                      United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                      ___________

                                      No. 99-1297
                                      ___________

Jean A. Stanko,                       *
                                      *
    Appellant,                        *
                                      * Appeal from the
    v.                                * United States Tax Court.
                                      *
Commissioner of Internal Revenue,     *
                                      *
    Appellee.                         *
                                 ___________

                               Submitted: December 13, 1999

                                    Filed: April 20, 2000
                                     ___________

Before RICHARD S. ARNOLD and LOKEN, Circuit Judges, and MELLOY,* District
      Judge.
                            ___________

LOKEN, Circuit Judge.

       This case raises novel and difficult questions concerning transferee liability under
the Internal Revenue Code. The transferee, Jean Stanko, appeals the Tax Court’s
determination that she is liable for $3,442,874 in unpaid taxes owed by Stanko Packing,
Inc. (“Stanko Packing”), because she is the successor transferee of an installment note
fraudulently conveyed by Stanko Packing to its sole shareholder, Jean’s former spouse,

      *
       The HONORABLE MICHAEL J. MELLOY, United States District Judge for
the Northern District of Iowa, sitting by designation.
Rudy Stanko. We agree Jean is liable as successor transferee, but we conclude the Tax
Court miscalculated the amount of her transferee liability under Nebraska law.
Accordingly, we reverse and remand.

       Rudy Stanko founded Stanko Packing in 1974. At all relevant times, he was its
president and sole shareholder. In April 1984, Rudy was indicted for violations of the
Federal Meat Inspection Act. As a result of these activities, Stanko Packing faced the
revocation of its meat inspection license. In June 1984, Stanko Packing adopted a plan
of liquidation, filed a Statement of Intent to Dissolve with the Nebraska Secretary of
State, and sold the majority of its assets to Packerland Packing Company for
$3,900,000. Stanko Packing received $900,000 in cash and a $3,000,000 five-year
installment note bearing 11.5 percent interest (“the Packerland Note”).

       On September 17, 1984 (three days after Rudy’s conviction for Meat Inspection
Act violations), Stanko Packing transferred the Packerland Note and other assets to
Rudy. Those transfers left Stanko Packing insolvent. On September 19, Rudy
transferred the Packerland Note to his wife, Jean. Rudy filed for divorce in July 1985,
the same month Jean received her first installment payment on the Packerland Note.
The Stankos were divorced in July 1986. The decree awarded Jean no property,
maintenance, or child support, and one dollar in alimony. Jean held the Packerland
Note until maturity in 1989, receiving installment payments totaling $4,101,779.86. As
each installment payment was received, Jean paid the deferred capital gains taxes that
Rudy would have paid as a result of Stanko Packing’s asset sale and liquidation.

        Stanko Packing dissolved in June 1985. It realized substantial taxable income in
its final year of operation, primarily deferred taxes on prior export sales. But Stanko
Packing did not file the income tax return for this period that was due in September
1985, and it has never paid either the tax deficiency or the substantial additions to tax
(penalties and interest) that are now owing. The Commissioner computed the tax and
additions to tax and assessed this deficiency against Rudy as transferee of over

                                          -2-
$6,000,000 of Stanko Packing assets. Rudy petitioned the Tax Court to redetermine
this deficiency. When he failed to appear for trial, the Tax Court held him liable by
default, and the Ninth Circuit affirmed. See Stanko v. Commissioner, T.C. Mem. 1993-
513, aff’d per curiam, 42 F.3d 1402 (9th Cir. 1994).

        In August 1991, the Commissioner sent Jean a notice that she is liable as
transferee for Stanko Packing’s unpaid deficiency based upon her receipt of the
Packerland Note from Rudy in September 1984. Jean, too, petitioned the Tax Court
to redetermine the alleged deficiency. Jean’s case was tried after Rudy’s transferee
liability was upheld on appeal. In December 1996, the Tax Court upheld the
Commissioner’s determination of transferee liability, concluding that Rudy conveyed
the note to Jean with actual intent to defraud creditors, that Jean did not give adequate
consideration, and that the note had a fair market value of $2,806,979 on the day Jean
received it. Almost two years later, the Tax Court adopted the Commissioner’s
computation of transferee liability and entered judgment against Jean in the amount of
$3,442,874. Jean now appeals.

                               I. Transferee Liability.

       In a variety of situations, such as a corporate merger or an individual inheritance,
the Commissioner may collect unpaid income taxes from a person to whom the
taxpayer transferred assets. Section 6901 of the Code authorizes the Commissioner to
assess and collect taxes from a transferee “in the same manner and subject to the same
provisions and limitations” as from the taxpayer who initially incurred the tax liability.
26 U.S.C. § 6901(a). However, § 6901 is procedural; state law governs the extent to
which a transferee is liable for the transferor’s taxes. See Commissioner v. Stern, 357
U.S. 39 (1958). In this case, the Commissioner asserts that Jean Stanko is liable for
Stanko Packing’s unpaid income tax liability under the Nebraska law of fraudulent
conveyances. Though the Tax Court recognized that this is the governing substantive


                                           -3-
law, it misapplied this law in a number of respects, errors of law that we review de
novo and that complicate our resolution of the issues raised on appeal.

                    II. Was There a Fraudulent Conveyance?

      In general, the law of fraudulent conveyances permits an injured creditor to set
aside a transfer of assets by the debtor made with actual or constructive intent to
defraud one or more creditors. See 37 AM. JUR. 2D Fraudulent Conveyances § 1
(1968). At the time in question, Nebraska had enacted the Uniform Fraudulent
Conveyance Act. See Neb. Rev. Stat. §§ 36-601-13 (1988).1 These statutes provided:

             § 36-604. Every conveyance made . . . by a person who is or will
      be thereby rendered insolvent is fraudulent as to creditors without regard
      to his or her actual intent if the conveyance is made . . . without a fair
      consideration.

             § 36-609(1). Where a conveyance . . . is fraudulent as to a
      creditor, such creditor, when his or her claim has matured, may, as
      against any person except a purchaser for fair consideration without
      knowledge of the fraud at the time of the purchase . . . (b) Disregard the
      conveyance and attach or levy execution upon the property conveyed.

(Emphasis added.)

       The Tax Court concluded that Jean Stanko is liable as a successor transferee
because Rudy transferred the Packerland Note to Jean with actual intent to defraud
creditors. Jean attacks that finding of fraudulent intent. We conclude the question is

      1
       In 1989, Nebraska replaced this statute with its version of the Uniform
Fraudulent Transfer Act. See Neb. Rev. Stat. §§ 36-701-12. However, the new statute
does not apply retroactively to conveyances made prior to its enactment. See Schall
v. Anderson’s Implement, Inc., 484 N.W.2d 86, 89-90 (1992).

                                         -4-
irrelevant. Stanko Packing is the debtor/taxpayer, and the Commissioner is the injured
creditor. If the transfer of the Packerland Note from Stanko Packing to Rudy was a
fraudulent conveyance -- and Jean concedes that it was, since Rudy gave no
consideration and the plan of liquidation necessarily rendered Stanko Packing insolvent
-- then § 36-609(1)(b) empowers the Commissioner to levy and execute against this
fraudulently conveyed asset in the hands of Jean as successor transferee, unless Jean
is “a purchaser for fair consideration without knowledge of the fraud.” Thus, the only
questions we need address on appeal are whether Jean gave fair consideration for the
note, and if not, whether the Tax Court properly calculated her transferee liability.2

                     III. Did Jean Give Fair Consideration?

       Jean first argues that she gave fair consideration for the Packerland Note by
forgoing claims for alimony, child support, and her share of the marital property during
the Stankos’ subsequent divorce proceedings. We disagree. Satisfying an existing or
antecedent debt may be fair consideration. See Neb. Rev. Stat. § 36-603 (1988).
However, Rudy did not file for divorce for almost a year after conveying the note to
Jean, and there is no evidence Jean promised to give up divorce-related claims in
exchange for the note. In September 1984, Rudy was facing time in prison and had an
obligation to provide support for his children. See Neb. Rev. Stat. § 43-1402. But
there is no evidence Jean undertook to discharge Rudy’s financial obligations to their
children in exchange for the note, and indeed Jean herself was jointly liable to provide
support regardless of the conveyance. Cf. Brown v. Borland, 432 N.W.2d 13, 17 (Neb.
1988). Thus, this case bears no resemblance to Bruce v. Dean, 140 S.E. 277 (Va.


      2
        In our view, there can be no doubt Jean Stanko is a “transferee” for purposes
of 26 U.S.C. § 6901. The statute does not define the term except to clarify that it
includes a “donee, heir, legatee, devisee, and distributee.” § 6901(h). Stern held that
state law governs. Therefore, the Commissioner may proceed under § 6901 against any
“transferee” who is liable under state law for the debts of the transferor/taxpayer.

                                          -5-
1927), where a father facing life in prison conveyed all his assets to a school in
exchange for its more valuable promise to care for and educate his children.

       Jean further argues that she gave fair consideration by assuming Rudy’s liability
to pay capital gains taxes as payments on the installment note were received. The
Packerland Note was an installment obligation. When an installment obligation is
transferred between spouses, “the same tax treatment . . . shall apply to the transferee
as would have applied to the transferor.” 26 U.S.C. § 453B(g)(2). In other words,
once the note passed to Jean, she acquired Rudy’s capital gains tax liability by
operation of law. As we discuss in the next section of this opinion, that liability
affected the value of the note in Jean’s hands, but it was not fair consideration.

      For these reasons, we agree with the Tax Court that Jean Stanko did not give fair
consideration when she received the Packerland Note from Rudy in September 1984.
Accordingly, the Commissioner may proceed against Jean as successor transferee to
recover the value of an asset that was fraudulently conveyed by the taxpayer, Stanko
Packing.3 The remaining question -- and the most difficult part of the case -- is to
determine the proper amount of Jean’s transferee liability fifteen years after the
conveyances in question.




      3
        Jean further argues the Commissioner may not proceed against her because
there was no reasonable effort to collect the unpaid taxes from her transferor, Rudy.
The Commissioner responds that there must be a prior effort to collect from the
taxpayer, Stanko Packing, but not from another transferee. As to a successor
transferee, this is an open question (whether governed by Nebraska or by federal law).
We need not resolve it, because the Commissioner’s extensive litigation over Rudy’s
transferee liability was clearly a reasonable effort to collect from Jean’s transferor.

                                          -6-
                     IV. The Amount of Transferee Liability.

        As a general rule in fraudulent conveyance cases, “a creditor may recover
judgment for the value of the asset transferred or the amount necessary to satisfy the
creditor’s claim, whichever is less.” Eli’s, Inc. v. Lemen, 591 N.W.2d 543, 556 (Neb.
1999).4 Accordingly, the starting point in determining Jean Stanko’s transferee liability
is the fair market value of the Packerland Note on the day it was transferred to Jean,
September 19, 1984. Accepting the opinion of the Commissioner’s expert, the Tax
Court found that the note had a fair market value of $2,806,979 on that day. Jean
argues the tax court incorrectly valued the note. We agree.

       The Commissioner’s expert valued the note by what a willing buyer would have
paid for it on September 19, 1984. That is the proper approach to valuation. See
United States v. Cartwright, 411 U.S. 546, 551 (1973). But the expert gave no
consideration to the deferred capital gains taxes that accompanied the note as a result
of Stanko Packing’s prior asset sale and liquidation. This has a substantial effect on
valuation. Jean Stanko reported on her individual income tax returns the following
amounts of taxable “long-term gain from installment sales” over the life of the note:

             1985     $ 187,668
             1986     $ 488,660
             1987     $ 547,920
             1988     $ 781,741
             1989     $ 499,060




      4
       Eli’s, Inc. was decided under the subsequently-enacted Nebraska Uniform
Fraudulent Transfer Act. However, the principle is universally recognized, and we
have no doubt the Supreme Court of Nebraska would have applied it under the Uniform
Fraudulent Conveyance Act as well. See 37 AM. JUR. 2D Fraudulent Conveyances
§ 167; 14 MERTENS LAW OF FEDERAL INCOME TAXATION § 53.37 (2000).

                                          -7-
       Had Rudy sold the installment note to a third party, then the total deferred capital
gain imbedded in the note would have been immediately realized. See 26 U.S.C.
§ 453B(a). If Rudy as seller paid the resulting capital gains tax, the buyer would no
doubt have been willing to pay the fair market value of the note as calculated by the
Commissioner’s expert. But as we have explained, when an installment obligation is
transferred between spouses, the imbedded tax liability continues to be deferred but
accompanies the note to the transferee. Obviously, if a third party could purchase the
note on these terms (which the Code does not allow), he or she would pay only the fair
market value of the right to principal and interest reflected by the note, minus the
capital gains taxes that must be paid when future payments on the note are received.
That net amount was the fair market value of the note to Jean as transferee on the date
of transfer.5 The Tax Court erred in concluding otherwise.

        Because the Tax Court seriously overvalued the Packerland Note, we must
remand for recalculation of Jean Stanko’s transferee liability. Before remanding, there
are other valuation questions that deserve a closer look. The Tax Court held Jean liable
as transferee for $3,442,874, including interest to August 7, 1991, the date she was sent
a notice of transferee liability. The Court did not explain why it assessed transferee
liability in excess of $2,806,979, its (erroneous) valuation of the transferred asset. The
Commissioner argues that Jean as transferee is liable “for the full amount of Stanko
Packing’s liability plus interest from September 15, 1985, the due date of Stanko
Packing’s return,” so long as the note was worth more than the tax liability plus
additions to tax on September 19, 1984. The Commissioner does not even attempt to



      5
        Stated differently, Jean as transferee should not be in a worse position than if
she had not been given the note. She paid capital gains tax as she received installment
payments on the note. If she now must disgorge the full facial fair-market value of the
note, she will have paid more to the Commissioner as creditor than she received from
Rudy. That is improper. See United States v. Brown, 86 F.2d 798 (6th Cir. 1936); 14
MERTENS § 53.37, at 101-02.

                                           -8-
justify this proposition under Nebraska fraudulent conveyance law. We conclude the
proposition is unsound.

        The Commissioner’s Computation Statement calculating Jean’s transferee tax
liability, on which the Tax Court relied without discussion, reflects the following:

      Deficiency in income tax                                  $1,224,726
      Penalty for failure to file a return                         298,746
      5% negligence underpayment penalty                            61,236
      50% negligence underpayment penalty                          335,8266
      Failure to pay estimated tax penalty                          76,747
      Interest on tax and penalties, 9/15/85 to 1/20/907           839,439
      Interest, 1/20/90 to 8/7/91                                  606,154
                                                                 __________

      Liability to be assessed                                  $3,442,874

This Statement reveals that much of Stanko Packing’s unpaid tax liability was incurred
after its fraudulent conveyance of the Packerland Note. It is well settled in Nebraska
that, “[a] creditor whose debt did not exist at the date of the voluntary conveyance by
the debtor cannot have the conveyance declared fraudulent unless he pleads and proves
that the conveyance was made to defraud subsequent creditors whose debts were in
contemplation at the time.” United States Nat’l Bank v. Rupe, 296 N.W.2d 474, 476
(Neb. 1980), quoting First Nat’l Bank v. Bunn, 241 N.W.2d 127, 129 (Neb. 1976).


      6
        This penalty under § 6653(a)(2) of the Code was not added to Rudy Stanko’s
assessed transferee liability. The Commissioner does not explain why Jean Stanko’s
transferee liability should be greater than her transferor’s, which seems grossly unfair
as well as contrary to Nebraska law. Cf. Caulfield v. Commissioner, 33 F.3d 991, 994
& n.4 (8th Cir.1994), cert. denied, 514 U.S. 1016 (1995).
      7
        The Commissioner does not explain the significance of this date. It appears to
be irrelevant under Nebraska law.

                                          -9-
The Commissioner made no attempt to prove that the transfer of the Packerland Note
from Stanko Packing to Rudy (a partial liquidating distribution to the company’s only
shareholder) was made to defraud subsequent, contemplated creditors. Therefore, the
Commissioner’s claim against Jean as successor transferee is limited to debts in
existence at the time of the fraudulent conveyance.

        In general, a transferee is liable under § 6901 for the transferor’s unpaid taxes
and additions to tax in the year of the transfer. See Mizrahi v. Commissioner, 63
T.C.M. (CCH) 2657 (1992). But we are not aware of any case applying this principle
to a fraudulent conveyance transferee. Because income taxes are paid annually, some
months after the end of the tax year, it is logical to consider unpaid taxes in the year of
the transfer part of the transferor’s existing tax debt. But penalties for negligent or
intentional misconduct by the transferor that occurred many months after the transfer,
such as penalties for failure to file a return and for substantial underpayment of the
year-end tax liability, are not, by any stretch of the imagination, existing at the time of
the transfer. To recover these penalties from a fraudulent conveyance transferee, the
Commissioner must prove that the transfer was made with intent to defraud future
creditors. (By contrast, the penalty for failure to pay estimated taxes in the year of the
transfer is based upon conduct during that year and therefore is part of the
taxpayer/transferor’s existing debt.) Thus, the penalty for Stanko Packing’s failure to
file a return and the two negligence penalties (a total of $695,808) are not part of the
Commissioner’s transferee claim against Jean.

       The Commissioner assessed Jean as transferee for all interest owed by Stanko
Packing on its unpaid tax liability between September 1985 and August 1991, the day
Jean received a notice of transferee liability. This part of the assessment is similarly
flawed, for we find nothing in Nebraska fraudulent conveyance law allowing such a
recovery of interest. Under the new Uniform Fraudulent Transfer Act, the creditor is
limited to recovering “the value of the asset at the time of the transfer, subject to
adjustment as the equities may require.” Neb. Rev. Stat. § 36-709(c) (emphasis

                                           -10-
added). The prior statute and case law are silent on the issue. Because the delay in
recovering from the transferee that occurred before the Commissioner assessed
transferee liability is attributable to the Commissioner (absent proof of transferee
deceit), we conclude the equities do not require an award of interest for that period.
Therefore, Nebraska law does not permit such an award. (On the other hand, the
question of prejudgment interest after the date of the Commissioner’s notice of
transferee liability to Jean may well be a matter of federal law. That issue is not
addressed in the Tax Court’s judgment, and we do not consider it.)

                                    Conclusion.

       The judgment of the Tax Court is reversed. The case is remanded for
recalculation of the value of the Packerland Note on September 19, 1984, in
accordance with this opinion. Jean Stanko’s transferee liability under Nebraska law
will then be the lesser of that value or $1,301,473, the amount of the Commissioner’s
then-existing claim.

      A true copy.

             Attest:

                CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                        -11-
