SCOTUS Reports

Tag: Uniform Fraudulent Transfer Act

  • Stuart v. Comm’r, 144 T.C. 235 (2015): Transferee Liability Under the Uniform Fraudulent Transfer Act

    William Scott Stuart, Jr. , Transferee, et al. v. Commissioner of Internal Revenue, 144 T. C. 235 (2015) (United States Tax Court, 2015)

    In Stuart v. Comm’r, the U. S. Tax Court rejected the IRS’s two-step analysis for determining transferee liability under I. R. C. § 6901, opting instead to apply state law directly. The court found shareholders liable as transferees under Nebraska’s Uniform Fraudulent Transfer Act for a corporation’s unpaid taxes, highlighting the significance of state law in defining transferee liability and the broad interpretation of the term “claim” to include contingent tax liabilities.

    Parties

    William Scott Stuart, Jr. , Arnold John Walters, Jr. , James Stuart, Jr. , and Robert Edwin Joyce (collectively, Petitioners) were shareholders of Little Salt Development Co. (Little Salt), a Nebraska corporation. They were designated as transferees by the Commissioner of Internal Revenue (Respondent) for the purpose of collecting Little Salt’s unpaid 2003 Federal income tax.

    Facts

    Little Salt owned 160 acres of land, which it sold to the City of Lincoln, Nebraska, for $472,000 on June 11, 2003, realizing a gain of $432,148. After the sale, Little Salt’s only asset was cash. On August 7, 2003, the shareholders sold their shares in Little Salt to MidCoast Investments, Inc. (MidCoast) for $358,826, which was calculated by subtracting 64. 92% of Little Salt’s estimated 2003 tax liability from its cash balance. Concurrently, Little Salt transferred all its cash ($467,721) to a trust account controlled by MidCoast’s attorney. The next day, the cash was transferred to a new Little Salt account at SunTrust Bank and then to a MidCoast account. Little Salt recorded this transfer as a receivable due from shareholders. Little Salt did not pay its 2003 taxes and was placed in inactive status by Nebraska in 2004. The IRS assessed a deficiency in Little Salt’s 2003 tax and issued notices of transferee liability to the shareholders.

    Procedural History

    The IRS sent notices of transferee liability to the shareholders in November 2010, asserting their liability for Little Salt’s unpaid 2003 tax based on the shareholders’ receipt of cash in a purported liquidation of Little Salt. The shareholders timely petitioned the U. S. Tax Court, contesting the transferee liability and asserting that the statute of limitations had expired. The Tax Court consolidated the cases for trial, briefing, and opinion. The court rejected the shareholders’ statute of limitations defense and proceeded to consider the substantive issue of transferee liability under Nebraska law.

    Issue(s)

    Whether the shareholders are liable as transferees of Little Salt’s property for its unpaid 2003 Federal income tax under the Nebraska Uniform Fraudulent Transfer Act (UFTA)?

    Rule(s) of Law

    The liability of a transferee for a transferor’s unpaid taxes is governed by I. R. C. § 6901, which allows the Commissioner to collect such taxes using the same procedures as those used against the taxpayer, subject to state law defining transferee liability. Under Nebraska’s UFTA, a transfer is fraudulent as to a creditor if it is made without receiving a reasonably equivalent value in exchange and the debtor is insolvent as a result of the transfer. The term “claim” under UFTA includes “a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. “

    Holding

    The shareholders are liable as transferees under Nebraska’s UFTA for Little Salt’s unpaid 2003 tax to the extent of the benefit they received from the transfer, which was the difference between the price they received for their shares and the amount they would have received in a liquidation of Little Salt after paying its taxes.

    Reasoning

    The court rejected the IRS’s two-step analysis, which would have involved disregarding the form of the transaction and applying federal tax principles to recast it as a liquidating distribution, followed by an application of state law. Instead, the court applied Nebraska’s UFTA directly, finding that Little Salt’s transfer of its cash to MidCoast was constructively fraudulent as to the IRS because it did not receive reasonably equivalent value and was rendered insolvent by the transfer. The court found that the shareholders benefited from the transfer, as they received more for their shares than they would have in a liquidation, and thus were liable as persons for whose benefit the transfer was made. The court also determined that the IRS’s claim arose before the transfer, as it was an unmatured claim for Little Salt’s 2003 tax liability. The court’s decision was based on the expansive definition of “claim” under UFTA, which includes contingent and unmatured liabilities, and the application of state law to determine the substantive liability of transferees.

    Disposition

    The court entered decisions for the Respondent, holding the shareholders liable as transferees for their respective shares of $58,842 of Little Salt’s unpaid 2003 tax.

    Significance/Impact

    The decision underscores the importance of state fraudulent transfer laws in determining transferee liability for unpaid taxes under I. R. C. § 6901. It clarifies that the IRS cannot use federal tax principles to recast transactions before applying state law and that the term “claim” under UFTA includes contingent tax liabilities. The case also illustrates the court’s willingness to hold shareholders liable as beneficiaries of fraudulent transfers, even if they did not directly receive the transferred assets. This ruling has implications for tax planning and the structuring of corporate transactions, as it highlights the risks of using intermediaries to avoid tax liabilities and the potential for shareholders to be held liable for corporate tax debts under state fraudulent transfer laws.

  • Bresson v. Commissioner, T.C. Memo. 1998-453: Federal Transferee Liability Not Bound by State Statutes of Limitations

    Bresson v. Commissioner, T. C. Memo. 1998-453

    Federal transferee liability for taxes is not bound by state statutes of limitations or extinguishment provisions.

    Summary

    In Bresson v. Commissioner, the Tax Court held that the IRS could assess transferee liability against Peter Bresson for taxes owed by Jaussaud Enterprises, Inc. , despite California’s Uniform Fraudulent Transfer Act (UFTA) limitations period having expired. The court found that Bresson received property from the corporation without providing reasonably equivalent value, constituting a fraudulent transfer under California law. However, the court ruled that the federal limitations period for assessing transferee liability under IRC § 6901(c) controlled, not the state UFTA limitations. This decision reinforces the principle that federal tax collection efforts are not constrained by state time limits, even when relying on state law to establish the underlying fraudulent transfer.

    Facts

    Jaussaud Enterprises, Inc. , owned by Peter Bresson, transferred real property to Bresson in 1990, which he then sold to a third party. The corporation reported a capital gain from the sale but did not pay the resulting taxes. Bresson executed a promissory note to the corporation three years later, but the court found this did not represent equivalent value for the transfer. The IRS issued a notice of transferee liability to Bresson in 1996, after the California UFTA limitations period had expired.

    Procedural History

    The IRS assessed taxes against Jaussaud Enterprises for the year ended February 28, 1991, and issued a notice of transferee liability to Bresson on August 2, 1996. Bresson petitioned the Tax Court, arguing that the California UFTA limitations period barred the assessment. The Tax Court held for the Commissioner, finding the federal limitations period applicable.

    Issue(s)

    1. Whether the transfer of property from Jaussaud Enterprises to Bresson constituted a fraudulent conveyance under California’s UFTA.
    2. Whether the federal limitations period under IRC § 6901(c) or the California UFTA limitations period applied to the IRS’s assessment of transferee liability against Bresson.

    Holding

    1. Yes, because the transfer was made without the corporation receiving reasonably equivalent value, satisfying the requirements for constructive fraud under California Civil Code § 3439. 04(b)(1) and/or (2).
    2. No, because the federal limitations period under IRC § 6901(c) controls the assessment of transferee liability, not the California UFTA limitations period.

    Court’s Reasoning

    The court applied California law to determine the existence of a fraudulent conveyance, finding that Jaussaud Enterprises received no value for the property transfer to Bresson. The court rejected Bresson’s argument that the promissory note he executed three years later constituted equivalent value. Regarding the limitations period, the court relied on the Supreme Court’s decision in United States v. Summerlin, holding that federal tax collection efforts are not bound by state statutes of limitations or extinguishment provisions. The court distinguished United States v. Vellalos, noting that the IRS timely proceeded under IRC § 6901 in this case, unlike in Vellalos where the federal limitations period had expired. The court emphasized that federal revenue law requires national application and cannot be displaced by variations in state law.

    Practical Implications

    This decision clarifies that the IRS may assess transferee liability for federal taxes even when state fraudulent transfer limitations periods have expired. Practitioners should be aware that state law may establish the existence of a fraudulent transfer, but federal law determines the limitations period for assessing transferee liability. This ruling may encourage the IRS to pursue transferee liability claims even when state limitations periods have run, as long as the federal period under IRC § 6901(c) remains open. The decision also highlights the importance of ensuring that corporate distributions are properly documented and supported by equivalent value to avoid potential fraudulent transfer claims.