                                T.C. Memo. 2013-32



                          UNITED STATES TAX COURT



             GEORGE SCHUSSEL, TRANSFEREE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 4050-11.                             Filed January 31, 2013.



      Francis J. DiMento, for petitioner.

      Carina J. Campobasso, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


      COHEN, Judge: Respondent determined that petitioner is liable as a

transferee to the extent of $2,044,106, $2,522,944, and $4,356,279 for 1993, 1994,

and 1995, respectively, for the Federal income tax liabilities and fraud penalties

assessed against Driftwood Massachusetts Business Trust, formerly known as
                                           -2-

[*2] Digital Consulting, Inc. (DCI or corporation). The issues for decision are

whether he is so liable and, if so, to what extent; whether certain funds transferred

to him were payment for his intellectual property and not income of DCI; and

whether he is entitled to credits for retransfers to DCI. A statute of limitations

defense previously asserted by petitioner has been deemed abandoned because of

his failure to address it in his brief. 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.

                                 FINDINGS OF FACT

       Some of the facts have been stipulated, and the stipulated facts are

incorporated in our findings by this reference. Petitioner resided in Florida when he

filed the petition.

       Our findings of fact include only a summary of those material to the

transferee liability issues in this case. Additional details appear in the opinion of the

Court of Appeals that affirmed petitioner’s conviction for tax evasion and

conspiracy to defraud the United States. See United States v. Schussel, 291 Fed.

Appx. 336 (1st Cir. 2008). Those details, however, need not be repeated here. Our

findings simply explain respondent’s determination and DCI’s activities as

background for petitioner’s attempt to recharacterize the transfers from DCI to the
                                           -3-

[*3] DCIL Bermuda account as payments for petitioner’s intellectual property.

The facts found are also those relevant to petitioner’s claims that he retransferred

funds to DCI and is entitled to credit for those retransfers against his liability.

      Petitioner incorporated DCI in 1983 as a Massachusetts for profit

corporation. Ronald Gomes joined DCI in 1983. During 1993, 1994, and 1995

petitioner owned 95% of DCI and Gomes owned 5%. Diane Reed was hired as

DCI’s accountant in 1985 and later was promoted to be DCI’s controller. DCI

conducted trade shows and educational seminars for software companies and other

corporations. DCI earned revenue from three sources: (1) “attendee sales”, which

were fees paid by individuals to attend conferences and events put on by DCI; (2)

“exhibit sales” (also called “vendor sales”), which were fees paid by companies to

exhibit their products and services at DCI-sponsored conferences; and (3) “user

group” accounts, which were accounts set up for deposits of fees made by attendees

of events and conferences run by DCI for other companies, such as Sybase,

Microsoft, or IBM (sponsoring companies).

      For each “user group” event there was a separate contract between DCI and

the sponsoring company. Each contract provided that profit would be split

between the sponsoring company and DCI and did not provide for profits to be

distributed to petitioner. DCI staff coordinated the events, prepared brochures,
                                          -4-

[*4] made hotel and travel arrangements, and kept track of the participants.

Sometimes petitioner contacted speakers, but other speakers were contacted by DCI

staff. The revenue from the events was deposited in accounts referred to as “user

group accounts”, which used DCI’s Andover, Massachusetts, address and DCI’s

Federal tax identification number. DCI paid the expenses of the events from either

the user group accounts or from DCI’s general account.

      Petitioner is married to Sandra Schussel. He is the father of Stacey Griffin

and another daughter and the father-in-law of Michael Griffin. In November 1987,

petitioner, his wife, and Stacey Griffin established an account at Fidelity

Investments in the name of Digital Consulting International. Petitioner also

maintained other accounts with Fidelity Investments. (The various accounts will be

referred to in this opinion as the Fidelity accounts without differentiating the specific

name on each account because petitioner used the funds in all of the accounts as his

personal funds.)

      In February 1988, petitioner, his wife, and Stacy Griffin incorporated Digital

Consulting International Limited (DCIL) in Bermuda. The same month they

established an account at the Bank of Bermuda in the name of DCIL. DCIL was a

shell company that never conducted any business and never filed any Federal

income tax returns.
                                         -5-

[*5] Starting in 1988 petitioner caused the following amounts to be transferred to

the DCIL Bermuda bank account:

                           Year                             Total

                           1988                       $1,428,000
                           1989                          340,000
                           1990                           45,000
                           1991                          731,000
                           1992                        1,174,000
                           1993                        1,666,121
                           1994                        2,360,453
                           1995                        3,816,546

Most of the funds were thereafter transferred to petitioner’s Fidelity accounts and

used by petitioner as his own. The funds so transferred in 1995 included $610,000

of $850,000 reported as salary on petitioner’s Form 1040, U.S. Individual Income

Tax Return, for 1995. Otherwise, the funds transferred to Bermuda were not

reported on DCI’s income tax returns or on petitioner’s individual income tax

returns.

      The amounts transferred from DCI to the Bermuda DCIL account included

checks from user group accounts made out to DCI or DCIL or checks from third

parties made out to DCI. The amounts so transferred were determined to be the

amounts not needed for DCI’s expenses. They were not based on the value of any

services or intellectual property provided by petitioner.
                                        -6-

[*6] In 1995, petitioner was interested in selling DCI. In order to do so, he

wanted DCI’s income to reflect the amounts that had previously been transferred to

the Bermuda account and had not been recorded on DCI’s books or reported on its

Federal income tax returns. As a result, petitioner discontinued the practice of

transferring DCI receipts to the DCIL Bermuda account.

       From 1988 through 1995, DCI was a C corporation and filed Forms 1120,

U.S. Corporation Income Tax Return. The transfer of DCI receipts to Bermuda was

not discovered during audits of DCI’s returns for 1986 through 1990 and 1993.

However, in early November 1997, while auditing DCI’s return for 1995, a revenue

agent began questioning checks payable to DCI deposited in DCIL’s account.

Petitioner prepared a bogus contract between DCI and DCIL allegedly for a term of

two years beginning January 4, 1994, to be presented to the revenue agent by the

lawyer he had hired to represent DCI in the audit. Petitioner picked the dates of the

contract to coincide with termination of the practice of sending money to Bermuda,

which was supposed to stop on December 31, 1995. While he was preparing the

contract, he looked out the window of his home and observed his gardener mowing

the lawn. Petitioner signed the name of his gardener as the “managing director”

executing the contract on behalf of DCIL.
                                         -7-

[*7] Petitioner, Gomes, Reed, and Michael Griffin devised a scheme referred to as

“Project Phoenix” to conceal DCI’s true income from the Internal Revenue Service

(IRS). This scheme involved discarding copies of checks and deleting information

from DCI’s computer database. However, the revised computer records were not

provided to the IRS.

        On February 26, 2004, petitioner, Gomes, and Reed were indicted on tax

evasion charges. Gomes and Reed pleaded guilty. Petitioner was tried and, on

January 25, 2007, he was convicted of two counts of tax evasion under section 7201

with respect to his 1995 individual return and DCI’s 1995 corporate return. He was

also found guilty of conspiracy to defraud the United States. He was sentenced to

five years in prison and completed his sentence in June 2011.

        Beginning with tax year 1996, DCI elected S corporation status. In 1997,

petitioner converted DCI to a Massachusetts business trust. In 2004, the trust’s

name was changed to Driftwood Massachusetts Business Trust (Driftwood).

Driftwood filed Federal income tax returns as an S corporation from 2004 through

2010.

        DCI ceased operations in 2004 and became insolvent as a result of the

criminal investigation of petitioner. The last gross receipts reported by DCI or

Driftwood were $4,615,479 for 2004. The DCI and Driftwood returns reported
                                         -8-

[*8] loans from petitioner totaling $2,141,786 from 2001 through 2010 and

deducted legal and consulting expenses that related to defense of the criminal

proceedings against petitioner. The amounts deducted from 2000 through 2010

totaled $3,961,122.

      Payments to petitioner’s two daughters for their assistance in case

preparation, processing payments to the Government, and subsequent State

investigations of petitioner’s State tax liability were deducted on the corporation’s

tax returns as consulting expenses, with the resulting losses claimed by petitioner as

the owner of the S corporation. Payments to a clemency attorney after petitioner’s

conviction were also claimed as corporate legal fees for 2008.

      On May 5, 2009, respondent issued a notice of deficiency for DCI’s 1993,

1994, and 1995 tax years. DCI did not contest the notice, and on October 19, 2009,

the following amounts were assessed against DCI:

                           1993                   1994                1995

Tax                     $622,455.00           $889,445.00        $1,321,449.00
Fraud penalty            466,841.25            667,083.75           991,086.75
  Total                1,089,296.25          1,556,528.75         2,312,535.75

Because of DCI’s insolvency, efforts to collect the assessed liabilities from its assets

would be futile.
                                          -9-

[*9] In the notice of transferee liability, respondent determined that the value of

property transferred to petitioner was as follows:

                                   1993              1994              1995

      Value of Property       $2,044,106.00 $2,522,944.00         $4,356,279.00
      Transferred to You

      The above named transferee is liable for the lesser of the value of the
      property transferred, plus interest as provided by law, or the balance of
      the liability, plus accrued interest. Accordingly, the transferee’s
      liability for the 1993, 1994 and 1995 assessed liability of the transferor
      is limited to the above stated value of property transferred to him for
      the three years.

The value was determined to be the amounts transferred from the Bermuda DCIL

account back to petitioner’s Fidelity accounts.

                                       OPINION

      Section 6901(a) provides that the liability, at law or in equity, of a transferee

of property “shall * * * 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”. Section 6901(a) does not

independently impose tax liability upon a transferee but provides a procedure

through which the IRS may collect unpaid taxes owed by the transferor of the

assets from a transferee if an independent basis exists under applicable State law

or State equity principles for holding the transferee liable for the transferor’s
                                         - 10 -

[*10] debts. Commissioner v. Stern, 357 U.S. 39, 45 (1958); Hagaman v.

Commissioner, 100 T.C. 180, 183 (1993). Thus, State law determines the elements

of liability, and section 6901 provides the remedy or procedure to be employed by

the Commissioner as the means of enforcing that liability. Ginsberg v.

Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), aff’g 35 T.C. 1148 (1961). The

IRS bears the burden of proving that the transferee is liable as a transferee of

property of a taxpayer but does not have the burden of proving that the taxpayer was

liable for the tax. Sec. 6902(a); Rule 142(d). The existence and extent of transferee

liability are determined according to the law of the State where the transfer

occurred--in this case, Massachusetts.

         Before October 6, 1996, the applicable law was the Massachusetts Uniform

Fraudulent Conveyance Law (MUFCL). Mass. Gen. Laws ch. 109A (repealed

1996). On July 8, 1996, Massachusetts enacted the Uniform Fraudulent Transfer

Act (MUFTA), striking out the MUFCL in its entirety. Uniform Fraudulent

Transfer Act, 1996 Mass. Acts 830. MUFTA was made effective October 6, 1996.

Id. Although the transfers in issue from DCI to DCIL occurred before the effective

date of MUFTA, some of the transfers from DCIL to the Fidelity account occurred

after the effective date. Under either law, transferee liability may result from actual

fraud.
                                         - 11 -

[*11] The MUFCL provided for liability where either actual fraud or constructive

fraud is present. Mass. Gen. Laws ch. 109A, secs. 4 - 7 (repealed 1996).

Specifically, with respect to actual fraud, MUFCL sec. 7 provided that a debtor’s

conveyance made “with actual intent * * * to hinder, delay or defraud either present

or future creditors, is fraudulent as to both present and future creditors.”

      Under MUFTA, transferee liability arises where there is either actual or

constructive fraud. Mass. Ann. Laws ch. 109A, secs. 4 - 7 (LexisNexis 2005).

With respect to actual fraud, MUFTA sec. 5 provides that “[a] transfer made * * *

by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before

or after the transfer was made * * * if the debtor made the transfer * * * with actual

intent to hinder, delay, or defraud any creditor of the debtor”.

      Petitioner does not give us any reason to doubt that the transfers from DCI to

DCIL to avoid tax on DCI’s income and to enable transfers of unreported income to

petitioner’s Fidelity accounts were fraudulent as to respondent as a creditor. The

evidence of fraud is compelling. The evidence shows transfers of funds to avoid

payment of Federal income tax, concealment of income, fabrication of records, false

representations to IRS personnel, and other indicia of actual fraud. Thus we need

not discuss principles of constructive fraud.
                                           - 12 -

[*12] Petitioner does not argue that respondent’s proof is lacking as to any element

of transferee liability under Massachusetts law, and we conclude that respondent’s

burden of proof as to liability has been satisfied. Petitioner asserts that his liability

is limited to $7,358,394 (plus interest as provided by law), which is the amount

respondent determined to be “dividend income” in a separate audit in relation to

petitioner’s individual income tax liabilities for the years in issue. Alternatively

petitioner agrees that his maximum liability is $8,923,329 as determined in the

notice of transferee liability but disagrees with his interest liability.

       The “dividends” determination of petitioner’s individual tax liability in a

separate proceeding is not material here. The stipulated evidence in this case

establishes the larger amounts transferred to petitioner’s Fidelity accounts during the

three years in issue.

       The real difference between the parties, however, relates to the interest for

which petitioner is liable as a transferee. Petitioner argues that he is liable for

interest under Massachusetts law only from the time of the notice of liability. He

cites only Massachusetts law relating to prejudgment interest in tort cases.

       Respondent argues that, under applicable Federal law, petitioner is liable for

the interest accruing on DCI’s liabilities because fraudulently transferred assets
                                          - 13 -

[*13] were in his hands before DCI’s liabilities for each year accrued on March 15,

1994, 1995, and 1996. Moreover, the value of the fraudulently transferred assets

petitioner received each year exceeded the tax and penalty owed by DCI for 1993,

1994, and 1995 as of March 15 of the following year. Thus, according to

respondent, section 6901(a) applies, and interest on DCI’s deficiencies runs from

the date the tax was due until paid, and section 6601(e)(2)(B) provides the same

period for interest on the fraud penalties due from DCI. See Estate of Stein v.

Commissioner, 37 T.C. 945, 961 (1962); Lowy v. Commissioner, 35 T.C. 393, 396-

397 (1960); Butler v. Commissioner, T.C. Memo. 2002-314.

      Respondent concedes in his reply brief that the

      Notice of Liability would have been clearer if it had omitted in the
      statement of DCI’s assessed liabilities the amount of interest that
      respondent assessed, as a routine matter, at the same time he assessed
      the tax and penalties. However, the inclusion of this extraneous
      information does not invalidate the notice or prohibit respondent from
      taking the position, fully supported by the law and not dependent on
      any new facts causing surprise to petitioner, that interest runs on the
      deficiencies from the due dates of DCI’s returns because the amounts
      transferred to petitioner, even under petitioner’s own reckoning,
      exceed the amount of assessed tax and penalties.

In other words, respondent is not claiming that petitioner is liable for all of the

interest that has accrued on DCI’s assessed deficiencies and penalties. The

interest for which petitioner is liable is separate and is accruing on the transferee
                                          - 14 -

[*14] liability determined in the notice. That interest is the amount due under

Federal law and accrues from the time DCI’s payments were due. See Lowy v.

Commissioner, 35 T.C. at 396. Petitioner attempts to distinguish Lowy and Butler

by arguing that the values of the transferred assets in those cases exceeded the

transferors’ liabilities, but that is the same situation as exists here when the interest

assessed against DCI is disregarded. We agree with respondent’s arguments that

interest on the deficiencies and penalties runs against petitioner as of the time that

DCI’s returns were due.

Nature of the Diverted Receipts

      Petitioner next argues that the funds transferred to him from user accounts

were payments for his intellectual property and not income of DCI. Respondent

argues that this explanation is not credible because petitioner was not paid for his

intellectual property after 1995, when, according to petitioner, the only change in

DCI’s operation was that the income was retained by DCI. During the earlier years,

DCI received only reimbursement for expenses of the events involved in the user

accounts although DCI employees performed organizational, promotional,

operational, and accounting services in relation to those events. Petitioner was

paid a substantial salary from DCI, including $850,000 in 1995. The argument
                                            - 15 -

[*15] that all profit from the user group events was additional compensation to

petitioner is not reasonable or credible.

      Petitioner asserts that forming DCI as a C corporation was a mistake because

tax at the corporate level could have been avoided if S corporation status had been

elected earlier. He testified: “[W]e’d gotten into this whole mess any way, because

it was like, well, why should I be paying double taxes. We didn’t want to pay

double taxes. Why should you have, basically, a family business, and you are

paying double taxes.” If his present contention is correct, there would have been no

“double taxation” issue because the profits earned on DCI’s operations would have

been deducted as compensation to him.

      Petitioner argues in his brief that Reed confirmed that the diverted funds

were payments for petitioner’s intellectual property. Reed’s testimony to that

effect was only in response to leading questions from petitioner’s counsel. She

also testified that from her standpoint petitioner and DCI were the same. She

followed his instructions about transferring funds to Bermuda and knew that the

funds were not being reported on DCI’s tax returns. The scheme by which DCI

gross receipts were diverted to Bermuda was terminated so that prospective

purchasers of DCI’s business could be shown DCI’s true earnings. All of these
                                        - 16 -

[*16] explanations and all contemporaneous evidence concerning DCI’s operations

are inconsistent with the current claim that the funds were not DCI’s income.

      In several other respects, we believe that petitioner’s testimony is improbable

and unreliable. He claims, for example, that he “had no clue” that his attorney was

going to give the bogus contract between DCI and DCIL to the IRS. He claims

naivete about the tax reporting of DCI and the audit of DCI, asserting that Reed and

the accountants were responsible for it, but this scenario is unconvincing in view of

his intelligence and education, his concern with double taxation, and the deliberate

and omitted evasion of personal income tax on millions of dollars of income.

      If the transfers from DCI’s user accounts were for bona fide corporate

expenses, they would have been deductible to the corporation and there would not

have been a concern about double taxation or about concealing DCI’s unreported

income. Because the amounts transferred were taxable to petitioner in either event,

and he has been punished for failing to report the income on his personal tax returns,

he sees no downside in attempting to rewrite history. The claim that petitioner was

receiving payments for his intellectual property is improbable and

belated, and we do not accept it.
                                         - 17 -

[*17] Nature of Loans to DCI or Driftwood

      Finally, petitioner claims that his liabilities should be reduced by the amounts

of certain transfers back to DCI accounts from 2001 through 2010 that were

originally recorded as loans to DCI. He asserts that the amounts used to pay

attorney’s fees and consulting expenses were properly regarded as expenses of the

corporation because defending the prosecution defended the business of DCI. He

testified that after DCI assets were sold, he loaned personal funds to the corporation

to pay his legal bills because he was advised by his criminal defense attorney, his

counsel of record in this case, that the legal bills were properly chargeable to and

deducted by the S corporation as legal expenses.

      Petitioner has not, however, presented any invoices or other evidence of a

proper apportionment of fees for his personal defense, defense of the count for

evasion of corporate taxes, or work on determining civil tax liabilities. He has

cited neither evidence that the corporation was responsible for the legal and

consulting fees nor authority for the claimed credits. To the extent that there is

testimony about the services performed, that testimony indicates that they were for

petitioner personally. The corporation was out of business when the loans were

made and had nothing to gain or lose by defending or not defending the charges.

The corporation did not contest the civil tax liabilities in response to the notice of
                                          - 18 -

[*18] deficiency that was the basis of the tax assessed for 1993, 1994, and 1995.

The amounts loaned to the corporation were never available to pay its tax liabilities.

We need not decide whether any of the claimed expenses would be properly

apportioned between petitioner and the corporation, or between deductible or

nondeductible, because we decide only whether loans by petitioner to the

corporation should reduce the transferee liabilities in issue.

      It appears that recording loans to a defunct entity, paying expenses and

deducting them on an S corporation return, and passing through the resulting losses

to petitioner’s personal income tax returns was simply a way to create the

appearance that personal expenses were business expenses. In any event, the

amounts that petitioner transferred to DCI accounts were recorded as loans, not as

repayment of income diverted from it in 1993, 1994, and 1995, and he is not entitled

to disregard the contemporaneous characterization. See United States v. Sorrentino,

726 F.2d 876, 883 n.3 (1st Cir. 1984) (citing Moline Props., Inc. v. Commissioner,

319 U.S. 436, 438-439 (1943)). In sum, he contends that his liability as a transferee

for corporate income taxes that he caused to be evaded should be reduced by the

costs of defending himself from the consequences of his fraud. We are not

persuaded that law or reason justifies that result.
                                        - 19 -

[*19] We have considered the other arguments of petitioner. They are contrary to

the evidence, legally erroneous, or irrelevant. They do not affect our conclusions.

      To reflect the foregoing,


                                                 Decision will be entered

                                          for respondent.
