                       T.C. Memo. 2000-66



                     UNITED STATES TAX COURT



 LAURA A. LOVELAND ESPINOSA, A.K.A. LAURA A. LOVELAND, TRUSTEE OF
THE LAURA A. LOVELAND TRUST, TRANSFEREE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 20338-97.                      Filed March 1, 2000.



          In July of 1990, P’s husband, T, transferred to
     her for no consideration shares of stock with a value
     of $53,828.12. Prior to that time, T had failed to
     file Federal income tax returns or to pay such taxes
     for years including 1981, 1982, 1984, and 1985. T
     subsequently filed returns for the foregoing years in
     November of 1993. On July 17, 1997, without having
     sent a notice of deficiency to T based upon the filed
     returns but after previous attempts to collect from T
     had yielded insufficient funds to satisfy his tax
     debts, R issued to P a notice of transferee liability
     pursuant to sec. 6901, I.R.C. R premises transferee
     liability on the grounds that the transfer of stock
     from T to P was a fraudulent conveyance under the
     California Uniform Fraudulent Transfer Act, Cal. Civ.
     Code secs. 3439 through 3439.12 (West 1997).
                                       - 2 -

           Held: R’s assertion of transferee liability is
      not barred by the period of limitations set forth in
      the California Uniform Fraudulent Transfer Act.
      Bresson v. Commissioner, 111 T.C. 172 (1998), followed.
           Held, further, P is liable as a transferee to the
      extent of the value of the assets received, plus
      interest thereon as provided by law.



      Joseph E. Mudd and Jeri L. Gartside, for petitioner.

      Jeffrey A. Schlei, for respondent.



                MEMORANDUM FINDINGS OF FACT AND OPINION

        NIMS, Judge:    Respondent determined that petitioner is

liable to the extent of $73,500.50 as a transferee of assets from

Frederick A. Espinosa for the following income tax deficiencies

and additions to tax, for the taxable years 1981, 1982, 1984, and

1985:

                                               Additions To Tax
  Taxable       Net1 Tax        Sec.         Sec.            Sec.          Sec.
    Year       Deficienc     6651(a)(1     6653(a)(1         6654          6661
                   y             )             )
    1981        $56,172        $14,043         $5,814      $3,153           --
    1982          50,077        12,519          5,655        3,341       $10,015
    1984           5,169         1,292          9,382        2,287         5,465
    1985          14,671         3,668          9,661        1,668         8,194

        1
         The statement attached to the notice of transferee liability explaining
petitioner’s liability for Mr. Espinosa’s taxes expresses the deficiency in terms of
the “net” deficiency existing after subtraction of withholding. We adopt this
convention throughout our opinion.

Respondent additionally asserted in the notice of transferee

liability that the interest due from Mr. Espinosa on the above
                                  - 3 -

amounts as of July 17, 1997, was calculated at $135,446, $97,109,

$19,476, and $21,900 for 1981, 1982, 1984, and 1985,

respectively.

       For reasons hereinafter stated, Mr. Espinosa’s 1980 taxable

year is also involved in the present controversy.    We consider

facts related to the 1980 year to the degree necessary to

evaluate petitioner’s liability with respect to the years before

the Court.    See sec. 6214(b).

       Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the relevant

years, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

       After concessions, the issues remaining for decision are:

       (1) Whether assessment of transferee liability against

petitioner is barred by the period of limitations set forth in

section 3439.09 of the California Civil Code (West 1997); and, if

not,

       (2) whether petitioner is liable as a transferee pursuant to

section 6901 for the unpaid Federal income taxes and additions to

tax of Mr. Espinosa.

                          FINDINGS OF FACT

       Some of the facts have been stipulated and are so found.

The stipulations of the parties, with accompanying exhibits, are

incorporated herein by this reference.
                               - 4 -

     Laura A. Loveland Espinosa resided in San Diego, California,

at the time of filing her petition in this case.   As trustee of

the Laura A. Loveland Trust, a grantor trust, she is the

transferee of assets received from her husband, Frederick A.

Espinosa.

Background of Mr. Espinosa

     Mr. Espinosa studied biology and chemistry in college and

became involved in the pharmaceutical and biotechnology industry

following graduation.   Prior to 1977, he held management

positions within General Electric Company in Georgia and

Wisconsin.   From 1977 to 1983, he was employed in executive

capacities by Johnson and Johnson, first at a Boston subsidiary

and then in New Jersey.   In 1983, Mr. Espinosa relocated to

California and served as president of biotechnology companies in

San Francisco and Palo Alto.   While working in San Francisco,

from approximately the latter part of 1983 to the middle of 1986,

Mr. Espinosa maintained an apartment at 2200 Sacramento Street,

Number 604, San Francisco, California, where he stayed during the

week.   On weekends, he commuted to Laguna Beach, California,

where he resided with his wife at that time, Colleen Espinosa,

and his children.   In July of 1986, Mr. Espinosa and Colleen

Espinosa were divorced.

     On September 10, 1988, Mr. Espinosa married petitioner, and

they continued to reside in Laguna Beach.   In July of 1989, Mr.
                                 - 5 -

Espinosa joined Lidak Biopharmaceuticals, later known as Lidak

Pharmaceuticals (Lidak), as its president and chief executive

officer.   During the latter part of 1989, Mr. Espinosa purchased

106,000 shares of stock in Lidak.       Then, on July 31, 1990, Mr.

Espinosa transferred all of his Lidak shares to petitioner’s

grantor trust.     The transfer was made for no consideration other

than love and affection, at a time when Mr. Espinosa was involved

in a dispute with Lidak’s chairman of the board over a project

that the company was funding.    In September of 1991, Mr. Espinosa

was terminated from his position at Lidak and has since been

unemployed.

Assets of Mr. Espinosa

     All significant assets owned by Mr. Espinosa at the time of

his 1986 divorce were awarded to Colleen Espinosa.       During the

period of 1989 through 1990, his assets consisted of two checking

accounts, a savings account, two certificates of deposit, and a

brokerage account.    Although the record does not reveal the

status of these accounts on July 31, 1990, petitioner offered

financial statements reflecting the following balances on the

dates indicated:

    Account Type                 Date              Account Balance
Checking Account                8/12/90               $7,763.93
(La Jolla Bank)
Checking Account                3/8/90                36,448.03
(First Interstate Bank)
                                 - 6 -

Savings Account                 3/8/90             1,299.67
(First Interstate Bank)
Certificate of Deposit          8/28/89           10,461.23
(Great American First
Savings)
Certificate of Deposit          9/27/89           21,417.21
(Columbia Federal
Savings & Loan)
Brokerage Account            11/26/89             12,855.39
(Shearson Lehman Hutton)

     As of the time of trial, the above accounts had been

dissipated.   Mr. Espinosa also did not own real property or a

vehicle and, since his termination from Lidak, has had no source

of income.

Tax Liability of Mr. Espinosa

     Mr. Espinosa did not file timely Federal income tax returns

for the years 1980, 1981, 1982, 1983, 1984, or 1985.   His last

previous return was filed from either Boston or New Jersey during

his employment with Johnson and Johnson.   In late 1987, the

Internal Revenue Service (IRS) began an investigation into the

potential tax liability of Mr. Espinosa.   This examination

culminated with statutory notices of deficiency for taxable years

1980 through 1985 being sent to Mr. Espinosa.   Respondent’s

certified mail list indicates that the notices were mailed on

April 5, 1989, and were addressed to “2200 Sacramento, Number

604”, “San Francisco, CA 94115-2305”.

     At the time the notices were issued, the IRS file on Mr.

Espinosa contained an entry, dated January 19, 1988, which stated
                                - 7 -

that a form letter previously sent to him had been returned

showing his address as “1278 Glenneyre #15”, “Laguna Beach, Ca.

92651”.    Subsequent to mailing the deficiency notices, the IRS

sent to the Laguna Beach postmaster a document on May 8, 1989,

requesting current address information for Mr. Espinosa and

received in response “375 Broadway #214”, “Laguna Beach, Ca.

92651”.    During this period, Mr. Espinosa maintained a post

office box at the Glenneyre address and resided at the Broadway

address.    IRS records do not indicate that the deficiency notices

were re-sent to either of these locations.    The taxes set forth

in the notices were assessed against Mr. Espinosa on November 27,

1989, and lien notices were thereafter recorded in three southern

California counties.

     In late 1990, an IRS agent contacted Mr. Espinosa at Lidak,

and the two later met to discuss his tax liabilities.    As a

result of this meeting, Mr. Espinosa began making payments to the

IRS on January 3, 1991.    The payments ceased at the end of 1991,

when his termination from Lidak left him with no source of

income.    The only further payment was made on July 15, 1993.   The

payments totaled between $93,000 and $94,000.    Respondent applied

all payments to Mr. Espinosa’s 1980 liability for income tax,

additions to tax, and interest, as determined by respondent in

the 1989 deficiency notices.
                               - 8 -

     After being advised by his attorney that submission of tax

returns for the delinquent years would reduce his tax liability,

Mr. Espinosa filed returns for 1981, 1982, 1984, and 1985 on

November 3, 1993.   (The record does not contain copies of returns

filed, if any, for years other than those upon which transferee

liability is based.)   The 1981 return showed a total tax of

$118,932 but, after subtracting $60,098 for withheld tax and

$80,967 claimed on line 56 for “1981 estimated tax payments and

amount applied from 1980 return”, indicated that Mr. Espinosa was

entitled to a refund of $22,133.   The 1982 return reflected a

total tax of $113,091 and, after subtraction of $63,015 for

withheld tax and $21,131 for the alleged overpayment carried over

from 1980 and unused in 1981 (the $1,002 discrepancy is not

explained by the record), a tax due of $28,945.   For 1984, a

total tax of $36,386 less $31,217 for withholding resulted in an

amount owed of $5,169.   Likewise, total tax of $28,782 minus

$13,511 for withholding led to tax liability of $15,271 for 1985.

The IRS did not issue notices of deficiency to Mr. Espinosa based

upon these returns.

Tax Liability of Petitioner

     On July 17, 1997, the IRS mailed a notice of transferee

liability to petitioner in her capacity as trustee of the Laura

A. Loveland Trust and transferee of Mr. Espinosa’s Lidak stock.

The asserted liability of $73,500.50 equaled the fair market
                                    - 9 -

value of the shares as estimated by the IRS.        The parties have

since stipulated that the value of the shares on the date of the

transfer was $53,828.12.

                                   OPINION

      We must decide whether petitioner may be held liable as a

transferee for unpaid taxes of Mr. Espinosa, from whom she

received assets worth $53,828.12.

I.   General Rules

A.   Transferee Liability

      Section 6901, which establishes a procedure whereby

respondent may assess and collect from a transferee of property

the unpaid taxes of the transferor, reads in part as follows:

      SEC. 6901.       TRANSFERRED ASSETS.

           (a) Method of Collection.--The amounts of the
      following liabilities shall, except as hereinafter 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:

                   (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),

                   *      *    *    *       *   *   *

      The foregoing section thus does not create or define a

substantive liability; rather, it merely provides a remedy for
                                - 10 -

enforcing the existing liability of the transferor.     See

Commissioner v. Stern, 357 U.S. 39, 42 (1958); Coca-Cola Bottling

Co. v. Commissioner, 334 F.2d 875, 877 (9th Cir. 1964), affg. 37

T.C. 1006 (1962); Bresson v. Commissioner, 111 T.C. 172, 179

(1998); Gumm v. Commissioner, 93 T.C. 475, 479 (1989), affd.

without published opinion 933 F.2d 1014 (9th Cir. 1991).      The

substantive question of whether or to what extent a particular

transferee may be held liable at law or in equity for a

transferor’s obligation is determined by State law.     See

Commissioner v. Stern, supra at 45; Coca-Cola Bottling Co. v.

Commissioner, supra at 877; Bresson v. Commissioner, supra at

180; Gumm v. Commissioner, supra at 485.     Since the transfer of

stock at issue here occurred in California, California law

governs.    See Coca-Cola Bottling Co. v. Commissioner, supra at

877; Bresson v. Commissioner, supra at 180.

     The California Uniform Fraudulent Transfer Act, applicable

to transfers made on or after January 1, 1987, includes

provisions imposing transferee liability on grounds of both

actual and constructive fraud.     See Cal. Civ. Code secs. 3439.04,

3439.05, 3439.12 (West 1997).     A transfer is actually fraudulent

when made “With actual intent to hinder, delay, or defraud any

creditor of the debtor.”     Cal. Civ. Code sec. 3439.04(a) (West

1997).     As regards constructive fraud, the provision of

California law most relevant here states:
                              - 11 -

          A transfer made or obligation incurred by a debtor
     is fraudulent as to a creditor whose claim arose before
     the transfer was made or the obligation was incurred if
     the debtor made the transfer or incurred the obligation
     without receiving a reasonably equivalent value in
     exchange for the transfer or obligation and the debtor
     was insolvent at that time or the debtor became
     insolvent as a result of the transfer or obligation.
     [Cal. Civ. Code sec. 3439.05 (West 1997).]

     This statute has been interpreted in the context of tax

disputes to require proof of four elements as a prerequisite to

imposing transferee liability:   (1) The transferor owed a debt to

the IRS, (2) the claim of the IRS arose before the transfer was

made, (3) the transferor made the transfer without receiving

reasonably equivalent value in exchange, and (4) the transferor

was insolvent at the time of the transfer or became insolvent as

a result of the transfer.   See Locke v. Commissioner, T.C. Memo.

1996-541, affd. without published opinion 152 F.3d 927 (9th Cir.

1998); O’Sullivan v. Commissioner, T.C. Memo. 1994-17.

     Transferee liability is generally limited to the value of

the assets received from the transferor.   See Gumm v.

Commissioner, supra at 480; Locke v. Commissioner, supra.

However, where the value of the assets transferred is less than

the tax debt of the transferor, the liability of the transferee

for interest from the date of the transfer to the date of the

notice of transferee liability is determined by State law.     See

Stansbury v. Commissioner, 104 T.C. 486, 493 (1995); Swinks v.
                              - 12 -

Commissioner, 51 T.C. 13, 19 (1968); Estate of Stein v.

Commissioner, 37 T.C. 945, 961 (1962); O’Sullivan v.

Commissioner, supra.

     Section 3287(a) of the California Civil Code (West 1997)

reads:   “Every person who is entitled to recover damages certain,

or capable of being made certain by calculation, and the right to

recover which is vested in him upon a particular day, is entitled

also to recover interest thereon from that day”.    Respondent

therefore has the right under California law to interest on the

value transferred, at the legal rate specified by State statute,

from the date the transfer was made, July 31, 1990, until July

17, 1997, the date of the notice of transferee liability.    See

O’Sullivan v. Commissioner, supra.     Additionally, a transferee is

liable for interest accruing at the statutory rate as prescribed

under sections 6601 and 6621 of the Internal Revenue Code for the

period following the issuance of the transferee notice until the

liability established thereby is paid.    See Estate of Stein v.

Commissioner, supra at 959; O’Sullivan v. Commissioner, supra.

     Respondent bears the burden of proving all elements

necessary to establish the taxpayer’s liability as a transferee,

but not to show that the transferor was liable for the tax.      See

sec. 6902(a); Rule 142(d).
                                 - 13 -

B.   Period of Limitations

      Section 6901(c) provides that the period of limitations for

assessment of liability against a transferee extends “1 year

after the expiration of the period of limitation for assessment

against the transferor”.     The period for assessment against the

transferor, in turn, is set forth in section 6501 and generally

runs for 3 years from the filing of the tax return.    See sec.

6501(a).   The period is of unlimited duration if no return is

filed.   See sec. 6501(c)(3).    Federal law thus allows at least 4

years, measured from the date a return is filed, in which a

notice of transferee liability may be issued.

      In contrast, section 3439.09 of the California Civil Code

(West 1997) states as follows:

           A cause of action with respect to a fraudulent
      transfer or obligation under this chapter is
      extinguished unless action is brought * * *

                (a) Under subdivision (a) of Section 3439.04,
           within four years after the transfer was made or
           the obligation was incurred or, if later, within
           one year after the transfer or obligation was or
           could reasonably have been discovered by the
           claimant.

                (b) Under subdivision (b) of Section 3439.04
           or Section 3439.05, within four years after the
           transfer was made or the obligation was incurred.

                *    *       *   *    *    *    *
                              - 14 -

Hence, State law establishes a period of limitations for actions

under the California Fraudulent Transfer Act that expires 4 years

after the date of the transfer, with a possibility for extension

in the case of actual, as opposed to constructive, fraud.

II.   Contentions of the Parties

      Respondent contends that transferee liability may be imposed

upon petitioner pursuant to section 6901 on the grounds that Mr.

Espinosa’s transfer of stock was both actually and constructively

fraudulent under California law.   According to respondent,

because Mr. Espinosa transferred his Lidak shares to petitioner

for no consideration, at a time when his unpaid taxes exceeded

the value of his remaining assets, the transfer was, at minimum,

constructively fraudulent.   Respondent further maintains that

assertion of transferee liability is not barred by any statute of

limitations; the notice of transferee liability was sent within

the time period prescribed by the Internal Revenue Code, and this

Federal limitations period is not affected by differing limits

under State law.

      Conversely, petitioner argues that respondent is precluded

from making a transferee assessment, at least on any basis other

than the taxes stated as due in the filed returns, because no

valid deficiency determination or assessment exists against Mr.

Espinosa.   Petitioner contends that because the 1989 notices of
                             - 15 -

deficiency were not sent to Mr. Espinosa’s last known address,

they are invalid and cannot be used to establish Mr. Espinosa’s

tax liability.

     Petitioner further asserts that because no deficiency

notices were issued with respect to the returns filed by Mr.

Espinosa in 1993, and because the period for issuing such notices

has expired, Mr. Espinosa cannot be said to owe taxes beyond the

figures reflected in those returns.   Since the amount so shown as

owing is less than the alleged value of Mr. Espinosa’s remaining

assets on the date of the transfer, petitioner contends that

there can be no finding of constructive fraud.   Petitioner also

argues that the requisite intent for actual fraud is lacking.

     Lastly, petitioner maintains that the provision for

extinguishment set forth in the California Uniform Fraudulent

Transfer Act governs so as to bar respondent’s assertion of

transferee liability.

     We conclude that the purported lack of a deficiency

determination or assessment against the transferor poses no

barrier to an assertion of transferee liability.   We further

agree with respondent that the transfer to petitioner was

fraudulent under section 3439.05 of the California Civil Code,

and we find that petitioner has failed to establish that Mr.

Espinosa is not presently liable for the underlying unpaid taxes.
                                - 16 -

Hence, because we also hold that the Federal limitations period

is applicable in this case, transferee liability may properly be

asserted against petitioner.

III.     Application

A.     Period of Limitations

        As a threshold procedural matter, we first focus on the

question of whether the State period of limitations prevails over

the Federal so as to bar respondent’s assertion of transferee

liability and to eliminate any need for further consideration of

the related substantive issues.

        Respondent contends that because Mr. Espinosa filed his

returns with respect to 1981, 1982, 1984, and 1985 on November 3,

1993, the period of limitations for assessment of transferee

liability against petitioner extended to November 3, 1997.

Hence, the notice of transferee liability sent on July 17, 1997,

was timely.     Petitioner, in contrast, argues that the provisions

set forth in the California Civil Code for extinguishment 4 years

after the date of transfer should control.     According to

petitioner, since the notice of transferee liability was not sent

until nearly 7 years after the July 31, 1990, transfer,

respondent’s right to pursue any such liability on the basis of a

fraudulent conveyance under California law has been extinguished.

        This precise issue was, however, decided unfavorably to

petitioner’s position in Bresson v. Commissioner, 111 T.C. 172
                               - 17 -

(1998).    There, this Court held that “respondent is not bound by

the limitations period in California’s UFTA in seeking to assert

or assess transferee liability against * * * [the transferee]

under section 6901."    Id. at 190.   Rather, “section 6901(c) is

the applicable limitations period to which respondent is bound in

asserting transferee liability”.      Id.   Given this precedent and

for the reasons stated therein, we likewise hold here that

respondent has issued a timely notice of transferee liability.

B.   Transferee Liability

      1.   Necessity for Deficiency Determination or Assessment

      Against Transferor

      Preliminary to our discussion of whether respondent has

established the substantive elements of transferee liability, we

address whether, as petitioner appears to contend, the purported

lack of a valid deficiency notice or assessment against the

transferor in any way inhibits respondent’s determinations of

liability for taxes, or additions to tax, against a transferee.

To answer this inquiry in the affirmative, however, would be

contrary both to congressional intent as evidenced by legislative

history and to existing case law.

      Legislative history deals explicitly with the procedural

requirement of a notice of deficiency in contexts involving

transferee liability:

           Section 274(a) [predecessor of sections 6212 and
      6213] requires notice of a deficiency in a tax to be
                              - 18 -

     sent the taxpayer before further proceedings for
     collection of the tax liability are continued. The
     section, however, in terms applies only to a deficiency
     in a tax and does not apply to the liability of a
     transferee in respect of the tax of the taxpayer.
     Therefore, in proceedings against the transferee,
     notice need not be given the taxpayer under section
     274(a). However, under the substitute agreed to by the
     conferees, the liability of the transferee is collected
     in the same manner as the liability for tax. Section
     274(a) is thus incorporated by reference, but the
     result of such reference is that for procedural
     purposes the transferee is treated as a taxpayer would
     be treated, and under section 274(a) notice would be
     sent to the transferee (and not the taxpayer) in
     proceedings to enforce the liability of the transferee.
     [H. Conf. Rept. 356, 69th Cong., 1st Sess. (1926),
     1939-1 C.B. (Part 2) 372.]

     Case law is likewise unequivocal in rejecting arguments that

a notice of deficiency to or assessment against the transferor

must precede enforcement of liability against the transferee.

See Kuckenberg v. Commissioner, 309 F.2d 202, 206 (9th Cir.

1962), affg. on this issue 35 T.C. 473 (1960); Bresson v.

Commissioner, supra at 178; Gumm v. Commissioner, 93 T.C. 475,

484 (1989); Maher v. Commissioner, 55 T.C. 441, 457 (1970), affd.

on this issue 469 F.2d 225 (8th Cir. 1972); Cleveland v.

Commissioner, 28 B.T.A. 578, 580-581 (1933), affd. 77 F.2d 184

(5th Cir. 1935).   The rule as developed by this Court is that

“the Commissioner is not required to issue a notice of deficiency

or to make an assessment against the transferor where efforts to

collect delinquent taxes from a transferor would be futile.”

Bresson v. Commissioner, supra at 178.   The following, oft-quoted

rationale underlies this position:
                              - 19 -

     A deficiency is not created by any act of the
     respondent, but by the facts and the legal significance
     thereof as set out in the taxpayer’s income tax return.
     The so-called “60-day [now 90-day] letter” is no more
     than notice to the taxpayer that the amount of a
     deficiency disclosed by its return has been determined
     under the applicable statute. In our opinion no
     assessment, notice, or other act of the respondent is
     necessary to establish liability for income taxes. We
     think that any deficiency existing at the date of a
     transfer of assets is a liability against such assets
     under the trust fund theory. * * * [Cleveland v.
     Commissioner, supra at 580-581 (fn. ref. omitted); see
     also Maher v. Commissioner, supra at 457; Kuckenberg v.
     Commissioner, 35 T.C. at 483.]

     Hence, the relevant procedural requirement for a proper

assertion of transferee liability is that respondent send to the

transferee a notice under section 6901 which serves to “inform

the transferee of the extent and nature of the tax deficiency

which he is claiming against the transferor.”    Kuckenberg v.

Commissioner, supra at 483-484.    Moreover, this rule is equally

applicable regardless of whether respondent is asserting that the

transferor is liable only for unpaid taxes and deficiencies or

whether respondent is claiming that the transferor is liable for

additions to tax as well.   See Bresson v. Commissioner, supra at

173; Gumm v. Commissioner, supra at 475; Kuckenberg v.

Commissioner, supra at 474.

     We further note that the Court of Appeals for the Ninth

Circuit, to which appeal in the instant case would normally lie,

has adopted the foregoing principle.   See Kuckenberg v.

Commissioner, 309 F.2d at 202.    In affirming the Tax Court on the
                                - 20 -

question of whether a deficiency determination or assessment

against the transferor must precede imposition of transferee

liability, the Court of Appeals in Kuckenberg v. Commissioner,

309 F.2d at 206, summarily disposed of the transferees’

contentions as follows:    “they assert that the United States does

not have the status of a creditor since no ninety-day letter was

sent to the corporation.   However, the government need not take

futile assessment action against a taxpayer without assets.”

     From these authorities, we conclude that the notice of

transferee liability received by petitioner is not rendered

ineffective either by the alleged invalidity of the notices of

deficiency sent to Mr. Espinosa in 1989 or by respondent’s

failure to issue deficiency notices to Mr. Espinosa with respect

to the returns filed in 1993.    As regards the 1989 notices, these

documents neither created nor impacted the underlying tax debt.

Hence, their existence and any procedural irregularities in their

issuance are irrelevant to the question of whether a transfer is

constructively fraudulent, and, as will be seen below, we find it

unnecessary to reach the issue of actual fraud.

     With respect to the failure to send Mr. Espinosa notices of

deficiency based on the filed returns, the law referenced above

does not require respondent first to take useless action against

a transferor.   Here, Mr. Espinosa had earned no income since

1991, and respondent was aware that Mr. Espinosa’s financial
                              - 21 -

situation had forced him to cease making payments on his tax

liabilities some years earlier.   Even the bank and brokerage

accounts he once possessed had been dissipated.     At the time of

trial, Mr. Espinosa still owned neither a residence nor a car,

and nothing in the record would indicate any other potential

assets.   Respondent was entitled to proceed directly against

petitioner as transferee in determining and assessing

deficiencies and additions to tax.     Because the notice sent to

petitioner informs her of the nature and extent of the

deficiencies and additions being claimed against Mr. Espinosa, it

constitutes a proper assertion of transferee liability.

     2.   Existence of Fraudulent Transfer

     Having thus determined that respondent’s efforts to impose

transferee liability are not defeated by absence of prior

procedural steps, we next consider whether respondent has

sustained the burden of establishing that Mr. Espinosa’s transfer

of stock to petitioner qualifies as fraudulent pursuant to

California law.   We begin our examination of this question with

the issue of constructive fraud, as a finding thereof will make

unnecessary further probing of Mr. Espinosa’s subjective intent.

     Turning to the first of the four elements required to

establish a constructively fraudulent transfer under section

3439.05 of the California Civil Code, we conclude that Mr.

Espinosa owed, and continues to owe, a debt to the IRS.     At the
                              - 22 -

time the transfer was made, Mr. Espinosa had paid no taxes,

beyond withholding, for the years 1980 through 1985.   Yet even

his own subsequently filed returns indicate that he owed taxes

for some of these years, and the parties stipulated that “The

Internal Revenue Service was a creditor of Frederick Espinosa at

the time of the transfer of the Lidak stock.”

     Moreover, no evidence shows that the taxes so reflected as

due have been paid.   To the extent that statements made by

petitioner on brief can be read to argue that the source of the

claimed $80,967 overpayment for 1980 was unrelated to the $93,000

to $94,000 in payments made to the IRS in 1991, and that these

payments are therefore sufficient to eliminate any remaining

liabilities, we find such a position to be insupportable on this

record.

     Respondent’s transcript of account for Mr. Espinosa’s 1980

taxable year records all activity with respect to the account

dating from the 1988 preparation by the IRS of a substitute

return for Mr. Espinosa as a nonfiler.   However, until the

subsequent payments of $93,000 to $94,000 commencing in 1991, the

only credit reflected therein is a $38,265 credit for withheld

taxes and excess FICA.   The transcript shows neither credit for

an overpayment from a prior year nor remittance of any additional

sums to the IRS beyond the $93,000 to $94,000.   Hence, since

these payments are the only ones made by Mr. Espinosa and applied
                                - 23 -

to his 1980 tax year, they are likewise the sole potential source

for the alleged overpayment.    We find that Mr. Espinosa’s status

was and is that of a debtor to the IRS.

     The above-quoted stipulation characterizing the IRS as a

creditor of Mr. Espinosa at the time of the transfer is likewise

sufficient to establish the second element, which requires the

IRS’s claim to have arisen prior to the transfer.    In addition,

an identical result would be demanded, regardless of the

stipulation, by existing law.    Tax liabilities accrue on the due

date of the tax return, and if such liabilities are not paid at

that time, the IRS is considered to be a creditor as of the close

of the applicable tax period.    See Swinks v. Commissioner, 51

T.C. 13, 17 (1968); Locke v. Commissioner, T.C. Memo. 1996-541;

O’Sullivan v. Commissioner, T.C. Memo. 1994-17; LaMothe v.

Commissioner, T.C. Memo. 1990-63.    Here, since the transfer in

July of 1990 took place more than 4 years after Mr. Espinosa’s

tax return was due for the most recent of the tax periods upon

which transferee liability is based, the IRS’ claim predated the

transfer by a wide margin.

     The third requirement, that the transferor must have

received no reasonably equivalent value in exchange, is once

again established by a stipulation of the parties:    “The transfer

of the Lidak stock was made for love and affection.   The parties

stipulate that love and affection is not adequate consideration.”
                              - 24 -

     With respect to the fourth element, which mandates

insolvency at the time or as a result of the transfer, a debtor

is insolvent under California law “if, at fair valuations, the

sum of the debtor’s debts is greater than all of the debtor’s

assets.”   Cal. Civ. Code sec. 3439.02(a) (West 1997).    Respondent

contends that Mr. Espinosa’s extensive tax liabilities as of the

date of the transfer outweighed his minimal assets to a degree

more than sufficient to meet this test.   Petitioner, in contrast,

claims that because the deficiency notices were invalid, Mr.

Espinosa’s debts for purposes of the insolvency calculation are

limited to the approximately $50,000 ($28,945 + $5,169 + $15,271

= $49,385) shown as owing on the returns filed in 1993.

Petitioner further points to the documentary evidence produced at

trial reflecting assets with a total value of $90,245.46 and

states on brief that Mr. Espinosa’s remaining property was worth

“approximately $100,000” at the time of the transfer.     Therefore,

according to petitioner, Mr. Espinosa’s financial status was one

of solvency.

     We conclude, however, that even if we accept the records

offered by petitioner, which we note are somewhat lacking in

contemporaneity, as accurately representing Mr. Espinosa’s assets

in July of 1990, we cannot agree that Mr. Espinosa was solvent.

The $93,000 to $94,000 in payments to the IRS were not made until

1991, after the transfer.   Hence, at minimum and without regard
                               - 25 -

to the contested notices of deficiency or any additions to tax or

interest, the tax liability in July of 1990 must have been at

least the $50,000 shown as still owing plus the between $93,000

and $94,000 paid subsequent to the transfer but prior to filing

the returns.    Even these figures when combined exceed the

purported $90,000 to $100,000 in assets remaining after the

transfer.

     Furthermore, because a notice of deficiency does not, as

explained above, create the underlying debt, the alleged lack of

a valid notice has no bearing upon Mr. Espinosa’s liability as of

July 1990 either for income taxes or for statutory additions to

tax or interest then accrued on his unpaid balance.    Any such

additions or interest, which would hardly be insignificant after

multiple years of failing to file a return despite owing taxes,

are thus properly considered as increasing the amount by which

Mr. Espinosa was indebted to the IRS in July of 1990.    We find

that at the time of the transfer of the Lidak shares to

petitioner, Mr. Espinosa was or was rendered insolvent.    We

therefore conclude that respondent has sustained the burden of

establishing each element necessary to support imposition of

transferee liability on the basis of a constructively fraudulent

transfer under California law, and we need not reach the issue of

actual fraud.
                               - 26 -

     3.   Liability for Underlying Tax

     Having decided that the July 1990 transfer was fraudulent,

we turn to the question of whether petitioner may nonetheless

reduce or avoid liability by proving that Mr. Espinosa does not

presently owe the amounts stated in the notice of transferee

liability.    Petitioner bears the burden of establishing that

respondent’s determinations are erroneous.    See Rule 142(a).    On

this record, however, evidence offered by petitioner is

insufficient to overcome the presumption of correctness afforded

to respondent’s determinations, at least to the degree that would

be necessary to render her liable for less than the value of the

assets transferred.

     The net deficiencies stated in the notice of transferee

liability generally parallel the balances shown on Mr. Espinosa’s

returns, with the major exception being that no credit was given

for the claimed $80,967 overpayment.     The only evidence produced

by petitioner of any payments that could reduce Mr. Espinosa’s

tax liability was the statement of his account revealing that

$93,000 to $94,000 had been received by respondent.    Petitioner

did not, however, provide a copy of the return Mr. Espinosa

claims to have filed for 1980 or any other evidence of his 1980

taxes.    We consequently have no basis for concluding that the

payments were misapplied and should more properly be credited

against the stated net deficiencies for 1981, 1982, 1984, or
                              - 27 -

1985.   The net deficiencies stated in the notice of transferee

liability, which petitioner’s evidence falls short of disproving,

are thus more than adequate to render petitioner liable for the

full stipulated value, $53,828.12, of the transferred stock.    We

need not reach the issue of whether Mr. Espinosa is also liable

for the additions to tax set forth in the transferee notice.

     We therefore conclude that petitioner has failed to sustain

her burden of showing that Mr. Espinosa does not currently owe

taxes to the IRS in an amount at least equal to the agreed value

of the Lidak shares.   Hence, we hold that petitioner is liable to

the extent of $53,828.12, plus interest thereon in accordance

with California and Federal law.

     To reflect the foregoing,



                                         Decision will be entered

                                    under Rule 155.
