1993Tax Ct. Memo LEXIS264">*264 Decision will be entered under Rule 155.
For petitioner: James P. Knight, Jr., and James T. Knight.
For respondent: Helen C. T. Smith.
PARKER
PARKER
MEMORANDUM FINDINGS OF FACT AND OPINION
PARKER, Judge: Pursuant to a notice of transferee liability, respondent determined that petitioner is liable for unpaid Federal income taxes in the amount of $ 291,645, plus interest, as the transferee of assets of James Williamson (James) and Vera Williamson (Vera). James and Vera are sometimes hereinafter referred to as the transferors.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
After concessions, and the holding by this Court that the transferors are liable for deficiencies and additions to tax for the years 1980, 1981, and 1982, Williamson v. Commissioner, T.C. Memo. 1993-246, the only issues remaining to be decided by the Court are:
(1) Whether petitioner is liable as the transferee of assets of James and Vera Williamson under Mississippi State law and section 6901; and
(2) If so, whether petitioner1993Tax Ct. Memo LEXIS264">*265 is also liable for interest on his transferee liability and the extent of such liability for interest.
FINDINGS OF FACTS
Some of the facts have been stipulated and are so found. The stipulation and the exhibits attached thereto are incorporated herein by this reference.
Petitioner resided in Ethel, Mississippi, at the time he filed his petition in this case. Petitioner and James are twin brothers, and their residences are located across the road from each other. They have lived across the road from each other all of their adult lives.
The transferors and their son, Terry, were defendants in a criminal tax trial in August of 1988. Their attorneys' fees totaled $ 56,000, of which the transferors paid half and Terry paid half. The transferors paid the fees at the time they hired the attorneys to represent them, prior to their criminal trial. As of July 1988, the transferors had paid these fees and did not owe any attorneys' fees for any services provided to them in their criminal trial. The transferors had different lawyers who represented them in regard to their civil tax matters, and the record does not contain any information as to the fees for those legal services.
Deeds conveying the above properties were filed for record in the appropriate Mississippi Chancery Courts. At the time of the transfers, none of the properties was subject to a mortgage, deed of trust, or other encumbrance. At the time of the transfers, the value of the property received by petitioner from the transferors exceeded the value of the property he transferred to them by $ 175,400. 1993Tax Ct. Memo LEXIS264">*268 2. Assets of the Transferors Following the Transfers
At the time of the transfers, Vera owned a parcel of property in Carroll County, Mississippi, that she had purchased sometime between 1982 and 1984 for $ 3,300. She had purchased the property so that she could obtain a permit to buy and sell beer in Carroll County. She used the vacant building (an abandoned store) on the property to store small quantities of beer. At the time the other properties were transferred between petitioner and the transferors, this Carroll County property was appraised for tax purposes at $ 8,700.
Prior to July 12, 1988, the transferors held two certificates of deposit (CD's) from the Kosciusko branch of the Citizens National Bank of Meridian (Citizens Bank). The CD's had face values of $ 50,000 and $ 60,000, exclusive of interest. The transferors purchased the $ 50,000 CD on December 3, 1986. On May 5, 1987, Vera borrowed $ 26,000 at 8.5 percent interest from Citizens Bank. The loan was evidenced by a 1-year promissory note and secured by the $ 50,000 CD. When the note became due, it was renewed for an additional year and continued to be secured by the $ 50,000 CD. The transferors and1993Tax Ct. Memo LEXIS264">*269 Terry purchased the $ 60,000 CD on March 25, 1988.
On July 12, 1988, the transferors cashed the above two CD's. After the bank charged early withdrawal penalties, the proceeds from the CD's, including interest, totaled $ 108,484.63. A portion of the proceeds in the amount of $ 26,465.89 was applied to the payment of the promissory note and accrued interest then due to Citizens Bank. The remaining $ 82,018.74 was disbursed to the transferors in the form of a cashier's check payable to them. James cashed the cashier's check on July 28, 1988, at which time Citizens Bank filed a Currency Transaction Report (Form 4789).
The transferors maintained the following bank accounts in Citizens Bank: account number 680-413-2, held in the name of Williamson's Store; account number 383-074-0, jointly held by Vera and Lynn Williamson; account number 382-564-3, held in the name of Vera Steed; and account number 382-930-6, held in the name of Vera Williamson.
On July 12, 1988, Vera withdrew $ 47,219 from Citizens Bank (account number 382-564-3) and received a bank check in that amount. On July 13, 1988, Vera returned the bank check to Citizens Bank in exchange for another check in the amount1993Tax Ct. Memo LEXIS264">*270 of $ 47,000, plus $ 219 cash. The $ 47,000 check was cashed on July 26, 1988, at which time Citizens Bank filed a Currency Transaction Report (Form 4789).
The record does not indicate the balances in the Citizens Bank accounts on July 21, 1988. On August 25, 1988, however, in response to levies served upon it by the Internal Revenue Service (IRS), Citizens Bank paid $ 3,800 from account number 383-074-0, $ 276.35 from account number 382-930-6, and $ 5,089.15 from account number 680-413-2, for a total of $ 9,165.50.
Section 6901 neither creates nor defines a transferee's substantive liability but merely provides a procedure by which taxes owed by a transferor may be collected from the transferee. Commissioner v. Stern, 357U.S.39">357U.S.39, 357U.S.39">42-43 (1958); Phillips v. Commissioner, 283U.S.589">283 U.S. at 602. The existence and extent of a transferee's substantive liability, at law or in equity, is determined by State law. Commissioner v. Stern, 357U.S.39">357 U.S. at 44-45. Thus, State law determines the elements of liability, and section 6901 provides the remedy or procedure to be employed by respondent as the means of enforcing that1993Tax Ct. Memo LEXIS264">*281 liability. Ginsberg v. Commissioner, 305F.2d664">305F.2d664, 305F.2d664">667 (2d Cir. 1962), affg. 35T.C.1148">35T.C.1148 (1961). Respondent bears the burden of proving petitioner's liability as a transferee. Sec. 6902; Rule 142(d).
Because the transfers in this case took place in Mississippi, transferee liability must be established under Mississippi law. Adams v. Commissioner, 70T.C.373">70T.C.373, 70T.C.373">390 (1978), supplemental opinion 70T.C.446">70T.C.446 (1978), affd. without published opinion 688F.2d815">688F.2d815 (2d Cir. 1982). Section 15-3-3 of the Mississippi Code Annotated (1972, 1992 Supp.) provides that:
Every * * * conveyance of lands, * * * or of any rent, common or other profit or charge out of the same, * * * had or made and contrived of malice, fraud, covin, collusion, or guile, to the intent or purpose to delay, hinder, or defraud creditors of their just and lawful actions, suits, debts, accounts, damages, penalties, or forfeitures, * * * shall be deemed * * * to be clearly and utterly void; * * *.
This fraudulent conveyance provision does not "extend to creditors whose 1993Tax Ct. Memo LEXIS264">*282 debts were contracted after such fraudulent act, unless made with intent to defraud them". Miss. Code Ann. sec. 15-3-5 (1972). Deeds executed before the debtor-creditor relationship arose and not executed with intent to defraud the creditors in question are not fraudulent conveyances even if unsupported by any consideration. Morgan v. Sauls, 413So. 2d370">413So. 2d370, 413So. 2d370">374 (Miss. 1982).
The Mississippi statute is liberally construed in determining who is an existing creditor and encompasses creditors who have not obtained judgments at law. Allred v. Nesmith, 245Miss.376">245Miss.376, 149So. 2d29">149So. 2d29, 149So. 2d29">31 (1963). This Court and the United States Court of Appeals for the Fifth Circuit have held that income taxes become legally enforceable at the time fixed for filing the returns. Hagaman v. Commissioner, 100 T.C. , (1993); cf. In re Ripley, 926F.2d440">926F.2d440 (5th Cir. 1991). The transferors' returns for 1980, 1981, and 1982 were required to be filed in 1981, 1982, and 1983, long before July 21, 1988, the date of the transfers. Thus, the transferors' income taxes were due on the date1993Tax Ct. Memo LEXIS264">*283 of the transfers, and IRS was an existing creditor of the transferors on that date.
Mississippi law provides that the validity of a conveyance, as against existing creditors, depends upon its being supported by adequate consideration and being made in good faith. Miss. Code Ann. sec. 15-3-5 (1972). "Either is not sufficient; consideration without good faith plainly does not displace the operation of the statute; and good faith without consideration does not necessarily protect a conveyance." Blount v. Blount, 231Miss.398">231Miss.398, 231Miss.398">412-413, 95So. 2d545">95So. 2d545, 95So. 2d545">551-552 (1957). Therefore, a conveyance is void as to existing creditors if it is made either without good faith or without adequate consideration.
The Mississippi Supreme Court has applied the Uniform Fraudulent Conveyance Act (1918) (UFCA) to determine whether a conveyance is supported by adequate consideration. Barbee v. Pigott, 507So. 2d77">507So. 2d77, 507So. 2d77">84 (Miss. 1987). The Mississippi Supreme Court stated:
Fair consideration is given for property, or obligation,
(a) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good1993Tax Ct. Memo LEXIS264">*284 faith, property is conveyed or an antecedent debt is satisfied,
(b) When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.
Barbee v. Pigott, 507So. 2d77">507 So. 2d at 87 n.7 (quoting Unif. Fraudulent Conveyance Act sec. 3, 7A U.L.A. 448 (1918)). This requirement is satisfied if, based on all the surrounding circumstances, the consideration "fairly represents" the value of the property transferred. Id.
On the date of the transfers in this case, the property transferred from the transferors to petitioner had a fair market value of $ 207,000, and the property transferred from petitioner to the transferors (the Winston County property) had a fair market value of $ 31,600. There is support for petitioner's position that, under Mississippi law, an obligation to make future payments or perform future services may provide adequate consideration for a conveyance of property. Patterson v. Adams, 245So. 2d194">245So. 2d194, 245So. 2d194">197-198 (Miss. 1971). Even if we were to include the $ 20,0001993Tax Ct. Memo LEXIS264">*285 petitioner claims to have promised to contribute to the construction of a house on the Winston County property and some amount for the value of his purported future services in such construction, the value of the property petitioner transferred is still disproportionately small as compared with the value of the property he received from the transferors. See supra notes 2, 6. Thus, the conveyance was not supported by adequate consideration.
The Mississippi Supreme Court has held that a transfer of a substantial portion of a debtor's property for nominal consideration or by way of gift is presumptively fraudulent as to existing creditors. Odom v. Luehr, 85So. 2d218">85So. 2d218, 85So. 2d218">219 (Miss. 1956). In such case, the burden is on the transferee to rebut the presumption by showing that the debtor retained ample property sufficient to satisfy his then-existing legal liabilities. Id.
The fair market value of the five parcels of real property the transferors transferred to petitioner greatly exceeded the value of the property they received (or claim they expect to receive) from petitioner. The record indicates that the five parcels constituted a substantial1993Tax Ct. Memo LEXIS264">*286 portion of the transferors' total assets. Therefore, the conveyance to petitioner is presumptively fraudulent, and under Mississippi law, the burden is on the transferee to show that the transferors retained sufficient property to satisfy their tax liability.
Petitioner argues that this rebuttable presumption is a procedural matter in State law only, and that the Federal statute imposes the burden of proof on respondent to establish the insolvency of the transferors. We disagree. Respondent has the burden of proving transferee liability under applicable State law. Hagaman v. Commissioner, 100 T.C. at . Under Mississippi law respondent can prove that the conveyance was fraudulent without proving the insolvency of the transferors. Id. Therefore, unless petitioner demonstrates that the transferors retained sufficient assets to satisfy their tax liability, the conveyance of the property to petitioner is fraudulent with regard to IRS.
After transferring the five parcels of real property to petitioner, James and Vera owned the real property (the Winston County property) they received from petitioner, valued at $ 31,600, and the Carroll County property, valued for 1993Tax Ct. Memo LEXIS264">*287 property taxes at $ 8,700. Although petitioner argues that the value assigned to the Carroll County property is substantially below its fair market value, there is no evidence as to any greater fair market value. There is evidence that IRS would have received little in a tax sale of the Carroll County property, and therefore chose not to try to sell that undeveloped, rural land.
In addition to the real property, the transferors owned one or two automobiles, a pickup truck, and their household furniture. There is no evidence as to the value of these items. Vera owned 50 percent of the grocery store business, including the store inventory, receivables, and cash on hand, which items petitioner asserts had a combined value of $ 9,500 to $ 10,600. There is no probative evidence to sustain these figures. See supra note 4. The indication is that Terry and his wife took over operation of the store after July 21, 1988, and possibly even before that date. We find that the transferors did not retain sufficient assets to pay their tax liability including deficiencies, penalties, and interest.
Petitioner argues that the bank checks in the amounts of $ 82,018.75 and $ 47,000, payable1993Tax Ct. Memo LEXIS264">*288 to the order of James or Vera, should be included in the amount retained by them. The facts taken as a whole and the transferors' whole course of conduct demonstrate that the transferors intended to place a substantial portion of their property beyond respondent's reach and did not intend to make these funds available for the payment of their tax liability. Vera and James cashed in their CD's for these checks which were then cashed, and the record does not show what happened to that cash. Although there is no indication that this cash was transferred to petitioner and, therefore, it is not included in computing the extent of petitioner's transferee liability, nonetheless this missing cash cannot realistically be viewed as an asset retained by the transferors for payment of their tax liability. While the transferors denied that they were trying to place their assets beyond the reach of IRS, the Court is satisfied that that is exactly what they were doing.
Petitioner has not met his burden under Mississippi law of showing that the transferors retained sufficient assets to satisfy their tax liability. The transferors transferred the property to petitioner without adequate consideration. 1993Tax Ct. Memo LEXIS264">*289 Therefore, the conveyances were fraudulent as against IRS, an existing creditor.
Petitioner argues that "the transferee assessment" against petitioner is invalid because respondent failed to take adequate legal steps to collect first from the transferors. Petitioner cites no Mississippi statute or case law in support of this proposition.
Furthermore, when such requirement applies, respondent is required to demonstrate that "all reasonable efforts were made to collect the tax liability from the transferor before proceeding against the transferee." Sharp v. Commissioner, 35T.C.1168">35T.C.1168, 35T.C.1168">1175 (1961). Whether respondent has made such effort depends upon the facts of the particular case. Ranno v. Commissioner, T.C. Memo 1990-599. Respondent need not proceed against the transferors if to do so would be a futile act. Coffee Pot Holding Corp. v. Commissioner, 113F.2d415">113F.2d415 (5th Cir. 1940), affg. a decision of the Board of Tax Appeals dated October 7, 1936; Adams v. Commissioner, 70T.C.373">70T.C.390.
The facts in this case indicate that respondent took all reasonable1993Tax Ct. Memo LEXIS264">*290 steps to try to collect from the transferors during a period when the transferors were making multiple transfers of a substantial portion of their property and reducing their remaining principal assets (the CD's) to cash. The transferors' actions made it virtually impossible for respondent to collect the taxes from the transferors.
We hold that petitioner is liable as the transferee of James and Vera Williamson to the extent of $ 175,400.
II
Liability for Interest
Petitioner's liability for interest from the time of the transfer to the time respondent issued the notice of transferee liability is governed by State law. Interest from the date of the notice of transferee liability to the date of payment is imposed by section 6601. Patterson v. Sims, 281F.2d577">281F.2d577 (5th Cir. 1960); see also Baptiste v. Commissioner, 100 T.C. (1993); Estate of Stein v. Commissioner, 37T.C.945">37T.C.945, 37T.C.945">961 (1962). The Court of Appeals for the Fifth Circuit has held that a transferee is liable for interest from the date of transfer to the date of the notice of transferee liability if, under State law, the transferee is liable for1993Tax Ct. Memo LEXIS264">*291 additions to the value of the property received either by way of interest or by accounting for rents and profits during the period he held the property fraudulently conveyed. Patterson v. Sims, 281F.2d577">281 F.2d at 580.
The Mississippi Supreme Court has held that, absent actual fraud on the part of the transferee, the transferee is not liable to account for the value of the use of the property, or for rents or profits derived therefrom. See Holman v. Hudson, 193So.628">193So.628, 193So.628">629-630 (Miss. 1940). The transferee, however, is not entitled to interest on any consideration he paid. 193So.628">Id. at 630. Furthermore, under Mississippi law, a transferee who has paid valuable, but substantially inadequate, consideration is entitled to reimbursement of (or in this case credit for) the consideration paid, only if the transferee himself intends no fraud and is without notice of the transferor's intent. Blount v. Blount, 231Miss.398">231Miss.398, 95So. 2d545">95So. 2d545, 95So. 2d545">560 (1957); see also McLellan v. Commissioner, T.C. Memo. 1975-15.
While the lack of credibility1993Tax Ct. Memo LEXIS264">*292 of the transferors and petitioner as witnesses in this case leaves the Court with some lingering suspicions, the evidence is not sufficient to show that petitioner participated in the transferors' fraud or that he was aware of the transferors' fraudulent intent. Furthermore, respondent has stipulated that petitioner is entitled to credit for the value of the property he transferred to the transferors. Therefore, we hold that petitioner is not liable for interest prior to the issuance of the notice of transferee liability.
Petitioner's liability for interest after the issuance of the notice of transferee liability, however, is not determined under Mississippi law. Patterson v. Sims, 281F.2d577">281 F.2d at 580. Petitioner's liability for interest from such date is established under section 6601. 281F.2d577">Id. at 580-581; Baptiste v. Commissioner, supra.
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1. The description of the properties is derived from an expert appraisal report, the accuracy of which is stipulated to by the parties. The matching of the deeds with the description of the related properties as indicated in the appraisal report differs from the description given by respondent's counsel in her questions to Vera during the trial. Because of the confusion created by counsel's inaccurate description in her questions, the Court has relied solely upon the appraisal report for the description of the properties.↩
2. Petitioner and the transferors testified that petitioner also agreed to assist the transferors in constructing a new residence on the Winston County property and agreed to pay up to $ 20,000 toward such construction. Aside from this self-serving, unpersuasive testimony, there is no evidence to support this claim or to demonstrate that petitioner's promise, if any, was enforceable. The Court did not find petitioner or the transferors to be credible witnesses.↩
3. This interest in the store does not include the underlying real estate that was transferred to petitioner that date. The record does not indicate that Terry ever had any interest in that real estate.↩
4. James testified that the store normally kept on hand a 2-week supply of beer that cost approximately $ 6,000 to $ 7,000 and that the grocery and motor oil inventory had a value of approximately $ 3,000. He further testified that the store normally kept about $ 500 to $ 600 in the cash register and that he normally kept $ 1,000 to $ 5,000 in cash on his person. If there was inventory and cash on hand of $ 9,500 to $ 10,600 in the store, presumably it remained there when Terry and his wife took over operation of the store at that time. The Court is not persuaded by James' testimony, particularly as to any cash he allegedly had on his person. He later admitted he was just guessing about the figures for the inventory and had no basis for those figures.↩
5. The record is unclear as to the vehicles owned by the transferors on July 21, 1988. Vera testified that she owned a 1986 or 1987 Lincoln and that James drove a pickup truck. James testified that he owned a 1986 Lincoln Continental and a pickup truck and Vera owned a 1983 Lincoln Continental.↩
6. The Court did not believe the transferors' testimony that Vera wanted to get away from the area of their old residence because of a police raid that had occurred back in 1984. The Court did not believe the testimony of petitioner and the transferors that they planned to build another home on the Winston County property.↩
7. Tomaw testified that he was assigned the transferors' case on August 22, 1988, but that it was after the jeopardy assessment had been made. The evidence indicates that the assessment was made on August 26, 1988. We conclude that Tomaw was assigned to the case just before and in anticipation of the jeopardy assessment.↩
8. The individual who came out of the courthouse said he was "Jack" and not "James".↩
1. This should be $ 402,071.59, but the jeopardy assessment itself contained this erroneous total.↩