inc. (In re Phongsisattanak), 353

B.R. 594, 598-599 (B.A.P. 8th Cir. 2006). Following the transfer, Little Salt faced

an estimated liability of $167,737 for combined unpaid 2003 Federal and State

income taxes. That estimated liability constituted a claim within the meaning of

Neb. Rev. Stat. Ann. sec. 36-702(3), see discussion supra pp. 37-40, and, for that

reason, it constituted a debt for purposes of determining whether, on account of

the transfer, Little Salt became insolvent within the meaning of Neb. Rev. Stat.

Ann. sec. 36-703(a). See Neb. Rev. Stat. Ann. sec. 36-702(5) ("Debt means

liability on a claim."); er, LR Dev. Co., LLC v. Commissioner, 2010 WL

3604164, at *44 (transferor insolvent under Illinois UFTA "because its liabilities,

including * * * contingent [capital gains tax] liability, exceeded its assets");

9The test of Neb. Rev. Stat. Ann. sec. 36-701(a) is a balance-sheet test (if

debts exceed assets, equity is negative). In addition, Neb. Rev. Stat. Ann. sec. 36703(b) contains a rebuttable presumption that a debtor who is generally not paying

its debts as they become due is insolvent. Since we find that Little Salt was

insolvent under the balance sheet test, we need not concern ourselves with the

rebuttable presumption.

- 48 United States v. Exec. Auto Haus, Inc., 234 F. Supp. 2d at 1257 (unknown tax

claim taken into account in determining insolvency under Florida UFTA).

Little Salt's transfer of all of its cash to the Davis' firm's trust account

denuded it of assets unless we are to attach value (1).to the $467,721 that

MidCoast lodged overnight with Little Salt or (2) to MidCoast's covenant pursuant

to the agreement to cause the company to pay its 2003 estiinated tax.

Whatever fair valuation one might attach to the $467,721 that MidCoast

transferred to Little Salt, those funds were not, as discussed in the immediately

preceding section of this report, received in consideration of Little Salt's transfer

of the funds to MidCoast. Whether a transfer was fraudulent when made depends

on conditions that existed when it was made. See Boyer, 587 F.3d at 795;

Nostalgia Network, Inc., 315 F.3d at 720. Because it was not received in

consideration for the transfer, we will disregard the $467,721 that MidCoast

lodged with Little Salt as an asset to be taken into account in determining whether

Little Salt was made insolvent by the transfer.

Also, notwithstanding the lack of any expert (or other) valuation testimony,

we find that MidCoast's covenant to cause Little Salt to pay its 2003 estimated tax

lacked any fair value. The term "fair valuation" is not defined in UFTA, but it is

well-known in bankruptcy law. See, e.g., 11 U.S.C. sec. 101(32)(A) (2012)

- 49 (defining "insolvent"). "[F]air valuation * * * means a fair market price that can

be made available for payment of debts within a reasonable period of time, and

'fair market value' implies a willing seller and a willing buyer." Am. Nat'l Bank &

Trust Co. of Chicago v. Bone, 333 F.2d 984, 986-987 (8th Cir. 1964). Assets that

are not salable are not taken into account. See, e.g., Briden v. Foley, 776 F.2d

379, 382 (1st Cir. 1985). MidCoast did not, by the agreement, promise that it

would pay Little Salt's combined estimated tax liability of $167,737. It promised

only that it would "cause" the company to pay that liability to the extent, if any,

that it was due "given the Company's post-Share Closing business activities". The

trailing phrase adds nothing to what precedes it; i.e., that Little Salt would pay

whatever were its 2003 tax bills (whether it had subsequent business activities that

reduced those bills (perhaps to zero) or not). And MidCoast's promise to "cause"

the company to pay its tax bills, without a concomitant promise to pay what the

company lacked assets to pay, had little intrinsic value, whether to the company or

to the shareholders. Moreover, that promise does not seem susceptible to

liquidation in the market. Who would pay anything to the company or to the

shareholders for it? How would it provide the company a ready source to pay its

tax bills if it had insufficient cash to do so? See Constructora Maza, Inc. v. Banco

de Ponce, 616 F.2d 573, 577 (1st Cir. 1980) ("Reduction in the face value of assets

- 50 may be appropriate if those assets are not susceptible to liquidation, and thus

cannot be made available for payment of debts, within a reasonable period of

time." (discussing discounting of accounts receivable)). Because the promise

appears to have little intrinsic value, and because whatever value it had would not

be readily realizable in a market transaction, we fimd that MidCoast's promise to

cause Little Salt to pay its 2003 tax bills had no value, determined under a fair

valuation standard.

On August 7, 2003, Little Salt transferred $467,721 to the Davis' firm's trust

account, which left it with assets with nil fair value and a combined estimated tax

liability of $167,737. The transfer, therefore, caused it to become insolvent within

the meaning of Neb. Rev. Stat. Ann. sec. 36-703(a).

v.

Conclusion

Little Salt's transfer of $467,721 to the Davis' firm's trust account was

fraudulent with respect to respondent within the meaning of Neb. Rev. Stat. Ann.

sec. 36-706(a).

c.

Neb. Rev. Stat. Ann. Sec. 36-705(a)(2)

i.

Introduction

Under UFTA, a transfer is constructively fraudulent with respect to a

present or future claim if the transfer was made without the debtor's receiving "a

- 51 reasonably equivalent value in exchange" and if either (1) the debtor's remaining

assets "were unreasonably small" in relation to a present or anticipated business

transaction or (2) the debtor "intended to incur, or believed or reasonably should

have believed that he or she would incur, debts beyond his or her ability to pay as

they became due." Id. sec. 36-705(a)(2). And while we have treated respondent's

claim for Little Salt's unpaid 2003 tax as (1) arising before the transfer and (2)

being fraudulent with respect to respondent pursuant to Neb. Rev. Stat. Ann. sec.

36-706(a), we believe that the transfer would be fraudulent with respect to

respondent under Neb. Rev. Stat. Ann. sec. 36-705(a)(2) even if respondent's

claim was viewed as arising when Little Salt's 2003 tax liability accrued (at the

end of the year) or became due (December 15, 2003). For reasons we have already

stated, Little Salt's transfer to the Davis' firm's trust account was not made for

reasonably equivalent value.

ii.

Unreasonably Small Assets

Neb. Rev. Stat. Ann. sec. 36-705(a)(2) is different from Neb. Rev. Stat.

Ann. sec. 36-706 in that it tests for near insolvency--for situations in which

insolvency is all but certain in the near future--rather than for current insolvency.

See, e.g., Boyer, 587 F.3d at 794 (interpreting Indiana UFTA; test applies where

debtor is left with "such meager assets that bankruptcy is a consequence both

- 52 likely and foreseeable"). Neb. Rev. Stat. Ann. sec. 36-705(a)(2) contains two,

disjunctive tests for near insolvency, and the debtor is nearly insolvent if either

test is satisfied. ASARCO LLC v. Ams. Mining Corp., 396 B.R. 278, 396 (Bankr.

S.D. Tex. 2008) (interpreting Delaware UFTA). Both tests are satisfied here.

The first test, Neb. Rev. Stat. Ann. sec. 36-705(a)(2)(i), is satisfied if the

debtor was engaged in, or was about to engage in, a transaction for which its

remaining assets were unreasonably small in relation to the transaction. At the

time of the transfer, Little Salt had an estimated combined tax liability of $167,737

and could anticipate postyearend transactions with Federal and State tax

authorities in which it would report its income and settle its 2003 tax bills. The

unreasonably-small-assets test denotes a financial condition short of equitable

insolvency (i.e., the inability of a debtor to pay its debts as they mature). In re

Vadnais Lumber Supply, Inc., 100 B.R. 127, 137 (Bankr. D. Mass. 1989). It,

instead, encompasses difficulties that are liable to lead to insolvency at some time

in the future. Dahar v. Jackson (In re Jackson), 459 F.3d 117, 124 (1st Cir. 2006)

(interpreting New Hampshire UFTA); Moody v. Sec. Pac. Bus. Credit, Inc., 971

F.2d 1056, 1070 (3d Cir. 1992) (interpreting Pennsylvania UFTA). It calls for the

court to examine the ability of the debtor to generate enough cash to pay its debts

and to remain financially stable after the transfer. Dahar, 459 F.3d at 123; Moody,

- 53 971 F.2d at 1070. The standard to be applied is "reasonable foreseeability."

Moody, 971 F.2d at 1073; ASARCO, 396 B.R. at 397. The determination requires

an objective assessment of the company's financial projections. ASARCO, 396

B.R. at 397. A court should consider only those cash inflows that it is reasonable

for the company to expect to receive, whether from new equity, cash from

operations, or available credit. Id.

Little Salt's management at the time of the transfer (i.e., Mr. Joyce, its

president, and Mr. Walters, its secretary and treasurer) had no knowledge of

MidCoast's business expectations or its financial projections for the company, nor

did they inquire of MidCoast as to those matters. Moreover, following the

transfer, Little Salt had no operating assets, no employees, intangible assets of no

discernable value, and no customers. The company's 2003 and 2004 Federal

income tax returns are evidence that MidCoast's only plan for the company was a

tax scheme to eliminate its taxable income. Those returns are clear evidence that,

after the stock sale, the company did not engage in any business activity. They

show that, at each September 30 yearend, the company reported neither business

assets, business liabilities, or other indicia of a business, such as cost of goods

sold. The returns are also evidence of MidCoast's tax scheme to generate a phony

bad debt deduction for the company by parking the cash MidCoast received from

- 54 the company back with it for 24 hours before ostensibly lending it back to

MidCoast, giving rise to a debt that MidCoast did not pay and that Little Salt

erroneously claimed gave rise to a 2004 bad debt deduction and a net operating

loss that the company carried back to, and deducted for, 2003. Little Salt's failure

to engage in any post-stock-sale business activity and MidCoast's implementation

of the tax scheme within minutes of receiving Little Salt's cash lead us to conclude

that MidCoast's plans could not reasonably be expected to eliminate Little Salt's

2003 tax debts. Given those debts, if the transfer did not itself cause Little Salt to

become insolvent, insolvency in the near future was a foregone conclusion.

Consequently, the transfer was fraudulent with respect to respondent within the

meaning of Neb. Rev. Stat. Ann. sec. 36-705(a)(2)(i).

iii.

Unable To Pay Debts

The inability-to-pay test found in Neb. Rev. Stat. Ann. sec. 36-705(a)(2)(ii)

can be satisfied either by a showing of intent, i.e., the debtor "intended to incur, or

believed" that he would incur debts beyond his ability to pay as they came due, or

by an objective showing; i.e., the debtor "reasonably should have believed" the

same. The objective alternative measures whether a debtor, as a going concern,

would reasonably have been able to pay its debts after making the challenged

transfer. See ASARCO, 396 B.R. at 400. Little Salt was not a going concern at

- 55 the time of the transfer. It would, therefore, have been unreasonable at that time to

believe that the company could, from its business operations, satisfy its 2003 tax

debt when that debt came due. Consequently, the transfer was fraudulent with

respect to respondent within the meaning of Neb. Rev. Stat. Ann. sec. 36-

705(a)(2)(ii).

d.

Remedies

Having shown that Little Salt's transfer of all of its cash was fraudulent with

respect to him, respondent may obtain "avoidance of the transfer * * * to the

extent necessary to satisfy * * * [his] claim". See id. sec. 36-708(a)(1). Moreover,

because the transfer is voidable, respondent may recover judgment equal to the

lesser of the value of the asset transferred or the amount necessary to satisfy his

claim. See id. sec. 36-709(b). Here, that is the latter amount. The judgment may

be entered against "the first transferee of the asset", "the person for whose benefit

the transfer was made", or certain subsequent transferees. See id. Neb. Rev. Stat.

Ann. sec. 36-708(b) is based on UFTA sec. 8 (1984), which is derived from

section 550 of the Bankruptcy Code, 11 U.S.C. sec. 550 (2012). See UFTA sec. 8

cmt. (2) at 31 (1984). Transferees are those who receive the money or other

property. Those who get a benefit because someone else received the money or

property are persons for whose benefit the transfer was made. See Bonded Fin.

- 56 Servs., Inc. v. European Am. Bank, 838 F.2d 890, 896 (7th Cir. 1988) (discussing

11 U.S.C. section 550(a)(1)). The paradigm "person for whose benefit the transfer

was made" is a guarantor, who receives no money but is no longer exposed to the

liability when the underlying obligation has been satisfied. See id. at 895. A

person may also be a benefited person if he receives something valuable from the

transferee. In Gibbons v. Stemcor USA (In re B.S. Livingston & Co.), 186 B.R.

841 (D.N.J. 1995), the defendants were benefited when they sold the core of the

debtor's business to a third party in exchange for lucrative positions in the new

company.

The agreement contains MidCoast's promise to purchase from the

shareholders all of their Little Salt shares for $358,826. MidCoast's fulfillment of

that promise, however, was conditioned on Little Salt's prior transfer of $467,721

to the Davis' firm's trust account for the benefit of MidCoast. MidCoast was, thus,

a transferee (the first transferee) of $467,721 from Little Salt. (The Davis firm,

MidCoast's agent, with no right to put the money to its own purposes, is

disregarded. See Bonded Fin. Servs., 838 F.2d at 893.) The shareholders

undoubtedly benefited from Little Salt's transfer of the money to MidCoast

because without it--as evidenced by the terms of the draft letter and the order of

the actual cash transfers on August 7, 2003--Mr. Davis would not have released

- 57 $358,826 from his firm's trust account to Mr. Morrow for disbursement to the

shareholders. That amount was substantially in excess of the amount that the

shareholders would have received had they foregone the agreement with

MidCoast, not caused Little Salt to transfer $467,721 to Midcoast, and, instead,

liquidated the company. Had they done that, then, after paying (or arranging to

pay) its combined estimated tax liability of $167,737 out of its cash balance of

$467,721, Little Salt would have had left $299,984 to distribute to the

shareholders in redemption of their shares. The shareholders benefited to the tune

of $58,842, at the expense of the tax collectors, both Federal and State. They

were, within the meaning of Neb. Rev. Stat. Ann. sec. 36-709(b)(1), "the person[s]

for whose benefit the transfer was made". See, e.g., Gibbons, 186 B.R. 841.

Because we make that finding, we need not determine whether MidCoast's transfer

of $467,721 to the shareholders was fraudulent as to respondent pursuant to Neb.

Rev. Stat. Ann. sec. 36-705 or 36-706, entitling him to avoidance of the transfer

under Neb. Rev. Stat. Ann. sec. 36-708, and a judgment against the shareholders,

"first transferees", under Neb. Rev. Stat. Ann. sec. 36-709(b). See Sawyer Trust of

May 1992 v. Commissioner, 712 F.3d at 611 ("[T]here were potentially two

fraudulent transfers: one transfer from the company to the * * * [MidCoast

equivalent], and another transfer from * * * [that entity] to the Trust [the stock

- 58 seller][.]"); Cullifer v. Commissioner, T.C. Memo. 2014-208, at *63-*73

("Transferee-of-Transferee Liability").

The shareholders' benefit, $58,842, is substantially less than the prescription

in Neb. Rev. Stat. Ann. sec. 36-709 that respondent may recover judgment for "the

amount necessary to satisfy * * * [his] claim". We have found scant authority

addressing the measure of recovery in beneficiary cases under Neb. Rev. Stat.

Ann. sec. 36-709 or 11 U.S.C. sec. 550(a). The issue is discussed in Larry Chek &

Vernon O. Teofan, "The Identity and Liability of the Entity for Whose Benefit a

Transfer Is Made Under Section 550(a): An Alternative to the Rorschach Test", 4

J. Bankr. L. & Prac. 145, 163-172 (1995). The shareholders' benefit was $58,842,

and that is the amount for which we adjudge they are proportionally liable to

respondent. _C_f, Neb. Rev. Stat. Ann. sec 36-709(d)(3); Sawyer Trust of May 1992

v. Commissioner, T.C. Memo. 2014-59, at *17 (under Massachusetts UFTA,

"good-faith transferee is entitled to a judgment liability reduction to the extent of

the value it gave the debtor for the transfer").

3.

Nebraska Business Corporation Act

Respondent predicates his claim under Neb. Rev. Stat. Ann. sec.

21-20,157(4) on our recasting the stock sale as a liquidation coupled with a fee

paid to MidCoast. Since we decline to do that, we need not further consider

- 59 respondent's argument for the application of Neb. Rev. Stat. Ann. sec.

21-20,157(4).

4.

Trust Fund Doctrine

Respondent likewise predicates his claim under the common law trust fund

doctrine on recasting the stock sale as a liquidation, and, since we do not do that,

we need not further consider his trust fund claim.

5.

Section 6901

Having determined that, pursuant to UFTA, respondent is entitled to a

judgment against petitioners to satisfy a portion of his claim against Little Salt for

its unpaid 2003 tax, we must finally determine whether petitioners are transferees

within the meaning of section 6901. The purpose of the section 6901 is to allow

the Commissioner summarily to enforce a transferee's liability established under

State statutory provisions or otherwise. See H.R. Conf. Rept. No. 69-356, supra at

43, 1939-1 C.B. (Part 2) at 371. In Stanko v. Commissioner, 209 F.3d 1082 (8th

Cir. 2000), rev'g T.C. Memo. 1996-530, the Court of Appeals determined that the

appellant, a successor transferee, was liable to the Commissioner under the

Nebraska Fraudulent Conveyance Act (replaced by UFTA) for the unpaid tax of

the first transferee's wholly owned corporation. The court considered whether, as

a successor transferee, appellant was a transferee within the meaning of section

- 60 6901. The court noted that the statute does not define the term "except to clarify

that it includes a 'donee, heir, legatee, devisee, and distributee.'" Id. at 1085 n.2

(referencing section 6901(h)). It held: "[T]he Commissioner may proceed under

§ 6901 against any 'transferee' who is liable under state law for the debts of the

transferor/taxpayer." Id.

In Cole v. Commissioner, T.C. Memo. 1960-278, rev'd, 297 F.2d 174 (8th

Cir. 1961), we considered whether a wife was liable as a transferee in the amount

of $12,000 on account of her husband's payment of that amount to discharge an

encumbrance upon her separately owned real property. The encumbrance secured

an indebtedness on which both the husband and wife were indebted. At the time

of the husband's payment, he was indebted to the Commissioner for unpaid taxes

of more than $12,000. Applying Missouri law, we found that the husband's

payment was fraudulent with respect to his creditors since it was without

consideration and he was insolvent when he made it. We determined that the

Commissioner could collect $12,000 from the wife pursuant to section 311(a) of

the Internal Revenue Code of 1939 (the predecessor to section 6901). The

question on appeal was whether, under Missouri law, the wife became a transferee

of assets of her husband on account of his payment of their joint obligation and the

discharge of the encumbrance on her property. The court held that she did not

- 61 because, under Missouri law, the "settlement of an honest debt is not a fraudulent

conveyance or assignment, even though the debtor is insolvent at the time and the

transfer disables him from paying his other creditors." Cole v. Commissioner, 297

F.2d at 175. No question was raised as to whether, as only a beneficiary (and not

the recipient) of the husband's payment of the debt, the wife could be a transferee

within the meaning of section 311 of the Internal Revenue Code of 1939. We

weré reversed only because we erred in finding there to have been a fraud on the

husband's creditors. The Court of Appeals concluded its opinion by stating:

"Frances Cole was unquestionably the beneficiary of a preferential payment of a

debt by her husband, but she was not a transferee of his assets in fraud of his

creditors." Id. at 176 (emphasis added). The emphasized words would have been

unnecessary had the court thought that Frances Cole was not a transferee within

the meaning of section 311 of the Internal Revenue Code of 1939.

In Shartle v. Commissioner, T.C. Memo. 1988-354, a corporation indebted

to the Internal Revenue Service for outstanding tax liabilities became insolvent

upon its transfer of two parcels of real property to the former wife of its sole

owner. The parcels were transferred by order of court in settlement of the former

wife's property rights acquired during her marriage to the owner. We found the

transfer to be fraudulent with respect to the Commissioner pursuant to section

- 62 1336.04 of the Ohio Uniform Fraudulent Conveyance Act, sec. 1336.04, Ohio

Rev. Code Ann. (Anderson 1961). The owner argued that the Commissioner

could not collect from him pursuant to section 6901 because he did not receive any

of the corporation's assets. We answered: "Although * * * [the owner] did not

physically receive any of * * * [the corporation's] assets, said assets were

transferred in satisfaction of his legal obligation to * * * [his former wife]. * * *

[He] received the same benefit from * * * the assets as if they had been physically

transferred to him." We treated him as a constructive recipient of the assets. We

found that he was a transferee of the corporation's assets from whom the

Commissioner could collect the corporation's tax liability pursuant to section

6901.

The three cited cases are evidence of the expansive reading that courts have

given term "transferee" in applying section 6901. A person can be a transferee

within the meaning of the section if he is an indirect transferee of property, Stanko

v. Commissioner, 209 F.3d 1082, is a constructive recipient of property, Shartle v.

Commissioner, T.C. Memo. 1988-354, or merely benefits in a substantial way

from a transfer of property, Cole v. Commissioner, T.C. Memo. 1960-278. The

determinative factor is liability to a creditor (the Commissioner) for the debt of

another under a State fraudulent conveyance, transfer, or similar law. We have

- 63 found that, pursuant to Neb. Rev. Stat. Ann. sec. 36-709(b)(1), the shareholders

are collectively liable to respondent for $58,842 as "person[s] for whose benefit"

Little Salt transferred $467,721 to MidCoast. They are, on that basis, transferees

within the meaning of section 6901.

IV.

Conclusion

For the reasons stated, we sustain respondent's determination that petitioners

are liable as transferees with respect to their respective shares of $58,842 of Little

Salt's unpaid 2003 tax.

Decisions will be entered for

respondent.