                         T.C. Memo. 1998-25



                       UNITED STATES TAX COURT



                SHERMAN R. SOLAAS, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11666-95.                     Filed January 21, 1998.



     Greg L. Eriksen (specially recognized), for petitioner.

     Irene S. Carroll, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined that petitioner is

liable as a transferee of Kemp Bros., Inc. (KBI), for

deficiencies in income tax, additions to tax, and penalties owed

by KBI as follows:
                                        - 2 -

                                       Additions to Tax              Penalties
                            Sec.              Sec.           Sec.       Sec.
   Year      Deficiency   6651(a)(3)     6653(a)(1)(A)    6661(a)     6662(a)

   1986     $110,582.82      ---            $10,882          ---       ---
   1987      175,819.00      ---              8,791          ---       ---
   1988       80,136.00   $4,808.16            ---         $4,007      ---
   1989      121,302.00      ---               ---           ---     $6,065
   1991            0.00      ---               ---           ---       ---

Respondent also asserted in the notice of transferee liability

that KBI owed, as additional amounts, the following:

     Item                                                     Year               Amount

     Unpaid lien fees:                                        1986              $14.79
     Interest refunded in error:                              1987            1,502.90

     Assessed interest:
                                                              1986        188,884.77
                                                              1987        120,203.59
                                                              1988         54,205.74
                                                              1989         45,832.50
                                                              1991         10,142.76

     Accrued interest to March 15, 1995:
           from Oct. 5, 1993                                  1986            51,229.73
           from Oct. 5, 1993                                  1987            36,467.28
           from Oct. 5, 1993                                  1988             5,472.83
           from Oct. 5, 1993                                  1989            25,206.89
           from Feb. 7, 1995                                  1991                92.95

     Accrued addition to tax for failure to pay:
                                                              1986            12,096.91
                                                              1987            15,823.71
                                                              1988            12,884.12
                                                              1989            10,917.18
                                                              1991                92.95

KBI's total tax liability was $1,113,471.58; however, the unpaid

balance was $943,187.03.        The issue for decision is whether

petitioner is liable as a transferee under section 69011 for (1)




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 3 -


petitioner's 1988 increase in salary from KBI, and (2) amounts

KBI loaned petitioner.2

                          FINDINGS OF FACT

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

The stipulation of facts and attached exhibits are incorporated

herein by this reference.

     KBI was a California corporation with its principal place of

business at 6321 South Hoover Avenue, Whittier, California.    KBI

was a general contractor in the construction industry.   KBI's

gross sales from 1989, 1990, 1991, and 1992 were $30,491,534,

$23,006,897, $22,239,334, and $18,831,235, respectively.   KBI

ceased to operate sometime during middle to late 1993.

     From 1977 through 1993, petitioner (Mr. Solaas) was the

president and sole shareholder of KBI.   Mr. Solaas actively

participated in the company's projects--he arrived early to work,

spent time with the estimating department and project management,

visited construction sites, and worked on marketing KBI.




     2
       On brief, respondent argues for the first time that KBI's
purchase of a one-third interest in a condominium in Mexico that
KBI used to entertain clients was a transfer by KBI to Mr.
Solaas. Generally, we do not consider issues that are raised for
the first time at trial or on brief. Foil v. Commissioner, 92
T.C. 376, 418 (1989), affd. 920 F.2d 1196 (5th Cir. 1990); Messer
v. Commissioner, 52 T.C. 440, 455 (1969), affd. 438 F.2d 774 (3d
Cir. 1971). This matter was not argued until briefing, therefore
we do not consider it to be before the Court.
                                 - 4 -


     KBI paid Mr. Solaas, John C. Espino (Mr. Espino), and Larry

C. Graham (Mr. Graham), officers of KBI, the following salaries:

      Year      Mr. Solaas       Mr. Espino       Mr. Graham

      1987       $156,000         $69,566          $65,738
      1988        203,980          73,653           68,525

Mr. Solaas decided how much KBI paid Mr. Espino, Mr. Graham, and

himself.

     Parr Contracting Co. (PCC) was a construction contractor

similar in size to KBI--it averaged between $20 and $35 million

in gross sales per year.     From 1986 through 1989, PCC paid its

CEO between $350,000 and $500,000.       Auerbach Construction, Inc.

(ACI), was a construction contractor similar in size to KBI--it

averaged between $20 and $25 million in gross sales per year.       In

1989, ACI paid its president and CEO approximately $250,000.

     Several times from 1988 until 1992, KBI loaned various

amounts of money to Mr. Solaas.     KBI recorded these loans on its

financial statements as accounts receivable from Mr. Solaas.      Mr.

Solaas determined the amounts of these loans.      Between September

of 1989 and December of 1992, Mr. Solaas repaid $88,000 of the

money KBI loaned to him.

     As of February of 1993, KBI's loan account analysis listed

the amount of the loans outstanding to Mr. Solaas as totaling

$911,073.15.   After February of 1993, KBI did not loan Mr. Solaas

any money.   On March 30, 1994, the amount of KBI's loans

outstanding to Mr. Solaas totaled $1,011,340.
                                            - 5 -


       In 1990, the Internal Revenue Service (IRS) began auditing

KBI.       KBI and the Examination Division of the IRS could not

resolve the tax liability; so, in July of 1991, KBI filed a

protest with the Appeals Office of the IRS.               The Appeals Office

and KBI resolved the matter, and on October 4, 1993, the IRS

assessed corporate income tax deficiencies, additions to tax,

penalties, and interest for 1986 through 1989 against KBI as

follows:

       Year       Tax Assessed     Additions to Tax   Penalties     Interest1

       1986         $217,629          $10,882           ---        $188,875.56
       1987          175,819            8,791           ---         120,203.59
       1988           80,136            4,007           ---          44,337.10
       1989          121,302             ---          $6,065         45,986.62
           1
               Interest to Oct. 4, 1993.

Additionally, on December 20, 1993, the IRS assessed corporate

income tax deficiencies and interest for 1990 and 1991 against

KBI as follows:

       Year                    Tax Assessed                    Interest1

       1990                      $211,342                 $54,069.80
       1991                        77,442                  10,695.95
       1
           Interest to Dec. 20, 1993.

       Sometime after March 30, 1994, the IRS took action to

collect KBI's unpaid corporate income taxes.                   The IRS seized all

of KBI's assets it could locate with the exception of KBI's

assets located in Mexico.

       The IRS is the only known unpaid creditor of KBI.
                                 - 6 -


                                OPINION

     Section 6901(a)(1)(A) authorizes the assessment of

transferee liability in the same manner as the taxes in respect

of which the liability was incurred.      This provision does not

create a new liability; it merely provides a remedy for enforcing

the existing liability of the transferor.      Coca-Cola Bottling Co.

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

1006 (1962); Mysse v. Commissioner, 57 T.C. 680, 700-701 (1972).

The Commissioner has the burden of proving all the elements

necessary to establish the taxpayer's liability as a transferee

except for proving that the transferor was liable for the tax.

Sec. 6902(a); Rule 142(d).

     The substantive question of whether a transferee is liable

for the transferor's obligation and the extent of his liability

depends on State law.   See Commissioner v. Stern, 357 U.S. 39, 45

(1958); Adams v. Commissioner, 70 T.C. 373, 389 (1978), affd.

without published opinion 688 F.2d 815 (2d Cir. 1982).      All the

transfers in the instant case occurred in California; hence,

California law governs.   Adams v. Commissioner, supra at 390.

Under California law, a person is liable as a transferee to the

extent of the value of transferred assets when such assets are

fraudulently conveyed to him.     Pierce v. Commissioner, 61 T.C.

424, 432 (1974); cf. Kuzmicki v. Nelson, 225 P.2d 233 (Cal. Dist.

Ct. App. 1950).
                               - 7 -


     In 1986, California adopted the Uniform Fraudulent Transfer

Act (UFTA) which applies to transfers made or obligations

incurred on or after January 1, 1987.   Cal. Civ. Code sec.

3439.12 (West 1997).   All the transfers that respondent alleges

are fraudulent took place after 1987.   Accordingly, the UFTA

applies.

     California Civil Code section 3439.04 provides:

          A transfer made or obligation incurred by a debtor
     is fraudulent as to a creditor, whether the creditor's
     claim arose before or after the transfer was made or
     the obligation incurred, if the debtor made the
     transfer or incurred the obligation as follows:

          (a) With actual intent to hinder, delay, or
     defraud any creditor of the debtor.

          (b) Without receiving a reasonably equivalent
     value in exchange for the transfer or obligation, and
     the debtor:

                (1) Was engaged or was about to engage
           in a business or a transaction for which the
           remaining assets of the debtor were
           unreasonably small in relation to the
           business or transaction; or

                (2) Intended to incur, or believed or
           reasonably should have believed that he or
           she would incur, debts beyond his or her
           ability to pay as they became due.

California Civil Code section 3439.05 provides:

          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 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
                               - 8 -


     was insolvent at that time or the debtor became
     insolvent as a result of the transfer or obligation.

Section 3439.04(a) relates to actual fraud, whereas sections

3439.04(b) and 3439.05 relate to constructive fraud.

Mr. Solaas' Salary

     1.   Actual Fraud

     Respondent contends that the amount of the increase in Mr.

Solaas' salary from 1987 to 1988 was actual fraud on KBI's

creditors.   Respondent points out that (1) KBI increased Mr.

Solaas' salary by 30 percent while during that same time it

increased other officers' salaries by only 6 percent, and (2) Mr.

Solaas determined the salary KBI paid him.     Mr. Solaas argues

that the salary KBI paid him in 1988 was reasonable.

     For the Court to find actual fraud, Mr. Solaas must have

actually intended to hinder, delay, or defraud any of KBI's

creditors.   Cal. Civ. Code sec. 3439.04(a).    Respondent concedes

that the increased salary by itself does not indicate that Mr.

Solaas had the intent to hinder, delay, or defraud KBI's

creditors.   Respondent, however, argues that the "unwarranted

increase in salary", when considered along with the other

transfers KBI made to Mr. Solaas, somehow amounts to actual

fraud.

     In 1988, KBI paid Mr. Solaas a salary that was comparable to

similarly positioned officers and executives at similar
                                   - 9 -


companies.     Respondent presented no persuasive evidence that Mr.

Solaas' salary was unreasonable.       After considering all the facts

and circumstances, we hold that the salary KBI paid to Mr. Solaas

was reasonable and was not actual fraud on KBI's creditors.

     2.     Constructive Fraud

     Respondent argues that Mr. Solaas did not give reasonably

equivalent value for the amount of increase in salary from 1987

to 1988.3    Mr. Solaas argues that he gave reasonably equivalent

value in exchange for the salary KBI paid him in 1988 and that

respondent has failed to carry the burden of proof because

respondent produced no evidence of reasonable compensation.

     For the Court to find constructive fraud, KBI must not have

received reasonably equivalent value in exchange for the transfer

it made to Mr. Solaas (the salary it paid him).       Cal. Civ. Code

secs. 3439.04(b), 3439.05.       In general, what constitutes

"reasonably equivalent value" under the UFTA must be determined

from the standpoint of the transferor's creditors.       In re

Prejean, 994 F.2d 706, 708 (9th Cir. 1993).

     Respondent points out that Mr. Solaas alone determined the

salary KBI paid him and that the increase in his salary from 1987

to 1988 was five times greater than the increase to the other



     3
       Respondent concedes that KBI received reasonably
equivalent value for $156,000 of the $203,980 salary it paid to
Mr. Solaas in 1988.
                                - 10 -


officers' salaries.    Respondent argues that there was no apparent

reason why Mr. Solaas gave himself a large increase, that Mr.

Solaas offered no explanation for the difference in increases

among the officers' salaries, and, therefore, Mr. Solaas did not

give reasonably equivalent value for the increase in his salary.

This argument is unconvincing.     We have already found that the

salary KBI paid Mr. Solaas was reasonable.       Therefore, we hold

that the salary KBI paid Mr. Solaas was not constructive fraud on

KBI's creditors.

The Loans

     1.     KBI's Loans to Mr. Solaas

     On brief, respondent argues for the first time that the

loans KBI made to Mr. Solaas were something other than loans;

i.e., respondent refers to KBI's loans to Mr. Solaas as "alleged

loans".     In the notice of transferee liability and answer,

however, respondent concedes that KBI loaned Mr. Solaas money.

     2.     Actual Fraud

     Respondent contends that the loans to Mr. Solaas from 1988

through 1992 constitute actual fraud on KBI's creditors.       Mr.

Solaas argues that respondent has failed to prove that the loans

to him constitute actual fraud on KBI's creditors.

     For the Court to find actual fraud, Mr. Solaas must have

actually intended to hinder, delay, or defraud any of KBI's

creditors.     Cal. Civ. Code sec. 3439.04(a).    Respondent suggests
                              - 11 -


that payments Murray Company (MC), an unrelated entity, made to

KBI to decrease the amount outstanding on KBI's loan to Mr.

Solaas and KBI's repayments to MC a few days later (the MC

transactions) mulcted banks and bonding companies by

misrepresenting KBI's financial status.   Respondent points to the

following:   (1) MC made all of its payments to KBI just before

Steven Wright, KBI's accountant, prepared KBI's financial

statements and midyear reports; (2) KBI used the financial

statements and midyear reports to gain lines of credit from banks

and to obtain bonding for its construction work; and (3) the MC

transactions reduced the amount of debt listed on the financial

statements and midyear reports as due from Mr. Solaas and

increased the amount of stated cash on hand shown on the

financial statement.

     We are not persuaded by respondent's argument.    First, MC

was an independent, unrelated third party.   Respondent presented

no evidence that Mr. Solaas or KBI controlled, or was in any way

involved with (other than in the MC transactions), MC.    Second,

the MC transactions were not transfers KBI made to Mr. Solaas;

the loans are the alleged transfers KBI made to Mr. Solaas.    Mr.

Solaas personally never received any money from KBI or MC from

the MC transactions.   Respondent has produced no persuasive

evidence that KBI loaned money to Mr. Solaas with the intent to

defraud any of KBI's creditors.
                                 - 12 -


       Respondent also claims that KBI intended to hinder and/or

delay payment to the IRS.     Respondent points to the fact that KBI

paid all of its creditors other than the IRS.     Under California

law, the preference of one creditor over another is not generally

a fraudulent conveyance.     See Wyzard v. Goller, 28 Cal. Rptr. 2d

608 (Cal. Ct. App. 1994).     Respondent's argument is one of

preference of one creditor over another and thus fails to

convince us that KBI intended to hinder or delay payment to the

IRS.

       Respondent has failed to prove that Mr. Solaas intended to

hinder, delay, or defraud any of KBI's creditors by having KBI

loan him money.     We hold that the loans KBI made to Mr. Solaas

were not actual fraud on KBI's creditors.

       3.   Constructive Fraud

       Respondent argues that Mr. Solaas did not give reasonably

equivalent value to KBI for the loans it made to Mr. Solaas from

1988 through 1992.     Mr. Solaas argues the contrary.

       For the Court to find constructive fraud, KBI must not have

received reasonably equivalent value in exchange for the

transfers it made to Mr. Solaas (the loans it made to him).     Cal.

Civ. Code secs. 3439.04(b) and 3439.05.     Respondent has conceded

that the alleged transfers were loans.     If a promise to repay

money provides the transferor with a sufficient quid pro quo when

given, the fact that later events may deprive the promise of
                                - 13 -


value is of no significance--the test is value when given, not

the exercise of hindsight.    Pierce v. Commissioner,   61 T.C. 424,

435 (1974).   Accordingly, under California law a bona fide loan

may be made for reasonably equivalent value.   See Reidy v.

Collins, 26 P.2d 712, 715 (Cal. Ct. App. 1933); Pierce v.

Commissioner, supra at 435.

     Chris Powell, KBI's controller from 1984 through 1989,

testified that, during his tenure at KBI, Mr. Solaas repaid

amounts he borrowed from KBI.    Mr. Powell's testimony generally

was credible, and we rely on his testimony as it was supported by

the record.   See Diaz v. Commissioner, 58 T.C. 560 (1972) (basing

analysis upon evaluation of the entire record and the credibility

of witnesses); see also Estate of Neff v. Commissioner, T.C.

Memo. 1997-186.   Additionally, from 1989 through 1992 Mr. Solaas

made repayments to KBI.   Repayments suggest that withdrawals were

made with the intent to repay.    See Pierce v. Commissioner,

supra at 431; Miele v. Commissioner, 56 T.C. 556, 567-568 (1971),

affd. without published opinion 474 F.2d 1338 (3d Cir. 1973);

Schneller v. Commissioner, T.C. Memo. 1996-62, affd. without

published opinion 129 F.3d 1265 (6th Cir. 1997).   Furthermore,

KBI charged Mr. Solaas interest on the money it loaned to him.4


     4
       KBI did not loan Mr. Solaas any money after Feb. of 1993,
but between Feb. of 1993 and Mar. of 1994 the amount Mr. Solaas
owed on the loans grew from $911,073.15 to $1,011,340. This is
                                                   (continued...)
                                - 14 -


Respondent has failed to show, by a preponderance of the

evidence, that Mr. Solaas' promise when given had insufficient

value to support the transfer.5    See Pierce v. Commissioner,

supra at 435.    Therefore, we hold that the loans KBI made to Mr.

Solaas were not constructive fraud on KBI's creditors.

KBI's Alleged Forgiveness of the Loans

     Respondent argues that "if the alleged loans are treated by

the Court as real loans" from KBI to Mr. Solaas, then the

forgiveness of those loans and/or the decision not to collect on

those loans is a transfer, citing Merriam v. Commissioner, T.C.

Memo. 1995-432, affd. without published opinion 107 F.3d 877 (9th

Cir. 1997).     Respondent contends that this transfer occurred when

KBI was insolvent and would constitute constructive fraud.

     Respondent bears the burden of proof.    Sec. 6902(a); Rule

142(d).   Respondent did not point to any evidence that KBI

forgave or decided not to collect the loans.    Furthermore,

respondent has not submitted any evidence that KBI did not

receive reasonably equivalent value in exchange for this alleged

transfer.   Respondent has failed to meet the burden of proof.




     4
       (...continued)
evidence that KBI charged Mr. Solaas interest.
     5
       We note that although Mr. Solaas was present at the trial
he did not testify, and respondent, who had the burden of proof,
did not call Mr. Solaas as a witness.
                             - 15 -


Therefore, we hold that the alleged transfer was not constructive

fraud on KBI's creditors.

Conclusion

     For the reasons stated above, we hold that Mr. Solaas is not

liable as a transferee for KBI's taxes and additions thereto.   To

reflect the foregoing,

                                        Decision will be entered

                                   for petitioner.
