                         T.C. Memo. 1998-426



                       UNITED STATES TAX COURT



 THOMAS H. SCOTT AND LYNN D. SCOTT, TRANSFEREES, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5245-95.                 Filed November 30, 1998.



     Thomas G. Hodel, for petitioners.

     William R. Davis, Jr. and Jerry L. Leonard, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     CHIECHI, Judge:    In separate notices of transferee liability

(notices), respondent determined that petitioner Thomas H. Scott

(Mr. Scott) and petitioner Lynn D. Scott (Ms. Scott) are liable

as transferees of Mountain States Stock Transfer Agents, Inc.

(MSSTA) (1) in amounts not exceeding $104,580 and $95,072, re-
                               - 2 -


spectively, for MSSTA's unpaid Federal income tax (tax) liability

for 1989 of $164,981 (MSSTA's unpaid tax liability) and (2) for

"interest as provided by law".1

     We must decide whether Mr. Scott and Ms. Scott (collec-

tively, the Scotts) are liable as transferees of MSSTA in amounts

not exceeding $104,580 and $95,072, respectively, for MSSTA's

unpaid tax liability and, if so, whether they are liable for

interest on such respective amounts from March 15, 1990, the date

on which MSSTA's unpaid tax liability became due, to January 10,

1995, the date on which the notices were issued.2   We hold that

Mr. Scott is so liable and that Ms. Scott is not.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found

unless otherwise stated herein.

     At the time the petition was filed, petitioners resided in

Denver, Colorado.

     On October 2, 1980, MSSTA was incorporated under the laws of

the State of Colorado.   From its incorporation until September


1
   Unless otherwise indicated, all section references are to the
Internal Revenue Code (Code) in effect for the years at issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
2
   The parties agree that in the event the Court were to deter-
mine that either petitioner is liable as a transferee of MSSTA,
each such petitioner also would be liable under secs. 6601 and
6621 for interest from Jan. 10, 1995, to the date on which the
amount of each such petitioner's liability is paid.
                               - 3 -


14, 1989, James R. Carter (Mr. Carter) owned 52 percent, and each

of the Scotts owned 24 percent, of the stock of MSSTA, and Mr.

Carter and Mr. Scott were directors and officers of that company,

Mr. Scott having served as its president.   At all relevant times

prior to September 14, 1989, Mr. Carter's son, Rock Carter, also

was a director of MSSTA.

     At all relevant times, MSSTA was in the business of acting

as a securities transfer agent (securities transfer agent busi-

ness), principally for corporations whose stock was traded on the

over-the-counter market in Denver, Colorado.   MSSTA's primary

competitor during the mid-to-late 1980's was American Securities

Transfer, Inc. (AST).3   Throughout that period, AST was wholly

owned by Charles R. Harrison (Mr. Harrison), its president who

was in charge of operational and marketing matters, and Bruce E.

Hall (Mr. Hall), its treasurer and secretary who was in charge of

financial, accounting, and tax matters.   At all relevant times,

Mr. Hall, a certified public accountant (C.P.A.), also engaged in

a small individual tax practice.

     Prior to 1989, MSSTA's business had been very profitable.

Based on his assessment of the securities transfer agent in-

dustry, Mr. Scott determined around early 1989 that the level of

profits which MSSTA had enjoyed over the prior several years


3
   Sometime during 1996, AST's name was changed to American
Securities Transfer and Trust, Inc.
                                 - 4 -


would not continue.    Mr. Scott and Mr. Carter met sometime during

the first several months of 1989 to discuss MSSTA's financial

situation.    Mr. Scott wanted to remain involved as an officer and

an owner of MSSTA's securities transfer agent business, whereas

Mr. Carter desired to withdraw his investment in that business

and use it for other purposes.    Mr. Scott and Mr. Carter decided

to attempt to merge MSSTA with another company in the securities

transfer agent business or to sell MSSTA's assets to such a com-

pany and then liquidate MSSTA.    Mr. Carter suggested to Mr. Scott

that he approach AST to explore a possible combination of MSSTA

and AST.    Mr. Scott contacted Mr. Harrison sometime around the

spring of 1989, and they held preliminary discussions relating to

that possibility.

       Around May 1989, Mr. Scott met (May 1989 meeting) with

Stephen Hrynik (Mr. Hrynik) who had been serving for about six or

seven years as MSSTA's outside accountant, auditor, and tax

return preparer.    Mr. Hrynik, a C.P.A. since 1976, had first met

Mr. Scott in the mid-1970's when Mr. Hrynik was employed by

another C.P.A. who was representing Mr. Scott and Mr. Scott's

business on accounting and tax matters, and Mr. Hrynik was

assigned to work on certain of those matters.    At the May 1989

meeting, Mr. Scott informed Mr. Hrynik about the discussions that

he was having regarding the possibility of combining MSSTA and

AST.    Mr. Hrynik advised Mr. Scott at that meeting about the
                               - 5 -


differences between a merger and an asset sale.   Mr. Scott did

not give Mr. Hrynik any documents relating to a possible com-

bination of MSSTA and AST at the May 1989 meeting.

     During the discussions between Mr. Scott and Mr. Harrison

about combining the businesses of MSSTA and AST, Mr. Scott was

acting on behalf of MSSTA, Mr. Carter, Ms. Scott, and himself,

and Mr. Harrison was acting on behalf of AST, Mr. Hall, and

himself.   During those discussions, it was determined that any

combination of MSSTA and AST would have to be structured as an

asset acquisition, and not a merger, so that the acquiring

company in any such combination would not be responsible for the

liabilities of the acquired company.   Mr. Scott informed Mr.

Harrison that, regardless how the combination of MSSTA and AST

was structured, Mr. Scott and Ms. Scott, but not Mr. Carter,

wanted to remain as stockholders of the combined businesses, and

Mr. Scott, but not Mr. Carter, desired to remain as an officer

thereof.

     As a result of negotiations between Mr. Scott and Mr.

Harrison, MSSTA and AST agreed in principle that MSSTA would sell

its assets to AST; Mr. Scott and Ms. Scott, but not Mr. Carter,

would acquire stock of AST; Mr. Scott would become president of

AST; and AST would enter into consulting agreements with Mr.

Scott and Mr. Carter, respectively.    Thereafter, Mr. Hall began

meeting with Mr. Scott and Mr. Harrison in order to negotiate the
                               - 6 -


specific terms of the foregoing agreement in principle.    In order

to assist them in those negotiations in determining, inter alia,

the value of the respective assets of AST and MSSTA and the total

number of shares of AST stock that the Scotts would be able to

acquire as part of the transaction in which AST purchased MSSTA's

assets, AST directed Ed Schultz (Mr. Schultz), AST's outside

C.P.A., to prepare business valuations of AST and MSSTA.     Al-

though not a business valuation expert, Mr. Hrynik, as MSSTA's

outside accountant and auditor, met twice with Mr. Schultz re-

garding Mr. Schultz' assignment.

     Based principally on Mr. Schultz' business valuations of AST

and MSSTA and Mr. Carter's decision not to acquire stock of AST

as part of the transaction in which AST purchased MSSTA's assets,

Mr. Harrison and Mr. Hall informed Mr. Scott, inter alia, that

AST was willing to buy MSSTA's assets for approximately $800,000

and that, as part of that transaction, the Scotts would be per-

mitted to purchase for approximately $300,000 a total of about 33

percent of AST's stock.   Mr. Scott, Mr. Carter, and MSSTA tenta-

tively agreed to the foregoing terms proposed by Mr. Harrison,

Mr. Hall, and AST.   They also tentatively agreed with Mr.

Harrison, Mr. Hall, and AST that (1) AST would pay (a) $600,000

of the $800,000 purchase price for MSSTA's assets directly to

MSSTA and (b) the $200,000 balance, as well as an additional

negotiated amount, directly to Mr. Carter under an agreement by
                                - 7 -


Mr. Carter to consult and not to compete with AST; (2) MSSTA

would make liquidating distributions to the Scotts and Mr.

Carter, based on their respective stock ownership of MSSTA, of

the $600,000 that it would receive directly from AST; and (3) the

Scotts would use money that they would receive from MSSTA in such

liquidating distributions to assist them in purchasing stock in

AST.

       Mr. Harrison and/or Mr. Hall directed AST's attorney, Gary

LaPlante (Mr. LaPlante), to prepare preliminary drafts of the

various documents that would be needed to implement the tentative

agreements that had been reached regarding, inter alia, MSSTA's

sale of its assets to AST, the Scotts' respective purchases of

stock of AST, and consulting agreements between AST and Mr. Scott

and Mr. Carter, respectively.    (We shall sometimes refer to

MSSTA's sale of its assets to AST and all of the transactions

that occurred simultaneously with that sale as the MSSTA

transaction.)

       Mr. Scott retained Arthur Bosworth (Mr. Bosworth), an at-

torney, to represent MSSTA and the Scotts in the MSSTA trans-

action.    Mr. Bosworth had previously represented them with

respect to various litigation matters.    Mr. Bosworth initially

declined to represent MSSTA and the Scotts in the MSSTA trans-

action because he was not competent to give tax advice.    However,

Mr. Bosworth agreed to represent them after Mr. Scott told him
                               - 8 -


that he had retained Mr. Hrynik for assistance on tax and ac-

counting matters relating to the MSSTA transaction.   Mr. Bosworth

informed Mr. Harrison, Mr. Hall, and AST's attorney, as well as

Mr. Scott, but not Ms. Scott, that he was not representing MSSTA

and the Scotts with respect to any tax matters.

     Around the end of August 1989, Mr. Scott asked Mr. Hall what

the tax consequences would be to MSSTA and the Scotts under the

tentative agreements that had been reached regarding the MSSTA

transaction.   Mr. Hall responded that (1) MSSTA's tax liability

would be approximately $100,000 if it reported the $600,000 that

AST had tentatively agreed to transfer directly to it as the

amount realized from the sale of its assets; (2) there would be

no tax consequence to MSSTA as a result of AST's payment directly

to Mr. Carter of $200,000 of the total $800,000 that AST was

willing to pay for MSSTA's assets; and (3) based on the tax law

relating to capital gains, the Scotts would owe tax on the capi-

tal gains that they would realize when MSSTA made liquidating

distributions to them as 48-percent stockholders of MSSTA of

approximately $300,000, which tax would be equal to about one-

third of such gains.   Because of that capital gains tax that the

Scotts would owe, they would not have sufficient cash from the

MSSTA transaction to purchase the entire 33-percent stock inter-

est in AST which they wanted to acquire and to which Mr.

Harrison, Mr. Hall, and AST had tentatively agreed, and they
                                - 9 -


would have to make other arrangements to buy that stock interest,

such as guaranteeing the loan that AST would have to obtain in

order to finance in part its purchase of MSSTA's assets.   Mr.

Hall cautioned Mr. Scott to consult his own tax adviser about the

tax consequences to MSSTA and the Scotts as a result of the MSSTA

transaction, since Mr. Hall was not familiar with either MSSTA's

or the Scotts' tax situation.

     Mr. Scott told Mr. Hall that he did not intend to pay any

taxes as a result of the MSSTA transaction.   In an attempt to

accommodate Mr. Scott, Mr. Harrison and Mr. Hall told Mr. Scott

that the form of the MSSTA transaction could be changed to the

following:   AST would transfer directly to MSSTA $300,000, in-

stead of $600,000, for MSSTA's assets; Mr. Carter would receive

that $300,000 from MSSTA in redemption of his MSSTA stock; and

each of the Scotts would acquire (1) a 10.5-percent stock inter-

est in AST for a nominal cash amount and (2) an additional 6-

percent stock interest in that company in exchange for a nominal

cash amount and Mr. Scott's promise to guarantee a bank loan that

AST would seek in order to finance in part its acquisition of

MSSTA's assets and to forgo for a period of several years con-

tributions by AST for Mr. Scott's benefit to its profit-sharing

plan.   Mr. Hall indicated to Mr. Scott that, under the foregoing

form of the MSSTA transaction, MSSTA and the Scotts could take

the following return positions:   (1) MSSTA would report the
                               - 10 -


$300,000 that it received directly from AST as the amount re-

alized from the sale of MSSTA's assets, and (2) the Scotts would

not report any income because there would be no liquidating dis-

tributions to them by MSSTA.   Mr. Hall further advised Mr. Scott

that, provided that the foregoing return positions were accepted

by the Internal Revenue Service (Service), (1) MSSTA's tax lia-

bility would be approximately $10,000, and (2) the Scotts would

not owe any tax.   Mr. Hall cautioned Mr. Scott that the Service

could decide not to accept those return positions of MSSTA and

the Scotts because the Scotts would be paying only a nominal cash

amount for a 21-percent stock interest in AST and would not be

reporting any income attributable to liquidating distributions by

MSSTA to them.   Nonetheless, Mr. Scott, acting on behalf of

MSSTA, Ms. Scott, Mr. Carter, and himself, and Mr. Harrison and

Mr. Hall, acting on behalf of AST and themselves, decided to take

that tax risk and agreed, inter alia, on the following form of

the MSSTA transaction:   AST would transfer only $300,000 directly

to MSSTA for its assets; Mr. Carter would receive that amount

from MSSTA in redemption of his MSSTA stock; and the Scotts would

pay AST only a nominal cash amount to acquire a 21-percent stock

interest in that company.

     Sometime after Mr. LaPlante prepared the preliminary drafts

of the various documents that would be needed to implement the

tentative agreements that had been reached, Mr. Scott contacted
                               - 11 -


Mr. Hrynik, whom Mr. Scott had not consulted since Mr. Scott had

asked him to meet with Mr. Schultz, and asked him to review sev-

eral draft documents relating to that transaction including, in-

ter alia, the following:    (1) An asset purchase agreement pur-

suant to which AST would acquire MSSTA's assets; (2) a stock re-

demption agreement pursuant to which MSSTA would redeem Mr.

Carter's entire stock interest in MSSTA for $300,000; (3) an

agreement between AST and Mr. Carter pursuant to which he would

agree to consult and not to compete with AST; and (4) separate

agreements between AST and Mr. Scott and Ms. Scott, respectively,

pursuant to which each of them would purchase certain stock of

AST.    (We shall refer collectively to the draft documents that

Mr. Hrynik received from Mr. Scott as the MSSTA transaction draft

documents.)    At the time Mr. Scott asked Mr. Hrynik to review the

MSSTA transaction draft documents, Mr. Hrynik did not know, inter

alia, that AST was willing to pay approximately $800,000, instead

of $300,000, to acquire MSSTA's assets.    Nor was he aware of the

discussions that had taken place among Mr. Scott, Mr. Harrison,

and Mr. Hall regarding the amount of MSSTA's tax liability if AST

transferred to MSSTA, and MSSTA reported, $600,000 as the sales

price for MSSTA's assets.

       After he reviewed the MSSTA transaction draft documents, Mr.

Hrynik told Mr. Scott that certain of those documents were in-

complete, including, inter alia, the MSSTA transaction draft
                                - 12 -


documents relating to the purchase by Mr. Scott and Ms. Scott,

respectively, of certain stock of AST, which did not reflect the

price for each such purchase.    In response, Mr. Scott advised Mr.

Hrynik that Mr. Scott would take responsibility for negotiating

that purchase price with AST.

     Mr. Hrynik's review of the MSSTA transaction draft documents

led him to inform Mr. Scott that, because the transactions re-

flected in those documents were to take place simultaneously and

in no particular order, the Service might consider them to be one

transaction for tax purposes.    In response, Mr. Scott told Mr.

Hrynik not to spend very much time reviewing the tax consequences

of the MSSTA transaction because Mr. Scott had consulted with

AST's accountants and Mr. Scott believed that he understood the

tax consequences of that transaction.

     On September 7, 1989, MSSTA and AST entered into an

"AGREEMENT FOR PURCHASE AND SALE OF ASSETS" (asset purchase

agreement) which stated that MSSTA would, inter alia, sell its

assets to AST for $300,000.   On or about the same date, Mr.

Scott, Mr. Carter, Mr. Harrison, Mr. Hall, MSSTA, and AST agreed

that MSSTA would retain 45 customer accounts that were known as S

accounts (S accounts).   Mr. Scott estimated that the retention of

those accounts by MSSTA would generate approximately $10,000 a

month in revenues, the approximate amount that was needed each

month in order for MSSTA to meet its existing lease obligation
                              - 13 -


(lease obligation) for which Mr. Scott also was personally lia-

ble, as well as its expenses in maintaining the S accounts.

     On September 7, 1989, MSSTA and Mr. Carter entered into a

"STOCK REDEMPTION AGREEMENT" (stock redemption agreement) with

MSSTA in which Mr. Carter agreed to "sell, convey, transfer,

assign, and deliver to" MSSTA all of the common stock that he

owned in that company, in return for which MSSTA agreed to pay

him $300,000.   Mr. Scott signed the stock redemption agreement as

president of MSSTA.

     On September 14, 1989 (closing date), MSSTA and AST entered

into an "AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF ASSETS"

(amendment to the asset purchase agreement), which reflected

MSSTA's retention of 45 S accounts.    MSSTA and AST also entered

into an "OPTION AGREEMENT" (option agreement), dated September

14, 1989, which gave AST an option until December 31, 1991, to

buy those S accounts from MSSTA for $500 per account.   Despite

MSSTA's retention of the S accounts, the purchase price of

$300,000 for MSSTA's assets that was reflected in the asset pur-

chase agreement was not altered by the amendment to the asset

purchase agreement.   (We shall refer collectively to the asset

purchase agreement and the amendment to the asset purchase

agreement as the amended asset purchase agreement.)

     On September 8, 1989, Mr. Bosworth wrote a letter to Mr.

Hrynik (Bosworth letter) that was signed by his associate.    The
                              - 14 -


Bosworth letter indicated that the purchase price for the assets

of MSSTA except the S accounts (MSSTA's non-S account assets) was

$300,000.   That letter listed MSSTA's non-S account assets and

allocated that $300,000 purchase price among those assets.     The

Bosworth letter also stated in pertinent part:

          The foregoing allocation of the [$300,000]
     purchase price for the assets will be utilized in
     reporting this transaction to any and all taxing
     authorities. * * *.

          Both in house and outside C.P.A.'s for AST have
     assured MSSTA this allocation results in the least
     possible taxable event to MSSTA, and that tax liability
     will not exceed $10,000 in connection with the
     allocation.

          This letter is to request that you review the
     allocation [of the $300,000 purchase price], and
     contact this firm regarding whether you agree with
     AST's representation that the maximum tax liability
     faced by MSSTA is $10,000.

          The closing of this sales transaction is scheduled
     for Wednesday morning, September 13, 1989. I would
     greatly appreciate it if you could contact Arthur
     Bosworth, * * * with respect to your opinion concerning
     the allocation, as well as your opinion letter relative
     to the solvency of MSSTA subsequent to the asset sale.
      * * *.

     Shortly after receiving the Bosworth letter, Mr. Hrynik

telephoned Mr. Bosworth and advised him that, based on the re-

presentations in the Bosworth letter that the purchase price for

MSSTA's non-S account assets was $300,000 and that, in reporting

the MSSTA transaction to all tax authorities, MSSTA would reflect

that amount as the purchase price for those assets, MSSTA's tax

liability would be around $10,000 or less.   Mr. Hrynik did not
                             - 15 -


consider his opinion about MSSTA's tax liability to constitute

his opinion as to whether the $300,000 purchase price, as set

forth in the Bosworth letter, would be sustained if MSSTA's

return were audited by the Service.

     As requested in the Bosworth letter, Mr. Hrynik also pre-

pared a letter (solvency letter), dated September 13, 1989, which

he sent to the board of directors and stockholders of MSSTA.    The

solvency letter stated:

     We have been requested to provide our opinion relative
     to the solvency of the Company [MSSTA] subsequent to
     the Company's sale of assets to American Securities
     Transfer, Inc. and the redemption of James R. Carter's
     common stock.

     Section 7-6-102 of the Colorado Corporation Code pro-
     vides that no redemption or purchase of redeemable
     stock shall be made by a corporation when it is insol-
     vent or when such redemption or purchase would render
     it insolvent and further provides that a corporation
     may redeem its stock only out of surplus. Section 7-1-
     102 of the Code defines insolvency as the inability of
     a corporation to pay its debts as they become due in
     the usual course of its business.

     In our opinion, based on the Company's unaudited bal-
     ance sheet at August 31, 1989, there will be, immedi-
     ately after the asset sale, adequate unreserved and
     unrestricted surplus to purchase Mr. Carter's stock.
     Further, subsequent to the stock redemption and based
     on management's statement that the Company [MSSTA] will
     continue to operate in a limited capacity and generate
     approximately $10,000 per month in gross revenue, the
     Company will have the ability to pay its debts as they
     become due in the usual course of business.

At the request of Mr. LaPlante, the only transactions that were

part of the MSSTA transaction which Mr. Hrynik considered in

opining on the solvency of MSSTA are those described in the first
                               - 16 -


paragraph of the solvency letter quoted above.   In considering

those transactions, Mr. Hrynik relied on the representations made

to him in the Bosworth letter about the $300,000 purchase price

for MSSTA's non-S account assets as set forth in that letter and

about MSSTA's redemption of Mr. Carter's MSSTA stock for

$300,000.    In rendering that solvency opinion, Mr. Hrynik was not

aware that the parties to the MSSTA transaction had agreed that

the Scotts could buy a specified number of shares of AST stock

for a nominal cash amount.

     Mr. Hrynik sent MSSTA two statements dated June 30, 1989,

and September 15, 1989, which billed MSSTA $525 and $2,085,

respectively, for various activities related to the MSSTA trans-

action, including "review of documents related to asset sale and

stock redemption, analysis of tax consequences of the same".

     At some undisclosed time prior to September 14, 1989, the

closing date, Ms. Scott learned about the MSSTA transaction from

Mr. Scott.   She understood from him that, after the MSSTA trans-

action, Mr. Scott would own an aggregate stock interest in AST, a

corporation that was larger than MSSTA, which was smaller than

his stock interest in MSSTA before that transaction.   Although

Ms. Scott was present at certain meetings between Mr. Bosworth

and Mr. Scott shortly before the closing of the MSSTA transaction

and reviewed certain documents relating to that transaction, she

did not participate in the discussions relating to that trans-
                              - 17 -


action.   In addition, while she was present at the closing of the

MSSTA transaction, Ms. Scott was not aware of the purchase price

that she was paying for the AST stock which she was acquiring as

part of the MSSTA transaction.   Ms. Scott agreed to the MSSTA

transaction because she relied on and accepted Mr. Scott's

recommendation to her that it was desirable to effect that

transaction.

     On the closing date, pursuant to the amended asset purchase

agreement, MSSTA sold substantially all of its assets to AST,

except the S accounts that MSSTA retained, and AST transferred

$300,000 directly to MSSTA for those assets.   On the same date,

pursuant to the stock redemption agreement, Mr. Carter trans-

ferred his stock interest in MSSTA (viz., 52,000 shares of MSSTA

stock) to, and he received $300,000 from, MSSTA.   Thereafter, Mr.

Scott and Ms. Scott each owned 50 percent of the stock of MSSTA,

and AST did not own any stock of MSSTA.

     Also on the closing date, pursuant to a "SUBSCRIPTION

AGREEMENT" (subscription agreement) between Mr. Scott and AST and

a subscription agreement between Ms. Scott and AST, each of them

purchased 6,150 shares of AST stock and transferred $615,4 or ten

4
   In the stipulation of facts (stipulation), the parties stipu-
lated that the terms of each subscription agreement stated that
Mr. Scott and Ms. Scott each purchased 6,150 shares of AST common
stock for $6,150. On brief, the parties point out, and we agree,
that the stipulation is wrong because reliable evidence in the
record establishes that the price paid under each subscription
                                                   (continued...)
                              - 18 -


cents a share, to AST.   According to the terms of each subscrip-

tion agreement, the transfer of 6,150 shares of AST stock to Mr.

Scott and Ms. Scott, respectively, was contingent on (1) AST's

purchase of MSSTA's assets in accordance with the asset purchase

agreement and (2) the closing of the other subscription agree-

ment.   In this regard, each subscription agreement stated in

pertinent part:

     The purchase [of AST stock] will take place upon AST
     completing its purchase of the assets of Mountain
     States Stock Transfer Agents, Inc. in accordance with
     an Agreement for Purchase and Sale of Assets dated
     September 7, 1989 ("Asset Purchaser [sic] Agreement")
     * * *. If the closing under the Asset Purchase Agree-
     ment has not occurred on or before September 30, 1989,
     unless extended for up to 30 days at the sole discre-
     tion of AST * * *, the escrowed purchase price [for the
     AST stock] will be returned promptly and without in-
     terest to Purchaser, and this [subscription] Agreement
     shall be deemed terminated.

In addition to the Scotts' paying $1,230 for an aggregate 33-

percent stock interest in AST as set forth in the subscription

agreements, as consideration for the Scotts' acquisition of about

36 percent of that stock interest, or in the aggregate 12 percent

of AST's stock, Mr. Scott agreed to guarantee a bank loan that

AST sought in order to finance in part AST's acquisition of

MSSTA's assets and to forgo for a period of several years con-

tributions by AST for Mr. Scott's benefit to its profit-sharing

plan.   As a result of the MSSTA transaction, Mr. Scott and Ms.

4
 (...continued)
agreement was $615, and not $6,150.
                               - 19 -


Scott each owned 16-1/2 percent, or in the aggregate 33 percent,

of the stock of AST.

     On the closing date, AST also paid Mr. Scott $25,000 pur-

suant to a document describing a consulting agreement between Mr.

Scott and AST (Scott-AST consulting agreement).    Also on that

date, pursuant to an agreement by Mr. Carter and his wife that

appeared at the end of the asset purchase agreement, Mr. Carter

and AST entered into a "CONSULTING AGREEMENT" (Carter-AST con-

sulting agreement).    Pursuant to the terms of the Carter-AST

consulting agreement, AST agreed to engage Mr. Carter as a con-

sultant with respect to certain matters through September 13,

1993, and Mr. Carter also agreed that, during the term of the

Carter-AST consulting agreement, he would not directly or in-

directly have any interest as owner, partner, agent, stockholder,

consultant, employee, or otherwise in any business that engaged

in any securities transfer agent business in the United States.

In exchange for Mr. Carter's agreement to consult and not to

compete with AST, AST was obligated under the Carter-AST con-

sulting agreement to pay Mr. Carter a total of $525,000 over four

years.   Immediately following the signatures on the Carter-AST

consulting agreement, a paragraph entitled "Consent", which was

executed by Mr. Scott as the president of MSSTA, included MSSTA's

acknowledgment and approval of that agreement.
                             - 20 -


     At the closing of the MSSTA transaction, Mr. Scott, in his

capacities as president, director, and stockholder of MSSTA,

knew, and consequently MSSTA knew, inter alia, that (1) the MSSTA

transaction took the form that it did because Mr. Scott did not

want to pay any taxes as a result of that transaction; (2) the

Scotts were not purchasing an aggregate 21-percent stock interest

in AST in exchange for the nominal cash amount of ten cents a

share and/or their aggregate 48-percent stock interest in MSSTA;5

(3) AST was not purchasing MSSTA's assets for only $300,000, but

instead, in substance, was purchasing those assets for an amount

substantially in excess of $300,000 consisting of cash and a 21-

percent stock interest in AST; (4) the Service could decide not

to accept the return positions that MSSTA and the Scotts intended

to take with respect to the MSSTA transaction (viz., MSSTA would

report only the $300,000 that it received directly from AST as

the amount realized from the sale of MSSTA's assets, and the

Scotts would not report any income since there were no liqui-

dating distributions to them by MSSTA) because the Scotts would

be paying only a nominal cash amount for a 21-percent stock in-

terest in AST and would not be reporting any income attributable

to liquidating distributions by MSSTA to them; and (5) MSSTA's

tax liability would be about $10,000, and the Scotts would not


5
   The Scotts acquired a total of 33 percent of the stock of AST
as part of the MSSTA transaction. See supra p. 19.
                              - 21 -


owe any tax as a result of the MSSTA transaction only if the

Service accepted those return positions of MSSTA and the Scotts.

At the closing of the MSSTA transaction, Mr. Scott, in his ca-

pacities as president, director, and stockholder of MSSTA, was

bound to know, and consequently MSSTA was bound to know, that

MSSTA would owe tax substantially in excess of $10,000 on the

consideration, which was substantially in excess of $300,000,

that he and MSSTA knew AST paid to purchase MSSTA's assets.

     With the closing of the MSSTA transaction, including (1) the

amended asset purchase agreement, (2) the Carter-AST consulting

agreement, (3) the stock redemption agreement, and (4) the sub-

scription agreements, MSSTA was left insolvent as of the closing

date, considering the effect of MSSTA's unpaid tax liability.

     As part of the MSSTA transaction, all of MSSTA's employees

became employees of AST, including Mr. Scott who became president

of AST.   Only Mr. Scott also remained an employee of MSSTA.

     After the closing date, Mr. Bosworth contacted Silverado

Savings and Loan, which was the lessor on the lease obligation

for which Mr. Scott also was personally liable, to negotiate a

termination of that lease.   Mr. Bosworth advised Silverado

Savings and Loan that MSSTA was vacating the space that it was

leasing either in December 1989 or January 1990, and MSSTA did,

in fact, move out around that time.    Silverado Savings and Loan

took no action against MSSTA or Mr. Scott with respect to that
                               - 22 -


lease.    During early 1990, AST exercised its option under the

option agreement and purchased from MSSTA the 45 S accounts for

$22,500.

     In January 1991, Mr. Scott's services as president of AST

were terminated after Mr. Scott, Mr. Harrison, and Mr. Hall had a

dispute over management styles.    AST offered to purchase the

Scotts' aggregate 33-percent stock interest in that corporation,

but Mr. Scott disagreed with the purchase price that AST offered.

As a result of, inter alia, that disagreement over the purchase

price, the Scotts sued AST as well as Mr. Harrison and Mr. Hall

individually.   On June 27, 1991, that lawsuit was settled, and,

pursuant to the terms of the settlement, AST redeemed the Scotts'

aggregate 33-percent stock interest in AST and agreed to indem-

nify the Scotts in an aggregate maximum amount of $30,000 for any

tax liability of MSSTA for which they were determined to be

liable.

     Beginning around late April 1991, the Service audited

MSSTA's 1989 return (Form 1120).    As part of that audit, the

Service examined the MSSTA transaction, including MSSTA's sale of

its assets to AST.

     Pursuant to section 6501(c)(4), on June 25, 1993, and on

July 22, 1994, MSSTA and respondent consented in writing to ex-

tend the time within which to assess MSSTA's tax liability for

1989 to October 31, 1994, and February 28, 1995, respectively.
                               - 23 -


     The Service's revenue agent auditing MSSTA's 1989 return

preliminarily proposed, inter alia, that MSSTA realized $1.6

million on that sale and that MSSTA was liable for certain

penalties.

     Attached to petitioners' 1991 return, which was filed on

August 4, 1992, was a statement, entitled "DISCLOSURE STATEMENT

OF TRANSACTION BETWEEN THOMAS H. AND LYNN D. SCOTT ("TAXPAYERS")

AND AMERICAN SECURITIES TRANSFER, INC. ("AST")", which stated in

pertinent part:

     On June 27, 1991, the taxpayers' 12,300 shares of
     common stock of AST were redeemed by the corporation,
     AST. * * *

             *    *      *     *     *     *     *

     The 12,300 shares of AST stock sold have a cost basis
     of $749,760. This basis represents the value assigned
     to AST shares as determined by the Internal Revenue
     Service in their examination of Mountain States Stock
     Transfer Agents, Inc. (MSSTA) * * * for tax year 1989.

     Around January or February 1992, petitioners retained J.

William Callison (Mr. Callison) to represent MSSTA and themselves

with respect to the Service's examination of the MSSTA trans-

action.   Mr. Callison participated in settlement negotiations

with Service representatives regarding its examination of the

MSSTA transaction.    On December 23, 1994, Form 906-C, Closing

Agreement on Final Determination Covering Specific Matters

(closing agreement), was entered into by the Service, Mr. Carter,

Mr. Scott, Ms. Scott, MSSTA, and AST.    The closing agreement,
                             - 24 -


which referred to petitioners collectively as "Scott", stated in

pertinent part:

          NOW, THEREFORE, IT IS HEREBY DETERMINED AND AGREED
     for Federal Income Tax purposes, that:

          1. The amount realized from AST upon the sale of
     * * * MSSTA's assets was $801,820 resulting in an
     additional Federal income tax liability of MSSTA in
     taxable year 1989 of $164,981.

          2. The value of the consulting and covenant not
     to compete agreements between AST and Carter was
     $325,016. The additional amount paid to Carter of
     $199,984 by AST was an amount realized by MSSTA for
     MSSTA's assets.

          3. A portion of the 12,300 shares of AST stock
     transferred to Scott and a portion of the consulting
     fee paid to Scott were amounts realized by MSSTA for
     MSSTA's assets. The value of the AST stock transferred
     and the consulting fee paid to Scott for MSSTA's assets
     was $199,652.

          4. This agreement makes no determination with
     respect to whether one or more of these parties
     (Carter, Scott, or AST) is personally liable as a
     transferee for any additional Federal income tax
     liability of MSSTA.

          5. Carter, Scott, AST, MSSTA and the Internal
     Revenue Service agree that in the event one or more of
     these parties (Carter, Scott, and/or AST) is found to
     be personally liable as a transferee, the liability is
     $164,981 plus interest from March 15, 1990.

The total amount of (1) that portion of the value of the 6,150

shares of AST stock issued by AST to Mr. Scott and (2) the

consulting fee paid to him, which total amount was an amount

realized by MSSTA for MSSTA's assets, was $104,580.   The amount

of the value of that portion of the 6,150 shares of AST stock
                              - 25 -


issued by AST to Ms. Scott, which was an amount realized by MSSTA

for MSSTA's assets, was $95,072.

     During April 1996, respondent's revenue officer, Linda

Wievers (Ms. Wievers), was assigned to collect MSSTA's unpaid tax

liability.   Ms. Wievers followed normal collection procedures in

her attempts to collect that liability from MSSTA.   Mr. Callison

informed Ms. Wievers that, as of November 27, 1996, MSSTA, a

corporation in good standing and authorized to conduct its af-

fairs within the State of Colorado, had no assets or income with

which to pay MSSTA's unpaid tax liability.   In late January 1997,

Ms. Wievers concluded that MSSTA did not have any assets or in-

come with which to satisfy that liability.

     On January 10, 1995, respondent issued separate notices of

transferee liability to Mr. Scott and Ms. Scott, respectively, in

which respondent determined that they are liable as transferees

of MSSTA (1) in amounts not exceeding $104,580 and $95,072, re-

spectively, for MSSTA's unpaid tax liability and (2) for interest

"as provided by law".

                              OPINION

     We shall first address certain evidentiary matters.   At

trial, we admitted into evidence conditionally, subject to our

ruling on admissibility, certain evidence to which respondent

objected.

     Paragraph 25 of the stipulation (stipulation 25) states:
                              - 26 -


     25. Respondent did not assert the accuracy-related
     penalty for a substantial underpayment, pursuant to
     I.R.C. § 6662(a), against MSSTA. Attached hereto as
     Petitioners' Exhibit 11 is a letter written by J.
     William Callison concerning his request that Respondent
     not assert such penalty. The stipulation is expressly
     limited to the existence of this letter, and is not
     intended as a stipulation to the truth of the matters
     asserted therein. Respondent specifically reserves the
     right to object to this stipulation, including the
     referenced exhibit, as inadmissible pursuant to Fed. R.
     Evid. 408.

Respondent objects to the admission into evidence of (1) the

first sentence of stipulation 25, (2) petitioners' exhibit 11,

the letter written by Mr. Callison (Mr. Callison's letter) that

is referenced in stipulation 25, and (3) certain testimony of Mr.

Callison regarding that letter and his recollection of his

discussions with the revenue agent who was auditing MSSTA's 1989

return.   The principal ground for respondent's objections to

those matters is that they are inadmissible under rule 408 of the

Federal Rules of Evidence (FRE 408) because they constitute "evi-

dence of conduct or statements made in compromise negotiations".6

     As we understand their position, petitioners contend that

the evidence to which respondent objects is not excluded by FRE

408 because (1) respondent "had not yet asserted" that MSSTA was


6
   Respondent also objects to the evidence in question on rele-
vancy grounds and on the ground that the evidence in question is
an attempt to go behind the notices. As for the relevancy ob-
jection, we indicated at trial that, assuming arguendo that we
were to find the evidence to which respondent objects to be
otherwise admissible, we shall give it whatever weight we deem
appropriate.
                               - 27 -


liable for the accuracy-related penalty at the time Mr.

Callison's letter was sent to respondent's representative and

(2) "Mr. Callison did not make any settlement offer or concession

to the revenue agent in exchange for the penalty not being

asserted."

      FRE 408 provides:

           Evidence of (1) furnishing or offering or prom-
      ising to furnish, or (2) accepting or offering or
      promising to accept, a valuable consideration in com-
      promising or attempting to compromise a claim which was
      disputed as to either validity or amount, is not ad-
      missible to prove liability for or invalidity of the
      claim or its amount. Evidence of conduct or statements
      made in compromise negotiations is likewise not admis-
      sible. This rule does not require the exclusion of any
      evidence otherwise discoverable merely because it is
      presented in the course of compromise negotiations.
      This rule also does not require exclusion when the
      evidence is offered for another purpose, such as prov-
      ing bias or prejudice of a witness, negativing a con-
      tention of undue delay, or proving an effort to ob-
      struct a criminal investigation or prosecution.

      With respect to respondent's objection to the first sentence

of stipulation 25, which states that "Respondent did not assert

the accuracy-related penalty for a substantial underpayment,

pursuant to I.R.C. § 6662(a), against MSSTA", it is not clear to

what point in time during the Service's examination of MSSTA that

sentence is referring.    According to Mr. Callison's testimony,

the Service's revenue agent auditing MSSTA's 1989 return prelim-

inarily proposed that MSSTA was liable for certain penalties.7

7
    It is not clear how Mr. Callison learned about what that agent
                                                    (continued...)
                              - 28 -


Pursuant to the closing agreement that was signed by, inter alia,

the Service, MSSTA, and the Scotts, MSSTA was not liable for any

penalties.   In any event, the first sentence of stipulation 25 is

not "Evidence of (1) furnishing or offering or promising to fur-

nish, or (2) accepting or offering or promising to accept, a

valuable consideration in compromising or attempting to compro-

mise a claim which was disputed as to either validity or amount".

Fed. R. Evid. 408.   Nor is it "Evidence of conduct or statements

made in compromise negotiations".   Id.   Consequently, we do not

find the first sentence of stipulation 25 to be inadmissible

under FRE 408.8   Accordingly, we unconditionally admit that sen-

tence into evidence and make it a part of the record in this

case.

     With respect to respondent's objection to Mr. Callison's

letter and certain of his testimony regarding that letter and his

recollection of his discussions with the revenue agent who was

auditing MSSTA's 1989 return, the record establishes that Mr.

Callison's letter was written at a time when there were ongoing

settlement negotiations between the Scotts and MSSTA and the




7
 (...continued)
had preliminarily proposed. We think that it is reasonable to
conclude that Mr. Scott so informed Mr. Callison.
8
   In addition, we reject respondent's contention that the first
sentence of stipulation 25 should be excluded from evidence be-
cause it is an attempt to go behind the notices.
                              - 29 -


Service.9   We find that Mr. Callison's letter and his testimony

to which respondent objects are "Evidence of conduct or state-

ments made in compromise negotiations", Fed. R. Evid. 408, and

are inadmissible under FRE 408.10   See McPike, Inc. v. United

States, 15 Cl. Ct. 94, 98-99 (1988).

     We shall now address the transferee liability issues in this

case.   Respondent bears the burden of showing that each peti-

tioner is liable as a transferee of property of MSSTA, but not

that MSSTA was liable for MSSTA's unpaid tax liability.   See sec.

6902(a); Rule 142(d).

     Section 6901 provides in pertinent part:

          SEC. 6901(a). Method of Collection.--The amounts
     of the following liabilities shall, except as herein-
     after in this section provided, be assessed, paid, and
     collected in the same manner and subject to the same
     provisions and limitations as in the case of the taxes
     with respect to which the liabilities were incurred:

9
   For example, the record shows that the revenue agent auditing
MSSTA's 1989 return preliminarily proposed that MSSTA realized
$1.6 million from the sale of substantially all of its assets to
AST. By way of further illustration, petitioners stated in their
1991 return that the stock of AST that they acquired had "a cost
basis of $749,760" which was "the value assigned to * * * [those]
shares as determined by the Internal Revenue Service in their
examination of * * * [MSSTA]". Nonetheless, the Service and,
inter alia, MSSTA and the Scotts ultimately agreed in the closing
agreement that MSSTA realized $801,820 from the sale of sub-
stantially all of its assets to AST and that $199,652 of (1) the
value of the AST stock transferred to the Scotts and (2) the
consulting fee paid to Mr. Scott was an amount realized by MSSTA
for MSSTA's assets.
10
   Even if we had held differently on the evidentiary matters at
issue, such a holding would not have affected our conclusions
with respect to the transferee liability issues presented.
                                  - 30 -


                 (1) Income, estate, and gift taxes.--

                     (A) Transferees.--The liability, at law or
                  in equity, of a transferee of property--

                         (i) of a taxpayer in the case of a
                        tax imposed by subtitle A (relating
                        to income taxes),

             *      *      *      *     *      *     *

            (h) Definition of Transferee.--As used in this
       section, the term "transferee" includes donee, heir,
       legatee, devisee, and distributee * * *.

       The courts have recognized that section 6901 does not create

or define a substantive liability, but merely provides a proce-

dure by which the Government may collect from a transferee of

property unpaid taxes owed by the transferor of the property.

Commissioner v. Stern, 357 U.S. 39, 42 (1958); Hagaman v. Com-

missioner, 100 T.C. 180, 183 (1993).        The existence and extent of

a transferee's liability is determined under applicable State

law.    See Commissioner v. Stern, supra at 42-45; Hagaman v. Com-

missioner, supra at 183-185.       The parties agree that the appli-

cable State law in this case is the law of the State of Colorado.

       Respondent argues that, as is true in other areas of the tax

law, see Gregory v. Helvering, 293 U.S. 465, 469-470 (1935), the

substance, and not the form, of the MSSTA transaction controls

our determination of whether Mr. Scott and Ms. Scott are liable

as transferees of MSSTA.       In support of respondent's position,

respondent relies principally on Bates Motor Transp. Lines, Inc.
                              - 31 -


v. Commissioner, 200 F.2d 20 (7th Cir. 1952), affg. 17 T.C. 151

(1951), and Hunn v. United States, 60 F.2d 430 (8th Cir. 1932).

      Petitioners counter that the form, and not the substance, of

the MSSTA transaction controls our determination of whether Mr.

Scott and Ms. Scott are liable as transferees of MSSTA.   In sup-

port of their position, petitioners rely principally on Vendig v.

Commissioner, 229 F.2d 93 (2d Cir. 1956), revg. 22 T.C. 1127

(1954).11

      We shall turn first to Vendig v. Commissioner, supra, on

which petitioners rely.   In that case, Mavco, Inc. (Mavco) owned

all of the outstanding stock of Mavco Sales, Inc. (Sales) except

for 100 shares of preferred stock that were held by Ms. Vendig.

Vendig v. Commissioner, supra at 94.   Pursuant to resolutions

adopted by the respective boards of directors of Mavco and Sales,

Ms. Vendig exchanged her 100 shares of Sales preferred stock for

100 shares of Mavco preferred stock of equal value.   Id. at 94-

95.   After that exchange, Sales dissolved and all of its assets,

subject to all of its liabilities, were transferred as a liqui-

11
   Petitioners also rely on (1) United States v. Rolland, 10
AFTR 2d 5371, 62-2 USTC par. 9671 (S.D. Fla. 1962), which cites
with approval Vendig v. Commissioner, 229 F.2d 93 (2d Cir. 1956),
revg. 22 T.C. 1127 (1954), and (2) Pittsburgh Realty Inv. Trust
v. Commissioner, 67 T.C. 260 (1976), to support their position
that the form, and not the substance, of the MSSTA transaction
should govern our resolution of the transferee liability issues
in this case. We find United States v. Rolland, supra, and
Pittsburgh Realty Inv. Trust v. Commissioner, supra, to be dis-
tinguishable from the present case, and petitioners' reliance on
those cases to be misplaced.
                               - 32 -


dating distribution to Mavco, its sole stockholder.    Id. at 94.

As a consequence, Sales no longer had any assets with which to

satisfy its unpaid tax liabilities for 1944, 1945, and 1946.

Because Mavco assumed all of the liabilities of Sales, respondent

could have sought to collect all of the unpaid taxes of Sales

from Mavco.   However, respondent chose to seek to collect $10,000

of those taxes from Ms. Vendig on the ground that she was liable

for that amount as a transferee of the assets of Sales.    Id.

     In Vendig v. Commissioner, supra at 95, the U.S. Court of

Appeals for the Second Circuit (Court of Appeals for the Second

Circuit) concluded:    "By exchanging stock of Sales for stock of

Mavco petitioner did not remove cash or other property from

Sales, thereby harming creditors of Sales who were entitled to be

paid before any distributions to shareholders."    The Court of

Appeals for the Second Circuit held that, because Ms. Vendig did

not receive, directly or indirectly, any property of Sales, she

was not a transferee of Sales within the meaning of section 311

of the Internal Revenue Code of 1939, the predecessor to section

6901.   Id. at 94.   In so holding, the Court of Appeals for the

Second Circuit appears to have relied on the form of the exchange

of Ms. Vendig's Sales preferred stock for preferred stock in

Mavco when it stated:

     We accept the following principles: Where the vendee
     issues its stock to the vendor corporation in return
     for assets of the vendor, then that stock becomes the
     asset of the vendor, and the stockholders who receive
                              - 33 -


     that asset are transferees of the vendor, and liable
     for its taxes * * *. But where, as in this case, the
     vendee issues its stock directly to the stockholders,
     then that stock never becomes a part of the vendor's
     assets, for these assets become the property of the
     vendee corporation when the vendor corporation ceases
     to exist.

          It is true that this holding may allow the par-
     ties, under some circumstances, to vary the tax conse-
     quences according to the manner in which a reorganiza-
     tion is conducted, but this does not affect the amount
     of the tax or the availability of property to satisfy
     it. [Vendig v. Commissioner, supra at 96-97.]

     Respondent contends, and we agree, that Vendig v. Commis-

sioner, supra, is distinguishable from the instant case.     In

Vendig, the form of the transaction was structured so that Ms.

Vendig transferred to Mavco her Sales preferred stock in return

for Mavco preferred stock of equal value.   Vendig v. Commission-

er, supra at 94-95.   In contrast, in the instant case, the form

of the MSSTA transaction was structured so that, pursuant to the

respective subscription agreements, Mr. Scott and Ms. Scott each

acquired, inter alia, 10.5 percent, or in the aggregate 21 per-

cent, of the stock of AST for the nominal cash amount of ten

cents a share,12 which petitioners concede was an inadequate

12
   Although after the closing of the MSSTA transaction the
Scotts owned in the aggregate 33 percent of AST's stock, re-
spondent concedes that, of that aggregate 33-percent stock inter-
est, the Scotts received an aggregate 12-percent stock interest
in AST in exchange for not only the nominal cash amount of ten
cents a share, but also Mr. Scott's guarantee of a loan and his
agreement to forgo for several years contributions by AST for his
benefit to AST's profit-sharing plan. We shall hereinafter ad-
dress only the aggregate 21-percent stock interest in AST that
                                                   (continued...)
                               - 34 -


price for that stock.13   In addition, in Vendig v. Commissioner,

supra, the Court of Appeals for the Second Circuit did not in-

dicate that Ms. Vendig's exchange of her Sales preferred stock

for Mavco preferred stock of equal value was contingent on

Mavco's purchase of all of the assets of Sales.   In contrast, in

the instant case, we have found that the Scotts' acquisition of

AST stock in the MSSTA transaction was contingent upon, inter

alia, the closing of the asset purchase agreement between AST and

MSSTA.

     Another distinction between Vendig v. Commissioner, supra,

and the present case is that in Vendig the tax liability of Sales

in question did not arise as a result of Ms. Vendig's exchange of

her Sales stock for Mavco stock of equal value and the liqui-

dation of Sales, and the amount of that tax liability was not

affected by the Court of Appeals for the Second Circuit's holding

in Vendig that the form of those transactions controlled the

transferee liability issue presented there.   Vendig v. Commis-

sioner, supra at 96-97.   In the instant case, the tax liability

12
 (...continued)
the Scotts acquired pursuant to the subscription agreements for
the nominal cash amount of ten cents a share.
13
   Although urging that the form, and not the substance, of the
MSSTA transaction is controlling here, petitioners nonetheless
contend that, despite the form of their respective purchases of
10.5 percent of AST's stock, as reflected in the subscription
agreements, each of them, in substance, exchanged a 24-percent
stock interest in MSSTA for a 10.5-percent stock interest in AST.
We shall address that contention below.
                               - 35 -


of MSSTA arose as a result of the MSSTA transaction and the

amount of that liability would turn out to be different from that

determined under the closing agreement if we were to hold that

the form of that transaction controls the transferee liability

issues presented here.14   Cf. Pert v. Commissioner, 105 T.C. 370

(1995) (transferee bound by closing agreement made by transferor

with respect to latter's tax liability).

     Not only do we find Vendig v. Commissioner, 229 F.2d 93 (2d

Cir. 1956), to be distinguishable from the instant case, it is

noteworthy that the Court of Appeals for the Second Circuit in

Abegg v. Commissioner, 429 F.2d 1209, 1215 (2d Cir. 1970), affg.

50 T.C. 145 (1968), did not rely on, or even cite, Vendig in de-

ciding that the substance of the transaction presented to it in

Abegg governed its resolution of the transferee liability issue

involved there.

     We reject petitioner's contention that in the instant case

Vendig v. Commissioner, supra, requires that the form, and not

the substance, of the MSSTA transaction control our resolution of

the transferee liability issues presented.



14
   Such a holding also would be inconsistent with the parties'
stipulations that $104,580 of the value of the 6,150 shares of
AST stock issued by AST to Mr. Scott and of the consulting fee
paid to him was an amount realized by MSSTA for MSSTA's assets
and that $95,072 of the value of the 6,150 shares of AST stock
issued by AST to Ms. Scott was an amount realized by MSSTA for
MSSTA's assets.
                                - 36 -


     We also reject petitioners' contention that Bates Motor

Transp. Lines, Inc. v. Commissioner, 200 F.2d 20 (7th Cir. 1952),

and Hunn v. United States, 60 F.2d 430 (8th Cir. 1932), on which

respondent relies, do not support respondent's position in the

present case.     In Bates Motor Transp. Lines, Inc. v. Commis-

sioner, supra at 24, Harry F. Chaddick (Mr. Chaddick) owned

around 64 percent of the stock of Bates Motor Transport Lines,

Inc. (Bates) and 100 percent of the stock of Standard Freight

Lines, Inc. (Standard) and was the president of both companies.

In form, Standard purchased all of the assets of Bates in ex-

change for Standard's assumption of the liabilities of Bates and

Standard's issuance of its stock to the stockholders of Bates,

including Mr. Chaddick.     Id. at 22-23.   One of the issues in

Bates Motor Transp. Lines, Inc. v. Commissioner, supra at 24-25,

was whether Mr. Chaddick was liable as a transferee of Bates.

The U.S. Court of Appeals for the Seventh Circuit (Court of

Appeals for the Seventh Circuit) held that he was.      Id. at 25.

In so holding, the Court of Appeals for the Seventh Circuit found

that the substance of the transactions there involved was Bates'

sale of its assets to Standard in exchange for, inter alia,

Bates' receipt of the stock of Standard, which Bates transferred

as liquidating distributions to its stockholders, including Mr.

Chaddick.   Id.    The Court of Appeals for the Seventh Circuit,

id., quoted with approval the following conclusions of this Court
                              - 37 -


in Bates Motor Transp. Lines, Inc. v. Commissioner, 17 T.C. 151,

160 (1951), affd. 200 F.2d 20 (7th Cir. 1952):

     The fact that the arrangement provided for Standard to
     issue such shares directly to the stockholders of
     Bates, who were to surrender to Standard the shares of
     stock they held in Bates, was no different in effect
     than if Standard had issued the shares directly to
     Bates, who, in turn, had called in its outstanding
     stock and in liquidation distributed to its stock-
     holders the shares of stock in Standard. The result in
     each instance would be for the stockholders of Bates to
     receive the stock in Standard and leave Bates insolvent
     and without funds to pay its debts. The short cut em-
     ployed by which Standard issued its stock directly to
     the stockholders of Bates in nowise relieved those
     stockholders of their liability as transferees of the
     assets of Bates.

     Petitioners question the foregoing reliance by the Court of

Appeals for the Seventh Circuit on substance, and not form, in

Bates Motor Transp. Lines, Inc. v. Commissioner, supra.   They

point out that the Court of Appeals for the Second Circuit in

Vendig v. Commissioner, supra at 95-96, stated that, to the ex-

tent that Bates Motor Transp. Lines, Inc. v. Commissioner, supra,

is not distinguishable on its facts from Vendig, the Bates case

was wrongly decided.   We have already determined that we shall

not rely on the Vendig case because it is distinguishable from

the instant case.

     Petitioners also attempt to distinguish Bates Motor Transp.

Lines, Inc. v. Commissioner, supra, from the instant case.     They

point out that the transferee in Bates Motor Transp. Lines, Inc.

v. Commissioner, supra, owned all the stock of Standard and 64
                              - 38 -


percent of the stock of Bates, was president of both those com-

panies, and therefore "orchestrated the asset sale".   In con-

trast, according to petitioners, prior to the MSSTA transaction

in the instant case, neither of them owned any stock of AST or

was an officer of that company, and neither of them had a con-

trolling interest in MSSTA.   Consequently, petitioners contend,

Mr. Scott and/or Ms. Scott did not "orchestrate" the MSSTA

transaction.   Petitioners' contention completely ignores the fact

that it was because of Mr. Scott's unwillingness to pay any tax

as a result of the MSSTA transaction that that transaction was

cast in a form in which MSSTA received only $300,000 directly

from AST for substantially all of its assets; MSSTA distributed

all of those sales proceeds to Mr. Carter, a 52-percent stock-

holder of MSSTA, and nothing to the Scotts, 48-percent stock-

holders of MSSTA; and the Scotts acquired a 21-percent stock

interest in AST for a nominal and inadequate price.

     Petitioners also attempt to distinguish Bates Motor Transp.

Lines, Inc. v. Commissioner, supra, from the instant case by

asserting that, unlike Standard which was the purchasing corpo-

ration in the Bates Motor Transp. Lines, Inc. case, AST which was

the purchasing corporation in the instant case transferred sig-

nificant assets to MSSTA as part of the MSSTA transaction.

Petitioners' assertion disregards the fact that in Bates Motor

Transp. Lines, Inc. v. Commissioner, supra at 22-23, Standard
                               - 39 -


assumed the liabilities of Bates and issued its stock to the

stockholders of Bates in exchange for all of Bates' assets.

Thus, Standard did transfer significant consideration to Bates in

exchange for Bates' assets.

     We conclude that Bates Motor Transp. Lines, Inc. v.

Commissioner, supra, supports respondent's position that the

substance, and not the form, of the MSSTA transaction controls

our resolution of the transferee liability issues presented.

     We also conclude that Hunn v. United States, supra, supports

respondent's position that the substance, and not the form, of

the MSSTA transaction governs our determination of the transferee

liability issues in this case, and we find petitioners' con-

tention that the Hunn case is distinguishable from the present

case to be without merit.   In Hunn v. Commissioner, 60 F.2d at

430, the United States brought a suit in equity against certain

individuals as the former stockholders of Young Bros. Wall Paper

& Paint Company (Young) to recover income tax due from Young

(Young's tax liability).    The form of the transaction in Hunn was

as follows:   Subsequent to the year to which Young's tax lia-

bility pertained, the stockholders of Young passed a resolution

authorizing Young (1) to sell all of its assets to Waggener Paint

& Glass Company of Kansas City, Missouri (Waggener), for $54,000

and (2) thereafter to liquidate its affairs and dissolve.     Hunn

v. Commissioner, supra at 431.    At the same time, the stock-
                              - 40 -


holders of Young agreed that, instead of Waggener's paying

$54,000 in cash for all of Young's assets, which was to be dis-

tributed to the stockholders of Young upon its dissolution, those

stockholders would receive from Waggener "as their 'distributive

shares of said amount of cash' the common stock of the Waggener

Paint & Glass Company in the ratio of one and one-fifth shares of

the common stock of the Waggener Paint & Glass Company for each

share of stock in the Young Bros. Wall Paper & Paint Company."

Pursuant to the foregoing agreement of the Young stockholders,

Waggener acquired all of the assets of Young, and the stock-

holders of Young received for each share of Young stock held one

and one-fifth shares of Waggener stock.   Id.   Waggener also

received Young stock, but Young was not immediately dissolved, as

provided for in the Young stockholders' resolution.   Instead, the

Young charter was permitted to be forfeited by the State of

Kansas in the year following the foregoing transaction.   The only

reason for continuing the existence of Young, instead of dissol-

ving it after all of its assets were transferred to Waggener, was

to ensure the continuance of a lease during negotiations to as-

sign that lease.   Id. at 431-432.

     According to the U.S. Court of Appeals for the Eighth Cir-

cuit (Court of Appeals for the Eighth Circuit), the trial court

had found that although all of the assets of Young were trans-

ferred to Waggener in consideration of the issuance by Waggener
                                - 41 -


to the Young stockholders of Waggener stock equal in value to

$54,000, in substance, (1) the Waggener stock that those stock-

holders received was transferred by Waggener to Young in return

for Young's assets, and (2) Young distributed such stock to its

stockholders in a transaction that was equivalent to a dissolu-

tion of Young.    Hunn v. Commissioner, supra at 432.   Consequent-

ly, the trial court had held that those stockholders were liable

for Young's tax liability.    The Court of Appeals for the Eighth

Circuit affirmed the trial court.    In so doing, the Court of

Appeals for the Eighth Circuit concluded that the substance, and

not the form, of the transaction involved there was controlling.

Id.

       We shall now determine the substance of the MSSTA trans-

action.    As we understand it, respondent contends that all of the

transactions that were effected as part of the MSSTA transaction

on September 14, 1989, are related and that, in substance, on

that date (1) MSSTA sold substantially all of its assets to AST

for an amount substantially in excess of $300,000;15 (2) a total

of $199,652 (i.e., $190,144 of the value of the aggregate stock

interest in AST acquired by the Scotts and $9,50816 of the fee

15
   AST acquired the S accounts during 1990, and that purchase is
not at issue in this case. Our discussion hereinafter shall be
limited to the sale of MSSTA's non-S account assets that took
place on Sept. 14, 1989, the closing date.
16
      The parties agree that $104,580 of the value of the stock of
                                                      (continued...)
                              - 42 -


received by Mr. Scott pursuant to the Scott-AST consulting

agreement) was transferred by AST to, and was an amount realized

by, MSSTA from the sale of its assets to AST; and (3) of the

total consideration that MSSTA realized from the sale of its

assets to AST, MSSTA distributed (a) to Mr. Scott stock of AST

equal in value to $95,072 (i.e., a 10.5-percent stock interest in

AST) and $9,508 in cash, or a total of $104,580, and (b) to Ms.

Scott stock of AST equal in value to $95,072 (i.e., a 10.5-

percent stock interest in AST).17   Stated differently, respondent

contends that, in substance, the Scotts did not acquire from AST

an aggregate 21-percent stock interest in that company for ten

cents a share.   Rather, according to respondent, in substance,

the Scotts acquired that aggregate stock interest, and Mr. Scott


16
 (...continued)
AST acquired by Mr. Scott and of the fee received by him pursuant
to the Scott-AST consulting agreement and $95,072 of the value of
the stock in AST acquired by Ms. Scott (or a total of $199,652)
were amounts realized by MSSTA from the sale of its assets to
AST. Consequently, we calculated the amount of that fee, which
is an amount that MSSTA realized from the sale of its assets, to
be $9,508.
17
   We do not understand respondent to be contending that, in
substance, instead of MSSTA's receiving from AST an aggregate 21-
percent stock interest in AST valued at $190,144 which MSSTA
distributed to the Scotts and $9,508 in cash which it distributed
to Mr. Scott, MSSTA received from AST cash in the total amount of
$199,652, (1) $9,508 of which MSSTA distributed to Mr. Scott and
(2) the balance of which (i.e., $190,144) MSSTA distributed to
the Scotts who in turn used that $190,144 to buy an aggregate 21-
percent stock interest in AST. However, even if respondent were
advancing such a contention, our conclusions with respect to the
transferee liability issues presented would not change.
                              - 43 -


also received $9,508 in cash, as distributions from MSSTA of

property that it received from AST as part of the consideration

that AST paid MSSTA to purchase MSSTA's assets.

     Petitioners counter that not all of the transactions that

are part of the MSSTA transaction are related.    For example, they

contend that AST's payment of $300,000 to MSSTA under the asset

purchase agreement was not related to the subscription agreements

between AST and Mr. Scott and Ms. Scott, respectively.   On the

record before us, we find that all of the transactions that are

part of the MSSTA transaction are related.   Indeed, the respec-

tive purchases by the Scotts of AST's stock under the subscrip-

tion agreements were expressly made contingent on, inter alia,

completion of AST's purchase of MSSTA's assets under the asset

purchase agreement.   In this regard, each subscription agreement

stated in pertinent part:

     The purchase [of AST stock] will take place upon AST
     completing its purchase of the assets of Mountain
     States Stock Transfer Agents, Inc. in accordance with
     an Agreement for Purchase and Sale of Assets dated
     September 7, 1989 ("Asset Purchaser [sic] Agreement")
     * * *. If the closing under the Asset Purchase Agree-
     ment has not occurred on or before September 30, 1989,
     unless extended for up to 30 days at the sole discre-
     tion of AST * * *, the escrowed purchase price [for the
     AST stock] will be returned promptly and without in-
     terest to Purchaser, and this [subscription] Agreement
     shall be deemed terminated.

     Petitioners further contend that they received an aggregate

21-percent stock interest in AST directly from AST, and not as a

distribution from MSSTA, and that they did not pay only ten cents
                                - 44 -


a share for that stock interest.    Instead, according to peti-

tioners, in substance, "Petitioners gave up a 48% ownership in-

terest in MSSTA in order to receive a 21% interest in AST."

While we agree with petitioners that they did not pay only ten

cents a share to acquire an aggregate 21-percent stock interest

in AST, on the record before us, we reject their contention that

they "gave up a 48% ownership interest in MSSTA in order to re-

ceive a 21% interest in AST."    In fact, after the MSSTA trans-

action, AST did not own any stock of MSSTA.    Instead, after that

transaction, each of the Scotts owned 50 percent of the stock of

MSSTA.   Moreover, we can find no reason in the record presented,

and petitioners have offered none, as to why AST would be willing

to exchange 21 percent of its stock worth $190,144 for the

Scotts' 48-percent stock interest in MSSTA, which became a 100-

percent stock interest in that company after the MSSTA trans-

action was closed on September 14, 1989, and which was worth no

more than $22,500, the aggregate purchase price that AST agreed

to pay under the option agreement for the 45 S accounts that

MSSTA continued to own after that closing date.    Nor can we

discern any reason in the record presented, and petitioners have

offered none, as to why they would agree, in form, that Mr.

Carter, a 52-percent stockholder of MSSTA, was to receive from

MSSTA a distribution of all of the proceeds that AST transferred

to MSSTA (i.e., $300,000) under the asset purchase agreement,
                               - 45 -


whereas they, 48-percent stockholders of MSSTA, were to receive

nothing from MSSTA, but were to be left after the MSSTA trans-

action owning 100 percent of the stock of MSSTA, which was worth

no more than $22,500.

      Based on our examination of the entire record in this case,

we find that, in substance, on the closing date (1) MSSTA sold

substantially all of its assets to AST for an amount substan-

tially in excess of $300,000; (2) a total of $199,652 (i.e.,

$190,144 of the value of the aggregate stock interest in AST

acquired by the Scotts and $9,508 of the fee received by Mr.

Scott pursuant to the Scott-AST consulting agreement) was trans-

ferred by AST to, and was an amount realized by, MSSTA from the

sale of its assets to AST; and (3) of the total consideration

that MSSTA realized from the sale of its assets to AST, MSSTA

distributed (a) to Mr. Scott stock of AST equal in value to

$95,072 (i.e., a 10.5-percent stock interest in AST) and $9,508

in cash, or a total of $104,580, and (b) to Ms. Scott stock of

AST equal in value to $95,072 (i.e., a 10.5-percent stock inter-

est in AST).18   On that record, we further find that Mr. Scott is

a transferee of property of MSSTA in the amount of $104,580 and

that Ms. Scott is a transferee of property of MSSTA in the amount

of $95,072.



18
     See supra note 17.
                              - 46 -


     Respondent contends that, as a transferee of property of

MSSTA, each petitioner is liable under Colorado law for MSSTA's

unpaid tax liability to the extent of the assets that MSSTA

transferred to each of them, viz., $104,580 to Mr. Scott and

$95,072 to Ms. Scott.   In support of that contention with respect

to Mr. Scott, respondent relies on (1) Colo. Rev. Stat. sec. 7-5-

114(1)(c) (repl. vol. 1986) (repealed 1994) (Colorado liquidation

statute), (2) Colo. Rev. Stat. sec. 7-5-114(1)(b) (repl. vol.

1986) (repealed 1994) (Colorado redemption statute), and/or

(3) Colo. Rev. Stat. sec. 38-10-117 (repl. vol. 1982) (Colorado

fraudulent conveyance statute).   In support of respondent's con-

tention with respect to Ms. Scott, respondent relies only on the

Colorado fraudulent conveyance statute.   Petitioners counter that

neither of them is liable under the Colorado statutes on which

respondent relies.

     We shall turn first to the Colorado fraudulent conveyance

statute on which respondent relies because that statute disposes

of the transferee liability questions remaining in this case.

The Colorado fraudulent conveyance statute provides:

          Every conveyance or assignment in writing or
     otherwise of any estate or interest in lands, goods, or
     things in action or of any rents and profits issuing
     thereupon, and every charge upon lands, goods, or
     things in action or upon the rents and profits thereof
     made with the intent to hinder, delay, or defraud
     creditors or other persons of their lawful suits,
     damages, forfeitures, debts, or demands, and every bond
     or other evidence of debt given, suits commenced, or
     decree or judgment suffered with the like intent as
                                - 47 -


       against the person so hindered, delayed, or defrauded
       shall be void. [Colo. Rev. Stat. sec. 38-10-117 (repl.
       vol. 1982)].

       The parties do not dispute that, in order for the Colorado

fraudulent conveyance statute to apply to the transfer of pro-

perty by MSSTA to Mr. Scott and the transfer of property by MSSTA

to Ms. Scott that we have found in the instant case, it is nec-

essary that MSSTA, the transferor, was insolvent at the time of

each such transfer or was rendered insolvent thereby; the purpose

of each such transfer was to hinder, delay, or defraud creditors;

MSSTA, the transferor, acted with that intent or with an intent

to benefit or secure an advantage to itself; and Mr. Scott and

Ms. Scott, each of the transferees, knew of, or participated in,

MSSTA's intent.    See Yetter Well Serv., Inc. v. Cimarron Oil Co.,

841 P.2d 1068, 1069-1070 (Colo. Ct. App. 1992); Wright v. Nelson,

242 P.2d 243, 246-247 (Colo. 1952); see also United States v.

Morgan, 554 F. Supp. 582, 586 (D. Colo. 1982).    The dispute be-

tween the parties relates to whether MSSTA and each of the Scotts

had the intent necessary to trigger application of the Colorado

fraudulent conveyance statute.    Respondent contends that they

did.    Petitioners disagree.   In support of their position, peti-

tioners assert:

            In this case, the evidence clearly established
       that neither MSSTA nor Petitioners knew that there was
       an unpaid MSSTA tax liability arising from the asset
       purchase transaction. Petitioners believed they had
       given up an interest in MSSTA for a comparable interest
       in AST without any tax consequences. Further, MSSTA
                              - 48 -


     and Mr. Scott relied on the advice of their attorney
     and their independent Certified Public Accountant, Mr.
     Hrynik. In addition, MSSTA received Mr. Hrynik's
     opinion that it could redeem Mr. Carter's MSSTA stock
     for $300,000, and that it would be able to pay its
     debts as they became due in the usual course of bus-
     iness. Neither MSSTA's attorney nor its accountant
     advised MSSTA or either Petitioner concerning any ad-
     ditional MSSTA tax liability. AST represented to Mr.
     Scott and his attorney that the anticipated MSSTA tax
     liability was not more than $10,000. Finally, Peti-
     tioners' contentions are buttressed by the fact that
     the revenue agent assigned to the audit waived all
     penalties against MSSTA.

     We shall first consider the positions of the parties with

respect to Mr. Scott.   Based on our examination of the entire

record before us, we find that at the closing of the MSSTA

transaction, Mr. Scott, in his capacities as president, director,

and stockholder of MSSTA, knew, and consequently MSSTA knew,

inter alia, that (1) the MSSTA transaction took the form that it

did because Mr. Scott did not want to pay any taxes as a result

of that transaction; (2) the Scotts were not purchasing an ag-

gregate 21-percent stock interest in AST in exchange for the

nominal cash amount of ten cents a share and/or their aggregate

48-percent stock interest in MSSTA; (3) AST was not purchasing

MSSTA's assets for only $300,000, but instead, in substance, was

purchasing those assets for an amount substantially in excess of

$300,000 consisting of cash and a 21-percent stock interest in

AST; (4) the Service could decide not to accept the return posi-

tions that MSSTA and the Scotts intended to take with respect to

the MSSTA transaction (viz., MSSTA would report only the $300,000
                              - 49 -


that it received directly from AST as the amount realized from

the sale of MSSTA's assets, and the Scotts would not report any

income since there were no liquidating distributions to them by

MSSTA) because the Scotts would be paying only a nominal cash

amount for a 21-percent stock interest in AST and would not be

reporting any income attributable to liquidating distributions by

MSSTA to them; and (5) MSSTA's tax liability would be about

$10,000, and the Scotts would not owe any tax as a result of the

MSSTA transaction only if the Service accepted those return po-

sitions of MSSTA and the Scotts.   At the closing of the MSSTA

transaction, Mr. Scott, in his capacities as president, director,

and stockholder of MSSTA, was bound to know, and consequently

MSSTA was bound to know, that MSSTA would owe tax substantially

in excess of $10,000 on the consideration, which was substan-

tially in excess of $300,000, that he and MSSTA knew AST paid to

purchase MSSTA's assets.

     On the record presented, we reject petitioners' contentions

regarding Mr. Scott's reliance on the advice of AST that MSSTA's

tax liability would not exceed $10,000 as a result of the MSSTA

transaction and that MSSTA and Mr. Scott did not know that "there

was an unpaid MSSTA tax liability arising from" that transaction.

In this connection, we found Mr. Hall to be a credible witness at

trial.   In contrast, based on our observation of Mr. Scott's de-

meanor during his testimony, we generally did not find him to be
                              - 50 -


credible.   Where the testimony of Mr. Hall and Mr. Scott was

conflicting, we relied on Mr. Hall's testimony.   Mr. Hall's tes-

timony establishes that Mr. Harrison, Mr. Hall, Mr. Scott, Mr.

Carter, MSSTA, and AST tentatively agreed that AST would pay ap-

proximately $800,000 for MSSTA's assets, $600,000 of which AST

would pay directly to MSSTA and $200,000 of which AST was willing

to reflect, along with an additional amount, as a payment to be

made by AST directly to Mr. Carter under an agreement by him to

consult and not to compete with AST.   They also tentatively

agreed that Mr. Carter and the Scotts would receive from MSSTA

liquidating distributions, based on their respective stock own-

ership of MSSTA, of the $600,000 balance of the $800,000 that AST

was willing to pay MSSTA for its assets and that the Scotts would

use money that they would receive from MSSTA in such liquidating

distributions to assist them in purchasing stock in AST.

     During the negotiations among Mr. Harrison, Mr. Hall, and

Mr. Scott, Mr. Scott asked Mr. Hall what the tax consequences

would be to MSSTA and the Scotts as a result of the foregoing

tentative agreements that they had reached about the MSSTA

transaction.   Mr. Hall responded that (1) MSSTA's tax liability

would be approximately $100,000 if it reported the $600,000 that

AST had tentatively agreed to transfer to it as the amount re-

alized from the sale of its assets; (2) there would be no tax

consequences to MSSTA as a result of AST's payment directly to
                              - 51 -


Mr. Carter under a consulting agreement of $200,000 of the total

$800,000 that AST was willing to pay for MSSTA's assets; and

(3) based on the tax law relating to capital gains, the Scotts

would owe tax on the capital gains that they would realize when

MSSTA made liquidating distributions to them as 48-percent

stockholders of MSSTA of approximately $300,000, which tax would

be equal to about one-third of such gains.    Because of that cap-

ital gains tax that the Scotts would owe, they would not have

sufficient cash from the MSSTA transaction to purchase the entire

33-percent stock interest in AST which they wanted to acquire and

to which Mr. Harrison, Mr. Hall, and AST had tentatively agreed,

and they would have to make other arrangements to buy that stock

interest, such as guaranteeing the loan that AST would have to

obtain in order to finance in part its purchase of MSSTA's as-

sets.   Mr. Hall cautioned Mr. Scott that, because Mr. Hall was

not familiar with either MSSTA's or the Scotts' tax situation,

Mr. Scott should consult a tax adviser to review the MSSTA

transaction and to advise them about the tax consequences to

MSSTA and the Scotts as a result of that transaction.

     Mr. Scott told Mr. Hall that he did not intend to pay any

taxes as a result of the MSSTA transaction.   To accommodate Mr.

Scott, Mr. Harrison and Mr. Hall told Mr. Scott that the form of

the MSSTA transaction could be changed to the following:   AST

would transfer directly to MSSTA $300,000, instead of $600,000,
                              - 52 -


for MSSTA's assets; Mr. Carter would receive that $300,000 from

MSSTA in redemption of his MSSTA stock; and the Scotts would

acquire a 21-percent stock interest in AST for a nominal cash

amount.   Mr. Hall indicated to Mr. Scott that, under the fore-

going form of the MSSTA transaction, MSSTA and the Scotts could

take the following return positions:   (1) MSSTA would report the

$300,000 that it received directly from AST as the amount re-

alized from the sale of MSSTA's assets, and (2) the Scotts would

not report any income because there would be no liquidating

distributions to them by MSSTA.   Mr. Hall further advised Mr.

Scott that, provided that the foregoing return positions were

accepted by the Service, (1) MSSTA's tax liability would be

approximately $10,000, and (2) the Scotts would not owe any tax.

Mr. Hall cautioned Mr. Scott that the Service could decide not to

accept those return positions of MSSTA and the Scotts because the

Scotts would be paying only a nominal cash amount for a 21-per-

cent stock interest in AST and would not be reporting any income

attributable to liquidating distributions by MSSTA to them.

Nonetheless, Mr. Scott, acting on behalf of MSSTA, Ms. Scott, Mr.

Carter, and himself, and Mr. Harrison and Mr. Hall, acting on

behalf of AST and themselves, decided to take that tax risk and

agreed, inter alia, on the following form of the MSSTA trans-

action:   AST would transfer only $300,000 directly to MSSTA for

its assets; Mr. Carter would receive that amount from MSSTA in
                               - 53 -


redemption of his MSSTA stock; and the Scotts would pay AST only

a nominal cash amount to acquire a 21-percent stock interest in

that company.

     As for petitioners' contention regarding Mr. Scott's and

MSSTA's reliance on the advice of Mr. Bosworth, we have found

that Mr. Bosworth did not hold himself out to be an expert in tax

matters.   In fact, Mr. Bosworth agreed to represent MSSTA and Mr.

Scott in the MSSTA transaction only after Mr. Scott informed him

that Mr. Scott had retained Mr. Hrynik, a C.P.A., to advise on

tax matters.    On the instant record, we reject petitioners' con-

tention regarding Mr. Scott's and MSSTA's reliance on Mr.

Bosworth for tax advice regarding the MSSTA transaction.

     As for petitioners' assertion regarding Mr. Scott's and

MSSTA's reliance on Mr. Hrynik for tax advice with respect to the

MSSTA transaction, we note initially that we found Mr. Hrynik to

be a credible witness at trial.   Where the testimony of Mr.

Hrynik and Mr. Scott was conflicting, we relied on Mr. Hrynik's

testimony.   Mr. Hrynik testified that he did not consider his

advice that MSSTA's tax liability would not exceed $10,000 to

constitute his opinion as to whether the $300,000 purchase price,

which the Bosworth letter represented to him was the amount to be

reported to all tax authorities as the purchase price for MSSTA's

assets, would be sustained if MSSTA's return were audited by the

Service.   Mr. Hrynik's advice about MSSTA's tax liability as a
                              - 54 -


result of the MSSTA transaction was based on the representations

in Mr. Bosworth's letter regarding that $300,000 purchase price.

Similarly, Mr. Hrynik's opinion about MSSTA's solvency after the

MSSTA transaction was based on the representations in the

Bosworth letter and Mr. Hrynik's review of the asset purchase

agreement and the stock redemption agreement between MSSTA and

Mr. Carter.   In rendering that solvency opinion, Mr. Hrynik was

not aware that the parties to the MSSTA transaction had agreed

that the Scotts could buy a specified number of shares of AST

stock for a nominal cash amount.   On the instant record, we re-

ject petitioners' contention regarding Mr. Scott's and MSSTA's

reliance on Mr. Hrynik's opinion that MSSTA's tax liability would

not exceed $10,000 and that MSSTA would remain solvent after the

MSSTA transaction.   In fact, Mr. Hrynik cautioned Mr. Scott that,

because the transactions reflected in the MSSTA transaction draft

documents that Mr. Scott gave him were to occur simultaneously

and in no particular order, the Service might treat those trans-

actions as one transaction for tax purposes.   In response, Mr.

Scott told Mr. Hrynik not to spend very much time reviewing the

tax consequences of the MSSTA transaction because Mr. Scott had

consulted with AST's accountants and Mr. Scott believed that he

understood the tax consequences of that transaction.

     Based on the entire record before us, we find that the

transfer by MSSTA to Mr. Scott of $104,580 of the amount that
                              - 55 -


MSSTA realized from the sale of its assets to AST (i.e., a 10.5-

percent stock interest in AST and $9,508 in cash) was made by

MSSTA, the transferor, to Mr. Scott, the transferee, with the

intent to hinder, delay, or defraud the Service within the mean-

ing of the Colorado fraudulent conveyance statute.19   We further

find that Mr. Scott is liable as a transferee of property of

MSSTA for MSSTA's unpaid tax liability to the extent of $104,580.

     We shall now address respondent's position regarding Ms.

Scott.   In support of respondent's contention that Ms. Scott, as

a transferee of property of MSSTA, is liable under the Colorado

fraudulent conveyance statute for MSSTA's unpaid tax liability to

the extent of $95,072, respondent asserts:

     Mrs. Scott could not even recite what kind of consid-
     eration she paid for the AST stock that constitutes the
     property she received from MSSTA. She asked no ques-
     tions at all during the closing of the transactions.
     Moreover, to the extent that she stands as a nominee of
     Mr. Scott, his conduct should be imputed to her.

          Regardless of her head-in-the-sand approach, Mrs.
     Scott's receipt of MSSTA's assets [was] part of a series of
     transactions that left MSSTA insolvent. This badge of
     fraud, along with the indifference to the transactions,
     support a finding of liability as to Mrs. Scott * * *.

     On the instant record, we find that respondent has failed to

establish that Ms. Scott knew of, or participated in, the intent

of MSSTA to hinder, delay, or defraud the Service of MSSTA's un-

paid tax liability within the meaning of the Colorado fraudulent

conveyance statute.   At some undisclosed time prior to September


19
   We have considered all of the arguments of petitioners that
are not addressed herein, and we find them to be without merit.
                              - 56 -


14, 1989, the closing date, Ms. Scott learned about the MSSTA

transaction from Mr. Scott.   She understood from him that, after

the MSSTA transaction, Mr. Scott would own an aggregate stock

interest in AST, a corporation that was larger than MSSTA, which

was smaller than his stock interest in MSSTA before that trans-

action.   Although Ms. Scott was present at certain meetings be-

tween Mr. Bosworth and Mr. Scott shortly before the closing of

the MSSTA transaction and reviewed certain documents relating to

that transaction, she did not participate in the discussions re-

lating to that transaction.   In addition, while she was present

at the closing of the MSSTA transaction, Ms. Scott was not aware

of the purchase price that she was paying for the AST stock which

she was acquiring as part of the MSSTA transaction.   Ms. Scott

agreed to the MSSTA transaction because she relied on and accep-

ted Mr. Scott's recommendation to her that it was desirable to

effect that transaction.20

     Based on our examination of the entire record in this case,

we find that respondent has failed to prove that Ms. Scott, as a

transferee of property of MSSTA, is liable under the Colorado

fraudulent conveyance statute for MSSTA's unpaid tax liability to


20
   With respect to respondent's suggestion that Ms. Scott
"stands as a nominee of Mr. Scott, [and therefore] his conduct
should be imputed to her", such a suggestion is a new matter,
Rule 142(a), and, in any event, on the record before us, we find
that respondent has failed to establish that Ms. Scott acted as a
nominee of Mr. Scott with respect to the MSSTA transaction.
                              - 57 -


the extent of $95,072.   Accordingly, we shall not sustain re-

spondent's determinations against Ms. Scott.

      Having found Mr. Scott liable as a transferee for MSSTA's

unpaid tax liability to the extent of $104,580, we shall consider

respondent's contention that, under Colo. Rev. Stat. sec. 5-12-

102 (1998) (Colorado statutory interest provision), Mr. Scott is

liable for interest from March 15, 1990, viz., the date on which

MSSTA became liable for MSSTA's unpaid tax liability, to January

10, 1995, viz., the date on which respondent issued the notice to

Mr. Scott.21

      The Colorado statutory interest provision states in

pertinent part:

         5-12-102. Statutory interest. (1) Except as pro-
      vided in section 13-21-101, C.R.S., when there is no
      agreement as to the rate thereof, creditors shall re-
      ceive interest as follows:

           (a) When money or property has been wrongfully
      withheld, interest shall be an amount which fully re-
      cognizes the gain or benefit realized by the person
      withholding such money or property from the date of
      wrongful withholding to the date of payment or to the
      date judgment is entered, whichever first occurs; or,
      at the election of the claimant,

           (b) Interest shall be at the rate of eight percent
      per annum compounded annually for all moneys or the
      value of all property after they are wrongfully with-
      held or after they become due to the date of payment or
      to the date judgment is entered, whichever first
      occurs.


21
     See supra note 2.
                               - 58 -


      Respondent contends that, because the transfer by MSSTA to

Mr. Scott of $104,580 of the amount that MSSTA realized from the

sale of its assets is a transfer subject to the Colorado fraudu-

lent conveyance statute, that amount of property was wrongfully

withheld within the meaning of the Colorado statutory interest

provision.    Consequently, according to respondent, Mr. Scott is

liable for interest under that provision for the period March 15,

1990, to January 10, 1995.22   Petitioners counter that Mr. Scott

is not liable under the Colorado statutory interest provision for

interest during that period because no assets of MSSTA were

wrongfully withheld.   On the instant record, we agree with

respondent.

      Although the term "wrongfully withheld" is not defined by

the Colorado statutory interest provision, Colorado courts have

consistently held that that section is to be broadly construed.

See Mesa Sand & Gravel Co. v. Landfill, Inc., 776 P.2d 362, 364-

365 (Colo. 1989) (en banc); see also Isbill Associates, Inc. v.

City and County of Denver, 666 P.2d 1117, 1121 (Colo. App. 1983).


22
     Par. 5 of the closing agreement stated:

      Carter, Scott, AST, MSSTA and the Internal Revenue
      Service agree that in the event one or more of these
      parties (Carter, Scott, and/or AST) is found to be
      personally liable as a transferee, the liability is
      $164,981 plus interest from March 15, 1990.

Respondent stipulated that the foregoing does not estop peti-
tioners from arguing that they are not liable for interest from
Mar. 15, 1990, to Jan. 10, 1995.
                              - 59 -


In Mesa Sand & Gravel Co. v. Landfill, Inc., supra at 364, the

Colorado Supreme Court stated:

     The purpose of section 5-12-102 [of the Colorado Re-
     vised Statutes] is to discourage a person responsible
     for payment of a claim to stall and delay payment until
     judgment or settlement. Section 5-12-102 recognizes
     the time value of money. It represents a legislative
     determination that persons suffer a loss when they are
     deprived of property to which they are legally enti-
     tled. [Citations omitted.]

     According to the U.S. Court of Appeals for the Tenth Cir-

cuit, to which an appeal in this case would normally lie, "a

'wrongful withholding' [under the Colorado statutory interest

provision] need not involve actual fraud, or indeed be tortious

in nature".   Stansbury v. Commissioner, 102 F.3d 1088, 1093 (10th

Cir. 1996), affg. 104 T.C. 486 (1995).   That Court of Appeals

found a wrongful withholding under the Colorado statutory

interest provision where the Colorado fraudulent conveyance

statute applied to a transfer of property.   Id.

     We have found that MSSTA's transfer to Mr. Scott of $104,580

of the amount that it realized from the sale of its assets to AST

is subject to the Colorado fraudulent conveyance statute.   We

further find that that amount was wrongfully withheld within the

meaning of the Colorado statutory interest provision, see Stans-

bury v. Commissioner, supra, and that Mr. Scott is liable for

interest under the Colorado statutory interest provision from

March 15, 1990, to January 10, 1995.
                        - 60 -


To reflect the foregoing,

                                  Decision will be entered

                             under Rule 155.
