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Espinosa v. C.I.R. T.C. Memo.2000-66;
U.S.Tax Ct.,2000; 2000 WL 230362 (U.S.Tax Ct.); 79 T.C.M. (CCH) 1574; T.C.M.
(RIA) 2000-066; 2000 RIA TC Memo 2000-066 U.S. Tax Court March 1, 2000 In July of 1990, P’s husband, T, transferred to her for
no consideration shares of stock with a value of $53,828.12. Prior to that
time, T had failed to file Federal income tax returns or to pay such taxes for
years including 1981, 1982, 1984, and 1985. T subsequently filed returns for
the foregoing years in November of 1993. On July 17, 1997, without having sent
a notice of deficiency to T based upon the filed returns but after previous
attempts to collect from T had yielded insufficient funds to satisfy his tax
debts, R issued to P a notice of transferee liability pursuant to sec. 6901,
I.R.C. R premises transferee liability on the grounds that the transfer of
stock from T to P was a fraudulent conveyance under the California Uniform
Fraudulent Transfer Act, Cal. Civ.Code secs. 3439 through 3439.12 (West 1997). Held: R’s assertion of transferee liability is not barred
by the period of limitations set forth in the California Uniform Fraudulent
Transfer Act. Bresson v. Commissioner, 111 T.C. 172 (1998), followed. Held, further, P is liable as a transferee to the extent of the
value of the assets received, plus interest thereon as provided by law.
Jeffrey A. Schlei, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined that petitioner is liable to the extent of
$73,500.50 as a transferee of assets from Frederick A. Espinosa for the
following income tax deficiencies and additions to tax, for the taxable years
1981, 1982, 1984, and 1985: Additions To Tax -------------------------- Taxable Net 1 Tax Sec. Sec. Sec. 6654 Sec. 6661 Year Deficiency 6651(a)(1) 6653(a)(1) ---------- ------------ ------------ ------------ ------------ ----------- 1981 $56,172 $14,043 $5,814 $3,153 -- 1982 50,077 12,519 5,655 3,341 $10,015 1984 5,169 1,292 9,382 2,287 5,465 1985 14,671 3,668 9,661 1,668 8,194 FN1. The statement attached to the notice of transferee
liability explaining petitioner’s liability for Mr.
Espinosa’s taxes expresses the deficiency in terms of the “net”
deficiency existing after subtraction of withholding. We adopt this convention
throughout our opinion.
Respondent additionally asserted in the notice of transferee
liability that the interest due from Mr. Espinosa on the above amounts as of
July 17, 1997, was calculated at $135,446, $97,109, $19,476, and $21,900 for
1981, 1982, 1984, and 1985, respectively. For reasons hereinafter stated, Mr. Espinosa’s 1980
taxable year is also involved in the present controversy. We consider facts
related to the 1980 year to the degree necessary to evaluate
petitioner’s liability with respect to the years before the Court. See
sec. 6214(b). Unless otherwise indicated, all section references are to sections
of the Internal Revenue Code in effect for the relevant years, and all Rule
references are to the Tax Court Rules of Practice and Procedure. After concessions, the issues remaining for decision are: (1) Whether assessment of transferee liability against petitioner
is barred by the period of limitations set forth in section 3439.09 of the
California Civil Code (West 1997); and, if not, (2) whether petitioner is liable as a transferee pursuant to
section 6901 for the unpaid Federal income taxes and additions to tax of Mr. Espinosa. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The
stipulations of the parties, with accompanying exhibits, are incorporated
herein by this reference. Laura A. Loveland Espinosa resided in San Diego, California, at the
time of filing her petition in this case. As trustee of the Laura A. Loveland
Trust, a grantor trust, she is the transferee of assets received from her
husband, Frederick A. Espinosa. Background of Mr. Espinosa Mr.
Espinosa studied biology and chemistry in college and became involved in the
pharmaceutical and biotechnology industry following graduation. Prior to 1977,
he held management positions within General Electric Company in Georgia and
Wisconsin. From 1977 to 1983, he was employed in executive capacities by
Johnson and Johnson, first at a Boston subsidiary and then in New Jersey. In
1983, Mr. Espinosa relocated to California and served as president of
biotechnology companies in San Francisco and Palo Alto. While working in San
Francisco, from approximately the latter part of 1983 to the middle of 1986,
Mr. Espinosa maintained an apartment at 2200 Sacramento Street, Number 604, San
Francisco, California, where he stayed during the week. On weekends, he
commuted to Laguna Beach, California, where he resided with his wife at that
time, Colleen Espinosa, and his children. In July of 1986, Mr. Espinosa and
Colleen Espinosa were divorced. On September 10, 1988, Mr. Espinosa married petitioner, and they
continued to reside in Laguna Beach. In July of 1989, Mr. Espinosa joined Lidak
Biopharmaceuticals, later known as Lidak Pharmaceuticals (Lidak), as its
president and chief executive officer. During the latter part of 1989, Mr.
Espinosa purchased 106,000 shares of stock in Lidak. Then, on July 31, 1990, Mr.
Espinosa transferred all of his Lidak shares to petitioner’s grantor
trust. The transfer was made for no consideration other than love and
affection, at a time when Mr. Espinosa was involved in a dispute with
Lidak’s chairman of the board over a project that the company was
funding. In September of 1991, Mr. Espinosa was terminated from his position at
Lidak and has since been unemployed. Assets of Mr. Espinosa All significant assets owned by Mr. Espinosa at the time of his
1986 divorce were awarded to Colleen Espinosa. During the period of 1989
through 1990, his assets consisted of two checking accounts, a savings account,
two certificates of deposit, and a brokerage account. Although the record does
not reveal the status of these accounts on July 31, 1990, petitioner offered
financial statements reflecting the following balances on the dates indicated: Account Type Date Account Balance ---------------------------------------------------- -------- --------------- Checking Account (La Jolla Bank) 8/12/90 $7,763.93 Checking Account (First Interstate Bank) 3/8/90 36,448.03 Savings Account (First Interstate Bank) 3/8/90 1,299.67 Certificate of Deposit (Great American First Sa 8/28/89 10,461.23 vings) Certificate of Deposit (Columbia Federal Savings & 9/27/89 21,417.21 Loan) Brokerage Account (Shearson Lehman Hutton) 11/26/89 12,855.39 As of the time of trial, the above accounts had been dissipated.
Mr. Espinosa also did not own real property or a vehicle and, since his
termination from Lidak, has had no source of income. Tax Liability of Mr. Espinosa Mr. Espinosa did not file timely Federal income tax returns for
the years 1980, 1981, 1982, 1983, 1984, or 1985. His last previous return was
filed from either Boston or New Jersey during his employment with Johnson and
Johnson. In late 1987, the Internal Revenue Service (IRS) began an
investigation into the potential tax liability of Mr. Espinosa. This
examination culminated with statutory notices of deficiency for taxable years
1980 through 1985 being sent to Mr. Espinosa. Respondent’s certified
mail list indicates that the notices were mailed on April 5, 1989, and were
addressed to “2200 Sacramento, Number 604”, “San
Francisco, CA 94115-2305”. At the time the notices were issued, the IRS file on Mr. Espinosa
contained an entry, dated January 19, 1988, which stated that a form letter
previously sent to him had been returned showing his address as “1278
Glenneyre # 15”, “Laguna Beach, Ca. 92651”. Subsequent
to mailing the deficiency notices, the IRS sent to the Laguna Beach postmaster
a document on May 8, 1989, requesting current address information for Mr.
Espinosa and received in response “375 Broadway # 214”,
“Laguna Beach, Ca. 92651”. During this period, Mr. Espinosa
maintained a post office box at the Glenneyre address and resided at the
Broadway address. IRS records do not indicate that the deficiency notices were
re-sent to either of these locations. The taxes set forth in the notices were
assessed against Mr. Espinosa on November 27, 1989, and lien notices were
thereafter recorded in three southern California counties. In late 1990, an IRS agent contacted Mr. Espinosa at Lidak, and
the two later met to discuss his tax liabilities. As a result of this meeting,
Mr. Espinosa began making payments to the IRS on January 3, 1991. The payments
ceased at the end of 1991, when his termination from Lidak left him with no
source of income. The only further payment was made on July 15, 1993. The
payments totaled between $93,000 and $94,000. Respondent applied all payments
to Mr. Espinosa’s 1980 liability for income tax, additions to tax, and
interest, as determined by respondent in the 1989 deficiency notices. After being advised by his attorney that submission of tax returns
for the delinquent years would reduce his tax liability, Mr. Espinosa filed
returns for 1981, 1982, 1984, and 1985 on November 3, 1993. (The record does
not contain copies of returns filed, if any, for years other than those upon which
transferee liability is based.) The 1981 return showed a total tax of $118,932
but, after subtracting $60,098 for withheld tax and $80,967 claimed on line 56
for “1981 estimated tax payments and amount applied from 1980
return”, indicated that Mr. Espinosa was entitled to a refund of
$22,133. The 1982 return reflected a total tax of $113,091 and, after
subtraction of $63,015 for withheld tax and $21,131 for the alleged overpayment
carried over from 1980 and unused in 1981 (the $1,002 discrepancy is not
explained by the record), a tax due of $28,945. For 1984, a total tax of
$36,386 less $31,217 for withholding resulted in an amount owed of $5,169.
Likewise, total tax of $28,782 minus $13,511 for withholding led to tax
liability of $15,271 for 1985. The IRS did not issue notices of deficiency to
Mr. Espinosa based upon these returns. Tax Liability of Petitioner On July 17, 1997, the IRS mailed a notice of transferee liability
to petitioner in her capacity as trustee of the Laura A. Loveland Trust and
transferee of Mr. Espinosa’s Lidak stock. The asserted liability of
$73,500.50 equaled the fair market value of the shares as estimated by the IRS.
The parties have since stipulated that the value of the shares on the date of
the transfer was $53,828.12. OPINION We must decide whether petitioner may be held liable as a
transferee for unpaid taxes of Mr. Espinosa, from whom she received assets
worth $53,828.12.
A. Transferee Liability Section 6901, which establishes a procedure whereby respondent may
assess and collect from a transferee of property the unpaid taxes of the
transferor, reads in part as follows: SEC. 6901. TRANSFERRED ASSETS. (a) Method of Collection.—The amounts
of the following liabilities shall, except as hereinafter in this section
provided, 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: (1) Income, estate, and gift taxes.— (A) Transferees.--The liability, at law or in
equity, of a transferee of property— (i) of a taxpayer in the case of a tax imposed
by subtitle A (relating to income taxes),
The foregoing section
thus does not create or define a substantive liability; rather, it merely
provides a remedy for enforcing the existing liability of the transferor. See Commissioner
v. Stern, 357 U.S. 39,
42 (1958); Coca-Cola Bottling Co. v. Commissioner, 334 F.2d 875, 877
(9th Cir.1964), affg. 37 T.C. 1006 (1962); Bresson v. Commissioner, 111 T.C. 172, 179
(1998); Gumm v. Commissioner, 93 T.C. 475, 479 (1989),
affd. without published opinion 933 F.2d 1014 (9th Cir.1991). The substantive
question of whether or to what extent a particular transferee may be held
liable at law or in equity for a transferor’s obligation is determined
by State law. See Commissioner v. Stern, supra at 45; Coca-Cola Bottling Co.
v. Commissioner, supra at 877; Bresson v. Commissioner, supra at 180; Gumm v.
Commissioner, supra at 485. Since the transfer of stock at issue here occurred
in California, California law governs. See Coca-Cola Bottling Co. v.
Commissioner, supra at 877; Bresson v. Commissioner, supra at 180. The California Uniform Fraudulent Transfer Act, applicable to
transfers made on or after January 1, 1987, includes provisions imposing
transferee liability on grounds of both actual and constructive fraud. See Cal.
Civ.Code secs. 3439.04, 3439.05, 3439.12 (West 1997). A transfer is actually
fraudulent when made “With actual intent to hinder, delay, or defraud
any creditor of the debtor.” Cal. Civ.Code sec. 3439.04(a) (West
1997). As regards constructive fraud, the provision of California law most
relevant here states: 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. [Cal. Civ.Code sec.
3439.05 (West 1997) .] This statute has been interpreted in the context of tax disputes
to require proof of four elements as a prerequisite to imposing transferee
liability: (1) The transferor owed a debt to the IRS, (2) the claim of the IRS
arose before the transfer was made, (3) the transferor made the transfer
without receiving reasonably equivalent value in exchange, and (4) the
transferor was insolvent at the time of the transfer or became insolvent as a
result of the transfer. See Locke v. Commissioner, T.C. Memo. 1996-541,
affd. without published opinion 152 F.3d 927 (9th Cir.1998); O’Sullivan
v. Commissioner, T.C.
Memo.1994-17. Transferee liability is generally limited to the value of the
assets received from the transferor. See Gumm v. Commissioner, supra at 480;
Locke v. Commissioner, supra. However, where the value of the assets
transferred is less than the tax debt of the transferor, the liability of the
transferee for interest from the date of the transfer to the date of the notice
of transferee liability is determined by State law. See Stansbury v.
Commissioner, 104 T.C. 486, 493 (1995); Swinks v. Commissioner, 51 T.C. 13, 19
(1968); Estate of Stein v. Commissioner, 37 T.C. 945, 961 (1962); O’sullivan
v. Commissioner, supra. Section 3287(a) of the California Civil Code (West 1997) reads:
“Every person who is entitled to recover damages certain, or capable
of being made certain by calculation, and the right to recover which is vested
in him upon a particular day, is entitled also to recover interest thereon from
that day”. Respondent therefore has the right under California law to
interest on the value transferred, at the legal rate specified by State
statute, from the date the transfer was made, July 31, 1990, until July 17,
1997, the date of the notice of transferee liability. See O’sullivan
v. Commissioner, supra. Additionally, a transferee is liable for interest
accruing at the statutory rate as prescribed under sections 6601 and 6621 of
the Internal Revenue Code for the period following the issuance of the
transferee notice until the liability established thereby is paid. See Estate
of Stein v. Commissioner, supra at 959; O’sullivan v.
Commissioner, supra. Respondent bears the burden of proving all elements necessary to
establish the taxpayer’s liability as a transferee, but not to show
that the transferor was liable for the tax. See sec. 6902(a); Rule 142(d). B. Period of Limitations Section 6901(c) provides that the period of limitations for
assessment of liability against a transferee extends “1 year after the
expiration of the period of limitation for assessment against the transferor”.
The period for assessment against the transferor, in turn, is set forth in
section 6501 and generally runs for 3 years from the filing of the tax return.
See sec. 6501(a). The period is of unlimited duration if no return is filed.
See sec. 6501(c)(3). Federal law thus allows at least 4 years, measured from
the date a return is filed, in which a notice of transferee liability may be
issued. In contrast, section 3439.09 of the California Civil Code (West
1997) states as follows: A cause of action with respect to a fraudulent
transfer or obligation under this chapter is extinguished unless action is
brought * * * (a) Under subdivision (a) of Section 3439.04,
within four years after the transfer was made or the obligation was incurred
or, if later, within one year after the transfer or obligation was or could
reasonably have been discovered by the claimant. (b) Under subdivision (b) of Section 3439.04
or Section 3439.05, within four years after the transfer was made or the
obligation was incurred. * * * Hence, State law establishes a period of limitations for actions
under the California Fraudulent Transfer Act that expires 4 years after the
date of the transfer, with a possibility for extension in the case of actual,
as opposed to constructive, fraud. II. Contentions of the Parties Respondent contends that transferee liability may be imposed upon
petitioner pursuant to section 6901 on the grounds that Mr. Espinosa’s
transfer of stock was both actually and constructively fraudulent under
California law. According to respondent, because Mr. Espinosa transferred his
Lidak shares to petitioner for no consideration, at a time when his unpaid
taxes exceeded the value of his remaining assets, the transfer was, at minimum,
constructively fraudulent. Respondent further maintains that assertion of
transferee liability is not barred by any statute of limitations; the notice of
transferee liability was sent within the time period prescribed by the Internal
Revenue Code, and this Federal limitations period is not affected by differing
limits under State law. Conversely, petitioner argues that respondent is precluded from
making a transferee assessment, at least on any basis other than the taxes
stated as due in the filed returns, because no valid deficiency determination
or assessment exists against Mr. Espinosa. Petitioner contends that because the
1989 notices of deficiency were not sent to Mr. Espinosa’s last known
address, they are invalid and cannot be used to establish Mr.
Espinosa’s tax liability. Petitioner further asserts that because no deficiency notices were
issued with respect to the returns filed by Mr. Espinosa in 1993, and because
the period for issuing such notices has expired, Mr. Espinosa cannot be said to
owe taxes beyond the figures reflected in those returns. Since the amount so
shown as owing is less than the alleged value of Mr. Espinosa’s
remaining assets on the date of the transfer, petitioner contends that there
can be no finding of constructive fraud. Petitioner also argues that the
requisite intent for actual fraud is lacking. Lastly, petitioner maintains that the provision for extinguishment
set forth in the California Uniform Fraudulent Transfer Act governs so as to
bar respondent’s assertion of transferee liability. We conclude that the purported lack of a deficiency determination
or assessment against the transferor poses no barrier to an assertion of
transferee liability. We further agree with respondent that the transfer to
petitioner was fraudulent under section 3439.05 of the California Civil Code,
and we find that petitioner has failed to establish that Mr. Espinosa is not
presently liable for the underlying unpaid taxes. Hence, because we also hold
that the Federal limitations period is applicable in this case, transferee
liability may properly be asserted against petitioner. III. Application A. Period of Limitations As a threshold procedural matter, we first focus on the question
of whether the State period of limitations prevails over the Federal so as to
bar respondent’s assertion of transferee liability and to eliminate
any need for further consideration of the related substantive issues. Respondent contends that because Mr. Espinosa filed his returns
with respect to 1981, 1982, 1984, and 1985 on November 3, 1993, the period of
limitations for assessment of transferee liability against petitioner extended
to November 3, 1997. Hence, the notice of transferee liability sent on July 17,
1997, was timely. Petitioner, in contrast, argues that the provisions set forth
in the California Civil Code for extinguishment 4 years after the date of
transfer should control. According to petitioner, since the notice of
transferee liability was not sent until nearly 7 years after the July 31, 1990,
transfer, respondent’s right to pursue any such liability on the basis
of a fraudulent conveyance under California law has been extinguished. This precise issue was, however, decided unfavorably to
petitioner’s position in Bresson v. Commissioner, 111 T.C. 172 (1998).
There, this Court held that “respondent is not bound by the
limitations period in California’s UFTA in seeking to assert or assess
transferee liability against * * * [the transferee] under section
6901.” Id. at 190. Rather, “section 6901(c) is the
applicable limitations period to which respondent is bound in asserting
transferee liability”. Id. Given this precedent and for the reasons
stated therein, we likewise hold here that respondent has issued a timely
notice of transferee liability. B. Transferee Liability 1. Necessity for Deficiency Determination or Assessment Against
Transferor Preliminary to our discussion of whether respondent has
established the substantive elements of transferee liability, we address
whether, as petitioner appears to contend, the purported lack of a valid deficiency
notice or assessment against the transferor in any way inhibits
respondent’s determinations of liability for taxes, or additions to
tax, against a transferee. To answer this inquiry in the affirmative, however,
would be contrary both to congressional intent as evidenced by legislative
history and to existing case law. Legislative history deals explicitly with the procedural
requirement of a notice of deficiency in contexts involving transferee
liability: Section 274(a) [predecessor of sections 6212 and 6213] requires
notice of a deficiency in a tax to be sent the taxpayer before further
proceedings for collection of the tax liability are continued. The section,
however, in terms applies only to a deficiency in a tax and does not apply to the
liability of a transferee in respect of the tax of the taxpayer. Therefore, in
proceedings against the transferee, notice need not be given the taxpayer under
section 274(a). However, under the substitute agreed to by the conferees, the
liability of the transferee is collected in the same manner as the liability
for tax. Section 274(a) is thus incorporated by reference, but the result of
such reference is that for procedural purposes the transferee is treated as a
taxpayer would be treated, and under section 274(a) notice would be sent to the
transferee (and not the taxpayer) in proceedings to enforce the liability of
the transferee. [H. Conf. Rept. 356, 69th Cong., 1st Sess. (1926), 1939-1 C.B.
(Part 2) 372.] Case law is likewise unequivocal in rejecting arguments that a
notice of deficiency to or assessment against the transferor must precede
enforcement of liability against the transferee. See Kuckenberg v.
Commissioner, 309 F.2d 202, 206 (9th Cir.1962), affg. on this issue 35 T.C.
473 (1960); Bresson v. Commissioner, supra at 178; Gumm v. Commissioner, 93 T.C. 475, 484
(1989); Maher v. Commissioner, 55 T.C. 441, 457 (1970), affd. on this issue 469
F.2d 225 (8th Cir.1972); Cleveland v. Commissioner, 28 B.T.A. 578,
580-581 (1933), affd. 77 F.2d 184 (5th Cir.1935). The rule as developed by this
Court is that “the Commissioner is not required to issue a notice of
deficiency or to make an assessment against the transferor where efforts to
collect delinquent taxes from a transferor would be futile.” Bresson
v. Commissioner, supra at 178. The following, oft-quoted rationale underlies
this position: A deficiency is not created by any act of the respondent, but by
the facts and the legal significance thereof as set out in the
taxpayer’s income tax return. The so-called “60-day [now
90-day] letter” is no more than notice to the taxpayer that the amount
of a deficiency disclosed by its return has been determined under the
applicable statute. In our opinion no assessment, notice, or other act of the respondent
is necessary to establish liability for income taxes. We think that any
deficiency existing at the date of a transfer of assets is a liability against
such assets under the trust fund theory. * * * [Cleveland v. Commissioner,
supra
at 580-581 (fn.ref.omitted); see also Maher v. Commissioner, supra at 457; Kuckenberg
v. Commissioner, 35 T.C. at 483.] Hence, the relevant procedural requirement for a proper assertion
of transferee liability is that respondent send to the transferee a notice
under section 6901 which serves to “inform the transferee of the
extent and nature of the tax deficiency which he is claiming against the
transferor.” Kuckenberg v. Commissioner, supra at 483-484. Moreover,
this rule is equally applicable regardless of whether respondent is asserting
that the transferor is liable only for unpaid taxes and deficiencies or whether
respondent is claiming that the transferor is liable for additions to tax as
well. See Bresson v. Commissioner, supra at 173; Gumm v. Commissioner, supra at 475; Kuckenberg
v. Commissioner, supra at 474. We further note that the Court of Appeals for the Ninth Circuit,
to which appeal in the instant case would normally lie, has adopted the
foregoing principle. See Kuckenberg v. Commissioner, 309 F.2d at 202. In
affirming the Tax Court on the question of whether a deficiency determination
or assessment against the transferor must precede imposition of transferee
liability, the Court of Appeals in Kuckenberg v. Commissioner, 309 F.2d at 206,
summarily disposed of the transferees’ contentions as follows:
“they assert that the United States does not have the status of a
creditor since no ninety-day letter was sent to the corporation. However, the
government need not take futile assessment action against a taxpayer without
assets.” From these authorities, we conclude that the notice of transferee
liability received by petitioner is not rendered ineffective either by the
alleged invalidity of the notices of deficiency sent to Mr. Espinosa in 1989 or
by respondent’s failure to issue deficiency notices to Mr. Espinosa
with respect to the returns filed in 1993. As regards the 1989 notices, these
documents neither created nor impacted the underlying tax debt. Hence, their
existence and any procedural irregularities in their issuance are irrelevant to
the question of whether a transfer is constructively fraudulent, and, as will
be seen below, we find it unnecessary to reach the issue of actual fraud. With respect to the failure to send Mr. Espinosa notices of deficiency
based on the filed returns, the law referenced above does not require
respondent first to take useless action against a transferor. Here, Mr.
Espinosa had earned no income since 1991, and respondent was aware that Mr.
Espinosa’s financial situation had forced him to cease making payments
on his tax liabilities some years earlier. Even the bank and brokerage accounts
he once possessed had been dissipated. At the time of trial, Mr. Espinosa still
owned neither a residence nor a car, and nothing in the record would indicate
any other potential assets. Respondent was entitled to proceed directly against
petitioner as transferee in determining and assessing deficiencies and
additions to tax. Because the notice sent to petitioner informs her of the nature
and extent of the deficiencies and additions being claimed against Mr.
Espinosa, it constitutes a proper assertion of transferee liability. 2. Existence of Fraudulent Transfer Having thus determined that respondent’s efforts to
impose transferee liability are not defeated by absence of prior procedural
steps, we next consider whether respondent has sustained the burden of
establishing that Mr. Espinosa’s transfer of stock to petitioner
qualifies as fraudulent pursuant to California law. We begin our examination of
this question with the issue of constructive fraud, as a finding thereof will
make unnecessary further probing of Mr. Espinosa’s subjective intent. Turning to the first of the four elements required to establish a
constructively fraudulent transfer under section 3439.05 of the California
Civil Code, we conclude that Mr. Espinosa owed, and continues to owe, a debt to
the IRS. At the time the transfer was made, Mr. Espinosa had paid no taxes,
beyond withholding, for the years 1980 through 1985. Yet even his own
subsequently filed returns indicate that he owed taxes for some of these years,
and the parties stipulated that “The Internal Revenue Service was a
creditor of Frederick Espinosa at the time of the transfer of the Lidak stock.” Moreover, no evidence shows that the taxes so reflected as due
have been paid. To the extent that statements made by petitioner on brief can
be read to argue that the source of the claimed $80,967 overpayment for 1980
was unrelated to the $93,000 to $94,000 in payments made to the IRS in 1991,
and that these payments are therefore sufficient to eliminate any remaining
liabilities, we find such a position to be insupportable on this record. Respondent’s transcript of account for Mr.
Espinosa’s 1980 taxable year records all activity with respect to the
account dating from the 1988 preparation by the IRS of a substitute return for
Mr. Espinosa as a nonfiler. However, until the subsequent payments of $93,000
to $94,000 commencing in 1991, the only credit reflected therein is a $38,265
credit for withheld taxes and excess FICA. The transcript shows neither credit
for an overpayment from a prior year nor remittance of any additional sums to
the IRS beyond the $93,000 to $94,000. Hence, since these payments are the only
ones made by Mr. Espinosa and applied to his 1980 tax year, they are likewise
the sole potential source for the alleged overpayment. We find that Mr.
Espinosa’s status was and is that of a debtor to the IRS. The above-quoted stipulation characterizing the IRS as a creditor
of Mr. Espinosa at the time of the transfer is likewise sufficient to establish
the second element, which requires the IRS’s claim to have arisen
prior to the transfer. In addition, an identical result would be demanded,
regardless of the stipulation, by existing law. Tax liabilities accrue on the
due date of the tax return, and if such liabilities are not paid at that time,
the IRS is considered to be a creditor as of the close of the applicable tax period.
See Swinks v. Commissioner, 51 T.C. 13, 17 (1968); Locke v.
Commissioner, T.C. Memo.1996-541; O’sullivan v. Commissioner, T.C. Memo.1994-17; LaMothe
v. Commissioner, T.C.
Memo.1990-63. Here, since the transfer in July of 1990 took place more than
4 years after Mr. Espinosa’s tax return was due for the most recent of
the tax periods upon which transferee liability is based, the IRS’
claim predated the transfer by a wide margin. The third requirement, that the transferor must have received no
reasonably equivalent value in exchange, is once again established by a
stipulation of the parties: “The transfer of the Lidak stock was made
for love and affection. The parties stipulate that love and affection is not
adequate consideration.” With respect to the fourth element, which mandates insolvency at
the time or as a result of the transfer, a debtor is insolvent under California
law “if, at fair valuations, the sum of the debtor’s debts is
greater than all of the debtor’s assets.” Cal. Civ.Code sec.
3439.02(a) (West 1997). Respondent contends that Mr. Espinosa’s
extensive tax liabilities as of the date of the transfer outweighed his minimal
assets to a degree more than sufficient to meet this test. Petitioner, in
contrast, claims that because the deficiency notices were invalid, Mr.
Espinosa’s debts for purposes of the insolvency calculation are
limited to the approximately $50,000 ($28,945 + $5,169 + $15,271 = $49,385)
shown as owing on the returns filed in 1993. Petitioner further points to the
documentary evidence produced at trial reflecting assets with a total value of
$90,245.46 and states on brief that Mr. Espinosa’s remaining property
was worth “approximately $100,000” at the time of the
transfer. Therefore, according to petitioner, Mr. Espinosa’s financial
status was one of solvency. We conclude, however, that even if we accept the records offered
by petitioner, which we note are somewhat lacking in contemporaneity, as
accurately representing Mr. Espinosa’s assets in July of 1990, we
cannot agree that Mr. Espinosa was solvent. The $93,000 to $94,000 in payments
to the IRS were not made until 1991, after the transfer. Hence, at minimum and
without regard to the contested notices of deficiency or any additions to tax
or interest, the tax liability in July of 1990 must have been at least the
$50,000 shown as still owing plus the between $93,000 and $94,000 paid
subsequent to the transfer but prior to filing the returns. Even these figures
when combined exceed the purported $90,000 to $100,000 in assets remaining
after the transfer. Furthermore, because a notice of deficiency does not, as explained
above, create the underlying debt, the alleged lack of a valid notice has no
bearing upon Mr. Espinosa’s liability as of July 1990 either for
income taxes or for statutory additions to tax or interest then accrued on his
unpaid balance. Any such additions or interest, which would hardly be insignificant
after multiple years of failing to file a return despite owing taxes, are thus
properly considered as increasing the amount by which Mr. Espinosa was indebted
to the IRS in July of 1990. We find that at the time of the transfer of the
Lidak shares to petitioner, Mr. Espinosa was or was rendered insolvent. We
therefore conclude that respondent has sustained the burden of establishing
each element necessary to support imposition of transferee liability on the
basis of a constructively fraudulent transfer under California law, and we need
not reach the issue of actual fraud. 3. Liability for Underlying Tax Having decided that the July 1990 transfer was fraudulent, we turn
to the question of whether petitioner may nonetheless reduce or avoid liability
by proving that Mr. Espinosa does not presently owe the amounts stated in the
notice of transferee liability. Petitioner bears the burden of establishing
that respondent’s determinations are erroneous. See Rule 142(a). On
this record, however, evidence offered by petitioner is insufficient to
overcome the presumption of correctness afforded to respondent’s
determinations, at least to the degree that would be necessary to render her
liable for less than the value of the assets transferred. The net deficiencies stated in the notice of transferee liability
generally parallel the balances shown on Mr. Espinosa’s returns, with
the major exception being that no credit was given for the claimed $80,967
overpayment. The only evidence produced by petitioner of any payments that
could reduce Mr. Espinosa’s tax liability was the statement of his
account revealing that $93,000 to $94,000 had been received by respondent.
Petitioner did not, however, provide a copy of the return Mr. Espinosa claims
to have filed for 1980 or any other evidence of his 1980 taxes. We consequently
have no basis for concluding that the payments were misapplied and should more
properly be credited against the stated net deficiencies for 1981, 1982, 1984,
or 1985. The net deficiencies stated in the notice of transferee liability,
which petitioner’s evidence falls short of disproving, are thus more
than adequate to render petitioner liable for the full stipulated value,
$53,828.12, of the transferred stock. We need not reach the issue of whether
Mr. Espinosa is also liable for the additions to tax set forth in the
transferee notice. We therefore conclude that petitioner has failed to sustain her
burden of showing that Mr. Espinosa does not currently owe taxes to the IRS in
an amount at least equal to the agreed value of the Lidak shares. Hence, we
hold that petitioner is liable to the extent of $53,828.12, plus interest
thereon in accordance with California and Federal law. To reflect the foregoing, Decision will be entered under Rule 155.
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