                       118 T.C. No. 4



                UNITED STATES TAX COURT



     LARRY D. JOHNSON, TRANSFEREE, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 14096-99.                    Filed January 24, 2002.


     R determined that P was liable as a transferee of
assets from C and, therefore, was liable for C’s tax
liabilities. P was the 100-percent owner and president
of C. The transfer to P was from a settlement that P,
C, and C’s subsidiaries had reached with a creditor. P
contends that the portion he received was in
consideration of his releasing a claim of his own
against the creditor for damages to business
reputation, so that, in effect, there was no transfer
from C. R contends that the settlement belonged to the
corporate entities and that P was a transferee.

     If it is decided that the transfer was of C’s
asset to P, then P contends in the alternative that the
transfer was made for adequate consideration so that
sec. 6901, I.R.C. would be inapplicable. R contends
that under Texas law, because P was considered an
“insider”, the transfer to him was in avoidance of
creditors. P contends that he comes within an
exception to the rule relating to “insiders”. The
exception involves circumstances where the transfer to
                               - 2 -

     the “insider” was made as part of the usual business
     practices of the “insider” and the transferor.

          Held: The transfer to P was from C. Held,
     further, even though P was an “insider” under Texas
     law, the transfer was not in avoidance of creditors
     because it was made in good faith and as part of the
     usual business practices of P and C. Held, further, P
     is not liable as a transferee.


     Gerald R. Mace and Ben D. Stevens, for petitioner.

     Nancy Graml, for respondent.



     GERBER, Judge:   In a notice of liability, respondent

determined that petitioner is liable as a transferee at law and

in equity for the assessed Federal income tax liability and

additions to tax of Johnson Consolidated Cos., Inc., and

Subsidiaries (JCC), for its taxable year ending June 30, 1989.

Respondent determined that petitioner is liable for JCC’s income

tax liability of $57,004.00 and additions to the tax in the

amounts of $12,825.90 and $14,251.00 under section 6651(a)(1)1

and (2), respectively.

     There is no dispute concerning JCC’s liability for the

deficiency.   The issue for our consideration is whether

petitioner is liable as a transferee for JCC’s unpaid Federal

income tax, additions to tax, and accrued interest.   If



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

petitioner is liable as a transferee, then we must decide the

applicable date on which interest began to accrue.

                          FINDINGS OF FACT2

     JCC was incorporated in 1985 under the laws of the State of

Texas and was in the business of developing real estate.    Larry

D. Johnson (petitioner) was the president, registered agent, sole

director, and sole shareholder of JCC and is statutorily deemed

to be an “insider” under Texas law.    At the time the petition

herein was filed, petitioner resided in Houston, Texas.

     From 1985 to 1992, JCC was involved in more than 20 real

estate projects.   The following companies were wholly owned

subsidiaries of JCC:   LDJ Construction Co.; LDJ Development Co.;

Parklane Development Corp.; Rialto Development Corp.; The Johnson

Corp.; Forest Homes, Inc.; Hearthstone Development Corp.; The

Johnson Development Corp.; and Larry D. Johnson Interests, Inc.

     In 1985, LDJ Development Co. entered into a joint venture

with the Brentwood Co. called the West Mill Joint Venture (West

Mill).   West Mill was formed in order to purchase and develop

Towne Lake, a 3,300-acre real estate project in Cherokee County.

In 1986, LDJ Construction Co. purchased Brentwood’s 50-percent

interest in West Mill by means of a note payable to Brentwood in

the amount of $709,560.



     2
      The stipulation of facts, supplemental stipulation of
facts, and the exhibits attached thereto are incorporated herein
by this reference.
                                - 4 -

      In 1987, West Mill entered into a $52,500,000 construction

loan agreement with Westinghouse Credit Corp. (Westinghouse).

Under the agreement, petitioner and JCC each guaranteed 50

percent of the Westinghouse loan, and petitioner was required to

execute all documents individually and in his capacity as a

corporate representative of JCC (shareholder/president).

During 1991, West Mill defaulted on the loan, and the payment

obligations of West Mill were accelerated.    On October 4, 1991,

petitioner spoke with a representative of Westinghouse regarding

a proposed settlement to resolve the default situation.    A letter

confirming petitioner’s conversation contained the following

proposals:

      (i)   West Mill will provide [Westinghouse] with a deed to
            Towne Lake in lieu of foreclosure;

      (ii) Johnson Consolidated Companies (guarantor of the Towne
           Lake loan and controlling stockholder of both West Mill
           venturers) will enter into a consulting agreement with
           [Westinghouse] and provide consulting services related
           to the operation and development of Towne Lake in
           exchange for consulting fees approximating One Million
           Fifty Thousand Dollars ($1,050,000) on terms to be
           mutually agreed upon.

      On December 5, 1991, a settlement agreement regarding the

Westinghouse loan was entered into between Westinghouse, West

Mill, petitioner, JCC, LDJ Development Co., and LDJ Construction

Co.   Throughout the settlement negotiations petitioner acted in a

dual capacity on his own behalf as a guarantor of the

Westinghouse loan and as a representative of the West Mill
                                - 5 -

venturers and their parent JCC.

      Pursuant to the settlement agreement, West Mill conveyed all

of its rights in the Towne Lake project to First Hotel Investment

Corp., an affiliate of Westinghouse.    Additionally, West Mill,

petitioner, JCC, LDJ Construction Co., and LDJ Development Co.

released any and all claims against Westinghouse.    In return,

Westinghouse released any and all claims, agreed not to foreclose

on the Towne Lake property, and paid $1,050,000 jointly to West

Mill, petitioner, JCC, LDJ Construction Co., and LDJ Development

Co.   The agreement did not specify to whom the $1,050,000 would

be distributed.

      On December 5, 1991, the $1,050,000 payment was received by

JCC and on December 6, 1991, was deposited into a bank account

opened by JCC to receive the $1,050,000 payment.    Petitioner

directed JCC to pay certain creditors of West Mill from the bank

account.   Of the $1,050,000 received from Westinghouse, JCC paid

$269,000 to the Johnson Corp. for management fees it earned in

conjunction with West Mill, and $492,442 to F. Gardner Parker,

Trustee.

      On January 9, 1992, petitioner submitted a request to JCC

for payment to him of the remainder of the settlement fund

($286,737.27).    Petitioner’s payment request contained no

explanation or reason for the requested transfer.    On or about

January 10, 1992, petitioner deposited the $286,737.27 payment
                                 - 6 -

received from JCC into his personal bank account.    JCC booked the

transferred amount as an amount payable from petitioner.      At the

time petitioner received the transferred amount JCC was insolvent

and had not filed its U.S. Corporation Income Tax Returns for its

fiscal tax years ended June 30, 1986, 1987, and 1989,

respectively.

     Although petitioner was aware that JCC was insolvent, he

believed that JCC’s net operating losses would result in no

Federal tax liability for JCC.    It was usual for petitioner to

advance or loan funds to JCC and/or its subsidiaries.    Prior to

receiving the $286,737.27 from JCC, there had been regular

advances and repayments of funds between JCC and petitioner.

Petitioner’s Income Tax Returns

     On his 1991 Form 1040, U.S. Individual Income Tax Return,

petitioner reported interest income from the Johnson Corp., in

the amount of $25,924.   That amount represented interest on

obligations owed to him by the Johnson Corp.    On his 1992

individual Federal income tax return, petitioner also reported

wages from JCC’s subsidiaries (the Johnson Corp. and Heritage

Development Co.) in the amounts of $50,000 and $56,250,

respectively.   Petitioner’s reported income of $304,637 did not

include the $286,737.27 received from JCC.

Tax Liability of JCC

     JCC’s corporate income tax return, for its fiscal tax year
                               - 7 -

ended June 30, 1989, was filed on October 3, 1994.    JCC reported

taxable income, before net operating losses (NOLs), in the amount

of $2,858,914.   After applying carryover NOLs from prior tax

years, JCC had no regular corporate income tax liability.    JCC,

however, remained liable for the alternative minimum tax of

$57,004, which is in controversy in this case.    The unpaid tax

liability reported on JCC’s return was assessed by the

Commissioner on November 14, 1994.     In addition, the Commissioner

assessed a $12,825 late filing penalty and a $14,251 penalty for

late payment of tax, plus interest as provided by law.    During

February 1995, the Commissioner filed a notice of Federal tax

lien against JCC for its 1986 tax liabilities.

                              OPINION

     We consider, under section 6901, whether respondent has

shown that petitioner is a transferee of JCC’s assets and, hence,

liable for JCC’s unpaid Federal tax liability.    Section 6901(a)

is a procedural statute enabling respondent to collect a

transferor’s unpaid tax liability from a transferee of the

transferor’s assets.   Under section 6901(a), respondent may

establish transferee liability if a basis exists under applicable

State law for holding the transferee liable.     Commissioner v.

Stern, 357 U.S. 39, 42-47 (1958); Bresson v. Commissioner, 111

T.C. 172, 179 (1998), affd. 213 F.3d 1173 (9th Cir. 2000);

Hagaman v. Commissioner, 100 T.C. 180, 183 (1993), affd. and
                                - 8 -

remanded 958 F.2d 684 (6th Cir. 1992).    Respondent bears the

burden of proving that petitioner is liable as a transferee of

the taxpayer.    Sec. 6902(a); Gumm v. Commissioner, 93 T.C. 475,

479 (1989), affd. without published opinion 933 F.2d 1014 (9th

Cir. 1991).

     Respondent determined that petitioner is a transferee at law

and in equity.    Petitioner asserts two different defenses in this

case in an attempt to avoid transferee liability.    First,

petitioner contends that the portion of the settlement proceeds

transferred to him was his asset and that JCC was merely a

conduit or recipient of the settlement proceeds for purposes of

convenience.    In other words, petitioner contends that the

portion of the settlement proceeds received by him was not an

asset of JCC or its subsidiaries and, accordingly, could not be

“transferred” to him.    Second, if we find that the proceeds

belonged to the JCC conglomerate and that they were then

transferred to petitioner, petitioner, in the alternative,

contends that the transfer was for adequate consideration.

Petitioner further contends that one of the JCC entities had an

antecedent obligation to petitioner and that the transfer

satisfied that obligation.    We note that the question of

transferee liability in this case is to be decided under the law

of the State of Texas.

     The first element about which the parties disagree concerns
                               - 9 -

whether there was a transfer of property; i.e., whether the

property received by petitioner was from JCC (JCC’s property as

opposed to being due petitioner from the Westinghouse

settlement).   If the property was, in fact, JCC’s, then we must

decide whether there was adequate consideration for the transfer

to petitioner.

     The laws of the State of Texas provide for transferee

liability under a modified form of the Uniform Fraudulent

Transfer Act (TUFTA).   TUFTA provides that a transferor engages

in a transfer that is fraudulent as to a creditor if:   (1) The

transferor makes a transfer to a transferee; (2) the creditor has

a claim against the transferor before the transfer is made; (3)

the transferor makes the transfer without receiving reasonably

equivalent value; and (4) the transferor is insolvent at the time

of the transfer or is rendered insolvent as a result of the

transfer.   Tex. Bus. & Com. Code Ann. sec. 24.006(a) (Vernon

1987); Hanna v. Commissioner, T.C. Memo. 1999-292.

     If all four elements of TUFTA section 24.006(a) are present,

a creditor of the transferor (i.e., respondent) may recover from

the transferee an amount equivalent to the lesser of the amount

of the assets transferred to the transferee (reduced by the

amount of assets or rights received by the transferor on the

transfer, if any) or the amount of the creditor’s claim.     Tex.

Bus. & Com. Code Ann. sec. 24.009(b), (d).   If transferee
                                - 10 -

liability is established under State law, the transferee is

liable for the transferor’s taxes due as of the time of the

transfer, as well as interest and any additions to tax, to the

extent of the value of the assets transferred.     See Estate of

Glass v. Commissioner, 55 T.C. 543, 575 (1970), affd. 453 F.2d

1375 (5th Cir. 1972).

     Petitioner argues that there was no transfer of property

from JCC.3    Petitioner maintains that the $286,737.27 he received

from JCC was property he was entitled to receive directly from

Westinghouse.     Petitioner contends that $286,737.27 of the

$1,050,000 settlement payment was in exchange for any claim

petitioner may have had against Westinghouse.     Specifically,

petitioner asserts, in the context of this case, that

Westinghouse damaged his business reputation and rendered him

unable to borrow funds.

         Petitioner’s factual assertions are not supported by the

record.     There is no evidence that the settlement agreement was

entered into to protect Westinghouse from a possible legal action

by petitioner in his individual capacity.     Prior to the default

on the Westinghouse loan, JCC performed consulting duties in


     3
       For purposes of this legal discussion, references to “JCC”
are to JCC, the parent corporation, and all of JCC’s wholly owned
subsidiaries. We note that their returns were consolidated, and,
hence, the disputed tax liability is consolidated. Factually and
legally, there is no meaningful distinction to be made between
any of the corporate entities linked by ownership to JCC or
petitioner.
                               - 11 -

connection with West Mill.    In the negotiations preceding the

settlement agreement, petitioner proposed to a representative of

Westinghouse that Westinghouse pay JCC consulting fees of

$1,050,000 for services related to Towne Lake.    His proposal to

that effect is confirmed in a October 7, 1991, letter to

petitioner that, in pertinent part, contains the following

statement:

          This letter will confirm our conversation * * *
     with respect to a proposed settlement agreement between
     Westinghouse Credit Corporation (“WCC”) and West Mill
     Joint Venture (“West Mill”) regarding the New defaulted
     loans made in connection with the Towne Lake
     development in Georgia (“Towne Lake”).

          WCC understands your proposal to be as follows:

          (i)   West Mill will provide WCC with a deed to
                Towne Lake in lieu of foreclosure;

          (ii) Johnson Consolidated Companies (guarantor
               of the Towne Lake loan and controlling
               stockholder of both West Mill venturers)
               will enter into a consulting agreement with WCC
               and provide consulting services related to the
               operation and development of Towne Lake in
               exchange for consulting fees approximating One
               Million Fifty Thousand Dollars ($1,050,000) on
               terms to be mutually agreed upon. [Emphasis
               added.]

     The settlement agreement, which mimics the above-quoted

letter, provides for West Mill to convey the Towne Lake deed to

Westinghouse in lieu of foreclosure and for Westinghouse to pay

$1,050,000 directly to JCC.    There is no additional language in

the agreement delineating or explaining the reason for the

payment or the entities or individuals to whom the $1,050,000 was
                               - 12 -

to be distributed.

     In that same vein, upon receipt, the entire $1,050,000 was

deposited into JCC’s bank account that was established for the

sole purpose of receiving and, ultimately, distributing the

settlement proceeds.    Of the $1,050,000 received from

Westinghouse, JCC paid $269,000 to The Johnson Corp. for

management fees earned in conjunction with West Mill and $492,442

to F. Gardner Parker, Trustee.    JCC transferred the remaining

$286,737.27 to petitioner and recorded the transfer in its books

as a payable due from petitioner.4      Mr. Boswell, who had been

working closely with petitioner as treasurer of The Johnson Corp.

at the time of the settlement agreement, testified that JCC

considered the $1,050,000 received from Westinghouse to be income

to JCC.    Likewise, JCC reported the $1,050,000 as income on its

1991 corporate income tax return.

     Petitioner’s contention that his individual participation in

the settlement agreement is conclusive evidence of his rights to

a portion of the settlement is unfounded.      The JCC corporations

entered into the settlement agreement to resolve claims

concerning the outstanding and defaulted debt owed to

Westinghouse.    Petitioner was named as a party to the agreement

in his individual capacity because he was a guarantor of the

loan.    The agreement identified and released petitioner as a


     4
       A nominal portion of the amount was used for
administrative expenses.
                                - 13 -

guarantor.   It is obvious that if petitioner had not been a party

to the agreement, he would have remained liable to Westinghouse

for 50 percent of the unpaid debt and/or future claims by

Westinghouse.    Accordingly, we hold that the $1,050,000

settlement was JCC’s property and that JCC transferred a payment

of $286,737.27 to petitioner.    Having decided that a transfer

from JCC to petitioner occurred, we must now decide whether the

transfer was for adequate consideration.

     We now consider, under Texas law, whether JCC received

reasonably equivalent value amounting to adequate consideration

for the amount transferred.    See Tex. Bus. & Com. Code Ann. sec.

24.006(a) (West 1987); Gumm v. Commissioner, 93 T.C. at 480.

     Respondent argues that petitioner received the transferred

amount without consideration or for less than adequate

consideration.    Petitioner argues that he was owed an antecedent

debt and that the $286,737.27 payment was received in

satisfaction of that debt.    A transfer that would otherwise

result in transferee liability under section 6091(a) may be

excepted from liability if the transfer was made for adequate

consideration.    See Gumm v. Commissioner, supra.   A similar

exception exists under TUFTA where the transferor receives

“reasonably equivalent value” in exchange for the transfer.      See

Tex. Bus. & Com. Code Ann. sec. 24.006(a) (West 1987).5     Under


     5
        “Reasonably equivalent value” includes a transfer that is
within the range of values for which the transferor would have
                                                   (continued...)
                                - 14 -

Texas law, payment in satisfaction of an antecedent debt may be

adequate consideration in order to avoid transferee liability.

     Respondent argues that the record does not contain

documentary evidence of a debt.6    However, the preponderance of

the evidence shows that, at the time of the transfer, there was a

debt due petitioner from JCC.

     Petitioner testified that he regularly advanced and received

funds from his corporations.    Petitioner’s uncontroverted

testimony, was supported by the testimony of other witnesses.

Mr. Boswell testified that petitioner regularly advanced money to

the corporation(s) to meet payroll and vendor obligations.    The

testimony of Mr. Boswell was also uncontroverted.

     In addition, documents in the record support and corroborate

petitioner’s testimony and that of Mr. Boswell.    JCC reported

shareholder loans due to petitioner in returns of prior years,

including the years ending June 30, 1988, and 1989.    Most

significantly, petitioner reported $25,924 of imputed interest

income from the corporation(s) on his 1991 individual income tax

return.   On that point, Mr. Boswell testified that “there were no


     5
      (...continued)
sold the asset in an arm’s-length transaction. The Texas UFTA
includes in its definition of “value” an antecedent debt that the
transfer satisfies.
     6
       Respondent contends that his burden was satisfied because
of petitioner’s failure to offer documentary evidence of debt.
That contention alone would not make a prima facie showing with
respect to transferee liability. Ultimately, this issue has
evolved into a factual and legal dispute about whether there was
adequate consideration for the transfer.
                                - 15 -

notes created, but that interest income was imputed by the CPAs

that prepared the returns on these due to/due from accounts.”

     Respondent counters petitioner’s argument by noting that the

$286,737.27 payment or transfer came from JCC and not the Johnson

Corp., the subsidiary of JCC to which petitioner had advanced

funds.   JCC, however, was merely a holding company, and the

Johnson Corp. and the other consolidated subsidiaries of JCC were

the operating companies through which the corporate business was

transacted.   Significantly, the asserted transferee liability is

for the consolidated JCC group, another factor that militates

against respondent’s argument.

     Finally, it appears that the amount of interest income

reported by petitioner quantitatively supports a $286,737.27 debt

due to petitioner.   If, for example, the $25,924 of interest

income represented an interest rate of 10 percent, the amount due

to petitioner would approximate $286,737.27.

     On this record, petitioner has shown that there was a debt

due him from the JCC corporation(s) at the time of the transfer.

With that finding, we next consider whether the satisfaction of

that debt due petitioner was “adequate consideration.”

     Under Texas law, “value” is given for a transfer if, in

exchange for the transfer, property is transferred or an

antecedent debt is satisfied.    Tex. Bus. & Com. Code Ann. sec.

24.006(a)(Vernon 1987).   Respondent argues that, even if JCC’s

payment satisfied an antecedent debt in an amount that was
                              - 16 -

reasonably equivalent to the transfer, as a matter of law the

transfer was fraudulent under TUFTA section 24.006(b).

     TUFTA provides that a transfer is fraudulent as to an

insider who is also a creditor.   In addition, if the creditor’s

antecedent debt arose before the transfer was made, the debtor

was insolvent at the time, and the insider had reasonable cause

to believe that the debtor was insolvent, then the transfer is

fraudulent as a matter of law.    Tex. Bus. & Com. Code Ann. sec.

24.006(b)(Vernon 1987).

     It is factually established in this case:   That petitioner

was an “insider” under Texas law; that JCC was insolvent at the

time of the transfer; and that the transfer satisfied an

antecedent debt.   Respondent contends that petitioner knew of

JCC’s insolvency prior to the transfer so that the transfer was

made in bad faith and represents the kind and type of “insider

preference” that Tex. Bus. & Com. Code Ann. section 24.006(b) was

designed to obviate.

     Petitioner counters that section 24.009(f) provides for a

statutory defense or exception to subsection (b).   That exception

occurs where a transfer was made in good faith in the “ordinary

course of business or financial affairs” of the transferor/debtor

and the insider.   Tex. Bus. & Com. Code Ann. sec. 24.006(f)(2)

(Vernon Supp. 2000).

     In this case, although the transfer facially appears to meet

the statutory threshold for an insider preference under section
                              - 17 -

24.006(b), it is nevertheless a “good faith” transfer under Texas

law, because it was part of the usual business practices of JCC

and petitioner.   Petitioner has shown by corroborated and

uncontroverted evidence that the making of advances by petitioner

for the corporation’s payroll and vendor costs was part of the

usual and regular business practice between the corporations and

himself.   Accordingly, we hold that petitioner is not a

transferee.

     We have considered all other arguments advanced by the

parties, and to the extent that we have not addressed these

arguments, we consider them irrelevant, moot, or without merit.

     To reflect the foregoing,

                                      Decision will be entered for

                                 petitioner.
