                             T.C. Memo. 2016-154



                        UNITED STATES TAX COURT



          SALUS MUNDI FOUNDATION, TRANSFEREE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent*

          DIEBOLD FOUNDATION, INC., TRANSFEREE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 24741-08, 24742-08.            Filed August 15, 2016.


      Allen Duane Webber, Mireille R. Oldak, and Parisa J. Manteghi, for

petitioners.

      John Richard Mikalchus, Thomas R. Thomas, Frances F. Regan, and Janet

F. Appel, for respondent.




      *
      This opinion supplements our previously filed opinion Salus Mundi Found.
v. Commissioner, T.C. Memo 2012-61, vacated and remanded sub nom. Diebold
Found., Inc. v. Commissioner, 736 F.3d 172 (2d Cir. 2013), and rev’d and
remanded, 776 F.3d 1010 (9th Cir. 2014).
                                         -2-

[*2]             SUPPLEMENTAL MEMORANDUM OPINION


       GOEKE, Judge: These cases are before the Court on remand from the Court

of Appeals for the Ninth Circuit and the Court of Appeals for the Second Circuit

for further proceedings in accordance with their opinions in Salus Mundi Found.

v. Commissioner (Salus Mundi II), 776 F.3d 1010, 1017 (9th Cir. 2014), rev’g and

remanding T.C. Memo. 2012-61 (Salus Mundi I), and Diebold Found., Inc. v.

Commissioner, 736 F.3d 172, 175 (2d Cir. 2013), vacating and remanding Salus

Mundi Found. v. Commissioner, T.C. Memo. 2012-61, respectively. The issues

for decision on remand are: (1) whether Double-D Ranch is liable for tax for the

short taxable year ended July 2, 1999; (2) whether the notices of liability issued to

Salus Mundi Foundation (Salus Mundi) and Diebold Foundation, Inc. (Diebold

Connecticut) (collectively, petitioners), with regard to Double-D Ranch’s short

taxable year ended July 2, 1999, were issued within the applicable period of

limitations for assessment under section 6901(c); (3) whether Diebold Foundation,

Inc. (Diebold New York), is a transferee of Double-D Ranch, Inc. (Double-D

Ranch), pursuant to section 6901;1 (4) whether petitioners are liable as transferees


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

[*3] of a transferee of Double-D Ranch pursuant to section 6901; and (5) whether

petitioners are liable for prenotice interest.2

                                      Background

      We incorporate our findings in Salus Mundi I and summarize the relevant

background for purposes of this opinion.

      Petitioners are two section 501(c)(3) private foundations organized in

Arizona and Connecticut on October 22 and July 12, 1999, respectively.

Petitioners and Ceres Foundation, Inc. (Ceres Foundation),3 received all of the

assets, consisting of cash and marketable securities, of Diebold New York in equal

shares pursuant to Diebold New York’s “Plan of Dissolution and Distribution of

Assets” during Diebold New York’s October 31, 2001, taxable year.

      Dorothy R. Diebold was the sole beneficiary of the Dorothy R. Diebold

Marital Trust (Marital Trust), created upon her husband Richard Diebold’s death

on June 18, 1996. The trustees of the Marital Trust were Mrs. Diebold, the



      2
        The issue of whether a penalty applies is moot because the amount
petitioners received is far less than the tax liability imposed by respondent against
Double-D Ranch. See Gumm v. Commissioner, 93 T.C. 475, 480 (1989), aff’d
without published opinion, 933 F.2d 1014 (9th Cir. 1991).
      3
        Ceres Foundation, Inc., was the third petitioner in Salus Mundi I. The
Internal Revenue Service did not appeal the decision in favor of Ceres Foundation,
Inc., to the Court of Appeals for the Fourth Circuit.
                                         -4-

[*4] Bessemer Trust Co., N.A. (Bessemer Trust), operating primarily through its

senior vice president, Austin J. Power, Jr., and Andrew W. Bisset, Mrs. Diebold’s

personal attorney. Diebold New York was a section 501(c)(3) charitable

organization incorporated under the laws of New York in 1963. Its directors were

Mrs. Diebold, Mr. Bisset, and Mrs. Diebold’s three children.

      At the time of the transaction at issue, Double-D Ranch had two

shareholders, Diebold New York, holding 2,555 shares, and the Marital Trust,

holding 1,280 shares. Double-D Ranch’s directors were Mrs. Diebold, her three

children, Mr. Bisset, and Mr. Power. The assets of Double-D Ranch consisted

primarily of: (1) stock in American Home Products (AHP), a publicly traded

company; (2) stock in other publicly traded companies; (3) U.S. Treasury

securities; (4) cash; and (5) real estate. The various securities and real estate were

highly appreciated.

      At some point in May or early June 1999, the cotrustees of the Marital Trust

and the directors of Diebold New York decided to sell Double-D Ranch stock.

Knowing that the liquidation of Double-D Ranch assets would be likely to

generate substantial tax liability, Mr. Power sought a possible solution. Mr. Power

was primarily responsible for implementing the sale of the stock. Stephen A.

Baxley, a senior vice president in Bessemer Trust’s tax department, and Morton
                                         -5-

[*5] Grosz, Richard Leder, and Adam Braverman assisted in the sale. Messrs.

Grosz, Leder, and Braverman were attorneys at Chadbourne & Parke, LLP

(Chadbourne & Parke), a law firm. Messrs. Power, Baxley, Grosz, Leder, and

Braverman (collectively, Double-D Ranch representatives) represented Double–D

Ranch throughout the stock sale process. Mr. Leder, the tax attorney to the

Bessemer Trust, was a well-educated and extremely sophisticated adviser with

more than 30 years of experience in 1999. After discussing the sale of Double-D

Ranch stock with two potential buyers, Double-D Ranch representatives decided

to sell the shares to Shap Acquisition Corp. II (Shap II), an entity created

specifically by Sentinel Advisors, LLC (Sentinel), for the sale of Double-D Ranch.

      On June 17, 1999, Shap II and the Double-D Ranch shareholders executed a

letter of intent confirming the terms of the stock sale. The term sheet, attached to

the letter of intent, reflected that Shap II would purchase all issued and

outstanding Double-D Ranch stock for cash in an amount equal to the fair market

value of the corporation’s assets minus an agreed-upon discount. The

agreed-upon discount was set equal to 4.5% of the fair market value of the

Double-D Ranch assets less Double-D Ranch’s tax basis in those assets. On June

25, 1999, Shap II and the Double-D Ranch shareholders executed a stock purchase

agreement indicating that the closing for the sale would occur on July 1, 1999.
                                           -6-

[*6] Also on June 25, 1999, Morgan Stanley and Shap II entered a contract

whereby Shap II agreed to sell Double-D Ranch’s securities to Morgan Stanley

after the closing date. The agreement was to be executed on July 1, 1999.

      On July 1, 1999, the Double-D Ranch shareholders entered into an escrow

agreement with Bessemer Trust whereby Bessemer Trust would serve as the

shareholders’ representative for all matters relating to the stock purchase

agreement and an escrow account would be created with Bessemer Trust whereby

Bessemer Trust would act as the escrow agent.

      The Double-D Ranch shareholders agreed to deposit a portion of the

proceeds from the stock sale into the escrow account for the purpose of satisfying

any outstanding business obligations of Double-D Ranch that might have existed

before the stock sale. Similarly, Shap II agreed to “hold back” $10 million4 of the

stock purchase price and deposit it in the escrow account. The hold-back amount

would become payable to the Double-D Ranch shareholders on or before July 9,

1999, subject to any adjustments relating to certain liabilities of Double-D Ranch.

      The closing was delayed from July 1 to July 2, 1999, and the stock purchase

agreement was amended accordingly. Morgan Stanley agreed to change its

settlement date to July 6, 1999, the next business day after July 2, 1999. The

      4
          All amounts are rounded to the nearest dollar.
                                          -7-

[*7] Marital Trust and Diebold New York sold their Double-D Ranch stock to

Shap II for approximately $309 million in cash. Morgan Stanley purchased

Double D’s securities and Topland Farms purchased Double-D Ranch’s real

property. Shap II received approximately $319 million from the asset sale. Shap

II did not pay any tax on the sale because it claimed losses sufficient to offset the

built-in gain. Shap II retained the “hold-back” amount after repaying the loan

used to finance the transaction to Rabobank Nederland (Rabobank). On July 9

and 12, 1999, Shap II paid the Marital Trust and Diebold New York the “hold

back” amount and additional purchase price adjustments.

      Double-D Ranch filed a return for the short taxable year ending July 2,

1999, that was due on October 15, 1999, and was received by the Internal Revenue

Service (IRS) on March 20, 2000. Pursuant to its plan of dissolution and

distribution of assets effective on January 29, 2001, Diebold New York distributed

all of its cash and marketable securities in equal shares to petitioners and the Ceres

Foundation, resulting in each petitioner’s receiving $32,918,670 from Diebold

New York. These transfers were not made in exchange for any property or in

satisfaction of an antecedent debt. Mr. Bessemer distributed an additional $5.6

million from the escrow account to the Marital Trust and to each of the successor

foundations of Diebold New York on March 26 and April 14, 2004. Petitioners
                                         -8-

[*8] each received a total of $623,827 from the escrow account, resulting in a total

of $33,542,496 received by each petitioner through the dissolution of Double-D.

      On March 10, 2006, respondent issued a notice of deficiency to Double-D

Ranch, determining a deficiency in income tax of $81,120,064 and a section 6662

penalty of $16,224,012 for the short taxable year ended on July 2, 1999.

Respondent determined that the sale of Double-D Ranch’s stock by the Double-D

Ranch shareholders to Shap II should not be respected for Federal income tax

purposes. Respondent determined that in substance the stock sale was really a sale

of Double-D Ranch’s assets followed by a liquidating distribution to the Double-D

Ranch shareholders. While the notice of deficiency was issued after the expiration

of the three-year period of limitations under section 6501(a), respondent contends

that the six-year period of limitations under section 6501(e) applies. In any event,

Double-D Ranch did not file a petition with this Court, and respondent assessed

$81,120,064 in tax liability, $16,224,013 in accuracy related penalties, and

$3,171,631 in interest against Double-D Ranch on July 31, 2006.

      Respondent could not find any assets of Double-D Ranch from which to

collect the assessed liability and determined that any additional efforts to collect

from it would be futile.
                                        -9-

[*9] Respondent also determined that petitioners and Ceres Foundation were

liable as transferees of a transferee of Double-D Ranch. On July 11, 2008,

respondent issued a notice of liability to both petitioners and Ceres Foundation as

transferees of the assets of Diebold New York and Double-D Ranch in the amount

of $33,542,496 for the corporate income tax and accrued interest assessed against

Double-D Ranch for the taxable year ended on July 2, 1999. Petitioners and Ceres

Foundation timely filed petitions in this Court, and the cases were consolidated

and presented to this Court for decision without trial under Rule 122.5

      This Court ruled for both petitioners and Ceres Foundation, and respondent

appealed with respect to Salus Mundi and Diebold Connecticut. The Court of

Appeals for the Second Circuit concluded that Double-D Ranch’s shareholders’

conduct demonstrated constructive knowledge, collapsed the series of

transactions, and found that there was a fraudulent conveyance to Diebold New

York under the New York Uniform Fraudulent Conveyance Act (NYUFCA). The

Court of Appeals for the Ninth Circuit adopted the reasoning of the Second Circuit

and also found that there was a fraudulent conveyance from Double-D Ranch to


      5
       The parties agree that the same evidence that was used in Diebold v.
Commissioner, T.C. Memo. 2010-238, should be used in the present cases,
including the trial testimony. As a result, under Rule 122, these cases do not
require a trial for the submission of evidence.
                                          -10-

[*10] Diebold New York under the NYUFCA. The cases were remanded to us to

determine (1) whether Diebold New York is a transferee of Double-D Ranch under

section 6901, (2) whether petitioners are transferees of a transferee of Double-D

Ranch , and (3) whether respondent issued notices of liability and assessed the

liability within the statutory period of limitations.

      After the Courts of Appeals issued the mandates, we ordered the parties to

state their respective positions regarding the issues on remand, and both parties

complied. There being no need for trial or further hearing, we review the parties’

respective positions in the light of the Courts of Appeals’ opinions.

                                      Discussion

      To prevail respondent must prove both that Diebold New York is liable as a

transferee of Double-D Ranch under section 6901 and that petitioners are liable as

transferees of Diebold New York. Two requirements must be met to impose

liability on a transferee: (1) the party must be a transferee under section 6901, and

(2) the party must be subject to liability at law or in equity.6 Diebold Found., Inc.

v. Commissioner, 736 F.3d at 184.

      Respondent must also prove that petitioners are liable for interest.

      6
       The Courts of Appeals for the Second and Ninth Circuits found the second
requirement satisfied in regard to Diebold New York but did not make such a
finding in regard to petitioners.
                                        -11-

[*11] Petitioners’ main argument is that the transaction occurred on July 6, 1999;

therefore it could not have happened during the taxable year ended July 2, 1999.

This argument is unavailing. In collapsing the series of transactions, the Court of

Appeals for the Second Circuit concluded that, in substance:

      Double D sold its assets and made a liquidating distribution to its
      Shareholders, which left Double D insolvent--that is, “the present fair
      salable value of [its] assets [wa]s less than the amount * * * required
      to pay [its] probable liability on [its] existing debts as they bec[a]me
      absolute and matured.” N.Y. Debt. & Cred. Law § 271. With the
      liquidating distribution, Double D did not receive anything from the
      Shareholders in exchange, and thus it is plain that Double D certainly
      did not receive fair consideration. As such, all three prongs of § 273
      have been met: Double D (1) made a conveyance, (2) without fair
      consideration, (3) that rendered Double D insolvent. * * *

Id., at 190 (alterations in original) (citing N.Y. Debt. & Cred. Law sec. 273, and

United States v. McCombs, 30 F.3d 310, 323 (2d Cir. 1994)).

      In arguing whether Double-D Ranch actually owed the tax liability

respondent determined for its short tax year ended July 2, 1999, petitioners rely on

the form of the transaction being respected. They maintain that Double-D Ranch

sold the assets on July 6, 1999, and, therefore, the sale could not have occurred

during the short taxable year ended July 2, 1999.

      Petitioners bear the burden of proof on this matter and offer no arguments

additional to the ones discussed infra as to Double-D Ranch’s tax liability. See
                                         -12-

[*12] sec. 6902(a); Rule 142(d). Petitioners point to nothing in the record that

shows that respondent incorrectly determined or improperly assessed Double-D

Ranch’s tax liability for 1999. The stock purchase agreement was slated to close

on July 1, 1999, and Morgan Stanley was to buy Double-D’s securities on the

same day. The closing date was delayed a day and Morgan Stanley agreed to

amend its settlement date until the next business day, July 6, 1999. “On July 2,

1999, both parties to the stock sale of Double D took steps to carry out the

transaction.” Diebold Found., Inc. v. Commissioner, 736 F.3d at 180.

      The series of transactions started on July 2, 1999, and substantial steps were

taken to complete the transaction on that day. Since the Court of Appeals

collapsed the transaction and treated it as a de facto liquidation to shareholders, we

conclude that Double-D Ranch was liable for the unpaid tax for its short tax year

ended July 2, 1999.

I. Statute of Limitations

      Under the general rule set forth in section 6501(a), the IRS must assess tax

or send a notice of deficiency within three years after a return is filed. The

limitations period extends to six years under section 6501(e)(1) “[i]f the taxpayer

omits from gross income an amount properly includible therein and * * * such

amount is in excess of 25% of the amount of gross income stated in the return.”
                                         -13-

[*13] Respondent issued the notice of deficiency to Double-D Ranch on March

10, 2006, more than three years but less than six years after Double-D Ranch filed

its return for the short taxable year ended on July 2, 1999.7 Thus, the notice is

timely with respect to that return only if the six-year limitations period applies.

      Petitioners argue that Double-D Ranch could not have underreported its

income for the short taxable year ending July 2, 1999, because Double-D Ranch

did not sell its assets during the short taxable year. However, the Courts of

Appeals for the Second and the Ninth Circuits concluding that the shareholders

had constructive knowledge of the transaction, collapsed the transaction, resulting

in a liquidating distribution to the shareholders from Double-D Ranch. Petitioners

reported gross income of $74,925 for the short tax year ended July 2, 1999. As a

result of the Courts of Appeals’ holding, petitioners omitted gross income of

$231,837,944, an amount more than 25% of their gross income. Therefore, the

six-year period of limitations of section 6501(e) applies.

      Under section 6901(c)(1), the Commissioner generally must assess

transferee liability within one year after expiration of the period of limitations on

the transferor. Section 6901(c)(2) provides that, “[i]n the case of the liability of a


      7
       Double-D Ranch’s income tax return for the short taxable year ended July
2, 1999, was due on October 15, 1999, and was received on March 20, 2000.
                                         -14-

[*14] transferee of a transferee, within 1 year after the expiration of the period of

limitation for assessment against the preceding transferee, but not more than 3

years after the expiration of the period of limitation for assessment against the

initial transferor”.

       There is some debate among the parties regarding the date of expiration of

the period of limitations. Respondent contends that the date of expiration for

Double-D Ranch is August 17, 2006. Petitioners say the date of expiration is no

later than September 15, 2006. Therefore, the date of expiration of the period of

limitations for Diebold New York is no later than September 15, 2007. The

expiration of the period of limitations for petitioners is no later than September 15,

2008. Accordingly, respondent timely issued the notice of deficiency on March

10, 2006, to Double-D Ranch pursuant to section 6501(e)(1), and subsequent

notices of liability to petitioners on July 11, 2008, were also timely pursuant to

section 6901(c)(2).

II. Whether Diebold New York Was a Transferee Under Section 6901

       For purposes of section 6901, the term “transferee” includes, inter alia,

donee, heir, legatee, devisee, distributee, and shareholder of a dissolved

corporation. See sec. 6901(h); sec. 301.6901-1(b), Proced. & Admin. Regs. The

inquiry regarding transferee liability under section 6901 has two separate and
                                        -15-

[*15] independent prongs. See Salus Mundi II, 776 F.3d at 1018-1019; Diebold

Found., Inc. v. Commissioner, 736 F.3d at 184. After the Court of Appeals found

Diebold New York liable as a fraudulent transferee of Double-D Ranch under

State law, we must now determine whether it is liable as a transferee under Federal

law.

       The Court of Appeals for the Ninth Circuit recently held that a court must

consider whether to disregard the form of a transaction by which the transfer

occurred when determining transferee status for Federal law purposes. See Slone

v. Commissioner, 810 F.3d 599, 605-606 (9th Cir. 2015), vacating and remanding

T.C. Memo. 2012-57. In performing the inquiry, the court must focus “holistically

on whether the transaction had any practical economic effects other than the

creation of income tax losses.” Id. at 606 (quoting Reddam v. Commissioner, 755

F.3d 1051, 1060 (9th Cir. 2014), aff’g T.C. Memo. 2012-106).

       The Courts of Appeals for both the Second and Ninth Circuits have found

Diebold New York was a transferee in a transaction that was fraudulent under the

NYUFCA. Further, the transaction had no economic purpose other than the

creation of income loss for Double-D Ranch. On that basis, we find Diebold New

York is liable under section 6901 as a transferee of Double-D Ranch.
                                         -16-

[*16] III. Whether Petitioners Are Liable as Successor Transferees of Diebold
           NewYork

      Transferee liability may be asserted against a transferee of a transferee.

Berliant v. Commissioner, 729 F.2d 496 (7th Cir. 1984), aff’g Magill v.

Commissioner, T.C. Memo. 1982-148. The Commissioner may collect unpaid

taxes of a transferor of assets from a transferee or a successor transferee of those

assets. Sec. 6901(a), (c)(2); Commissioner v. Stern, 357 U.S. 39, 42 (1958);

Stansbury v. Commissioner, 104 T.C. 486, 489 (1995), aff’d, 102 F.3d 1088 (10th

Cir. 1996). We apply New York law in determining whether petitioners are liable

as subsequent transferees, and respondent bears the burden of proof. See secs.

6901(a), 6902; Rule 142.

      A. Petitioners’ Liability Under State Law

      Under N.Y. Debt. & Cred. Law sec. 273 (McKinney 2012) respondent must

prove: (1) a conveyance was made; (2) without fair consideration; (3) by a person

who was or will be rendered insolvent by the conveyance. McCombs, 30 F.3d at

323. Moreover, a person is insolvent when the “present fair salable value of his

assets is less than the amount that will be required to pay his probable liability on

his existing debts as they become absolute and matured.” N.Y. Debt. & Cred. Law

sec. 271 (McKinney 2012).
                                        -17-

[*17] Diebold New York transferred all of its assets to petitioners pursuant to its

plan of dissolution approved by the Supreme Court of the State of New York,

leaving itself with no assets. We previously found Diebold New York liable as a

transferee of the assets of Double-D Ranch and now find petitioners liable as

transferees of a transferee. Therefore, we hold that petitioners are liable under

section 6901 as transferees of a transferee.

                   1. Conveyance

      Under the NYUFCA, a “‘conveyance’ includes every payment of money,

assignment, release, transfer, lease, mortgage or pledge of tangible or intangible

property, and also the creation of any lien or encumbrance.” Id. sec. 270. During

the taxable year ended October 31, 2001, petitioners received transfers of

approximately $33 million each in cash and marketable securities directly from

Diebold New York. In 2004 additional transfers totaling $623,827 to each

petitioner were made from the escrow account, constructively through Diebold

New York. These payments are a conveyance for purposes of N.Y. Debt. & Cred.

Law sec. 273.

                   2. Fair Consideration

      Under New York law, “fair consideration” is defined as:
                                         -18-

[*18]         a. When in exchange for such property, or obligation, as a fair
        equivalent therefor, and in good faith, property is conveyed or an
        antecedent debt is satisfied, or

               b. When such property, or obligation is received in good faith
        to secure a present advance or antecedent debt in amount not
        disproportionately small as compared with the value of the property,
        or obligation obtained.

N.Y. Debt. & Cred. Law sec. 272; see McCombs, 30 F.3d at 326 (observing that

what constitutes fair consideration must be determined on a case-by-case basis).

        The parties have stipulated that the conveyances from Diebold New York to

petitioners were not made in exchange for any property or in satisfaction of an

antecedent debt. Thus, the transfers were not made in exchange for property as a

fair equivalent. Thus, the transfers were not made for “fair consideration”.

                    3. Insolvency

        A person is considered insolvent under the NYUFCA when “the present fair

salable value of his assets is less than the amount that will be required to pay his

probable liability on his existing debts as they become absolute and matured.”

N.Y. Debt. & Cred. Law sec. 271. Under New York law, insolvency of the

transferor is presumed when a conveyance is made without fair consideration.

United States v. Alfano, 34 F. Supp. 2d 827, 844-845 (E.D.N.Y. 1999). The

transferee then has the burden to come forward and show that the transferor had
                                         -19-

[*19] sufficient assets remaining to pay the debt which existed at the time of

conveyance. Sutain v. Commissioner, T.C. Memo. 1979-428; Brown v.

Commissioner, T.C. Memo. 1975-120. The parties have stipulated that, after the

conveyance of its assets to petitioners and Ceres Foundation, Diebold New York

had no assets. Combined with Diebold New York’s liability as an initial

transferee of Double-D Ranch, the conveyances to petitioners and Ceres

Foundation rendered Diebold New York insolvent.

       Conveyances were made to petitioners without fair consideration by

Diebold New York, which was rendered insolvent by the conveyances.

Accordingly, petitioners are liable as transferees of a transferee under New York

law.

       B. Petitioners’ Liability Under Section 6901

       As stated supra, under section 6901 the term “transferee” includes, inter

alia, donee, heir, legatee, devisee, distributee, and shareholder of a dissolved

corporation. See sec. 6901(h); sec. 301.6901-1(b), Proced. & Admin. Regs. The

inquiry has two separate and independent prongs. See Salus Mundi II, 776 F.3d at

1018-1019; Diebold Found., Inc. v. Commissioner, 736 F.3d at 184. After finding

that the transfers to petitioners were fraudulent under State law, we must now

determine whether petitioners are liable under Federal law.
                                         -20-

[*20] We found petitioners to be transferees of a transferee under NYUFCA. On

that basis, we find petitioners are also liable under section 6901 as transferees of a

transferee.

IV. Interest

      Interest in transferee liability cases is calculated in accordance with two

separate periods--prenotice and postnotice--and, under some circumstances, two

separate rates. See generally Estate of Stein v. Commissioner, 37 T.C. 945 (1962).

If the transferee received assets worth less than the creditor’s claim against the

transferor, then the prenotice period is “measured from a point of time that would

not be earlier than the date of transfer” up to (but not including) the notice of

liability issue date. Lowy v. Commissioner, 35 T.C. 393, 395 (1960). In this

instance interest, including its applicable rate, is determined under State law. See

id.

      Because petitioners, as transferees, received assets worth less than Double-

D Ranch’s tax liability, New York law must determine the extent to which

petitioners are liable for prenotice interest. Under New York law petitioners are

liable for prenotice interest only where actual fraud exists. Estate of Stein v.

Commissioner, 37 T.C. at 962.
                                         -21-

[*21] Respondent contends that actual fraud “may include transfers which are

denoted as ‘constructively fraudulent’ and which fall, for example, within § 273.”

Ruderman v. United States, 355 F.2d 995, 998 (2d Cir. 1966). Actual fraud has

been defined as “the intentional and successful employment of any cunning,

deception, or artifice, used to circumvent, cheat, or deceive another.” Nasaba

Corp. v. Harfred Realty Corp., 39 N.E.2d 243, 245 (N.Y. 1942) (quoting Bouvier

Law Dictionary 1304). However, we did not find actual fraud in Salus Mundi I,

slip op. at 34, and we decline to do so here. Accordingly, we do not find actual

fraud here, and petitioners are not liable for prenotice interest.

V. Efforts To Collect From Double-D Ranch

      We must look to New York law to determine whether the Commissioner has

an obligation to pursue all reasonable collection efforts against a transferor before

proceeding against a transferee. See Hagaman v. Commissioner, 100 T.C. 180,

183-184 (1993); Jeffries v. Commissioner, T.C. Memo. 2010-172; Upchurch v.

Commissioner, T.C. Memo. 2010-169. Where “the transferor is hopelessly

insolvent, the creditor is not required to take useless steps to collect from the

transferor.” Zadorkin v. Commissioner, T.C. Memo. 1985-137, 49 T.C.M. (CCH)

1022, 1028 (1985).
                                          -22-

[*22] We think respondent did pursue all reasonably necessary collection efforts,

and petitioners have not shown that respondent’s efforts to collect against Double-

D Ranch were not reasonably exhausted. If for the sake of argument we presume

that respondent did not take reasonable steps, the NYUFCA does not require a

creditor to pursue all reasonable collection efforts against the transferor. See

N.Y. Debt. & Cred. Law secs. 270-281. Therefore, respondent was not required to

exhaust collection efforts against Double-D Ranch, and petitioners may be held

liable.

          We conclude that Double-D Ranch was liable for unpaid tax for the short

tax year ending July 1999, the notices of liability were timely issued, Diebold New

York is a transferee of Double-D Ranch, petitioners are liable as transferees of a

transferee of Double-D Ranch, and petitioners are not liable for prenotice interest.

          In reaching our holding herein, we have considered all arguments of the

parties, and, to the extent not mentioned above, we conclude they are moot,

irrelevant, or without merit.

          To reflect the foregoing,


                                                      Decisions will be entered under

                                                 Rule 155.
