                           114 T.C. No. 5



                       UNITED STATES TAX COURT


         FRANK ARMSTRONG, III, TRANSFEREE, ET AL.,1 Petitioners
            v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 7267-98, 7269-98,          Filed February 28, 2000.
                 7270-98, 7274-98.



          D transferred a substantial portion of his assets
     to Ps within 3 years of his death. After paying the
     Federal gift taxes associated with these gifts, D was
     nearly insolvent. Following D's death, R determined a
     deficiency in Federal estate tax due from D's estate
     attributable to the estate's failure to include in the
     gross estate the gift taxes that D paid on the
     aforementioned gifts. See sec. 2035(c), I.R.C. R
     subsequently issued notices of transferee liability to
     Ps who filed timely petitions for redetermination with
     the Court. Ps filed motions for partial summary
     judgment alleging that they are not liable as
     transferees as a matter of law.


     1
        Cases of the following petitioners are consolidated
herewith: William Armstrong, Transferee, docket No. 7269-98;
Gretchen A. Redmond, Transferee, docket No. 7270-98; JoAnne
Armstrong-Jones, f.k.a. JoAnne A. Strader, Transferee, docket No.
7274-98.
                               - 2 -


          Held: Ps are transferees of property the value of
     which is treated as if included in D's gross estate
     pursuant to sec. 2035(d)(3)(C), I.R.C., and are, to the
     extent of the value of such property at the time of D's
     death, personally liable for unpaid estate taxes
     pursuant to sec. 6324(a)(2), I.R.C. Held, further,
     Ps' motions for partial summary judgment will be
     denied.


     Charles S. McCandlish and Aubrey J. Owen, for petitioners.

     Cheryl M.D. Rees, for respondent.


                              OPINION

     DAWSON, Judge:   These cases were assigned to Chief Special

Trial Judge Peter J. Panuthos, pursuant to the provisions of

section 7443A(b)(5) and Rules 180, 181, and 183.2   The Court

agrees with and adopts the opinion of the Special Trial Judge,

which is set forth below.

               OPINION OF THE SPECIAL TRIAL JUDGE

     PANUTHOS, Chief Special Trial Judge:    These cases are before

the Court on petitioners' Motions for Partial Summary Judgment.

Petitioners contend that they are entitled to summary judgment

that they are not liable as transferees.    As discussed in detail

below, we will deny petitioners' motions.




     2
        Section references are to the Internal Revenue Code, as
amended. Rule references are to the Tax Court Rules of Practice
and Procedure.
                               - 3 -


Background

     The material facts in these cases are not in dispute.

During 1991 and 1992, Frank Armstrong, Jr. (decedent),

transferred a substantial amount of stock in National Fruit

Product Co., Inc., to his children and grandchildren, including

Frank Armstrong III, JoAnne Armstrong-Jones, Gretchen A. Redmond,

and William Armstrong (hereinafter petitioners).    Decedent was

nearly insolvent after paying $4,680,283 in Federal gift taxes

attributable to the stock transfers.   Decedent died on July 29,

1993--within 3 years of the aforementioned transfers.

     Respondent subsequently issued a notice of deficiency to the

Estate of Frank Armstrong (the Armstrong estate) determining a

deficiency in estate tax of $2,350,071.   The deficiency is

attributable to respondent's determination that the estate failed

to include in the gross estate the gift taxes that decedent had

paid on the above-described transfers as required under the so-

called gross-up rule prescribed in section 2035(c).3    The estate


     3
         Sec. 2035(c) provides in pertinent part:

          (c) Inclusion of Gift Tax on Certain Gifts Made
     During 3 Years Before Decedent's Death.--The amount of
     the gross estate (determined without regard to this
     subsection) shall be increased by the amount of any tax
     paid under chapter 12 by the decedent or his estate on
     any gift made by the decedent or his spouse after
     December 31, 1976, and during the 3-year period ending
     on the date of the decedent's death.

                                                     (continued...)
                              - 4 -


filed a timely petition for redetermination (assigned docket No.

1118-98).

     Respondent issued separate notices of transferee liability

to petitioners stating that, as transferees, petitioners each are

liable for $1,968,213 (the value of the stock that decedent

transferred to each petitioner) in respect of the estate tax

deficiency of $2,350,071 due from the estate.   Petitioners filed

timely petitions for redetermination contesting the notices of

transferee liability.

     Petitioners move for partial summary judgment asserting that

they are not liable as transferees as a matter of law.4

Respondent maintains that petitioners are subject to transferee

liability for the Armstrong estate tax deficiency pursuant to

section 6324(a)(2).

Discussion

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.   See Florida Peach Corp.



     3
      (...continued)
The gift tax is imposed on the value of the property transferred
to the donee and does not include the money used to pay the tax.
In contrast, the estate tax base includes the money ultimately
used to pay the estate tax. For gifts made within 3 years of
death, the sec. 2035(c) gross-up rule is designed to eliminate
this disparity between the gift tax and the estate tax.
     4
        In the event that their motions are denied, petitioners
intend to contest the amount of the estate tax deficiency due
from the estate and the amount of their personal liability.
                                 - 5 -


v. Commissioner, 90 T.C. 678, 681 (1988).       Summary judgment may

be granted with respect to all or any part of the legal issues in

controversy "if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable materials,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that a decision may be

rendered as a matter of law."    Rule 121(b); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).

     Section 6901 sets forth the procedures that are applicable

prior to the assessment and collection of an income, estate, or

gift tax liability from a transferee.    Section 6901(a)(1)(A)(ii)

provides:

     SEC. 6901.    TRANSFERRED ASSETS.

          (a) Method of Collection.--The amounts of the
     following liabilities shall, except as hereinafter in
     this section provided, 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:

                  (1) Income, estate, and gift taxes.--

                       (A) Transferees.--The
                  liability, at law or in equity, of
                  a transferee of property--

     *        *            *        *       *          *        *
                                - 6 -


                           (ii) of a decedent
                      in the case of a tax
                      imposed by chapter 11
                      (relating to estate
                      taxes) * * *.

When proceeding pursuant to section 6901(a), respondent generally

may not assess or attempt to collect an estate tax deficiency

from a transferee without first following the normal deficiency

procedures set forth in sections 6211 to 6216.   See, e.g., Estate

of Frost v. Commissioner, T.C. Memo. 1993-94.

     Section 6901(h) defines the term "transferee" as follows:

          SEC. 6901(h) Definition of Transferee.--As used in
     this section, the term “transferee” includes donee,
     heir, legatee, devisee, and distributee, and with
     respect to estate taxes, also includes any person who,
     under section 6324(a)(2), is personally liable for any
     part of such tax. [Emphasis added.]

     Although section 6901(a) sets forth the procedures to be

followed in transferee liability cases, the existence and extent

of a transferee's substantive liability is established under

section 6324(a)(2).   See Schuster v. Commissioner, 312 F.2d 311,

315 (9th Cir. 1962), affg. 32 T.C. 998 (1959), and revg. First

Western Bank & Trust Co. v. Commissioner, 32 T.C. 1017 (1959)

(interpreting section 827(b) of the Internal Revenue Code of

1939--a predecessor of section 6324(a)).   Section 6324(a)

provides in pertinent part:
                              - 7 -


          (a) Liens for Estate Tax.--Except as otherwise
     provided in subsection (c)--

               (1) Upon Gross Estate.--Unless the
          estate tax imposed by chapter 11 is sooner
          paid in full, or becomes unenforceable by
          reason of lapse of time, it shall be a lien
          upon the gross estate of the decedent for 10
          years from the date of death, except that
          such part of the gross estate as is used for
          the payment of charges against the estate and
          expenses of its administration, allowed by
          any court having jurisdiction thereof, shall
          be divested of such lien.

               (2) Liability of Transferees and
          Others.--If the estate tax imposed under
          chapter 11 is not paid when due, then the
          * * * transferee * * * who receives, or has
          on the date of the decedent's death, property
          included in the gross estate under sections
          2034 to 2042, inclusive, to the extent of the
          value, at the time of the decedent's death,
          of such property, shall be personally liable
          for such tax. Any part of such property
          transferred by (or transferred by a
          transferee of) such * * * transferee * * * to
          a purchaser or holder of a security interest
          shall be divested of the lien provided in
          paragraph (1) and a like lien shall then
          attach to all the property of such * * *
          transferee * * *, except any part transferred
          to a purchaser or a holder of a security
          interest.   [Emphasis added.]

In sum, in the event that a decedent's estate taxes are not paid

when due, section 6324(a)(1) imposes a 10-year lien on the gross

estate, and section 6324(a)(2) imposes personal liability upon

transferees of property included in the decedent's gross estate

under sections 2034 to 2042 and provides for the imposition of a
                                - 8 -


lien on the transferee's separate property in the event the

transferee should transfer any part of such property received

from the decedent.

     Section 6324(a)(2) provides that a transferee's liability

for unpaid estate taxes is limited to the value of the property

that is included in the decedent's gross estate under sections

2034 to 2042 and transferred to the transferee as measured at the

time of the decedent's death.   However, a transferee's liability

is not conditioned on either the exhaustion of remedies for

collection against the estate or the estate's insolvency.    See

Schuster v. Commissioner, 312 F.2d at 315; Equitable Life

Assurance Society v. Commissioner, 19 T.C. 264, 269 (1952);

Estate of Callahan v. Commissioner, T.C. Memo. 1981-357.

     Relying on the portion of section 6901(a) which states that

the Commissioner may only assess and collect an estate tax

deficiency from a transferee "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", petitioners

first contend that they are not liable for the Armstrong estate

tax deficiency inasmuch as the stock that decedent transferred to

them was not the source of the deficiency.   Petitioners reason

that if there is no estate tax directly related to decedent's
                                - 9 -


stock transfers, respondent is barred from attempting to collect

such taxes from them.

     Petitioners' reliance on section 6901(a) as the basis for

defining the scope of their liability as transferees is

misplaced.   As previously discussed, section 6901(h) defines a

transferee in pertinent part as "any person who, under section

6324(a)(2), is personally liable for any part of such tax."

Section 6324(a) in turn establishes the existence and extent of a

transferee's substantive liability.     See Schuster v.

Commissioner, supra.    In contrast, section 6901(a) merely

prescribes the procedures that respondent must follow in

assessing and collecting taxes from transferees under that

section.   See id.   Thus, although section 6901(a) provides that

respondent must follow the normal deficiency procedures before

assessing and collecting estate taxes from a transferee, the

provision does not define or otherwise restrict a transferee's

substantive liability as petitioners contend.

     Petitioners argue in the alternative that they are not

liable as transferees under section 6324(a)(2) on the ground that

they did not receive property that is includable in the gross

estate pursuant to sections 2034 through 2042.    Petitioners

emphasize that the estate tax deficiency is attributable solely
                               - 10 -


to the estate's failure to include in the gross estate pursuant

to section 2035(c) the amount of the gift tax that decedent paid

with respect to the stock transfers.

     Respondent counters that petitioners are personally liable

for the estate tax deficiency pursuant to section 6324(a)(2)

inasmuch as section 2035(d)(3)(C) provides that the value of the

stock that petitioners received from decedent is treated as if it

were included in the gross estate for purposes of section

6324(a)(2).

     Section 2035 provides in pertinent part:

          SEC. 2035(a) Inclusion of Gifts Made by Decedent.-
     -Except as provided in subsection (b), the value of the
     gross estate shall include the value of all property to
     the extent of any interest therein of which the
     decedent has at any time made a transfer, by trust or
     otherwise, during the 3-year period ending on the date
     of the decedent's death.

       *          *       *       *       *       *        *


            (d) Decedents Dying After 1981.--

                 (1) In general.--Except as otherwise
            provided in this subsection, subsection (a)
            shall not apply to the estate of a decedent
            dying after December 31, 1981.

        *        *       *       *       *        *        *

                 (3) 3-Year Rule Retained for Certain
            Purposes.--Paragraph (1) shall not apply for
            purposes of–
                             - 11 -


                    (A) section 303(b) (relating
               to distributions in redemption of
               stock to pay death taxes),

                    (B) section 2032A (relating to
               special valuation of certain farm,
               etc., real property), and

                    (C) subchapter C of chapter 64
               (relating to lien for taxes).

Section 2035(d)(3)(C) provides that the value of any gift made

within 3 years of death is included in the gross estate for

purposes of subchapter C of chapter 64.   Section 6324(a)(2) falls

under subchapter C of chapter 64.

     Petitioners assert that respondent's interpretation of

section 2035(d)(3)(C) is flawed in that respondent has ignored

the parenthetical language "(relating to lien for taxes)."     In

petitioners' view, the parenthetical language limits the

application of section 2035(d)(3)(C) by providing that gifts made

within 3 years of death are treated as if they are included in

the gross estate only for purposes of a lien provision contained

in subchapter C of chapter 64--such as section 6324(a)(1).5

Petitioners argue that the first sentence of section 6324(a)(2)

is a personal liability provision, as opposed to a lien



     5
        Sec. 6324(a)(1), quoted supra at p. 6, provides that
property included in the gross estate shall be subject to a
10-year lien for unpaid estate taxes.
                              - 12 -


provision, and therefore the value of decedent's gifts is not

included in the gross estate for purposes of determining whether

petitioners are personally liable as transferees.

     Petitioners further contend that the legislative history of

section 2035(d)(3)(C) supports their position.   Section 2035(d)

was enacted by section 424 of the Economic Recovery Tax Act of

1981, Pub. L. 97-34, 95 Stat. 172, 317.   Petitioners rely on H.

Rept. 97-201, at 187 (1981), 1981-2 C.B. 352, 390, which explains

the addition of section 2035(d)(3)(C) as follows:   "[A]ll

transfers within 3 years of death (other than gifts eligible for

the annual gift tax exclusion) will be included [in the gross

estate] * * * for purposes of determining property subject to the

estate tax liens (under subchapter C of Chapter 64)".

     Based upon our review of the plain language of section

2035(d)(3)(C), and the background of section 6324(a)(2), we agree

with respondent that petitioners are liable as transferees in

these cases.   The legislative history cited by petitioners does

not persuade us otherwise.

     Initially, we reject petitioners' contention that the

parenthetical language "(relating to lien for taxes)" contained

in section 2035(d)(3)(C) limits the application of the provision

to what petitioners consider to be traditional lien provisions.
                               - 13 -


Significantly, each of the subparagraphs in section 2035(d)(3)

contains parenthetical language.    In each case, the parenthetical

language is simply an abbreviation of the title of the section or

subchapter referred to therein.    For example, section

2035(d)(3)(A) provides that gifts made within 3 years of death

shall be included in the gross estate for purposes of "section

303(b)(relating to distributions in redemption of stock to pay

death taxes)".    Like the parenthetical language, the title of

section 303 is "Distributions In Redemption Of Stock To Pay Death

Taxes."   Similarly, the parenthetical language in section

2035(d)(3)(C), "(relating to lien for taxes)", is simply a

reference to the title for subchapter C of chapter 64--"Lien for

Taxes".   Thus, we reject petitioners' argument that the

parenthetical language limits the applicability of section

2035(d)(3)(C) to any specific provisions within subchapter C of

chapter 64.

     Moreover, section 6324(a)(2) is properly characterized as a

lien provision.   Section 827(b) of the Internal Revenue Code of

1939, a predecessor to section 6324(a)(2), imposed personal

liability on a transferee of property included in a decedent's

gross estate and provided for the imposition of a lien on:    (1)

The decedent's property in the hands of the transferee; and (2) a
                              - 14 -


lien on the transferee's separate property in the event the

transferee should transfer any part of such property received

from the decedent.   Although Congress later determined that it

was redundant to impose a lien on a decedent's property in the

hands of a transferee under section 827(b) given the imposition

of an identical lien on a decedent's property prescribed in

section 827(a) (the predecessor to section 6324(a)(1)), the

second sentence of section 6324(a)(2) continues to provide for a

lien on a transferee's separate property.   Despite the difference

in the remedies provided under the first and second sentences of

section 6324(a)(2), we see no basis for concluding that Congress

intended to distinguish between the two in the application of

section 2035(d)(3)(C).

     The legislative history underlying section 2035(d)(3)(C)

does not persuade us to hold otherwise.   Although H. Rept. 97-

201, supra, suggests that the House may have viewed section

2035(d)(3)(C) primarily as a means to impose a lien upon property

in aid of the collection of unpaid estate taxes, the related

conference report explains the addition of section 2035(d)(3)(C)

as follows:   "[A]ll gifts made within 3 years of death are

included [in the gross estate] for purposes of * * * estate tax

liens (subchapter C of chapter 64)."   H. Conf. Rept. 97-215, at
                               - 15 -


255, 1981-2 C.B. 481, 511.   As we see it, the explanation of

section 2035(d)(3)(C) in the conference report supports our

holding that section 2035(d)(3)(C) is applicable in these cases.

Indeed, the plain language of section 2035(d)(3)(C), by referring

as it does to subchapter C of chapter 64, and not to section

6324(a)(1) to the exclusion of section 6324(a)(2), belies

petitioners' interpretation.

     Petitioners' final contention is that there is an

insufficient "nexus" between the stock that they received from

decedent and the estate taxes that respondent seeks to collect

from them.   Consistent with their argument under section 6901(a),

petitioners assert that there is no meaningful connection between

the estate tax liability--which is attributable to the

application of the section 2035(c) "gross-up" rule--and the stock

transfers that petitioners received from decedent.

     The short answer to petitioners' contention is that Congress

did not restrict transferee liability to those instances where

there is an immediate link between an estate tax liability and

property transferred to a transferee.   As previously discussed,

section 6324(a)(2) imposes personal liability for unpaid estate

taxes upon a transferee in the event that the transferee has

received property from a decedent that is includable in the gross
                             - 16 -


estate pursuant to sections 2034 to 2042.    Section 2035(d)(3)(C)

closes the circle by providing that gifts made by a decedent

within 3 years of his death are treated as if they are included

in the gross estate for purposes of subchapter C of chapter 64,

which includes section 6324(a)(2).    Because petitioners received

property the value of which is included in decedent's gross

estate pursuant to section 2035(d)(3)(C), the only

congressionally mandated link or connection between petitioners

and the disputed estate tax liability has been satisfied.    This

promotes sound Federal tax policy by enhancing the Commissioner's

ability to collect unpaid estate taxes where a taxpayer has

rendered himself insolvent by giving away the vast majority of

his assets within 3 years of death.

     In sum, we hold that section 2035(d)(3)(C) provides that the

value of the stock that decedent transferred to petitioners is

included in the gross estate for purposes of subchapter C of

chapter 64, including section 6324(a)(2).    Consequently,

petitioners are liable as transferees for the estate tax

deficiency due from the Armstrong estate.    Consistent with the

foregoing, we will deny petitioners’ motions for partial summary

judgment.

     To reflect the foregoing,

                                     Orders denying petitioners'

                         motions for partial summary judgment

                         will be issued.
