Schussel v. Werfel, 1st Cir. (2014)

7/26/2019 Schussel v. Werfel, 1st Cir. (2014)

http://slidepdf.com/reader/full/schussel-v-werfel-1st-cir-2014 1/32

United States Court of AppealsFor the First Circuit

No. 13- 1717

GEORGE SCHUSSEL, Tr ansf er ee,

Pet i t i oner , Appel l ant ,

v.

DANI EL I . WERFEL, Act i ng Commi ssi oner of t heI nt er nal Revenue Ser vi ce,

Respondent , Appel l ee.

APPEAL FROM THE UNI TED STATES TAX COURT[ Hon. Mary Ann Cohen, J udge, U. S. Tax Cour t ]

Bef or e

Thompson, St ahl , and Kayat t a,Ci r cui t J udges.

Fr anci s J . Di Ment o, wi t h whomJ ason A. Kosow and Di Ment o& Sul l i van wer e on br i ef , f or appel l ant .

Regi na S. Mor i ar t y, At t or ney, Tax Di vi si on, Depar t ment of J ust i ce, wi t h whom Ri char d Far ber , At t or ney, Tax Di vi si on,Depar t ment of J ust i ce, and Kat hr yn Keneal l y, Assi st ant At t or neyGener al , wer e on br i ef , f or appel l ee.

J ul y 8, 2014



KAYATTA, Circuit Judge. George Schussel appeal s a

deci si on of t he Uni t ed St at es Tax Cour t hol di ng hi m l i abl e, as t he

r eci pi ent of a f r audul ent t r ansf er f r omhi s f or mer company, f or t he

company' s back taxes ( i ncl udi ng penal t i es) of over $4. 9 mi l l i on,

pl us i nt er est of at l east $8. 7 mi l l i on. On appeal , he does not

di sput e t hat hi s company f r audul ent l y t r ansf er r ed mi l l i ons of

dol l ar s t o hi m i n an ef f or t t o avoi d payi ng i ncome t axes t o t he

I RS. What he di sputes i s how much he owes t he I RS as a r esul t of

t hose t r ansf er s. Fi r st , he ar gues t hat t he t ax cour t err ed i n

appl yi ng t he f eder al t ax i nt er est st at ut e, and t hat he shoul d onl y

have t o pay t he l i kel y much l ower amount of pr ej udgment i nt erest

t hat woul d be due under Massachuset t s l aw. Second, he cl ai ms t hat

t he tax cour t shoul d have accept ed hi s cor r ect ed t ax r et ur ns as

est abl i shi ng t he amount of t he asset s he mi sappr opr i at ed. Thi r d,

he mai nt ai ns t hat he shoul d have recei ved credi t f or money he

l oaned back t o hi s company, whi ch t he company then used t o pay hi s

l egal bi l l s. Concl udi ng t hat t he t ax cour t cal cul at ed pr ej udgment

i nt er est under t he wr ong st at ut e, we af f i r m i n par t , r ever se i n

par t , and remand f or f ur t her pr oceedi ngs.

I. Background

We have pr evi ousl y r ecount ed George Schussel ' s ef f or t s t o

ci r cumvent U. S. t ax l aw, af f i r mi ng hi s convi ct i ons f or t ax evasi on

and conspi r acy t o def r aud t he Uni t ed St at es. See Uni t ed St at es v.

Schussel , 291 F. App' x 336 ( 1st Ci r . 2008) . We r ecount t he basi cs

-2-



her e, addi ng onl y t he det ai l s necessary t o resol ve thi s appeal

( most of whi ch wer e st i pul at ed by t he par t i es) .

Begi nni ng i n the ear l y 1980s, Schussel oper at ed a

Massachuset t s cor por at i on cal l ed Di gi t al Consul t i ng, I nc. ( "DCI ") .

Unt i l 1996, DCI was a subchapt er C corporat i on. 1 Dur i ng t he

r el evant per i od, Schussel cont r ol l ed 95% of DCI . 2 Schussel set up

an of f shor e shel l company t o si phon DCI i ncome i nt o account s t hat

he cont r ol l ed, al l wi t hout payi ng t he r equi si t e cor por at e or

i ndi vi dual t axes. DCI f ai l ed t o r epor t al l of i t s i ncome t o t he

I RS, and event ual l y, t he I RS i ssued a not i ce of def i ci ency

r egardi ng DCI ' s 1993, 1994, and 1995 t ax r et ur ns. DCI nei t her

cont est ed nor pai d t he assessed l i abi l i t i es. I t has been i nsol vent

si nce 2004.

As we expl ai n bel ow, t he I RS can, by st at ut e, col l ect a

per son' s t ax debt by r ecl ai mi ng asset s t he debt or has t r ansf er r ed

t o someone el se ( a " t r ansf er ee" ) . See 26 U. S. C. § 6901. On

November 24, 2010, t he I RS sent Schussel a not i ce of l i abi l i t y

( "Not i ce" ) , cl ai mi ng t hat he was l i abl e as a t r ansf er ee f or DCI ' s

1993- 1995 t ax def i ci enci es. The Not i ce cl ai med t hat DCI had t ax

def i ci enci es of $1, 796, 477. 71, $2, 596, 817. 21, and $3, 878, 275. 77 f or

1 I n 1996, DCI became a subchapter S corporat i on. I t wasl at er conver t ed i nt o a Massachuset t s busi ness t r ust , and i t s namewas changed t o t he Dr i f t wood Massachuset t s Busi ness Tr ust . We r ef ersi mpl y t o "DCI " f or cl ar i t y.

2 Schussel t est i f i ed t hat he owned 90% and hi s wi f e 5%, but

t hat he cont r ol l ed al l 95%.

-3-



t hose thr ee years "as shown i n t he at t ached st atement , " and that

"[ t ] hi s por t i on of t ot al assessed i ncome t ax def i ci enci es, pl us

i nt er est as pr ovi ded by l aw, const i t ut e your l i abi l i t y as

t r ansf er ee . . . . " I n summar y, t he at t ached st at ement pr ovi ded:

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

Schussel$2, 044, 106. 00 $2, 522, 944. 00 $4, 356, 279. 004

The st at ement al so sai d t hat , of DCI ' s t ax l i abi l i t y,

"onl y $2, 044, 106. 00, $2, 522, 944. 00 and $4, 356, 279. 00 [ i . e. t he

amount s t r ansf er r ed] f or t hese r espect i ve t ax year s, pl us i nt er est

as pr ovi ded by l aw f r om t he dat e of t hi s not i ce, wi l l be assessed

agai nst Geor ge Schussel as t r ansf er ee . . . . " ( These sums, not

i ncl udi ng i nt er est , add up t o $8, 923, 329. ) A not e at t he base of

t he page expl ai ned t hat Schussel was:

l i abl e f or t he l esser of t he val ue of t he pr oper t yt r ansf er r ed, pl us i nt er est as pr ovi ded by l aw, or t hebal ance of t he l i abi l i t y, pl us accr ued i nt er est .Accor di ngl y, t he t r ansf er ee' s l i abi l i t y f or t he 1993,1994 and 1995 assessed l i abi l i t y of t he t r ansf er or i sl i mi t ed t o t he above st at ed val ue of pr oper t y t r ansf er r edt o hi m f or t he t hr ee year s.

3 The par t i es l at er st i pul at ed t hat t he $5 mi l l i on i nt er estf i gur e was i ncor r ect .

4 The "1995" t r ansf er s t o Schussel occur r ed i n 1995- 1997.

-4-



Schussel chal l enged t he Not i ce i n t ax cour t , cl ai mi ng

( among ot her t hi ngs) t hat he shoul d r ecei ve cr edi t agai nst any

t r ansf er ee l i abi l i t y f or money t hat he l oaned back t o DCI . Most of

t hat money, Schussel r eadi l y admi t s, DCI used t o cover expenses

r el at ed t o hi s tax l i t i gat i on. 5 Accor di ng t o t he st i pul at ed f act s

and evi dence at t r i al , DCI ' s gr oss r ecei pt s, l egal and consul t i ng

expenses, and l oans f r om Schussel amount ed t o:

Year Gross

Receipts

Legal Consulting Loans

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 I RS' s answer t o Schussel ' s pet i t i on f or r evi ew asked

t hat t he Not i ce of Li abi l i t y si mpl y be conf i r med. However , i t s

l at er - f i l ed pr et r i al memor andum abandoned the l i mi t ed theor y of

Schussel ' s l i abi l i t y f or i nt er est advanced i n t he Not i ce and

St at ement . I nst ead, i t ar gued t hat Schussel was l i abl e f or DCI ' s

5 Not al l of t he money came out of a DCI account ; someappear s t o have come f r om account s of ot her compani es r un bySchussel . He cl ai ms, however , t hat these expendi t ur es wer eat t r i but ed t o DCI f or account i ng pur poses.

-5-



back taxes, pl us i nt er est as det er mi ned under t he f eder al t ax

i nt er est st at ut e f r om t he due dat e of DCI ' s t ax r et ur ns, and t hat

hi s l i abi l i t y was not l i mi t ed t o the amount of asset s t hat DCI

f r audul ent l y t r ansf er r ed t o hi m. 6

Af t er t r i al , t he t ax cour t r ul ed on a l ar ge number of

i ssues, onl y a f ew of whi ch ar e r el evant t o t hi s appeal . As

per t i nent her e, i t f i r st det er mi ned t hat Schussel r ecei ved f r omDCI

f r audul ent t r ansf er s i n t he amount s of $2, 044, 106 dur i ng 1993,

$2, 522, 944 dur i ng 1994, and $4, 356, 279 dur i ng 1995 t o 1997, f or a

t ot al of $8, 923, 329. Then, at t he I RS' s request , t he cour t hel d

Schussel l i abl e f or DCI ' s back t axes, pl us pr ej udgment i nt er est at

t he f eder al r at e f r om t he r espect i ve dat es on whi ch DCI ' s i ncome

t axes were due f or 1993, 1994, and 1995. 7 So cal cul at ed,

pr ej udgment i nt er est al one t ot al ed appr oxi mat el y $8. 7 mi l l i on by

t he t i me t he I RS i ssued t he Not i ce, l eavi ng Schussel l i abl e f or

over $13. 6 mi l l i on pl us f ur t her accr ui ng i nt er est at t he f eder al

r at e. Fi nal l y, t he t ax cour t r ef used t o gi ve Schussel credi t

agai nst hi s l i abi l i t y f or t he amount he l oaned back to DCI f r om

2001 t o 2010, or t o l i mi t hi s l i abi l i t y t o t he amount of asset s he

r ecei ved ( no mat t er how t hat f i gur e was cal cul at ed) .

6 The t ax cour t evi dent l y accept ed t hi s shi f t , and al t hough

Schussel ment i ons t he shi f t i n hi s br i ef , he does not di r ect l y

chal l enge i t s al l owance.

7 By st at ut e and r egul at i on, t he f eder al r at e var i es over

t i me.

-6-



Schussel t i mel y appeal ed, Fed. R. App. P. 13( a) ( 1) ,

chal l engi ng each of t hose concl usi ons. Fi r st , he ar gues t hat hi s

t ot al l i abi l i t y shoul d have been l i mi t ed t o $7, 358, 394, t he

undecl ar ed i ncome f i gur e t he I RS used t o cor r ect hi s i ndi vi dual t ax

r et ur ns, or at most t o the $8. 9 mi l l i on of DCI asset s t hat t he

I RS' s Not i ce and St atement cl ai med he r ecei ved. Second, he

cont ends t hat any pr ej udgment i nt er est on t he f r audul ent l y

t r ansf er r ed f unds shoul d have been assessed at t he Massachuset t s

r at e of 12% per year , but onl y f r omt he dat e of t he 2010 I RS Not i ce

r at her t han t he dat es on whi ch DCI ' s unpai d taxes were due i n 1993-

1995, r esul t i ng i n a substant i al r educt i on i n hi s t ot al l i abi l i t y.

Thi r d, he ar gues t hat he shoul d r ecei ve cr edi t , t o be count ed

agai nst hi s l i abi l i t y, f or r oughl y $2. 1 mi l l i on i n l oans he made t o

DCI bet ween 2001 and 2010.

We have j ur i sdi ct i on under 26 U. S. C. § 7482. We addr ess

each of Schussel ' s argument s, assessi ng f i r st t he quest i on of

i nt er est , t hen t he amount t r ansf er r ed, and t hen whet her Schussel

shoul d r ecei ve credi t f or any al l eged r et r ansf er s.

II. Standard of Review

Our r evi ew of t he t ax cour t ' s r ul i ng i s " i n most r espect s

si mi l ar t o our r evi ew of di st r i ct cour t deci si ons: f actual f i ndi ngs

f or cl ear er r or and l egal r ul i ngs de novo. " Dr ake v. Comm' r , 511

F. 3d 65, 68 ( 1st Ci r . 2007) ; see al so 26 U. S. C. § 7482( a) ( 1) ,

( c) ( 1) . "The cl ear er r or st andar d of r evi ew ext ends t o f act ual

-7-



f i ndi ngs based on i nf er ences f r omst i pul at ed f act s. " Capi t al Vi deo

Cor p. v. Comm' r , 311 F. 3d 458, 463 ( 1st Ci r . 2002) ( i nt er nal

quot at i on mar ks omi t t ed) . "A f i ndi ng i s cl ear l y er r oneous when,

al t hough t her e i s evi dence t o suppor t i t , t he r evi ewi ng cour t on

t he ent i r e evi dence i s l ef t wi t h t he def i ni t e and f i r m convi cti on

t hat a mi st ake has been commi t t ed. " I nt er ex, I nc. v. Comm' r , 321

F. 3d 55, 58 ( 1st Ci r . 2003) ( i nt er nal quot at i on mar ks omi t t ed) .

Al t hough t he bur den i s usual l y on t he taxpayer t o demonst r ate that

an I RS r ul i ng i s wr ong, i n t r ansf er ee cases t he I RS bear s t he

bur den of showi ng t hat t he pet i t i oner "i s l i abl e as a t r ansf er ee of

pr oper t y of a t axpayer , but not [ of showi ng] t hat t he t axpayer was

l i abl e f or t he t ax. " 26 U. S. C. § 6902( a) ; see gener al l y U. S. Tax

Ct . R. 142( a) , ( d) . 8

8 Tax Cour t Rul e 142 pr ovi des: The bur den of pr oof shal l be upon t he pet i t i oner , exceptas ot her wi se pr ovi ded by st atut e or det er mi ned by t he

Cour t . . . . I n any case i nvol vi ng t he i ssue of f r audwi t h i nt ent t o evade t ax, t he bur den of pr oof i n r espectof t hat i ssue i s on t he r espondent . . . by cl ear andconvi nci ng evi dence. . . . The bur den of pr oof i s on t her espondent t o show t hat a pet i t i oner i s l i abl e as at r ansf er ee of pr oper t y of a t axpayer , but not t o showt hat t he t axpayer was l i abl e f or t he t ax.

-8-



III. Analysis

A. The Tax Court Applied the Wrong Framework to Assess How Much

Schussel Owes.

1. The Fraudulent Transfer Claim

I n i t s ef f or t t o r ecover sums t r ansf er r ed t o Schussel by

DCI , t he I RS avai l ed i t sel f of t he pr ocedur es set f or t h i n 26

U. S. C. § 6901. Sect i on 6901 speci f i es t he pr ocedur es by whi ch t he

I RS may admi ni st r at i vel y asser t ( among ot her cl ai ms) st at e l aw

r emedi es f or f r audul ent t r ansf er s, subj ect t o chal l enge i n t ax

cour t .9

Whi l e t he pr ocedur es ar e f eder al , st at e subst ant i ve l aw

cont r ol s i n det er mi ni ng whet her and t o what extent t he t r ansf er ee

i s l i abl e. See Fr ank Sawyer Trust of May 1992 v. Comm' r , 712 F. 3d

597, 602- 03 ( 1st Ci r . 2013) . 10 Her e, near l y al l of t he t r ansf er s

are cover ed by t he now- r epeal ed Massachuset t s Uni f orm Fr audul ent

Conveyance Act ( "MUFCA") . Mass. Gen. Laws ch. 109A, §§ 1 et seq.

( 1995) . The f ew made af t er Oct ober 1996 f al l under the

Massachuset t s Uni f or mFraudul ent Tr ansf er Act ( "MUFTA") . I d. §§ 1

et seq. ( 2014) .

9 Sect i on 6901 pr ovi des, as most r el evant her e, t hat " [ t ] heamount [ ] " of "[ t ] he l i abi l i t y, at l aw or i n equi t y, of a t r ansf er eeof pr oper t y" " of a t axpayer " " shal l . . . be assessed, pai d, andcol l ect ed i n t he same manner and subj ect t o the same pr ovi si ons and

l i mi t at i ons as i n t he case of t he t axes wi t h r espect t o whi ch t hel i abi l i t i es wer e i ncur r ed. " 26 U. S. C. § 6901( a) .

10 Ther e i s a f eder al f r audul ent t r ansf er l aw, see 28 U. S. C.§ 3304, but nei t her part y suggest s t hat t he gover nment has i nvokedi t her e. See gener al l y i d. § 3002( 2) ( excl udi ng t he t ax cour t f r omt he def i ni t i on of "cour t " f or t hat chapt er ) .

-9-



Schussel di d not appeal t he t ax cour t ' s f i ndi ng t hat t he

t r ansf er s i n t hi s case wer e made wi t h t he act ual i nt ent t o def r aud

DCI ' s cr edi t or s- - speci f i cal l y, t he I RS. Ther ef or e, t he t r ansf er s

ar e i nval i d bot h as t o cr edi t or s wi t h cl ai ms agai nst DCI at t he

t i me of t he t r ansf er and as t o t hose whose cl ai ms ar ose l at er . See

i d. § 7 ( 1995) ; i d. § 5( a) ( 1) ( 2014) .

Bot h t he MUFCA and MUFTA gener al l y permi t a cr edi t or wi t h

a mat ur ed cl ai m t o avoi d a f r audul ent conveyance ( i . e. , secur e a

r et ur n of t he t r ansf er r ed f unds i n f avor of t he credi t or ) "t o t he

ext ent necessary t o sat i sf y hi s cl ai m. " Davi d v. Zi l ah, 325 Mass.

252, 256 ( 1950) ; Mass. Gen. Laws ch. 109A, § 8(a) ( 1) , § 9(b) , ( c)

( 2014) ( al l owi ng avoi dance " t o t he ext ent necessary t o sat i sf y the

credi t or ' s cl ai m, " but l i mi t i ng t he j udgment t o t he l esser of a)

t he amount of t he cl ai m, and b) t he val ue of t he asset s " adj ust ed"

"as t he equi t i es may r equi r e" ) ; 48A J or dan L. Shapi r o et al . ,

Massachuset t s Pr act i ce: Col l ect i on Law § 14: 57 (3d ed. 2000)

( descr i bi ng r emedi es under t he MUFCA) . Each st atut e gi ves the

cour t some di scr et i on t o f ashi on an equi t abl e r emedy i n some cases.

See Mass. Gen. Laws ch. 109A, § 8( a) ( 3) ( i i i ) ( 2014) ( subj ect t o

sect i on 9, al l owi ng "any ot her r el i ef t he ci r cumst ances may

r equi r e" ) ; i d. § 10( d) ( 1987) ( al l owi ng cour t s t o " [ m] ake any or der

whi ch the ci r cumst ances of t he case may r equi r e" t o pr otect

cr edi t or s wi t h i mmat ur e cl ai ms) .

-10-



2. Interest

I n di scussi ng t he i ssues r ai sed by t hi s appeal , i t i s

hel pf ul t o di st i ngui sh bet ween i nt er est accrued on t he t ax

obl i gat i on of t he t axpayer - t r ansf er or , and i nt er est accr ued on t he

t r ansf er r ed f unds r ecover ed f r om t he t r ansf er ee by a credi t or .

Feder al i nt er est on a t ax obl i gat i on accr ues aut omat i cal l y, usual l y

f r om t he date when t he t ax payment f i r st becomes l ate. 26 U. S. C.

§ 6601( a) , ( e) . 11 That i nt er est i s si mpl y a par t of t he debt owed

by the t axpayer - t r ansf er or t o t he I RS, see § 6601( e) , al l of whi ch

may usual l y be col l ect ed f r oma f r audul ent t r ansf er ee to the ext ent

of t he amount f r audul ent l y t r ansf er r ed. See, e. g. , Lowy v. Comm' r ,

35 T. C. 393, 394 ( 1960) ; cf . al so Uni t ed St at es v. Ver duchi , 434

F. 3d 17, 21- 22 & n. 6, 25 ( 1st Ci r . 2006) ( under Rhode I sl and

f r audul ent t r ansf er l aw- - but not sect i on 6901- - t r eat i ng t he I RS' s

cl ai m agai nst t he t r ansf er or as i ncl udi ng t he accumul at ed

i nt er est ) . Thus, f or exampl e, i f t he t axpayer owes $100 i n t axes,

upon whi ch $30 i n i nt er est accrues, and t he t axpayer t hen

11 Sect i on 6601 pr ovi des t hat , gener al l y, " [ i ] f any amount of

t ax i mposed by t hi s t i t l e . . . i s not pai d on or bef or e t he l astdate pr escr i bed f or payment , i nt erest on such amount at [ t hef eder al l y- set r at e] shal l be pai d f or t he per i od f r om such l astdat e t o t he dat e pai d. " 26 U. S. C. § 6601( a) . Gener al l y, t hati nt erest has t o be pai d upon not i ce and demand, and al most anyr ef er ence i n t he tax code to a " t ax" must be read t o i ncl udesect i on 6601 i nt er est . I d. § 6601( e) ( 1) .

-11-



f r audul ent l y t r ansf er s $150 t o a t r ansf er ee, t he I RS can cer t ai nl y

r ecover a j udgment of no l ess t han $130 agai nst t he t r ansf er ee. 12

What i s at i ssue i n t hi s case i s pr ej udgment i nt er est

asser t ed agai nst t he t r ansf er ee on t he amount of t he t r ansf er

deemed t o be avoi dabl e ( t hat i s, t he amount t hat t he t r ansf er ee

must gi ve back) . Suppose, agai n, t hat a t axpayer owed $100 i n

t axes and accr ued $30 i n i nt er est ; but , t hi s t i me, he t r ansf er r ed

$101 t o a t hi r d- par t y t r ansf er ee. The t r ansf er ee woul d be l i abl e

f or a j udgment t hat he pay over t o t he I RS t he ent i r e $101

t r ansf er r ed t o hi m. Li ke most ot her l i t i gant s agai nst whom a

monet ary l i abi l i t y i s est abl i shed, he mi ght al so owe some amount of

pr ej udgment i nt er est - - t he quest i on i s how much.

Accordi ng t o t he I RS, i t depends on when t he i nt er est

accrued. I f , as i n our exampl e, i t accrued bef or e t he t axpayer

t r ansf er r ed t he $101 ( so that on t he day of t r ansf er , t he t axpayer

owed more t o t he I RS than he gave away t o t he t r ansf eree) , t he I RS

concedes t hat st at e f r audul ent t r ansf er l aw woul d appl y to l i mi t

t he I RS t o r ecover i ng f r om t he t r ansf er ee t he $101 he r ecei ved,

pl us such pr ej udgment i nt er est as mi ght be avai l abl e under t hat

st at e l aw. But i f t he addi t i onal i nt er est owed by t he t axpayer t o

12 Moreover , even i n a case wher e t he i nt er est di d not accr ueunt i l af t er t he dat e of t he t r ansf er , t he gover nment woul d seem t obe abl e t o r ecover t he $30, at l east wher e, as her e, t het r ansf er or ' s act ual f r audul ent i nt ent r ender s t he t r ansf er i nval i das t o both pr esent and f ut ur e cr edi t ors. Mass. Gen. Laws ch. 109A,§ 7 ( 1995) ; i d. § 5( a) ( 1) ( 2014) .

-12-



t he I RS accrued af t er t he t r ansf er ( so t hat on t he day of t r ansf er ,

t he t axpayer gave away more t han he owed at t hat t i me) , t he I RS

cl ai ms t hat t he t r ansf er ee woul d owe t he ent i r e $30 i n i nt er est

accrued under f eder al l aw. That i nt er est , i t says, accrued on t he

t r ansf er ee' s own l i abi l i t y ( not j ust on t he t axpayer ' s under l yi ng

debt ) and r an under sect i on 6601 at t he same r at e and f r omt he same

dat e as agai nst t he or i gi nal t axpayer on t he under l yi ng t ax debt .

Essent i al l y, t he I RS ar gues t hat wher e st at e l aw pr ovi des t he basi s

f or t r ansf er ee l i abi l i t y, t he r at i o of I RS debt t o asset s

t r ansf er r ed on t he dat e of t r ansf er oper at es as a t oggl e swi t ch t o

pi ck whet her st at e or f eder al l aw cont r ol s pr ej udgment i nt er est .

The l anguage of t he t wo st at ut es i s suf f i ci ent l y abst r act

t hat i t coul d be r ead as pr ovi di ng par t i al suppor t f or t he I RS.

Under sect i on 6901, t r ansf er ee l i abi l i t y i s t o be assessed and

col l ect ed " i n t he same manner and subj ect t o the same pr ovi si ons

and l i mi t at i ons as i n t he case of t he t axes wi t h r espect t o whi ch

t he l i abi l i t i es wer e i ncur r ed. " 26 U. S. C. § 6901( a) . And t he t ax

i nt er est st at ut e, sect i on 6601, pr ovi des t hat "[ a] ny r ef er ence i n

t hi s t i t l e [ except f or i n t he subchapt er r el at i ng t o def i ci ency

pr ocedur es] t o any t ax i mposed . . . shal l be deemed al so t o ref er

t o i nt er est i mposed by t hi s sect i on on such t ax. " I d.

§ 6601( e) ( 1) . Ther e i s some appeal , t her ef or e, i n t he I RS' s cl ai m

t hat sect i on 6601 i s s i mpl y one of t he same tax "pr ovi si ons and

l i mi t at i ons" t o whi ch t r ansf er ee l i abi l i t y i s subj ect under

-13-



sect i on 6901. See Robi net t e v. Comm' r , 139 F. 2d 285, 288 ( 6t h Ci r .

1943) ( so hol di ng, bef ore the Supr eme Cour t r ul ed i n Comm' r v.

St er n, 357 U. S. 39 ( 1958) , t hat st ate l aw gover ns t he subst ance of

f r audul ent t r ansf er ee l i abi l i t y under sect i on 6901) ; cf . Ni chol as

v. Uni t ed St at es, 384 U. S. 678, 690- 91 ( 1966) ( i nt er pr et i ng t he

si mi l ar l y- worded 26 U. S. C. § 7501 t o mean that wher e a Chapt er 11

bankrupt cy t r ust ee was not l i abl e f or i nt er est on t he debt or ' s

t axes af t er a cer t ai n poi nt , a t r ust f und col l ect abl e i n t he same

manner as t hose t axes woul d not gar ner i nt er est ) ; Bapt i st e v.

Comm' r , 29 F. 3d 1533, 1541- 42 ( 11t h Ci r . 1994) ( wher e a f ederal

st at ut e creat ed t he t r ansf er ee l i abi l i t y, concl udi ng t hat "subj ect

t o t he same pr ovi si ons and l i mi t at i ons" i n sect i on 6901 means t hat

t he I RS can char ge i nt er est on t r ansf er ee l i abi l i t y "as i f i t wer e

a tax l i abi l i t y" ) . 13

St at ut or y hi st or y can al so be read as provi di ng some

suppor t f or t he ( mor e l i mi t ed) i dea that i nt er est accr ues at t he

f eder al r at e f r om t he dat e of t he t r ansf er . The or i gi nal dr af t of

sect i on 6901' s precur sor , sect i on 280 of t he Revenue Act of 1926,

44 St at . 61 ( 1926) , speci f i ed t hat no i nt er est woul d accrue on a

13 To avoi d any conf usi on, we not e t hat t he t ax cour t ' sopi ni on i n Bapt i st e was appeal ed t o t wo ci r cui t cour t s. Those

cour t s r eached conf l i ct i ng concl usi ons about whet her a t r ansf er ee,l i abl e under f eder al l aw f or est at e t axes, coul d owe mor e t han hehad r ecei ved. Compare Bapt i st e, 29 F. 3d at 1541- 42 ( yes) , wi t hBapt i st e v. Comm' r , 29 F. 3d 433, 437 ( 8t h Ci r . 1994) ( no) . TheBapt i st e cases deal t wi t h subst ant i ve t r ansf er ee l i abi l i t y creat edand l i mi t ed by f eder al l aw r at her t han st at e l aw; we expr ess noopi ni on on t hei r out comes.

-14-



t r ansf er ee' s l i abi l i t y unt i l he r ecei ved a not i ce and demand.

S. Rep. No. 69- 52 ( 1926) , r epr i nt ed i n 1939- 1 Cum. Bul l . ( Pt . 2)

354- 55. I n conf erence, t hat l anguage was changed; t he commi t t ee

asser t ed t hat sect i on 280 di d not al t er t he ext ent of t r ansf er ee

l i abi l i t y, but went on t o add t hat no i nt er est accr ued on t he

t r ansf er ee' s assumed l i abi l i t y af t er t he t r ansf er , except i nt er est

" f or f ai l ur e t o pay upon not i ce and demand . . . and i nt er est at

6 per cent a year f or r ei mbur si ng the Gover nment at t he usual r ate

f or t he l oss of t he use of t he money due i t . " H. R. Rep. No. 69-

356, at 44 ( 1926) ( Conf . Rep. ) , r epr i nt ed i n 1939- 1 Cum. Bul l . ( Pt .

2) 371- 73. 14 Thi s mi ght suggest t hat Congr ess expect ed a st andard

f eder al i nt er est r at e t o appl y, and di d not vi ew t hat choi ce as

much al t er i ng exi st i ng t r ansf er ee l i abi l i t y l aw. But as a number

of cases poi nt out , i t i s har dl y cryst al cl ear . 15

14 The 1926 act i ncl uded sever al di f f er ent i nt er est r at es; f or

exampl e, t axpayer s owed si x per cent per year on t ax def i ci enci es,i ncr easi ng t o one per cent per mont h af t er t he I RS sent a not i ce anddemand f or payment . Revenue Act of 1926, ch. 27, §§ 274( j ) ,276( b) , 44 St at . 9, 56- 58 ( 1926) . Thus i t i s uncl ear whet her t her ef er ence i n t he l egi sl at i ve hi st or y t o "t he usual r at e" of si xper cent r ef er s t o t he def i ci ency r at e, see Poi ni er v. Comm' r , 858F. 2d 917, 921 ( 3d Ci r . 1988) ( concl udi ng so) , or j ust ant i ci pat edt hat an equi t abl e gr ant of i nt er est mi ght adopt a rat e usedel sewher e i n t he Act . Cf . Bi l l i ngs v. Uni t ed St at es, 232 U. S. 261,286 ( 1914) ( af f i r mi ng t he I RS' s ent i t l ement t o i nt er est ) ; cf . al soLei ght on v. Uni t ed St at es, 289 U. S. 506, 509 ( 1933) ( af f i r mi ng, asnot an abuse of di scr et i on, i nt er est awar ded agai nst a

cor por at i on' s t r ansf er ee- st ockhol der s at si x per cent per year f r omt he dat e of t he assessment agai nst t he cor por at i on. See Lei ght onv. Uni t ed St at es, 61 F. 2d 530, 534 ( 9t h Ci r . 1932) ) .

15 See Pat t er son v. Si ms, 281 F. 2d 577, 580 n. 4 ( 5t h Ci r .1960) ( not i ng t hat t he l egi sl at i ve hi st or y "seems t o i ndi cat e t hatt he Uni t ed St at es i s ent i t l ed t o i nt er est accr ui ng af t er t he

-15-



Ul t i mat el y, we ar e saved f r om havi ng t o sear ch f or an

answer i n ambi guous st at ut ory l anguage and uncl ear l egi sl at i ve

hi st or y. I nst ead, we f i nd our answer i n t he U. S. Supr eme Cour t ' s

i nt er pr et at i on of a pr i or ver si on of t hi s same st at ut e. I n

Commi ssi oner v. St ern, 357 U. S. 39 ( 1958) , t he Supr eme Cour t hel d

t hat anot her of sect i on 6901' s pr edecessor st at ut es, sect i on 311 of

t he I nt er nal Revenue Code of 1939, 26 U. S. C. § 311 ( 1939) , pr ovi ded

onl y t he pr ocedur e by whi ch t he I RS coul d asser t subst ant i ve r i ght s

agai nst t r ansf er ees creat ed by ot her l aws- - i t di d not cr eat e any

such r i ght s. St er n, 357 U. S. at 42- 45. Thus, wher e, as t her e,

st at e f r audul ent t r ansf er l aw suppl i ed t he subst ant i ve r ul e, st at e

l aw cont r ol l ed " t he exi st ence and ext ent of [ t r ansf er ee]

l i abi l i t y. " I d. at 45. Al t hough t he st at ut or y l anguage has

changed some si nce t hen, 16 t he par t i es agr ee t hat St er n st i l l

t r ansf er , i f under st at e l aw a t r ansf er ee woul d be so l i abl e t o a

pr i vat e credi t or " ) ; Est at e of St ei n v. Comm' r , 37 T. C. 945, 961n. 18 ( 1962) ( "The l egi sl at i ve hi st or y, al t hough not of suf f i ci entcl ar i t y f or j udi ci al r el i ance, t ends t o suppor t t he r unni ng of i nt er est on t r ansf er ee l i abi l i t y f r om t he dat e of t r ansf er ,al t hough i n 1926 t he i ssue r esol ved i n [ St er n] was notconsi der ed. ") ; cf . Poi ni er , 858 F. 2d at 922 ( r ej ect i ng t he ear l y20t h cent ur y hi st or y as unhel pf ul because t he var i ous i nt er estpr ovi si ons wer e l at er combi ned i nt o sect i on 6601) .

16 The key l anguage of sect i on 311 r ead: The amount s of t he f ol l owi ng l i abi l i t i es shal l , except asher ei naf t er i n t hi s sect i on pr ovi ded, be assessed,

col l ect ed, and pai d i n t he same manner and subj ect t o t hesame pr ovi si ons and l i mi t at i ons as i n t he case of adef i ci ency i n a t ax i mposed by t hi s chapt er ( i ncl udi ngt he pr ovi si ons i n case of del i nquency i n payment af t ernot i ce and demand. . . ) : ( 1) TRANSFEREES. - - The l i abi l i t y,at l aw or i n equi t y, of a t r ansf er ee of pr oper t y of at axpayer , i n r espect of t he t ax ( i ncl udi ng i nt er est ,

-16-



cont r ol s, and r equi r es t hat st at e l aw di ct at e the exi st ence and

ext ent of Schussel ' s tr ansf er ee l i abi l i t y.

I n t ur n, bot h Massachuset t s and f eder al cour t s t r eat

pr ej udgment i nt er est as a subst ant i ve par t of a st at e- l aw r emedy.

See, e. g. , Tobi n v. Li ber t y Mut . I ns. Co. , 553 F. 3d 121, 146 ( 1st

Ci r . 2009) ( i n a di scr i mi nat i on case, not i ng t hat "[ i ] t i s wel l

est abl i shed t hat pr ej udgment i nt er est i s a subst ant i ve r emedy

gover ned by st ate l aw when st ate- l aw cl ai ms ar e br ought i n f eder al

cour t ") ; Mi l i t el l o v. Ann & Gr ace, I nc. , 411 Mass. 22, 26 & n. 4

( 1991) ( " [ A] n awar d of pr ej udgment i nt er est i s a subst ant i ve

r emedy. " ) . Si nce sect i on 6901 gover ns onl y pr ocedur e, and si nce

pr ej udgment i nt er est i s gener al l y a mat t er of subst ance, i t f ol l ows

t hat sect i on 6901 does not govern pr ej udgment i nt erest where t he

subst ant i ve l aw i s st at e l aw.

Resi st i ng t hi s concl usi on, t he I RS poi nt s t o sever al

cases i n whi ch t he I RS was i n f act abl e to recover pr ej udgment

i nt er est under f eder al l aw. But i t of f er s l i t t l e aut hor i t y

expr essl y adopt i ng i t s posi t i on- - t hat i s, f ew st at e- l aw- based

t r ansf er ee cases wher e a cour t hel d that because t he t r ansf er or

gave away mor e t han he owed t o t he I RS that day, sect i on 6601

i nt er est r uns on t he t r ansf er ee' s l i abi l i t y f r omt he dat e t hat t he

t r ansf er or ' s t axes wer e due, even t hough t hat i nt er est has grown

addi t i onal amount s, and addi t i ons t o t he t ax pr ovi ded byl aw) i mposed upon t he t axpayer by t hi s chapter .

26 U. S. C. § 311, 53 St at . 1, 90 ( 1939) .

-17-



t he debt wel l beyond what t he t r ansf er ee r ecei ved ( and r egardl ess

of when t he t r ansf eree l earned about t he debt ) . And even t hose f ew

cases i t i dent i f i es of f er l i t t l e i nf or mat i ve anal ysi s. See

Upchur ch v. Comm' r , 100 T. C. M. ( CCH) 85 ( 2010) ( under I l l i noi s

est at e t r ansf er ee l i abi l i t y r ul es, wher e t he t r ansf er ee r ecei ved

more t han t he est ate owed as a def i ci ency but l ess t han t he

def i ci ency pl us i nt er est , concl udi ng t hat i nt er est r an under

sect i on 6601 on t he t r ansf er ee' s l i abi l i t y f or t he def i ci ency f r om

t he dat e the est at e t ax ret ur n was due) ; see al so Nat ' l Pneumat i c

Co. v. Uni t ed St at es, 176 Ct . Cl . 660, 666 ( 1966) ( wher e t he asset s

t r ansf er r ed wer e adequat e t o sat i sf y the t ot al t axes, penal t i es,

and i nt er est , descr i bi ng t he i nt er est char ged as upon t he

t r ansf er ee' s l i abi l i t y, r at her t han t he t r ansf er or ' s t ax debt ) ;

But l er v. Comm' r , 84 T. C. M. ( CCH) 681 ( 2002) ( i n a case appl yi ng

Mi nnesot a f r audul ent t r ansf er l aw, expl i ci t l y compar i ng t he r oughl y

$4. 6 mi l l i on t r ansf er r ed wi t h t he t r ansf er or ' s $1. 1 mi l l i on t ax

l i abi l i t y on t he dat e of t he t r ansf er ) .

On t he whol e, t he wei ght of t he case l aw i s consi st ent

wi t h t he basi c l ogi c of our St er n anal ysi s. Thi s pr ecedent

i ncl udes t wo of t he cases upon whi ch t he I RS i t sel f r el i es, Est at e

of St ei n v. Commi ssi oner , 37 T. C. 945 ( 1962) , and Lowy v.

Commi ssi oner , 35 T. C. 393 ( 1960) . I n Lowy, t he t ax cour t expl ai ned

t hat f eder al l aw det er mi nes "t he quant um of " t he I RS' s cl ai m

agai nst t he t axpayer - t r ansf er or , and t hat t hat cl ai m i ncl udes

-18-



st at ut or y i nt er est . 35 T. C. at 395 ( i nt er pr et i ng t he 1939 code) .

Ther ef or e, where t he asset s i n t he hands of t he t r ansf er ee wer e

"mor e t han ampl e t o di schar ge t he f ul l Feder al l i abi l i t y of t he

t r ansf er or ( i ncl udi ng i nt er est ) , " t her e was no need t o r esor t t o

st at e- l aw i nt er est pr i nci pl es t o make t he I RS whol e. See i d. at

397. Here, of cour se, t he I RS woul d not be made whol e by

r ecover i ng t he f unds t r ansf er r ed t o Schussel because DCI ' s debt ,

i ncl udi ng penal t i es and i nt er est , was l ar ger t han t he amount

t r ansf er r ed. Thi s t ype of si t uat i on was pr esent ed i n Est at e of

St ei n, wher e t he t ax cour t expl ai ned t hat because t he t r ansf er r ed

asset s wer e " i nsuf f i ci ent t o pay t he t r ansf er or ' s t ot al l i abi l i t y,

i nt er est i s not assessed agai nst t he def i ci enci es because t he

t r ansf er ee' s l i abi l i t y f or such def i c i enci es i s l i mi t ed t o t he

amount act ual l y t r ansf er r ed t o hi m. I nt er est may be charged

agai nst t he t r ansf er ee onl y. . . [ as] det er mi ned by St at e l aw. " 37

T. C. at 961. Accor d, e. g. , St anko v. Comm' r , 209 F. 3d 1082,

1087- 88 ( 8t h Ci r . 2000) ( i n a const r uct i ve f r audul ent t r ansf er

case, r ej ect i ng an ar gument si mi l ar t o the I RS' s her e as unsound

under Nebr aska l aw) ; Stansbury v. Comm' r , 102 F. 3d 1088, 1089, 1092

( 10t h Ci r . 1996) ( wher e the t r ansf er ees r ecei ved l ess t han t he

t r ansf er or ' s " t ot al amount owed t o t he I RS, " concl udi ng t hat under

St er n t hei r i nt er est l i abi l i t y bef or e r ecei vi ng a not i ce was

gover ned by st ate l aw) ; Pat t erson v. Si ms, 281 F. 2d 577, 580 ( 5t h

Ci r . 1960) ( wher e t he t axpayer ' s l i abi l i t y, even bef or e i nt er est ,

-19-



exceeded t he t r ansf er ee' s net benef i t , concl udi ng t hat t he

t r ansf er ee' s subst ant i ve l i abi l i t y was cont r ol l ed by st at e l aw, and

usi ng st at e l aw t o assess t he "l i abi l i t y of a t r ansf er ee i n

addi t i on t o t he val ue of t he pr oper t y r ecei ved") .

We t her ef or e accept t he I RS' s i nvi t at i on t o f ol l ow Lowy

and Est at e of St ei n, but we f ol l ow t he act ual r easoni ng of t he

opi ni ons i n t hose cases, not t he car i cat ur e of t hem r ef l ect ed i n

t he I RS' s posi t i on. The r esul t i ng r ul e, we bel i eve, i s consi st ent

wi t h St er n' s mandat e t hat Massachuset t s l aw di ct at e Schussel ' s

subst ant i ve l i abi l i t y. St er n, 357 U. S. at 45. That r ul e i s

si mpl e: The I RS may r ecover f r om Schussel al l amount s DCI owes t o

t he I RS ( i ncl udi ng sect i on 6601 i nt er est accrui ng on DCI ' s t ax

debt ) , up t o t he l i mi t of t he amount t r ansf er r ed t o Schussel , wi t h

any r ecover y of pr ej udgment i nt er est above t he amount t r ansf er r ed

t o be determi ned i n accor d wi t h Massachuset t s l aw. 17 Thi s rul e, i n

our vi ew, appr opr i at el y def er s t o Massachuset t s f r audul ent t r ansf er

l aw and avoi ds t he ar bi t r ar y ef f ect s of t he gover nment ' s f ocus on

t he r at i o of t he debt t o t he t r ansf er r ed asset s on t he dat e of

t r ansf er . Our comf or t wi t h t hi s concl usi on i s but t r essed by ( but

not pr edi cat ed on) t he f act t hat t he I RS i t sel f appear s t o have

17 Thus, t he I RS wi l l r ecover f r omSchussel t he penal t i es andi nt er est owed t o the I RS by DCI t o the ext ent t he f undsf r audul ent l y t r ansf er r ed t o Schussel exceeded DCI ' s unpai d taxes.

-20-



t aken a si mi l ar appr oach i n non- pr ecedent i al gui dance. 18 Si mi l ar l y,

t he Not i ce of Li abi l i t y i n t hi s ver y case t r acked t hat gui dance,

r at her t han t he posi t i on t he I RS l at er advanced at t r i al and on

appeal .

Schussel cont ends, and t he I RS does not di sput e, t hat

under Massachuset t s l aw, no i nt erest woul d have begun t o accr ue

18 See I nt er nal Revenue Ser vi ce, Chi ef Counsel Advi sory200916027 ( Apr i l 17, 2009) ( " I f t he asset t r ansf er r ed exceeds t het r ansf er or ' s l i abi l i t y on t he dat e of t r ansf er , i nt er est under 6601cont i nues t o r un f r om t he dat e of t r ansf er unt i l t he ear l i er of exhaust i on of t he val ue of t he asset or t he begi nni ng of i nt er eston t he t r ansf er ee' s l i abi l i t y. . . . I f t he val ue of t he assetexceeded t he t r ansf er or ' s l i abi l i t y but has been exhaust ed and t i me

st i l l r emai ns bef or e i nt er est begi ns t o r un on t he t r ansf er ee' sl i abi l i t y, st at e l aw may i mpose i nt er est f r om t he poi nt of exhaust i on of t he val ue of t he asset s unt i l i nt er est begi ns t o r unon t he t r ansf er ee' s l i abi l i t y. ") ; I nt er nal Revenue Ser vi ce, Chi ef Counsel Advi sor y 200915038 ( Apr i l 10, 2009) ( "Wher e the t otal val ueof asset s t r ansf er r ed exceeded t he t r ansf er or ' s t ot al l i abi l i t y ont he dat e of t r ansf er , and t he excess of val ue of asset s has beenexhaust ed by t he i mposi t i on of sect i on 6601 i nt er est but t i mer emai ns i n t he second per i od, i mposi t i on of i nt er est under st at el aw may appl y . . . . " ) ; I nt er nal Revenue Ser vi ce, Chi ef CounselAdvi sor y 200851072 (Dec. 19, 2008) ( "Wher e t he t otal val ue of t het r ansf er r ed asset s exceeds t he t r ansf er or ' s t ot al l i abi l i t y on t he

date of t r ansf er , 6601 i nt er est may be i mposed f or t he secondper i od unt i l t he val ue of t he asset i s exhaust ed. . . . [ W] her e t heexcess i n val ue of asset s t r ansf er r ed has been exhaust ed, st at e l awmay i mpose i nt er est f or t he second per i od or r emai nder of t hesecond per i od. ") ; cf . Uni t ed St at es v. Cr af t , 535 U. S. 274, 300 n. 9( 2002) ( Thomas, J . , di ssent i ng) ( ci t i ng a var i et y of f or mal andi nf or mal I RS gui dance, i ncl udi ng a Chi ef Counsel Advi sor y) .

-21-



unt i l t he dat e of t he Not i ce of Li abi l i t y. 19 Cf . Mass. Gen. Laws

ch. 231, § 6B ( pr ovi di ng f or pr ej udgment i nt er est as of " t he dat e

of commencement of t he act i on. " ) ; Lassman v. Keef e ( I n re Keef e) ,

401 B. R. 520, 527 ( B. A. P. 1st Ci r . 2009) ( appl yi ng sect i on 6B t o a

Massachuset t s f r audul ent t r ansf er act i on i n bankrupt cy cour t ) . We

accept ( wi t hout deci di ng) t hat uncont est ed descr i pt i on of

Massachuset t s l aw. Schussel t her ef ore owes no pr ej udgment i nt er est

on hi s own l i abi l i t y as t r ansf er ee ( t hat i s, on t he amount s

t r ansf er r ed t o hi m) f or t he t i me per i od pr e- dat i ng t he Not i ce.

The r eader mi ght t hi nk ( and hope) we ar e done wi t h t hi s

i nt er est ( i ng) i ssue, but t hi s i s t ax l aw, and i t shoul d sur pr i se no

one that a bi t more need be sai d r egardi ng the subsequent per i od of

t i me t hat passed bet ween the Not i ce and t he j udgment ( as opposed to

t he l onger per i ods t hat passed between t he due dat e of t he t ax and

t he i ssuance of t he Not i ce, or bet ween t he dat e of t he t r ansf er and

t he Not i ce) . Sect i on 6601 pr ovi des t hat when a t ax i s "not pai d on

or bef or e the l ast dat e pr escr i bed f or payment , " i nt er est shal l

accr ue, and t hat wher e t he l ast dat e f or payment i s not pr escr i bed

19 I t may be t hat Massachuset t s l aw cont ai ns some equi t abl epr i nci pl e t hat woul d al l ow i nt er est t o accr ue ear l i er t han t hat .Compar e St ansbury, 102 F. 3d at 1092 ( wher e a t r ansf eree wasi nt i mat el y i nvol ved i n t he f r aud, Col or ado l aw l et i nt er est r un

f r om t he dat e of t he t r ansf er ) , wi t h, e. g. , Wood v. Robbi ns, 11Mass. 504, 506 (1814) ( i n an act i on f or money had and recei ved,"wher e t he def endant obt ai ned the pl ai nt i f f ' s money by f r aud andi mposi t i on, i nt er est ought t o be al l owed f r om t he r ecei pt of t hemoney, and not mer el y f r omt he servi ce of t he wr i t " ) . However , t heI RS af f i r mat i vel y wai ved t he oppor t uni t y t o chal l enge Schussel ' schar acter i zat i on of Massachuset t s l aw i n i t s post - t r i al br i ef i ng.

-22-



anywher e el se, t hat dat e " i n no event shal l be l at er t han t he dat e

not i ce and demand f or t he t ax i s made by t he Secretary. " 26 U. S. C.

§ 6601 ( a) , ( b) ( 5) ; cf . I nt er nal Revenue Ser vi ce, Chi ef Counsel

Advi sor y 200848068 ( Nov. 28, 2008) ( not i ng t hat sect i on 6901 does

not pr escr i be a " l ast dat e" f or t he t r ansf er ee t o pay a t ax and

t hat a t r ansf er ee' s l i abi l i t y f or t he t ax ar guabl y ar i ses upon t he

dat e of t r ansf er , but t hat sect i on 6601 i mposes l i abi l i t y f or

i nt er est on t he t r ansf er ee at l east as of t he dat e of not i ce and

demand f or payment of t he t r ansf er ee l i abi l i t y) . Thi s l anguage

suggest s t hat " t he quest i on of pr ej udgment i nt er est af t er t he dat e

of t he Commi ssi oner ' s not i ce of t r ansf er ee l i abi l i t y . . . may wel l

be a mat t er of f eder al l aw. " St anko, 209 F. 3d at 1088. See al so

Pat t er son, 281 F. 2d at 580.

Schussel , however , af f i r mat i vel y vol unt eer s t hat , f r om

t he dat e of t he Not i ce unt i l j udgment , he i s subj ect t o pr ej udgment

i nt erest under Mass. Gen. Laws ch. 231, § 6B. And because t he

Massachuset t s r ate ( t wel ve per cent ) exceeds t he cur r ent f eder al

r at e ( t hr ee per cent ) , t he I RS has had no cause t o oppose Schussel ' s

posi t i on t hat Massachuset t s i nt er est r ul es al so appl y t o t he per i od

bet ween t he Not i ce and t he j udgment . See Mass. Gen. Laws ch. 231,

§ 6B; 26 U. S. C. §§ 6601( a) , 6621; I RS Rev. Rul . 2014- 11.

Accor di ngl y, on r emand i n t hi s par t i cul ar case, t he "si mpl e r ul e"

st at ed above shoul d cont r ol f or t he ent i r e pr ej udgment t i me per i od,

-23-



wi t h any pr ej udgment i nt erest assessed above t he amount t r ansf err ed

cal cul at ed at t he Massachuset t s r at e f r om t he dat e of t he Not i ce.

B. How Much Did DCI Transfer to Schussel?

We t ur n next t o di vi ni ng t he si ze of t he t r ansf er .

Schussel ar gues f i r st t hat t hat amount i s $7, 358, 394, whi ch i s t he

amount t he I RS determi ned he r ecei ved as const r uct i ve di vi dends

f r om DCI when t he I RS cor r ect ed hi s per sonal t ax r et ur ns f or

1993- 1995. I n t he al t er nat i ve, he argues t hat t he amount shoul d be

$8, 923, 329- - t he amount i dent i f i ed i n t he Not i ce of t r ansf er ee

l i abi l i t y ( and adopt ed by t he t ax cour t ) . The I RS di d not

cr oss- appeal , but cl ai ms ( appar ent l y as an al t er nat e basi s f or

af f i r mance) t hat t he r ecor d shows t hat over t he l i f e of t he scheme,

Schussel used DCI t o di ver t over $15 mi l l i on t o hi msel f ( not j ust

t he $8. 9 mi l l i on l i st ed i n t he Not i ce) .

Addr essi ng f i r st Schussel ' s ar gument s f or l i mi t i ng t he

amount deemed to have been f r audul ent l y t r ansf er r ed to hi m t o $7. 3

mi l l i on, we agr ee wi t h t he t ax cour t t hat t he const r uct i ve

di vi dends det er mi nat i on i s not cont r ol l i ng. Schussel concedes t hat

t he $8. 9 mi l l i on f i gur e r epr esent s t he amount of DCI ' s gr oss

r ecei pt s di ver t ed f r om 1993 t o 1997 i nt o account s t hat he

cont r ol l ed. And on appeal , Schussel of f er s no suf f i ci ent

expl anat i on f or why t he amount of hi s const r uct i ve di vi dend i ncome

i s al so t he cor r ect measur e of asset s f r audul ent l y t r ansf er r ed

-24-



under Massachuset t s l aw. 20 Accor di ngl y, we see no er r or i n t he t ax

cour t ' s deci si on t o accept as a pr oper measur e of t he asset s he

r ecei ved dur i ng 1993- 1997 t he act ual amount t r ansf er r ed f r om DCI

i nt o Schussel - cont r ol l ed account s as st i pul at ed by the par t i es.

We t ur n next t o t he I RS' s ar gument f or i ncr easi ng t he

amount deemed t o have been t r ansf er r ed by DCI t o Schussel . The I RS

ar gues t hat t her e i s r ecor d evi dence demonst r at i ng t hat , i n

addi t i on t o t he $8, 923, 329 t r ansf er r ed i n 1993- 1997, DCI al so

di ver t ed r oughl y $6 mi l l i on mor e t o Schussel ( l ar gel y compr i sed of

amount s t r ansf er r ed t o hi m bef or e 1993. ) Assumi ng t hat t hese

t r ansf er s wer e al so made wi t h f r audul ent i nt ent , Massachuset t s l aw

r ender s al l of t he money avai l abl e t o pay both pr i or and subsequent

cl ai ms. See Davi d v. Zi l ah, 325 Mass. 252, 256 ( 1950) . Ther ef or e,

t he I RS asks us t o concl ude that t he amount t r ansf er r ed t o Schussel

was roughl y $15 mi l l i on.

The I RS' s ar gument f or usi ng t hi s i ncr eased f i gure

conf r ont s a net t l esome pr obl emof not i ce and pr ocedur e- - namel y t hat

20 Schussel argues t hat t he I RS t ook DCI ' s unr eport ed i ncomeand t hen made "adj ust ment s" t o t hat amount t o cal cul at e t headj ust ed "di vi dend i ncome" i t at t r i but ed t o hi m and hi s wi f e. Theonl y such adj ust ment t hat Schussel descr i bes on appeal i s f or moneypai d t o Ronal d Gomes. The recor d suggest s Schussel gave Gomes t hat

money t o keep hi m happy wi t h t he cash- di ver si on ar r angement and soSchussel may wel l be i nel i gi bl e t o cl ai mcredi t f or t hose payment s.See gener al l y Nort hborough Nat ' l Bank v. Ri sl ey, 384 Mass. 348,350- 51 ( 1981) . I n addi t i on, more t han $450, 000 of t he di scr epancyappear s t o rel at e to asset s t r ansf er r ed i n 1996, whi ch nat ur al l ywoul d not appear on t he Schussel s' i ncome t ax adj ust ment s f or1993- 1995.

-25-



t he I RS never ( i t seems) sought t o amend i t s Not i ce of Li abi l i t y or

ot her pl eadi ngs t o cl ear l y war n Schussel t hat i t woul d seek t o use

t he $15 mi l l i on f i gur e. Cf . 26 U. S. C. § 6214( a) ( gr ant i ng t he t ax

cour t j ur i sdi ct i on t o det er mi ne i ncreases i n def i ci enci es asser t ed

at or bef or e a hear i ng or r ehear i ng) ; U. S. Tax Ct . R. 41

( speci f yi ng t he pr ocedur e, much l i ke Fed. R. Ci v. P. 15, f or

amendi ng pl eadi ngs) . The Not i ce assur ed hi mt hat hi s l i abi l i t y was

l i mi t ed t o $8, 923, 329 pl us i nt er est as pr ovi ded by l aw. When

Schussel f i l ed hi s pet i t i on wi t h t he t ax cour t chal l engi ng t he

l i abi l i t y i mposed on hi m by t he Not i ce, t he I RS f i l ed an answer ,

l ar gel y af f i r mi ng t he posi t i on t aken i n t he Not i ce, but r ef er r i ng

( wi t hout speci f i c dol l ar amount s) t o t r ansf er s dat i ng back t o 1988.

Appar ent l y deci di ng ( but not announci ng) t hat i t had

er r ed i n i t s mor e l i mi t ed i ni t i al appr oach, t he I RS' s pr et r i al

memor andum di d i ndeed add al l egat i ons of addi t i onal t r ansf er s and

di ver si ons ( wi t h dol l ar f i gur es) dat i ng back t o 1985. At t r i al ,

t he I RS al so of f er ed evi dence r ef l ect i ng t he al l eged di ver si ons

f r om 1985 on. Schussel , f or hi s par t , obj ect ed t o t hi s awkwar d

at t empt t o est abl i sh t r ansf er s i n excess of t hose cl ai med i n t he

Not i ce, al t hough he f ai l ed t o i dent i f y any pr ej udi ce t he shi f t had

caused hi m. I n r epl y, t he I RS asser t ed t hat i t was not seeki ng,

and need not seek, an i ncr eased def i ci ency ( because DCI ' s

under l yi ng t ax def i ci ency was t he same as i t has al ways been) ; i t

t hen si mpl y assert ed t hat i t had ampl y pr oved t he gr eat er amount of

-26-



asset s t r ansf er r ed t o Schussel . The t ax cour t never cl ear l y

addr essed t he i ssue, possi bl y because, by accept i ng t he I RS' s

t heor y of pr ej udgment i nt er est , t he cour t pr et t y much af f i r med a

r ecover y t hat equal ed t he taxpayer - t r ansf er or ' s ent i r e tax

l i abi l i t y.

On appeal , t he I RS agai n pays scant at t ent i on t o t he

pr ocedur al ni cet i es. Rat her , i t si mpl y asser t s t hat i t pr oved

t r ansf er s i n t he l ar ger amount . Maybe so, but t hat i s har dl y t he

poi nt . The poi nt i s t hat t he r ecor d avai l abl e t o us on appeal

cont ai ns nei t her a not i ce of l i abi l i t y, nor an amendment , nor a

r ul i ng under Tax Cour t Rul e 41( b) t hat coul d pr ovi de a basi s f or

af f i r mi ng t he deci si on of t he t ax cour t on t he al t er nat i ve $15

mi l l i on f i gur e now ur ged by t he I RS. Cf . O' Rour ke v. Comm' r , 73

T. C. M. ( CCH) 2443 ( 1997) ( expl ai ni ng t hat t he t ax cour t cannot

gener al l y det er mi ne a gr eat er def i ci ency t han t hat l i st ed i n t he

Not i ce wher e the I RS has not pl eaded such an i ncr ease) ; U. S. Tax

Ct . R. 41. We t her ef or e l eave t hi s ent i r e quest i on ( i . e. , whet her

t he t ax court may or shoul d accept a bel at ed mot i on t o amend or

consi der any ot her avai l abl e r el i ef ) t o t he di scret i on of t he t ax

cour t on remand.

C. Schussel's Loans to DCI to Pay Schussel's Litigation Expenses

Did Not Reduce the Net Amount Transferred to Him.

Gener al l y, a f r audul ent t r ansf er ee can r educe or

el i mi nat e hi s l i abi l i t y by r et ur ni ng t he pr oper t y t o t he or i gi nal

t r ansf er or bef or e he r ecei ves a not i ce of t r ansf er ee l i abi l i t y.

-27-



See Eyl er v. Comm' r , 760 F. 2d 1129, 1134 ( 11t h Ci r . 1985) ; Gi nsber g

v. Comm' r , 35 T. C. 1148, 1155- 56 ( 1961) , af f ' d, 305 F. 2d 664 ( 2d

Ci r . 1962) ; 14A Mert ens Law of Federal I ncome Taxat i on § 53: 11

( Thompson Reut er s/ West 2014) . 21

Even i f t her e i s no act ual r et r ansf er , a t r ansf er ee mi ght

r educe hi s l i abi l i t y by showi ng t hat he used t he pr oper t y t o pay

t he t r ansf er or ' s debt s ( at l east i f t hose debt s had pr i or i t y over

t he t r ansf er or ' s t ax l i abi l i t y) . See, e. g. , Eyl er v. Comm' r , 53

T. C. M. ( CCH) 308 ( 1987) and cases ci t ed t herei n; 14A Mer t ens Law of

Feder al I ncome Taxat i on § 53: 11 ( "Whi l e a t r ansf er ee who pays t he

debt s of t he t r ansf er or wi l l not be r el i eved of l i abi l i t y t o t he

extent of payment unl ess t he debt s pai d hel d pr i or i t y over t he t ax

cl ai med by t he Gover nment , a t r ansf er ee . . . [ who] r et r ansf er s t he

pr oper t y to t he t r ansf er or can avoi d l i abi l i t y as a f r audul ent

t r ansf er ee. ") .

Wi t h t hese pr i nci pl es i n mi nd, we t ur n t o Schussel ' s

cl ai m t hat t he t ax cour t er r ed i n denyi ng hi m credi t f or j ust over

21 Nei t her si de addr essed whet her st at e or f eder al l awcont r ol s t hi s quest i on, or ci t ed t o any Massachuset t s l aw on poi nt .Because i t i mpl i cat es t he ext ent of t r ansf er ee l i abi l i t y, we ar e

i ncl i ned t o concl ude t hat under St er n, Massachuset t s l aw cont r ol s.See Gr i f f i n v. Comm' r , 74 T. C. M. ( CCH) 433 n. 17 ( 1997) . As nei t herpar t y has pr essed such a posi t i on, however , we f ol l ow t hei r l ead,not i ng t hat t he r esul t woul d l i kel y be t he same i n any event . Cf .Nort hborough Nat ' l Bank v. Ri sl ey, 384 Mass. 348, 350- 51 ( 1981) ;Modi n v. Hanr on, 346 Mass. 629, 631 ( 1964) ; Ri chman v. Lei ser , 18Mass. App. Ct . 308, 314 ( 1984) .

-28-



$2 mi l l i on t hat he " l oaned" t o DCI bet ween 2001 and 2010. 22 Most

of t hat money was used t o pay expenses r el at i ng t o Schussel ' s own

cr i mi nal and ci vi l t ax cases. Schussel ar gues t hat hi s l egal cost s

wer e pr oper l y deduct i bl e as busi ness expenses, suggest i ng t hat

t her e i s no i r r egul ar i t y i n DCI payi ng t hem, and hence i n hi s

gi vi ng DCI money t o do so. The I RS obj ect s t hat t hese wer e l oans,

not r et r ansf er s, and t hat t he onl y poi nt of t he l oans was t o l et

Schussel count per sonal expenses as DCI expenses and maxi mi ze hi s

t ax deduct i ons. Al t hough t he I RS bear s t he bur den of pr oof i n

t r ansf er ee l i abi l i t y cases, see 26 U. S. C. § 6902( a) , Schussel bor e

t he bur den "of goi ng f or war d wi t h t he evi dence . . . t o r ef ut e

t r ansf er ee l i abi l i t y once t he . . . [ I RS] made a pr i ma f aci e

showi ng of such l i abi l i t y. " Eyl er , 53 T. C. M. ( CCH) 308 ( ci t at i on

omi t t ed) .

The t ax cour t , si di ng wi t h t he I RS, evi dent l y f ound t hat

t he " l oan" t r ansact i ons l acked economi c subst ance. I t f ound t hat

DCI was out of busi ness when t he l oans were made, "had not hi ng t o

gai n or l ose by def endi ng or not def endi ng the charges, " and never

cont est ed t he t ax def i ci ency. Schussel v. Comm' r , 105 T. C. M. ( CCH)

1223, at *7- 8 ( 2013) . I t hel d t hat " [ t ] he amount s l oaned t o t he

cor por at i on wer e never avai l abl e t o pay i t s tax l i abi l i t i es. " I d.

at *7. The t ax cour t decl i ned t o addr ess Schussel ' s ar gument s

22 Schussel t r ansf err ed $2, 141, 786 t o DCI bet ween 2000 and2010, of whi ch $75, 000 was repai d i n 2004, l eavi ng a net " l oan" t oDCI of $2, 066, 786.

-29-



about whether t he cl ai med expenses were deduct i bl e t o ei t her

Schussel or DCI , or t o appor t i on t hem bet ween t he t wo, deci di ng

"onl y whet her l oans by pet i t i oner t o t he cor por at i on shoul d r educe

t he t r ansf er l i abi l i t i es i n i ssue; " i t not ed, however , t hat

" r ecor di ng l oans t o a def unct ent i t y, payi ng expenses and deduct i ng

t hem on an S cor por at i on r et ur n, and passi ng t hr ough t he resul t i ng

l osses t o pet i t i oner ' s per sonal i ncome t ax ret ur ns was si mpl y a way

t o creat e t he appearance t hat personal expenses were busi ness

expenses. " I d. at *7- 8. " I n any event , " t he cour t not ed, Schussel

was bound by t he cont empor aneous charact er i zat i on of t hese

t r ansact i ons as l oans. I d. at *8. "I n sum, " t he cour t f ound

unj ust i f i ed by "l aw or r eason" t he i dea t hat Schussel ' s "l i abi l i t y

as a t r ansf er ee f or corporate i ncome t axes t hat he caused t o be

evaded shoul d be r educed by t he cost s of def endi ng hi msel f f r omt he

consequences of hi s f r aud. " I d.

Schussel obj ect s t o t he t ax cour t ' s f i ndi ngs and

concl usi ons on onl y t wo gr ounds. Fi r st , he at t acks t he cour t ' s

obser vat i on t hat not hi ng i n "l aw or r eason" j ust i f i ed r educi ng

Schussel ' s l i abi l i t y by t he amount of hi s own l egal f ees. Not so,

Schussel cont ends: pr ecedent makes cl ear t hat l egal def ense cost s

r el ated t o one' s busi ness may be deduct i bl e as a busi ness expense.

See, e. g. , Comm' r v. Tel l i er , 383 U. S. 687 ( 1966) . Whi l e t r ue,

t hi s hel ps hi ml i t t l e. We vi ew t he t ax cour t ' s r emar k as a passi ng

comment upon t he equi t i es of t he case- - not as hol di ng t hat

-30-



Schussel ' s sui t - r el at ed expenses wer e per se nondeduct i bl e. Thi s

i s especi al l y cl ear i n l i ght of t he t ax cour t ' s expl i ci t r ef usal t o

deci de t he deduct i bi l i t y quest i on. Thi s passi ng comment af f or ds no

basi s f or r ever sal .

Second, Schussel t akes ai mat t he t ax cour t ' s concl usi on

t hat t he l oaned f unds wer e never avai l abl e t o pay DCI ' s t ax bi l l ,

and i t s resul t i ng r ef usal t o appor t i on t hose expenses. Regar dl ess

of how t he t r ansf er s wer e recorded on t he cor porate books, he

ar gues, t hey put cash i n DCI ' s account s ( or r eal l y, on i t s l edger s)

whi ch was t hen avai l abl e t o pay DCI ' s debt s. Readi ng t he cour t ' s

anal ysi s as a whol e, however , we t hi nk t hat i t j ust i f i abl y

concl uded t hat t her e was no meani ngf ul r et r ansf er .

Vi ewed t hr ough t he l ens of f eder al t ax doct r i ne ( whi ch

t he par t i es mor e or l ess i nvi t e by f ai l i ng t o ci t e any non- f eder al

aut hor i t y on poi nt ) , t he r esul t i s j ust i f i ed by t he power t o

di sr egar d t he f or mof t r ansact i ons t hat have no busi ness pur pose or

economi c subst ance beyond t ax evasi on. See Fi del i t y I nt ' l Cur r ency

Advi sor A Fund, LLC ex r el . Tax Mat t er s Par t ner v. Uni t ed St at es,

661 F. 3d 667, 670 ( 1st Ci r . 2011) ( "Tax consi der at i ons are

per mi ssi bl y t aken i nt o account by t axpayer s . . . but wher e a

t r ansact i on has no economi c pur pose other t han t o reduce t axes, t he

I RS may di sr egar d t he repor t ed f i gur es as f i ct i ons and l ook t hr ough

t o t he under l yi ng subst ance. " ) . Why el se woul d t he t ax cour t

speci f y that t he servi ces pai d f or wer e r ender ed t o Schussel

-31-



per sonal l y, or t hat DCI was out of busi ness and had not hi ng t o gai n

by def endi ng t he charges, bef ore concl udi ng t hat t he l oans wer e

"not avai l abl e" t o pay DCI ' s debt s? ( We not e t hat Schussel of f er s

no chal l enge t o t hose f i r st t wo f i ndi ngs. ) I t t hus appear s t hat

t he t ax cour t f ound no economi c subst ance or busi ness pur pose f or

DCI i n t he l oans, and t hat t hei r onl y f unct i on was t o mani pul at e

t ax l i abi l i t y. 23 Cf . Ber ger sen v. Comm' r , 109 F. 3d 56, 60 ( 1st Ci r .

1997) ( decl i ni ng t o credi t t he char act er i zat i on of pur por t ed l oans

f r om a company t o st akehol der s, and i nst ead t r eat i ng t hem as

di vi dends, wher e t he ef f ect of t he whol e t r ansact i on was t o gi ve

t he t axpayers " permanent t ax- f r ee cont r ol over t he moneys" and

r epayment of t he l oans amount ed t o "a meani ngl ess exchange of

checks. " ( i nt er nal quot at i on mar ks omi t t ed) ) . We see no basi s f or

di st ur bi ng t he t ax cour t ' s r ul i ng on t hi s poi nt .

IV. Conclusion

For t he f or egoi ng r easons, t he j udgment of t he tax cour t

i s affirmed i n par t and reversed i n par t , and t he mat t er i s

remanded f or f ur t her pr oceedi ngs consi st ent wi t h t hi s opi ni on. No

cost s ar e awarded.

23 Thus, t hi s case di f f er s f r om one i n whi ch a t r ansf er eemi ght gi ve t he t r ansf er or gener al f unds whi ch wer e t hen pai d out t oot her cr edi t or s. When t her e i s a genui ne r et r ansf er , t he use t owhi ch t hose f unds are t hen put by the or i gi nal t r ansf er or does notbear on t he l i abi l i t y of t he or i gi nal t r ansf er ee.

-32-

Documents

Schussel v. Werfel, 1st Cir. (2014)