Schussel v. Werfel ( 2014 )

United States Court of Appeals
For the First Circuit
No. 13-1717
GEORGE SCHUSSEL, Transferee,
Petitioner, Appellant,
v.
DANIEL I. WERFEL, Acting Commissioner of the
Internal Revenue Service,
Respondent, Appellee.
APPEAL FROM THE UNITED STATES TAX COURT
[Hon. Mary Ann Cohen, Judge, U.S. Tax Court]
Before
Thompson, Stahl, and Kayatta,
Circuit Judges.
Francis J. DiMento, with whom Jason A. Kosow and DiMento
& Sullivan were on brief, for appellant.
Regina S. Moriarty, Attorney, Tax Division, Department of
Justice, with whom Richard Farber, Attorney, Tax Division,
Department of Justice, and Kathryn Keneally, Assistant Attorney
General, were on brief, for appellee.
July 8, 2014
KAYATTA, Circuit Judge. George Schussel appeals a
decision of the United States Tax Court holding him liable, as the
recipient of a fraudulent transfer from his former company, for the
company's back taxes (including penalties) of over $4.9 million,
plus interest of at least $8.7 million. On appeal, he does not
dispute that his company fraudulently transferred millions of
dollars to him in an effort to avoid paying income taxes to the
IRS. What he disputes is how much he owes the IRS as a result of
those transfers. First, he argues that the tax court erred in
applying the federal tax interest statute, and that he should only
have to pay the likely much lower amount of prejudgment interest
that would be due under Massachusetts law. Second, he claims that
the tax court should have accepted his corrected tax returns as
establishing the amount of the assets he misappropriated. Third,
he maintains that he should have received credit for money he
loaned back to his company, which the company then used to pay his
legal bills. Concluding that the tax court calculated prejudgment
interest under the wrong statute, we affirm in part, reverse in
part, and remand for further proceedings.
I. Background
We have previously recounted George Schussel's efforts to
circumvent U.S. tax law, affirming his convictions for tax evasion
and conspiracy to defraud the United States. See United States v.
Schussel, 291 F. App'x 336 (1st Cir. 2008). We recount the basics
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here, adding only the details necessary to resolve this appeal
(most of which were stipulated by the parties).
Beginning in the early 1980s, Schussel operated a
Massachusetts corporation called Digital Consulting, Inc. ("DCI").
Until 1996, DCI was a subchapter C corporation.1 During the
relevant period, Schussel controlled 95% of DCI.2 Schussel set up
an offshore shell company to siphon DCI income into accounts that
he controlled, all without paying the requisite corporate or
individual taxes. DCI failed to report all of its income to the
IRS, and eventually, the IRS issued a notice of deficiency
regarding DCI's 1993, 1994, and 1995 tax returns. DCI neither
contested nor paid the assessed liabilities. It has been insolvent
since 2004.
As we explain below, the IRS can, by statute, collect a
person's tax debt by reclaiming assets the debtor has transferred
to someone else (a "transferee"). See 26 U.S.C. § 6901. On
November 24, 2010, the IRS sent Schussel a notice of liability
("Notice"), claiming that he was liable as a transferee for DCI's
1993-1995 tax deficiencies. The Notice claimed that DCI had tax
deficiencies of $1,796,477.71, $2,596,817.21, and $3,878,275.77 for
1
In 1996, DCI became a subchapter S corporation. It was
later converted into a Massachusetts business trust, and its name
was changed to the Driftwood Massachusetts Business Trust. We refer
simply to "DCI" for clarity.
2
Schussel testified that he owned 90% and his wife 5%, but
that he controlled all 95%.
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those three years "as shown in the attached statement," and that
"[t]his portion of total assessed income tax deficiencies, plus
interest as provided by law, constitute your liability as
transferee . . . ." In summary, the attached statement provided:
1993 1994 1995
DCI Tax Assesed $622,455.00 $889,445.00 $1,321,449.00
Fraud Penalty $466,841.25 $667,083.75 $991,086.75
Interest $2,249,268.11 $2,752,369.18 $5,467,439.663
DCI Funds
Diverted to $2,044,106.00 $2,522,944.00 $4,356,279.004
Schussel
The statement also said that, of DCI's tax liability,
"only $2,044,106.00, $2,522,944.00 and $4,356,279.00 [i.e. the
amounts transferred] for these respective tax years, plus interest
as provided by law from the date of this notice, will be assessed
against George Schussel as transferee . . . ." (These sums, not
including interest, add up to $8,923,329.) A note at the base of
the page explained that Schussel was:
liable for the lesser of the value of the property
transferred, plus interest as provided by law, or the
balance of the liability, plus accrued interest.
Accordingly, the transferee's liability for the 1993,
1994 and 1995 assessed liability of the transferor is
limited to the above stated value of property transferred
to him for the three years.
3
The parties later stipulated that the $5 million interest
figure was incorrect.
4
The "1995" transfers to Schussel occurred in 1995-1997.
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Schussel challenged the Notice in tax court, claiming
(among other things) that he should receive credit against any
transferee liability for money that he loaned back to DCI. Most of
that money, Schussel readily admits, DCI used to cover expenses
related to his tax litigation.5 According to the stipulated facts
and evidence at trial, DCI's gross receipts, legal and consulting
expenses, and loans from Schussel amounted to:
Year Gross Legal Consulting Loans
Receipts
2001 $26,773,417 $34,152 $513,440 $500,000
2003 $12,325,807 $21,288 $522,000 $200,000
2004 $4,615,479 $1,034,291 $0 ($75,000)
2005 $0 $477,709 $0 $549,194
2006 $0 $409,391 $0 $187,900
2007 $0 $543,790 $0 $77,132
2008 $0 $35,866 $0 $585,747
2009 $0 $22,835 $0 $37,167
2010 $0 $2,834 $0 $4,646
The IRS's answer to Schussel's petition for review asked
that the Notice of Liability simply be confirmed. However, its
later-filed pretrial memorandum abandoned the limited theory of
Schussel's liability for interest advanced in the Notice and
Statement. Instead, it argued that Schussel was liable for DCI's
5
Not all of the money came out of a DCI account; some
appears to have come from accounts of other companies run by
Schussel. He claims, however, that these expenditures were
attributed to DCI for accounting purposes.
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back taxes, plus interest as determined under the federal tax
interest statute from the due date of DCI's tax returns, and that
his liability was not limited to the amount of assets that DCI
fraudulently transferred to him.6
After trial, the tax court ruled on a large number of
issues, only a few of which are relevant to this appeal. As
pertinent here, it first determined that Schussel received from DCI
fraudulent transfers in the amounts of $2,044,106 during 1993,
$2,522,944 during 1994, and $4,356,279 during 1995 to 1997, for a
total of $8,923,329. Then, at the IRS's request, the court held
Schussel liable for DCI's back taxes, plus prejudgment interest at
the federal rate from the respective dates on which DCI's income
taxes were due for 1993, 1994, and 1995.7 So calculated,
prejudgment interest alone totaled approximately $8.7 million by
the time the IRS issued the Notice, leaving Schussel liable for
over $13.6 million plus further accruing interest at the federal
rate. Finally, the tax court refused to give Schussel credit
against his liability for the amount he loaned back to DCI from
2001 to 2010, or to limit his liability to the amount of assets he
received (no matter how that figure was calculated).
6
The tax court evidently accepted this shift, and although
Schussel mentions the shift in his brief, he does not directly
challenge its allowance.
7
By statute and regulation, the federal rate varies over
time.
-6-
Schussel timely appealed, Fed. R. App. P. 13(a)(1),
challenging each of those conclusions. First, he argues that his
total liability should have been limited to $7,358,394, the
undeclared income figure the IRS used to correct his individual tax
returns, or at most to the $8.9 million of DCI assets that the
IRS's Notice and Statement claimed he received. Second, he
contends that any prejudgment interest on the fraudulently
transferred funds should have been assessed at the Massachusetts
rate of 12% per year, but only from the date of the 2010 IRS Notice
rather than the dates on which DCI's unpaid taxes were due in 1993-
1995, resulting in a substantial reduction in his total liability.
Third, he argues that he should receive credit, to be counted
against his liability, for roughly $2.1 million in loans he made to
DCI between 2001 and 2010.
We have jurisdiction under 26 U.S.C. § 7482. We address
each of Schussel's arguments, assessing first the question of
interest, then the amount transferred, and then whether Schussel
should receive credit for any alleged retransfers.
II. Standard of Review
Our review of the tax court's ruling is "in most respects
similar to our review of district court decisions: factual findings
for clear error and legal rulings de novo." Drake v. Comm'r, 511
F.3d 65, 68 (1st Cir. 2007); see also 26 U.S.C. § 7482(a)(1),
(c)(1). "The clear error standard of review extends to factual
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findings based on inferences from stipulated facts." Capital Video
Corp. v. Comm'r, 311 F.3d 458, 463 (1st Cir. 2002) (internal
quotation marks omitted). "A finding is clearly erroneous when,
although there is evidence to support it, the reviewing court on
the entire evidence is left with the definite and firm conviction
that a mistake has been committed." Interex, Inc. v. Comm'r, 321
F.3d 55, 58 (1st Cir. 2003) (internal quotation marks omitted).
Although the burden is usually on the taxpayer to demonstrate that
an IRS ruling is wrong, in transferee cases the IRS bears the
burden of showing that the petitioner "is liable as a transferee of
property of a taxpayer, but not [of showing] that the taxpayer was
liable for the tax." 26 U.S.C. § 6902(a); see generally U. S. Tax
Ct. R. 142(a), (d).8
8
Tax Court Rule 142 provides:
The burden of proof shall be upon the petitioner, except
as otherwise provided by statute or determined by the
Court . . . . In any case involving the issue of fraud
with intent to evade tax, the burden of proof in respect
of that issue is on the respondent . . . by clear and
convincing evidence. . . . The burden of proof is on the
respondent to show that a petitioner is liable as a
transferee of property of a taxpayer, but not to show
that the taxpayer was liable for the tax.
-8-
III. Analysis
A. The Tax Court Applied the Wrong Framework to Assess How Much
Schussel Owes.
1. The Fraudulent Transfer Claim
In its effort to recover sums transferred to Schussel by
DCI, the IRS availed itself of the procedures set forth in 26
U.S.C. § 6901. Section 6901 specifies the procedures by which the
IRS may administratively assert (among other claims) state law
remedies for fraudulent transfers, subject to challenge in tax
court.9 While the procedures are federal, state substantive law
controls in determining whether and to what extent the transferee
is liable. See Frank Sawyer Trust of May 1992 v. Comm'r, 712 F.3d
597, 602-03 (1st Cir. 2013).10 Here, nearly all of the transfers
are covered by the now-repealed Massachusetts Uniform Fraudulent
Conveyance Act ("MUFCA"). Mass. Gen. Laws ch. 109A, §§ 1 et seq.
(1995). The few made after October 1996 fall under the
Massachusetts Uniform Fraudulent Transfer Act ("MUFTA"). Id. §§ 1
et seq. (2014).
9
Section 6901 provides, as most relevant here, that "[t]he
amount[]" of "[t]he liability, at law or in equity, of a transferee
of property" "of a taxpayer" "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." 26 U.S.C. § 6901(a).
10
There is a federal fraudulent transfer law, see 28 U.S.C.
§ 3304, but neither party suggests that the government has invoked
it here. See generally id. § 3002(2) (excluding the tax court from
the definition of "court" for that chapter).
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Schussel did not appeal the tax court's finding that the
transfers in this case were made with the actual intent to defraud
DCI's creditors--specifically, the IRS. Therefore, the transfers
are invalid both as to creditors with claims against DCI at the
time of the transfer and as to those whose claims arose later. See
id. § 7 (1995); id. § 5(a)(1) (2014).
Both the MUFCA and MUFTA generally permit a creditor with
a matured claim to avoid a fraudulent conveyance (i.e., secure a
return of the transferred funds in favor of the creditor) "to the
extent necessary to satisfy his claim." David v. Zilah, 325 Mass.
252, 256 (1950); Mass. Gen. Laws ch. 109A, § 8(a)(1), § 9(b), (c)
(2014) (allowing avoidance "to the extent necessary to satisfy the
creditor's claim," but limiting the judgment to the lesser of a)
the amount of the claim, and b) the value of the assets "adjusted"
"as the equities may require"); 48A Jordan L. Shapiro et al.,
Massachusetts Practice: Collection Law § 14:57 (3d ed. 2000)
(describing remedies under the MUFCA). Each statute gives the
court some discretion to fashion an equitable remedy in some cases.
See Mass. Gen. Laws ch. 109A, § 8(a)(3)(iii) (2014) (subject to
section 9, allowing "any other relief the circumstances may
require"); id. § 10(d) (1987) (allowing courts to "[m]ake any order
which the circumstances of the case may require" to protect
creditors with immature claims).
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2. Interest
In discussing the issues raised by this appeal, it is
helpful to distinguish between interest accrued on the tax
obligation of the taxpayer-transferor, and interest accrued on the
transferred funds recovered from the transferee by a creditor.
Federal interest on a tax obligation accrues automatically, usually
from the date when the tax payment first becomes late. 26 U.S.C.
§ 6601(a), (e).11 That interest is simply a part of the debt owed
by the taxpayer-transferor to the IRS, see § 6601(e), all of which
may usually be collected from a fraudulent transferee to the extent
of the amount fraudulently transferred. See, e.g., Lowy v. Comm'r,
35 T.C. 393, 394 (1960); cf. also United States v. Verduchi, 434
F.3d 17, 21-22 & n.6, 25 (1st Cir. 2006) (under Rhode Island
fraudulent transfer law--but not section 6901--treating the IRS's
claim against the transferor as including the accumulated
interest). Thus, for example, if the taxpayer owes $100 in taxes,
upon which $30 in interest accrues, and the taxpayer then
11
Section 6601 provides that, generally, "[i]f any amount of
tax imposed by this title . . . is not paid on or before the last
date prescribed for payment, interest on such amount at [the
federally-set rate] shall be paid for the period from such last
date to the date paid." 26 U.S.C. § 6601(a). Generally, that
interest has to be paid upon notice and demand, and almost any
reference in the tax code to a "tax" must be read to include
section 6601 interest. Id. § 6601(e)(1).
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fraudulently transfers $150 to a transferee, the IRS can certainly
recover a judgment of no less than $130 against the transferee.12
What is at issue in this case is prejudgment interest
asserted against the transferee on the amount of the transfer
deemed to be avoidable (that is, the amount that the transferee
must give back). Suppose, again, that a taxpayer owed $100 in
taxes and accrued $30 in interest; but, this time, he transferred
$101 to a third-party transferee. The transferee would be liable
for a judgment that he pay over to the IRS the entire $101
transferred to him. Like most other litigants against whom a
monetary liability is established, he might also owe some amount of
prejudgment interest--the question is how much.
According to the IRS, it depends on when the interest
accrued. If, as in our example, it accrued before the taxpayer
transferred the $101 (so that on the day of transfer, the taxpayer
owed more to the IRS than he gave away to the transferee), the IRS
concedes that state fraudulent transfer law would apply to limit
the IRS to recovering from the transferee the $101 he received,
plus such prejudgment interest as might be available under that
state law. But if the additional interest owed by the taxpayer to
12
Moreover, even in a case where the interest did not accrue
until after the date of the transfer, the government would seem to
be able to recover the $30, at least where, as here, the
transferor's actual fraudulent intent renders the transfer invalid
as to both present and future creditors. Mass. Gen. Laws ch. 109A,
§ 7 (1995); id. § 5(a)(1) (2014).
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the IRS accrued after the transfer (so that on the day of transfer,
the taxpayer gave away more than he owed at that time), the IRS
claims that the transferee would owe the entire $30 in interest
accrued under federal law. That interest, it says, accrued on the
transferee's own liability (not just on the taxpayer's underlying
debt) and ran under section 6601 at the same rate and from the same
date as against the original taxpayer on the underlying tax debt.
Essentially, the IRS argues that where state law provides the basis
for transferee liability, the ratio of IRS debt to assets
transferred on the date of transfer operates as a toggle switch to
pick whether state or federal law controls prejudgment interest.
The language of the two statutes is sufficiently abstract
that it could be read as providing partial support for the IRS.
Under section 6901, transferee liability is to be assessed 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." 26 U.S.C. § 6901(a). And the tax
interest statute, section 6601, provides that "[a]ny reference in
this title [except for in the subchapter relating to deficiency
procedures] to any tax imposed . . . shall be deemed also to refer
to interest imposed by this section on such tax." Id.§ 6601(e)(1). There is some appeal, therefore, in the IRS's claim
that section 6601 is simply one of the same tax "provisions and
limitations" to which transferee liability is subject under
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section 6901. See Robinette v. Comm'r, 139 F.2d 285, 288 (6th Cir.
1943) (so holding, before the Supreme Court ruled in Comm'r v.
Stern, 357 U.S. 39 (1958), that state law governs the substance of
fraudulent transferee liability under section 6901); cf. Nicholas
v. United States, 384 U.S. 678, 690-91 (1966) (interpreting the
similarly-worded 26 U.S.C. § 7501 to mean that where a Chapter 11
bankruptcy trustee was not liable for interest on the debtor's
taxes after a certain point, a trust fund collectable in the same
manner as those taxes would not garner interest); Baptiste v.
Comm'r, 29 F.3d 1533, 1541-42 (11th Cir. 1994) (where a federal
statute created the transferee liability, concluding that "subject
to the same provisions and limitations" in section 6901 means that
the IRS can charge interest on transferee liability "as if it were
a tax liability").13
Statutory history can also be read as providing some
support for the (more limited) idea that interest accrues at the
federal rate from the date of the transfer. The original draft of
section 6901's precursor, section 280 of the Revenue Act of 1926,
44 Stat. 61 (1926), specified that no interest would accrue on a
13
To avoid any confusion, we note that the tax court's
opinion in Baptiste was appealed to two circuit courts. Those
courts reached conflicting conclusions about whether a transferee,
liable under federal law for estate taxes, could owe more than he
had received. Compare Baptiste, 29 F.3d at 1541-42 (yes), with
Baptiste v. Comm'r, 29 F.3d 433, 437 (8th Cir. 1994) (no). The
Baptiste cases dealt with substantive transferee liability created
and limited by federal law rather than state law; we express no
opinion on their outcomes.
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transferee's liability until he received a notice and demand.
S. Rep. No. 69-52 (1926), reprinted in 1939-1 Cum. Bull. (Pt. 2)
354-55. In conference, that language was changed; the committee
asserted that section 280 did not alter the extent of transferee
liability, but went on to add that no interest accrued on the
transferee's assumed liability after the transfer, except interest
"for failure to pay upon notice and demand . . . and interest at
6 per cent a year for reimbursing the Government at the usual rate
for the loss of the use of the money due it." H.R. Rep. No. 69-
356, at 44 (1926)(Conf. Rep.), reprinted in 1939-1 Cum. Bull. (Pt.
2) 371-73.14 This might suggest that Congress expected a standard
federal interest rate to apply, and did not view that choice as
much altering existing transferee liability law. But as a number
of cases point out, it is hardly crystal clear.15
14
The 1926 act included several different interest rates; for
example, taxpayers owed six percent per year on tax deficiencies,
increasing to one percent per month after the IRS sent a notice and
demand for payment. Revenue Act of 1926, ch. 27, §§ 274(j),
276(b), 44 Stat. 9, 56-58 (1926). Thus it is unclear whether the
reference in the legislative history to "the usual rate" of six
percent refers to the deficiency rate, see Poinier v. Comm'r, 858
F.2d 917, 921 (3d Cir. 1988) (concluding so), or just anticipated
that an equitable grant of interest might adopt a rate used
elsewhere in the Act. Cf. Billings v. United States, 232 U.S. 261,
286 (1914) (affirming the IRS's entitlement to interest); cf. also
Leighton v. United States, 289 U.S. 506, 509 (1933) (affirming, as
not an abuse of discretion, interest awarded against a
corporation's transferee-stockholders at six percent per year from
the date of the assessment against the corporation. See Leighton
v. United States, 61 F.2d 530, 534 (9th Cir. 1932)).
15
See Patterson v. Sims, 281 F.2d 577, 580 n.4 (5th Cir.
1960) (noting that the legislative history "seems to indicate that
the United States is entitled to interest accruing after the
-15-
Ultimately, we are saved from having to search for an
answer in ambiguous statutory language and unclear legislative
history. Instead, we find our answer in the U.S. Supreme Court's
interpretation of a prior version of this same statute. In
Commissioner v. Stern, 357 U.S. 39 (1958), the Supreme Court held
that another of section 6901's predecessor statutes, section 311 of
the Internal Revenue Code of 1939, 26 U.S.C. § 311 (1939), provided
only the procedure by which the IRS could assert substantive rights
against transferees created by other laws--it did not create any
such rights. Stern, 357 U.S. at 42-45. Thus, where, as there,
state fraudulent transfer law supplied the substantive rule, state
law controlled "the existence and extent of [transferee]
liability." Id. at 45. Although the statutory language has
changed some since then,16 the parties agree that Stern still
transfer, if under state law a transferee would be so liable to a
private creditor"); Estate of Stein v. Comm'r, 37 T.C. 945, 961
n.18 (1962) ("The legislative history, although not of sufficient
clarity for judicial reliance, tends to support the running of
interest on transferee liability from the date of transfer,
although in 1926 the issue resolved in [Stern] was not
considered."); cf. Poinier, 858 F.2d at 922 (rejecting the early
20th century history as unhelpful because the various interest
provisions were later combined into section 6601).
16
The key language of section 311 read:
The amounts of the following liabilities shall, except as
hereinafter in this section provided, be assessed,
collected, and paid in the same manner and subject to the
same provisions and limitations as in the case of a
deficiency in a tax imposed by this chapter (including
the provisions in case of delinquency in payment after
notice and demand. . .): (1) TRANSFEREES.--The liability,
at law or in equity, of a transferee of property of a
taxpayer, in respect of the tax (including interest,
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controls, and requires that state law dictate the existence and
extent of Schussel's transferee liability.
In turn, both Massachusetts and federal courts treat
prejudgment interest as a substantive part of a state-law remedy.
See, e.g., Tobin v. Liberty Mut. Ins. Co., 553 F.3d 121, 146 (1st
Cir. 2009) (in a discrimination case, noting that "[i]t is well
established that prejudgment interest is a substantive remedy
governed by state law when state-law claims are brought in federal
court"); Militello v. Ann & Grace, Inc., 411 Mass. 22, 26 & n.4
(1991) ("[A]n award of prejudgment interest is a substantive
remedy."). Since section 6901 governs only procedure, and since
prejudgment interest is generally a matter of substance, it follows
that section 6901 does not govern prejudgment interest where the
substantive law is state law.
Resisting this conclusion, the IRS points to several
cases in which the IRS was in fact able to recover prejudgment
interest under federal law. But it offers little authority
expressly adopting its position--that is, few state-law-based
transferee cases where a court held that because the transferor
gave away more than he owed to the IRS that day, section 6601
interest runs on the transferee's liability from the date that the
transferor's taxes were due, even though that interest has grown
additional amounts, and additions to the tax provided by
law) imposed upon the taxpayer by this chapter.
26 U.S.C. § 311, 53 Stat. 1, 90 (1939).
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the debt well beyond what the transferee received (and regardless
of when the transferee learned about the debt). And even those few
cases it identifies offer little informative analysis. See
Upchurch v. Comm'r, 100 T.C.M. (CCH) 85 (2010) (under Illinois
estate transferee liability rules, where the transferee received
more than the estate owed as a deficiency but less than the
deficiency plus interest, concluding that interest ran under
section 6601 on the transferee's liability for the deficiency from
the date the estate tax return was due); see also Nat'l Pneumatic
Co. v. United States, 176 Ct. Cl. 660, 666 (1966) (where the assets
transferred were adequate to satisfy the total taxes, penalties,
and interest, describing the interest charged as upon the
transferee's liability, rather than the transferor's tax debt);
Butler v. Comm'r, 84 T.C.M. (CCH) 681 (2002) (in a case applying
Minnesota fraudulent transfer law, explicitly comparing the roughly
$4.6 million transferred with the transferor's $1.1 million tax
liability on the date of the transfer).
On the whole, the weight of the case law is consistent
with the basic logic of our Stern analysis. This precedent
includes two of the cases upon which the IRS itself relies, Estate
of Stein v. Commissioner, 37 T.C. 945 (1962), and Lowy v.
Commissioner, 35 T.C. 393 (1960). In Lowy, the tax court explained
that federal law determines "the quantum of" the IRS's claim
against the taxpayer-transferor, and that that claim includes
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statutory interest. 35 T.C. at 395 (interpreting the 1939 code).
Therefore, where the assets in the hands of the transferee were
"more than ample to discharge the full Federal liability of the
transferor (including interest)," there was no need to resort to
state-law interest principles to make the IRS whole. See id. at
397. Here, of course, the IRS would not be made whole by
recovering the funds transferred to Schussel because DCI's debt,
including penalties and interest, was larger than the amount
transferred. This type of situation was presented in Estate of
Stein, where the tax court explained that because the transferred
assets were "insufficient to pay the transferor's total liability,
interest is not assessed against the deficiencies because the
transferee's liability for such deficiencies is limited to the
amount actually transferred to him. Interest may be charged
against the transferee only. . . [as] determined by State law." 37
T.C. at 961. Accord, e.g., Stanko v. Comm'r, 209 F.3d 1082,
1087-88 (8th Cir. 2000) (in a constructive fraudulent transfer
case, rejecting an argument similar to the IRS's here as unsound
under Nebraska law); Stansbury v. Comm'r, 102 F.3d 1088, 1089, 1092
(10th Cir. 1996) (where the transferees received less than the
transferor's "total amount owed to the IRS," concluding that under
Stern their interest liability before receiving a notice was
governed by state law); Patterson v. Sims, 281 F.2d 577, 580 (5th
Cir. 1960) (where the taxpayer's liability, even before interest,
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exceeded the transferee's net benefit, concluding that the
transferee's substantive liability was controlled by state law, and
using state law to assess the "liability of a transferee in
addition to the value of the property received").
We therefore accept the IRS's invitation to follow Lowy
and Estate of Stein, but we follow the actual reasoning of the
opinions in those cases, not the caricature of them reflected in
the IRS's position. The resulting rule, we believe, is consistent
with Stern's mandate that Massachusetts law dictate Schussel's
substantive liability. Stern, 357 U.S. at 45. That rule is
simple: The IRS may recover from Schussel all amounts DCI owes to
the IRS (including section 6601 interest accruing on DCI's tax
debt), up to the limit of the amount transferred to Schussel, with
any recovery of prejudgment interest above the amount transferred
to be determined in accord with Massachusetts law.17 This rule, in
our view, appropriately defers to Massachusetts fraudulent transfer
law and avoids the arbitrary effects of the government's focus on
the ratio of the debt to the transferred assets on the date of
transfer. Our comfort with this conclusion is buttressed by (but
not predicated on) the fact that the IRS itself appears to have
17
Thus, the IRS will recover from Schussel the penalties and
interest owed to the IRS by DCI to the extent the funds
fraudulently transferred to Schussel exceeded DCI's unpaid taxes.
-20-
taken a similar approach in non-precedential guidance.18 Similarly,
the Notice of Liability in this very case tracked that guidance,
rather than the position the IRS later advanced at trial and on
appeal.
Schussel contends, and the IRS does not dispute, that
under Massachusetts law, no interest would have begun to accrue
18
See Internal Revenue Service, Chief Counsel Advisory
200916027 (April 17, 2009) ("If the asset transferred exceeds the
transferor's liability on the date of transfer, interest under 6601
continues to run from the date of transfer until the earlier of
exhaustion of the value of the asset or the beginning of interest
on the transferee's liability. . . . If the value of the asset
exceeded the transferor's liability but has been exhausted and time
still remains before interest begins to run on the transferee's
liability, state law may impose interest from the point of
exhaustion of the value of the assets until interest begins to run
on the transferee's liability."); Internal Revenue Service, Chief
Counsel Advisory 200915038 (April 10, 2009) ("Where the total value
of assets transferred exceeded the transferor's total liability on
the date of transfer, and the excess of value of assets has been
exhausted by the imposition of section 6601 interest but time
remains in the second period, imposition of interest under state
law may apply . . . ."); Internal Revenue Service, Chief Counsel
Advisory 200851072 (Dec. 19, 2008) ("Where the total value of the
transferred assets exceeds the transferor's total liability on the
date of transfer, 6601 interest may be imposed for the second
period until the value of the asset is exhausted. . . . [W]here the
excess in value of assets transferred has been exhausted, state law
may impose interest for the second period or remainder of the
second period."); cf. United States v. Craft, 535 U.S. 274, 300 n.9
(2002) (Thomas, J., dissenting) (citing a variety of formal and
informal IRS guidance, including a Chief Counsel Advisory).
-21-
until the date of the Notice of Liability.19 Cf. Mass. Gen. Laws
ch. 231, § 6B (providing for prejudgment interest as of "the date
of commencement of the action."); Lassman v. Keefe (In re Keefe),
401 B.R. 520, 527 (B.A.P. 1st Cir. 2009) (applying section 6B to a
Massachusetts fraudulent transfer action in bankruptcy court). We
accept (without deciding) that uncontested description of
Massachusetts law. Schussel therefore owes no prejudgment interest
on his own liability as transferee (that is, on the amounts
transferred to him) for the time period pre-dating the Notice.
The reader might think (and hope) we are done with this
interest(ing) issue, but this is tax law, and it should surprise no
one that a bit more need be said regarding the subsequent period of
time that passed between the Notice and the judgment (as opposed to
the longer periods that passed between the due date of the tax and
the issuance of the Notice, or between the date of the transfer and
the Notice). Section 6601 provides that when a tax is "not paid on
or before the last date prescribed for payment," interest shall
accrue, and that where the last date for payment is not prescribed
19
It may be that Massachusetts law contains some equitable
principle that would allow interest to accrue earlier than that.
Compare Stansbury, 102 F.3d at 1092 (where a transferee was
intimately involved in the fraud, Colorado law let interest run
from the date of the transfer), with, e.g., Wood v. Robbins, 11
Mass. 504, 506 (1814) (in an action for money had and received,
"where the defendant obtained the plaintiff's money by fraud and
imposition, interest ought to be allowed from the receipt of the
money, and not merely from the service of the writ"). However, the
IRS affirmatively waived the opportunity to challenge Schussel's
characterization of Massachusetts law in its post-trial briefing.
-22-
anywhere else, that date "in no event shall be later than the date
notice and demand for the tax is made by the Secretary." 26 U.S.C.
§ 6601 (a), (b)(5); cf. Internal Revenue Service, Chief Counsel
Advisory 200848068 (Nov. 28, 2008) (noting that section 6901 does
not prescribe a "last date" for the transferee to pay a tax and
that a transferee's liability for the tax arguably arises upon the
date of transfer, but that section 6601 imposes liability for
interest on the transferee at least as of the date of notice and
demand for payment of the transferee liability). This language
suggests that "the question of prejudgment interest after the date
of the Commissioner's notice of transferee liability . . . may well
be a matter of federal law." Stanko, 209 F.3d at 1088. See also
Patterson, 281 F.2d at 580.
Schussel, however, affirmatively volunteers that, from
the date of the Notice until judgment, he is subject to prejudgment
interest under Mass. Gen. Laws ch. 231, § 6B. And because the
Massachusetts rate (twelve percent) exceeds the current federal
rate (three percent), the IRS has had no cause to oppose Schussel's
position that Massachusetts interest rules also apply to the period
between the Notice and the judgment. See Mass. Gen. Laws ch. 231,
§ 6B; 26 U.S.C. §§ 6601(a), 6621; IRS Rev. Rul. 2014-11.
Accordingly, on remand in this particular case, the "simple rule"
stated above should control for the entire prejudgment time period,
-23-
with any prejudgment interest assessed above the amount transferred
calculated at the Massachusetts rate from the date of the Notice.
B. How Much Did DCI Transfer to Schussel?
We turn next to divining the size of the transfer.
Schussel argues first that that amount is $7,358,394, which is the
amount the IRS determined he received as constructive dividends
from DCI when the IRS corrected his personal tax returns for
1993-1995. In the alternative, he argues that the amount should be
$8,923,329--the amount identified in the Notice of transferee
liability (and adopted by the tax court). The IRS did not
cross-appeal, but claims (apparently as an alternate basis for
affirmance) that the record shows that over the life of the scheme,
Schussel used DCI to divert over $15 million to himself (not just
the $8.9 million listed in the Notice).
Addressing first Schussel's arguments for limiting the
amount deemed to have been fraudulently transferred to him to $7.3
million, we agree with the tax court that the constructive
dividends determination is not controlling. Schussel concedes that
the $8.9 million figure represents the amount of DCI's gross
receipts diverted from 1993 to 1997 into accounts that he
controlled. And on appeal, Schussel offers no sufficient
explanation for why the amount of his constructive dividend income
is also the correct measure of assets fraudulently transferred
-24-
under Massachusetts law.20 Accordingly, we see no error in the tax
court's decision to accept as a proper measure of the assets he
received during 1993-1997 the actual amount transferred from DCI
into Schussel-controlled accounts as stipulated by the parties.
We turn next to the IRS's argument for increasing the
amount deemed to have been transferred by DCI to Schussel. The IRS
argues that there is record evidence demonstrating that, in
addition to the $8,923,329 transferred in 1993-1997, DCI also
diverted roughly $6 million more to Schussel (largely comprised of
amounts transferred to him before 1993.) Assuming that these
transfers were also made with fraudulent intent, Massachusetts law
renders all of the money available to pay both prior and subsequent
claims. See David v. Zilah, 325 Mass. 252, 256 (1950). Therefore,
the IRS asks us to conclude that the amount transferred to Schussel
was roughly $15 million.
The IRS's argument for using this increased figure
confronts a nettlesome problem of notice and procedure--namely that
20
Schussel argues that the IRS took DCI's unreported income
and then made "adjustments" to that amount to calculate the
adjusted "dividend income" it attributed to him and his wife. The
only such adjustment that Schussel describes on appeal is for money
paid to Ronald Gomes. The record suggests Schussel gave Gomes that
money to keep him happy with the cash-diversion arrangement and so
Schussel may well be ineligible to claim credit for those payments.
See generally Northborough Nat'l Bank v. Risley, 384 Mass. 348,
350-51 (1981). In addition, more than $450,000 of the discrepancy
appears to relate to assets transferred in 1996, which naturally
would not appear on the Schussels' income tax adjustments for
1993-1995.
-25-
the IRS never (it seems) sought to amend its Notice of Liability or
other pleadings to clearly warn Schussel that it would seek to use
the $15 million figure. Cf. 26 U.S.C. § 6214(a) (granting the tax
court jurisdiction to determine increases in deficiencies asserted
at or before a hearing or rehearing); U.S. Tax Ct. R. 41
(specifying the procedure, much like Fed. R. Civ. P. 15, for
amending pleadings). The Notice assured him that his liability was
limited to $8,923,329 plus interest as provided by law. When
Schussel filed his petition with the tax court challenging the
liability imposed on him by the Notice, the IRS filed an answer,
largely affirming the position taken in the Notice, but referring
(without specific dollar amounts) to transfers dating back to 1988.
Apparently deciding (but not announcing) that it had
erred in its more limited initial approach, the IRS's pretrial
memorandum did indeed add allegations of additional transfers and
diversions (with dollar figures) dating back to 1985. At trial,
the IRS also offered evidence reflecting the alleged diversions
from 1985 on. Schussel, for his part, objected to this awkward
attempt to establish transfers in excess of those claimed in the
Notice, although he failed to identify any prejudice the shift had
caused him. In reply, the IRS asserted that it was not seeking,
and need not seek, an increased deficiency (because DCI's
underlying tax deficiency was the same as it has always been); it
then simply asserted that it had amply proved the greater amount of
-26-
assets transferred to Schussel. The tax court never clearly
addressed the issue, possibly because, by accepting the IRS's
theory of prejudgment interest, the court pretty much affirmed a
recovery that equaled the taxpayer-transferor's entire tax
liability.
On appeal, the IRS again pays scant attention to the
procedural niceties. Rather, it simply asserts that it proved
transfers in the larger amount. Maybe so, but that is hardly the
point. The point is that the record available to us on appeal
contains neither a notice of liability, nor an amendment, nor a
ruling under Tax Court Rule 41(b) that could provide a basis for
affirming the decision of the tax court on the alternative $15
million figure now urged by the IRS. Cf. O'Rourke v. Comm'r, 73
T.C.M. (CCH) 2443 (1997) (explaining that the tax court cannot
generally determine a greater deficiency than that listed in the
Notice where the IRS has not pleaded such an increase); U.S. Tax
Ct. R. 41. We therefore leave this entire question (i.e., whether
the tax court may or should accept a belated motion to amend or
consider any other available relief) to the discretion of the tax
court on remand.
C. Schussel's Loans to DCI to Pay Schussel's Litigation Expenses
Did Not Reduce the Net Amount Transferred to Him.
Generally, a fraudulent transferee can reduce or
eliminate his liability by returning the property to the original
transferor before he receives a notice of transferee liability.
-27-
See Eyler v. Comm'r, 760 F.2d 1129, 1134 (11th Cir. 1985); Ginsberg
v. Comm'r, 35 T.C. 1148, 1155-56 (1961), aff'd, 305 F.2d 664 (2d
Cir. 1962); 14A Mertens Law of Federal Income Taxation § 53:11
(Thompson Reuters/West 2014).21
Even if there is no actual retransfer, a transferee might
reduce his liability by showing that he used the property to pay
the transferor's debts (at least if those debts had priority over
the transferor's tax liability). See, e.g., Eyler v. Comm'r, 53
T.C.M. (CCH) 308 (1987) and cases cited therein; 14A Mertens Law of
Federal Income Taxation § 53:11 ("While a transferee who pays the
debts of the transferor will not be relieved of liability to the
extent of payment unless the debts paid held priority over the tax
claimed by the Government, a transferee . . . [who] retransfers the
property to the transferor can avoid liability as a fraudulent
transferee.").
With these principles in mind, we turn to Schussel's
claim that the tax court erred in denying him credit for just over
21
Neither side addressed whether state or federal law
controls this question, or cited to any Massachusetts law on point.
Because it implicates the extent of transferee liability, we are
inclined to conclude that under Stern, Massachusetts law controls.
See Griffin v. Comm'r, 74 T.C.M. (CCH) 433 n.17 (1997). As neither
party has pressed such a position, however, we follow their lead,
noting that the result would likely be the same in any event. Cf.
Northborough Nat'l Bank v. Risley, 384 Mass. 348, 350-51 (1981);
Modin v. Hanron, 346 Mass. 629, 631 (1964); Richman v. Leiser, 18
Mass. App. Ct. 308, 314 (1984).
-28-
$2 million that he "loaned" to DCI between 2001 and 2010.22 Most
of that money was used to pay expenses relating to Schussel's own
criminal and civil tax cases. Schussel argues that his legal costs
were properly deductible as business expenses, suggesting that
there is no irregularity in DCI paying them, and hence in his
giving DCI money to do so. The IRS objects that these were loans,
not retransfers, and that the only point of the loans was to let
Schussel count personal expenses as DCI expenses and maximize his
tax deductions. Although the IRS bears the burden of proof in
transferee liability cases, see 26 U.S.C. § 6902(a), Schussel bore
the burden "of going forward with the evidence . . . to refute
transferee liability once the . . . [IRS] made a prima facie
showing of such liability." Eyler, 53 T.C.M. (CCH) 308 (citation
omitted).
The tax court, siding with the IRS, evidently found that
the "loan" transactions lacked economic substance. It found that
DCI was out of business when the loans were made, "had nothing to
gain or lose by defending or not defending the charges," and never
contested the tax deficiency. Schussel v. Comm'r, 105 T.C.M. (CCH)
1223, at *7-8 (2013). It held that "[t]he amounts loaned to the
corporation were never available to pay its tax liabilities." Id.
at *7. The tax court declined to address Schussel's arguments
22
Schussel transferred $2,141,786 to DCI between 2000 and
2010, of which $75,000 was repaid in 2004, leaving a net "loan" to
DCI of $2,066,786.
-29-
about whether the claimed expenses were deductible to either
Schussel or DCI, or to apportion them between the two, deciding
"only whether loans by petitioner to the corporation should reduce
the transfer liabilities in issue;" it noted, however, that
"recording loans to a defunct entity, paying expenses and deducting
them on an S corporation return, and passing through the resulting
losses to petitioner's personal income tax returns was simply a way
to create the appearance that personal expenses were business
expenses." Id. at *7-8. "In any event," the court noted, Schussel
was bound by the contemporaneous characterization of these
transactions as loans. Id. at *8. "In sum," the court found
unjustified by "law or reason" the idea that Schussel's "liability
as a transferee for corporate income taxes that he caused to be
evaded should be reduced by the costs of defending himself from the
consequences of his fraud." Id.
Schussel objects to the tax court's findings and
conclusions on only two grounds. First, he attacks the court's
observation that nothing in "law or reason" justified reducing
Schussel's liability by the amount of his own legal fees. Not so,
Schussel contends: precedent makes clear that legal defense costs
related to one's business may be deductible as a business expense.
See, e.g., Comm'r v. Tellier, 383 U.S. 687 (1966). While true,
this helps him little. We view the tax court's remark as a passing
comment upon the equities of the case--not as holding that
-30-
Schussel's suit-related expenses were per se nondeductible. This
is especially clear in light of the tax court's explicit refusal to
decide the deductibility question. This passing comment affords no
basis for reversal.
Second, Schussel takes aim at the tax court's conclusion
that the loaned funds were never available to pay DCI's tax bill,
and its resulting refusal to apportion those expenses. Regardless
of how the transfers were recorded on the corporate books, he
argues, they put cash in DCI's accounts (or really, on its ledgers)
which was then available to pay DCI's debts. Reading the court's
analysis as a whole, however, we think that it justifiably
concluded that there was no meaningful retransfer.
Viewed through the lens of federal tax doctrine (which
the parties more or less invite by failing to cite any non-federal
authority on point), the result is justified by the power to
disregard the form of transactions that have no business purpose or
economic substance beyond tax evasion. See Fidelity Int'l Currency
Advisor A Fund, LLC ex rel. Tax Matters Partner v. United States,
661 F.3d 667, 670 (1st Cir. 2011) ("Tax considerations are
permissibly taken into account by taxpayers . . . but where a
transaction has no economic purpose other than to reduce taxes, the
IRS may disregard the reported figures as fictions and look through
to the underlying substance."). Why else would the tax court
specify that the services paid for were rendered to Schussel
-31-
personally, or that DCI was out of business and had nothing to gain
by defending the charges, before concluding that the loans were
"not available" to pay DCI's debts? (We note that Schussel offers
no challenge to those first two findings.) It thus appears that
the tax court found no economic substance or business purpose for
DCI in the loans, and that their only function was to manipulate
tax liability.23 Cf. Bergersen v. Comm'r, 109 F.3d 56, 60 (1st Cir.
1997) (declining to credit the characterization of purported loans
from a company to stakeholders, and instead treating them as
dividends, where the effect of the whole transaction was to give
the taxpayers "permanent tax-free control over the moneys" and
repayment of the loans amounted to "a meaningless exchange of
checks." (internal quotation marks omitted)). We see no basis for
disturbing the tax court's ruling on this point.
IV. Conclusion
For the foregoing reasons, the judgment of the tax court
is affirmed in part and reversed in part, and the matter is
remanded for further proceedings consistent with this opinion. No
costs are awarded.
23
Thus, this case differs from one in which a transferee
might give the transferor general funds which were then paid out to
other creditors. When there is a genuine retransfer, the use to
which those funds are then put by the original transferor does not
bear on the liability of the original transferee.
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