*578 transferee to the extent of the value of the assets received from Rocky Mountain. OPINION
I. Transferee Liability
The first issue in this case is whether petitioner is a transferee at law or in equity of Rocky Mountain so as to make it liable for any part or all of the tax, additions to tax, and interest owed by Rocky Mountain. Section 6901(a) provides a method of collection of taxes from a transferee of property of a taxpayer who is liable at law or in equity for the indebtedness of the transferor. Whether a transferee of property is liable for the transferor's indebtedness is decided under the laws of the state in which the transfers of property occurred. Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 45 (1958).
Section 6902(a) provides that, in proceedings before this Court, respondent has the burden of proving that a taxpayer is liable as a transferee of property of a taxpayer. Sec. 6902(a); Rule 142(d). Petitioner has the burden of proving that the transferor is not liable for the tax. Sec. 6902(a); Rule 142(d).
In the instant case, the parties do not agree that the transfers took place in Missouri. Respondent's theory of transferee liability is founded upon two sets of transactions. The first is the transfer of three checks to petitioner and the second is the capital improvements that were made to the Kehrs Mill Road property. Petitioner argues that, as the three checks were payable to Escrow and were then endorsed "Pay to the order of Royal Bank of Canada," which was located in Grand Bahama, it is just as likely that the transfers took place in Grand Bahama as it is that they took place in Missouri. Thus, petitioner contends that Morris could have written the checks on the Rocky Mountain account while in Grand Bahama.
We find that the transfers took place in Missouri. The State of incorporation of the transferor, Rocky Mountain, was Missouri and the three checks upon which transferee liability is based were drawn on Rocky Mountain's account which was located in Missouri.
Mo. Ann. Stat. sec. 428.020 (Vernon 1952) provides:
Every conveyance or assignment in writing, or otherwise, of any estate or interest in lands, or in goods and chattels, or in things in action, or of any rents and profits issuing therefrom, and every charge upon lands, goods or things in action, or upon the rents and profits thereof, and every bond, suit, judgment, decree or execution, made or contrived with the intent to hinder, delay or defraud creditors of their lawful actions, damages, forfeitures, debts or demands, or to defraud or deceive those who shall purchase the same lands, tenements or hereditaments, or any rent, profit or commodity issuing out of them, shall be from henceforth deemed and taken, as against said creditors and purchasers, prior and subsequent, to be clearly and utterly void.
The law of Missouri, specifically section 428.020 as it applies in transferee liability cases, was set forth in Bartmer Automatic Self Service Laundry, Inc. v. Commissioner, 35 T.C. 317">35 T.C. 317, 322 (1960). In Bartmer, we held that
A prima facie case of transferee liability is established if the respondent succeeds in proving, by competent evidence (1) that assets were transferred to the alleged transferee without consideration or for inadequate consideration; (2) that the transferor was insolvent or the transfer left the transferor insolvent or the transfer was a "purely voluntary conveyance conceived and made with the intent of hindering, delaying, and defrauding" the Government; (3) that the assets transferred had value, and what that value was on the date of transfer; and (4) he has made every reasonable effort to collect the sums due.
In interpreting whether a taxpayer voluntarily conveyed property with the intent of hindering, delaying, and defrauding creditors, the courts of Missouri have recognized that it is difficult to establish "intent" under section 428.020 by direct proof. As a result, "intent" must be established by the facts and circumstances surrounding the parties. By this analysis, Missouri courts have recognized a number of indicia or "badges of fraud" which, in certain combinations, establish a strong inference of fraud. These "badges" of fraud are:
1) Conveyance to a near relative;
2) Conveyance in anticipation of suit;
3) A transfer of all or nearly all of a debtor's property;
4) Insolvency;
5) Inadequate consideration;
6) Unusual clauses in instruments or unusual methods of transacting business;
7) Retention of possession by the debtor; and
8) The failure to produce abutting evidence when the circumstances surrounding the transfer are suspicious.
See Allison v. Mildred, 307 S.W.2d 447">307 S.W.2d 447 (Mo. 1957); Conrad v. Diehl, 344 Mo. 811">344 Mo. 811, 129 S.W.2d 870">129 S.W.2d 870 (1939); Thomas v. Shoots, 651 S.W.2d 663">651 S.W.2d 663, 665 (Mo. App. 1983); Morris v. Holland, 529 S.W.2d 948">529 S.W.2d 948 (Mo. App. 1975).
In this analysis, certain "badges" carry more weight than others. While none of the "badges" alone establishes fraud, a concurrence of several of the "badges" raises a presumption of fraud. Cohoon v. Cohoon, 627 S.W.2d 304">627 S.W.2d 304, 307 (Mo. App. 1981).
Pursuant to Commissioner v. Stern, supra, in order to impose transferee liability at law or in equity, the Federal statute, section 6901, must be satisfied as well as any test under State law. Therefore, before we decide the existence of petitioner's liability under Missouri law, we must address petitioner's arguments with respect to what transfers liability attaches to under section 6901. Petitioner has raised two arguments with respect to its liability as a transferee under section 6901.
A. Time of Liability
Petitioner contends that it cannot be a transferee with respect to the $ 30,000 check dated December 18, 1981, because such a transfer was prior to the accrual of the tax liability for Rocky Mountain's taxable years ending May 31, 1983, and May 31, 1984, the taxable years in issue.
Section 6901 provides a method of collecting from a transferee amounts owed for the tax deficiencies of the transferor. For transferee liability to exist under section 6901, however, there must be a transfer of assets which was made during or after the period for which the liability for the debt accrued. Commissioner v. Southern Bell Telephone & Telegraph Co., 102 F.2d 397">102 F.2d 397, 401 (6th Cir. 1939), affg. 34 B.T.A. 540">34 B.T.A. 540 (1936); Kean, Transferee v. Commissioner, 91 T.C. 575">91 T.C. 575, 603 (1988).
The tax liability of the transferor, Rocky Mountain, is for the taxable years ending May 31, 1983, and May 31, 1984. Thus, the earliest date at which transferee liability could accrue against petitioner is June 1, 1982, the beginning date of Rocky Mountain's taxable year ending on May 31, 1983. The transfers in question were made from December 18, 1981, through September 1983. With respect to the transfers made on or after June 1, 1982, transferee liability exists under section 6901 because the transfer of assets was made during the period for which the liability for the debt accrued. Leach v. Commissioner, 21 T.C. 70 (1953); Wyche v. Commissioner, 36 B.T.A. 414">36 B.T.A. 414 (1937). Check number 104 was cancelled by the bank on January 18, 1982. Therefore, it was transferred before the beginning of the period. This transfer cannot result in transferee liability against petitioner. The other checks were written and transferred to petitioner after June 1, 1982.
Respondent, however, contends fraud is provable by evidence that the actual transfers of property in dispute were part of a series of transfers or a comprehensive plan by the transferor to defraud his creditors. He cites Harrison v. Harrison, 339 S.W.2d 509 (Mo. App. 1960), in support of this argument.
We do not dispute respondent's argument that a single transfer as well as a series of transfers could be found to be fraudulent pursuant to section 428.020. Pursuant to section 6901 however, there must be a transfer of property during or after the period for which the liability for the debt accrued. In Harrison and the cases cited therein, section 6901 was not at issue and a judgment or liability existed prior to the series of transfers. We do not have that situation in the instant case. B. Transfers of Property
The next issue for our decision is whether Rocky Mountain transferred property to petitioner within the meaning of section 6901(a)(1)(A) with respect to the capital improvements which Rocky Mountain paid for with respect to the Kehrs Mill Road property.
Petitioner contends that respondent has failed to prove that there was a transfer to petitioner because petitioner, although it held legal title to the property, was not the beneficial owner. Respondent contends that many fraudulent conveyances constitute conveyances in which the transferee does not acquire beneficial ownership of the assets transferred, citing United States v. Jones, 631 F. Supp. 57">631 F.Supp. 57 (W.D. Mo. 1986), in support of his argument.
We do not disagree with respondent's position. However, this principle is not applicable to cases involving transferee liability and indeed, respondent has not cited any cases involving transferee liability in support of his position.
Although the law of the state where the transfers occurred governs the substantive aspects of transferee liability, the principles of section 6901 may be applied to eliminate, enlarge, or diminish transferee liability. Commissioner v. Stern, supra.Pursuant tosection 6901, a transferee of property who receives no beneficial ownership interest in the transferred property cannot be held liable for the unpaid tax of the transferor. Tomfohr v. Commissioner, 44 B.T.A. 730">44 B.T.A. 730 (1941).
Morris and Judith transferred legal title to the Kehrs Mill Road property to petitioner in 1977 without any intention of passing beneficial ownership. This transfer of property is not at issue in the instant case. Morris retained beneficial ownership of the property and subsequently constructed a house on this property. During the years in issue, improvements were made to this property by Morris and paid for by Rocky Mountain. There is no evidence that petitioner had any interest in the property or the improvements other than as legal titleholder. Although naked legal title was in petitioner, Morris had the right and did direct how the property was to be used. Commissioner v. Southern Bell Telephone & Telegraph Co., supra.As a result, there can be no transferee liability with respect to the improvements made to the Kehrs Mill Road property.
C. State Law
The final issue for our decision is whether Rocky Mountain, in transferring the two checks to petitioner, was fraudulent under the Missouri Fraudulent Conveyances statute section 428.020. Mo. Ann. Stat. sec. 428.020 (Vernon 1952). Having held above that the transfer of check number 104 for $ 30,000 is not subject to transferee liability and the improvements to the Kehrs Mill Road property are not subject to transferee liability, we are left with deciding the fate of the two transfers of checks totaling $ 69,600.
Turning to the application of section 428.020 to the instant case, we find that the transfers in question exhibit many of the "badges of fraud" raising a presumption of fraud. With respect to the consideration for the transfers made by Rocky Mountain to petitioner, petitioner contends that the transfers of the three checks to petitioner were repayments of loans which Michael made to Morris to enable Morris to construct a home on the Kehrs Mill Road property. However, petitioner has not brought forth any evidence substantiating the existence of these alleged loans.
Petitioner argues, on brief, many facts regarding these loans which we are unable to glean from the record. In his arguments, petitioner relies upon the testimony of Michael J. Ebeling to establish the existence of the loans.
During trial, the only evidence presented on behalf of petitioner was Michael's uncorroborated testimony. However, based upon inconsistencies in his testimony, we do not find Michael to be a credible witness. Michael did not explain his use or his wife's use of aliases in signing documents. He testified that he had no concept of Rocky Mountain or its operations prior to this trial, yet the exhibits show that he signed documents on behalf of Rocky Mountain as its president. Furthermore, Michael, using the alias "M. Jerome," falsely represented to the Internal Revenue Service that a tax return for Rocky Mountain for the taxable year ending May 31, 1983, had been filed. These inconsistencies combined with the fact that Michael had previously pled guilty to the felony charge of making and subscribing a false corporate return for petitioner for the 1985 taxable year cast a grave shadow of doubt over his credibility.
Petitioner also relies upon a contract for deed between petitioner and Morris and Judith as evidence of the existence of the loans. However, the contract for deed reflects the fact that legal title to the Kehrs Mill Road property was to be conveyed from Morris and Judith to petitioner. It does not prove the existence of any loans made by Michael to Morris. The contract for deed merely recites that Michael and Peggy "contemplate advancing the money as per need above [reference to construction of a home on the Kehrs Mill Road property]" to Morris and Judith. We are left with a complete absence of proof as to the existence of any loans other than the fact that Michael and Peggy are contemplating advancing monies. Furthermore, the contract for deed speaks in terms of "advancing" money subsequent to February 4, 1977, the date of the contract for deed. Michael testified, however, that amounts had been transferred to Morris in 1976. Based upon these facts, we cannot say that the contract for deed is evidence of the existence of the loans.
Petitioner attaches significance to the fact that respondent, in his audit work papers, treated the three checks as constructive dividends to Morris. In addition, petitioner makes light of the fact that a 1979 Internal Revenue Service report concluded that Michael had lent Morris $ 103,000. However, these facts are irrelevant as they do not establish the existence of any loans in the instant case. There was no consideration for the transfers made by Rocky Mountain to petitioner.
Rocky Mountain was formed in 1981 and Morris was the incorporator and president. Rocky Mountain's first taxable year ended May 31, 1982, and it filed a corporate income tax return for that year signed by Morris reflecting a loss of $ 4,441. This loss is the result of an interest expense deduction claimed in the amount of $ 247,558. An examination of the balance sheet attached to the 1982 return does not reflect any liability which would justify an interest expense deduction of that amount. Morris, who was an attorney at that time, should have been aware of the imminent administrative and judicial efforts by the Internal Revenue Service to collect any taxes due from Rocky Mountain as a result of filing such a return. Subsequent to filing its 1982 return, two payments were made by Rocky Mountain to petitioner in the amount of $ 69,600.
Michael was president and sole shareholder of petitioner, Security Counselors, Inc. During 1981, Rocky Mountain purchased the Sun Valley condominium for $ 250,000. Through a series of transactions in which Morris transferred $ 135,000 to the Escrow Account in Grand Bahama, Michael thereafter drew and endorsed a cashier's check in the amount of $ 130,000 from this account as part payment for the Sun Valley condominium.
No tax returns were filed by Rocky Mountain for the taxable years ending May 31, 1983, and May 31, 1984. In December of 1983, a form was sent by the Internal Revenue Service requesting information with regard to Rocky Mountain's failure to file a tax return for the taxable year ending May 31, 1983. In response to this form, "M. Jerome," as president of Rocky Mountain, responded that the tax return had been filed and that Rocky Mountain had no tax liability for that year. The response also advised the Internal Revenue Service of the change in address of Rocky Mountain from Missouri to Grand Bahama.
Rocky Mountain transferred, by two separate checks written by Morris on Rocky Mountain's Clayton Metro Account, $ 69,600 to the Escrow Account. Michael or Peggy endorsed each check with their alias "M. Jerome" or "Berniece Hodges." These checks totaling $ 69,600 were then transferred to petitioner.
On August 29, 1983, a deed of trust was executed between petitioner and Escrow with respect to the Kehrs Mill Road property, which encumbered this property to the extent of $ 710,000. Michael testified that there was in fact no debt underlying this deed of trust. Petitioner has not provided any believable explanation as to why this deed of trust was executed.
On September 5, 1983, "M. Jerome" as president and "B. Hodges" as secretary of Rocky Mountain executed and filed a warranty deed which transferred ownership of the Sun Valley condominium from Rocky Mountain to International, a Bahamian corporation of which Michael was president. The warranty deed was executed before a notary public in Grand Bahama and reflected that on September 5, 1983, "Personally appeared M. Jerome and B. Hodges, known to me to be President and Secretary of the corporation that executed this instrument."
"M. Jerome" is Michael and "B. Hodges" is his wife Peggy. The Clayton Metro Account was closed out on October 3, 1983, with a miscellaneous credit memo in the amount of $ 3.93.
Based upon the above facts, we have found that the conveyance of the two checks totaling $ 69,600 was made between relatives for no consideration in anticipation of administrative and judicial action by the United States. In addition, the unexplained use of aliases, the illusory deed of trust, the transfer of $ 69,600 by Rocky Mountain through Escrow to petitioner, and the unusual connections between Michael, Morris, petitioner, Rocky Mountain, Escrow, and International are not only unusual methods of conducting business, but are unexplained by petitioner.
We, therefore, find that the transfers of the two checks in the amount of $ 69,600 were purely voluntary conveyances conceived and made with the intent of hindering, delaying, and defrauding the Government in its efforts to collect the deficiencies of Rocky Mountain, and were, therefore, void under Missouri law. As a result, respondent need not prove the insolvency of Rocky Mountain at the time of the transfers. Bartmer Automatic Self Service Laundry, Inc. v. Commissioner, supra at 324.
The parties do not dispute what the value of the assets was on the date of the transfer. Therefore, the final issue in deciding whether petitioner is liable as a transferee is whether respondent has made every reasonable effort to collect the sums due from Rocky Mountain before proceeding against petitioner as transferee.
Petitioner contends that the Sun Valley condominium was conveyed to International by a deed dated September 5, 1983, and was not recorded until October 7, 1983. Thus, the Sun Valley condominium could have been levied upon by respondent to satisfy Rocky Mountain's liabilities until that date.
Rocky Mountain's corporate income tax return for the taxable year ending May 31, 1983, was due on August 15, 1983. This return and the return for the taxable year ending May 31, 1984, were never filed. When the Internal Revenue Service inquired as to the existence of the 1983 return, Michael, acting as president of Rocky Mountain, replied that no tax was due and such return had been filed. Furthermore, on Rocky Mountain's corporate return for the taxable year ending May 31, 1982, Rocky Mountain failed to list the Sun Valley condominium as an asset. On January 28, 1986, the Commissioner mailed a Notice of Jeopardy Assessment and Right of Appeal to Rocky Mountain. A statutory notice of deficiency was mailed to Rocky Mountain on March 20, 1986. In light of these facts, we find that respondent made every reasonable effort to collect the sums due from Rocky Mountain before proceeding against petitioner as transferee.
II. Tax Liability of Rocky Mountain
We must next decide whether Rocky Mountain is liable for the unpaid Federal income taxes, additions to tax, and interest for its taxable years ending May 31, 1983, and May 31, 1984. The burden of proof is on petitioner to prove that the transferor, Rocky Mountain, is not liable for the tax. Sec. 6902(a); Rule 142(d).
Rocky Mountain failed to file corporate tax returns for the taxable years ending May 31, 1983, and May 31, 1984. In the statutory notice of deficiency mailed to Rocky Mountain, the Commissioner determined that Rocky Mountain had "Income from Sale of Tax Shelters" for the taxable years ending May 31, 1983, and May 31, 1984, in the amounts of $ 261,218.32 and $ 78,589.16. These amounts were determined based upon an analysis of Rocky Mountain's deposits into the Clayton Metro Account and the Elkhorn Time Share Fund. These deposits were classified as follows:
In addition, the Commissioner determined "Other Income - Norman W. Olsen" in the amount of $ 13,900 for the taxable year ending May 31, 1984. The Commissioner allowed deductions of $ 825.14 and $ 66.50 for the taxable years ending May 31, 1983, and May 31, 1984, for substantiated real estate taxes paid on the Sun Valley condominium. As a result, the Commissioner determined deficiencies in Rocky Mountain's Federal income tax for the taxable years ending May 31, 1983, and May 31, 1984, in the amounts of $ 99,824.01 and $ 22,719.06. Petitioner raises four arguments with respect to respondent's adjustments.
Petitioner first contends that the transactions entered into between Rocky Mountain and the investors are sales of the time share interests and, as a result, Rocky Mountain should be allowed to report, as principal, the down payments and interest under the installment method pursuant to section 453. Alternatively, petitioner contends that if the transactions were not sales, they should be treated as leases and Rocky Mountain should be allowed depreciation on the Sun Valley condominium.
During the years 1981 through 1983, Rocky Mountain sold 52, 1/50 interests in the Sun Valley condominium. The real estate contracts entered into between Rocky Mountain and the investors did not create a present obligation on Rocky Mountain to execute and deliver a deed to the investor of the time share interest or the Association. Under each real estate contract, the Association acquired legal title to the time share units upon payment in full of the real estate contract. Absent prepayment, this would occur 30 years from the date of the alleged sale. There was no transfer of equitable title as the real estate contracts were never recorded in the State of Idaho with the Blaine County registrar of deeds.
However, we do not believe that title would ever pass. At least three of the investors entered into an Agreement to Foreclose. This Agreement provided that, in return for $ 10, Rocky Mountain would satisfy the outstanding liability of the defaulting investor solely by foreclosure against that investor's time share or time shares. Thus, this Agreement allowed an investor to walk away from the real estate contract at any time with no liability.
Petitioner contends that the obligations of the other investors were apparently full recourse obligations as respondent has failed to bring forth evidence of their existence. However, the burden is on petitioner to establish that the transferor, Rocky Mountain, is not liable for the tax, additions to tax, and interest for the respective years. Petitioner has failed to bring forth any evidence on this issue.
Each of the 34 investors agreed to pay $ 407,688.96 for a 1-week time share interest in a condominium that was purchased for $ 250,000. Of this total purchase price for a 1-week time share interest, $ 380,938.96 constituted a balloon payment that was to be made in the thirtieth year. The Agreement allowed each investor to walk away from the transaction having taken full advantage of the five-to-one write-off. Without more evidence, it is impossible for us to believe that any investor would not sign an Agreement upon the purchase of a time share interest.
Furthermore, on September 5, 1983, Rocky Mountain transferred title of the Sun Valley condominium to International. On March 31, 1986, International transferred title of the condominium to Pacific Rim Holdings, Ltd. The real estate contracts for the time share interests were not amended in any way reflecting this change in ownership. These contracts specifically provide that Rocky Mountain will transfer legal title to the Sun Valley condominium to the Association at the end of the 30-year financing period. Rocky Mountain no longer holds legal title to such property.
Rocky Mountain paid real estate taxes of $ 825.14 and $ 66.50 with respect to the Sun Valley condominium for the taxable years ending May 31, 1983, and May 31, 1984.
Consistent with this analysis, we conclude that the transactions entered into between Rocky Mountain and the investors were not sales of time share interests. Therefore, there was no "disposition of property" pursuant to section 453(a) and, accordingly, the funds received by Rocky Mountain for the purchase of time share interests are properly characterized as gross income under section 61 in the taxable year received.
Petitioner's alternative argument that Rocky Mountain should be allowed depreciation on the Sun Valley condominium is also without merit. We have found as a fact that Rocky Mountain purchased the condominium in December 1981. It claimed no deduction for depreciation for its taxable year ending May 31, 1982. It transferred title to International on September 5, 1983. There is no evidence as to when the Sun Valley condominium was first placed in use in connection with the sale of time share interests. Petitioner has not requested a finding as to the amount of depreciation to which Rocky Mountain would be entitled. The record is insufficient to allow a deduction for depreciation.
Petitioner's second argument is that respondent erred in not allowing any deduction for various ordinary and necessary business expenses incurred by Rocky Mountain in connection with maintaining and operating the Sun Valley condominium pursuant to section 162. Petitioner relies upon a revenue agent's report regarding Rocky Mountain to prove that expenses were incurred. The revenue agent's report is not evidence that any expenses were incurred. Petitioner has failed in its burden of proof.
Thirdly, petitioner contends that the payments made by Rocky Mountain to Morris should be treated as compensation and, therefore, deductible by Rocky Mountain. Payments are deductible as compensation if, at the time the payments were made, the payments were intended to be compensation. Paula Construction Co. v. Commissioner, 58 T.C. 1055">58 T.C. 1055, 1058 (1972), affd. without published opinion 474 F.2d 1345">474 F.2d 1345 (5th Cir. 1973); Electric & Neon, Inc. v. Commissioner, 56 T.C. 1324">56 T.C. 1324, 1340 (1971), affd. without published opinion 496 F.2d 876">496 F.2d 876 (5th Cir. 1974). Whether such intent existed at the time the payments were made is a factual question to be decided on the basis of the evidence presented. Paula Construction Co. v. Commissioner, 58 T.C. at 1059; Electric & Neon, Inc. v. Commissioner, 56 T.C. at 1340. Petitioner has not brought forth any evidence whatsoever supporting the conclusion that the amounts which were expended for Morris' benefit were intended by Rocky Mountain to be treated as compensation.
Petitioner's final argument is that Rocky Mountain should be allowed depreciation for furniture purchased for use in the Sun Valley condominium. Petitioner has not, however, demonstrated the furniture was "used" in the Sun Valley condominium subsequent to its purchase. Sec. 168(c)(1). Although petitioner has brought forth evidence regarding the purchase of the furniture, petitioner has failed to prove by testimony or by documentary evidence that the furniture was actually used in its trade or business in the Sun Valley condominium. As a result, petitioner's argument is without merit.
Petitioner does not contest the additions to tax as determined against Rocky Mountain. They are, therefore, sustained.
We have held above that only the two checks transferred to petitioner ($ 69,600) are subject to transferee liability. We have also held that the Commissioner correctly determined the Federal income tax and additions to tax of Rocky Mountain, the transferor, which exceeds the $ 69,600 total of the two checks. A decision will, therefore, be entered in favor of respondent in the amount of $ 69,600.