                        T.C. Memo. 1997-117



                      UNITED STATES TAX COURT



          JEFF A. WILTZIUS, TRANSFEREE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent


        WILLIAM ROBERT WALDORF, TRANSFEREE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 19235-93, 19344-93.            Filed March 6, 1997.



     Jeff A. Wiltzius, pro se.

     William Robert Waldorf, pro se.

     Joanne B. Minsky and Stephen Takeuchi, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined that petitioner Jeff

A. Wiltzius is liable as a transferee for the unpaid income tax
                                - 2 -


and additions to tax of House of Babes of Fern Park, Inc. (House

of Babes), for 1984 and 1985 in the amount of $155,990, and that

petitioner William R. Waldorf is liable as a transferee in the

amount of $225,319.

     We must decide the following issues:

     1.     Whether petitioners are liable as transferees for the

1984 and 1985 income tax and additions to tax of House of Babes.

We hold they are;

     2.     whether Wiltzius' and Waldorf's interests in a note

from the buyer of House of Babes are worth $23,376.15 and

$34,783, as petitioners contend; $118,125 and $170,625, as

respondent contends; or some other amount.    We hold that their

interests in the note are worth $88,593.75 and $127,968.75,

respectively;

     3.     whether Wiltzius' plea agreement (in which he pled

guilty to filing false income tax returns for 1984 and 1985 and

agreed to pay $11,329.94 in restitution) limits his liability as

a transferee for House of Babes' income taxes for 1984 and 1985.

We hold that it does not;

     4.     whether the doctrines of res judicata, collateral

estoppel, and equitable estoppel bar respondent from assessing

tax against petitioners as transferees of House of Babes for 1984

and 1985.    We hold that they do not;
                                 - 3 -


     5.      whether the statututory period of limitations bars

respondent from assessing transferee tax liability against

petitioners for 1984 and 1985.     We hold that it does not.

     Unless stated otherwise, section references are to the

Internal Revenue Code in effect for the years in issue.       Rule

references are to the Tax Court Rules of Practice and Procedure.

                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioners

     Jeff A. Wiltzius (Wiltzius) lived in Casselberry, Florida,

and William R. Waldorf (Waldorf) lived in Maitland, Florida, when

they filed their petitions in these cases.

B.   House of Babes of Fern Park, Inc.

     1.      Formation and Operation

     Waldorf incorporated House of Babes in Florida on May 1,

1983.     House of Babes is a topless bar.    Initially, Waldorf was

the sole shareholder of House of Babes.       He was president of

House of Babes from 1984 to 1986.

     Seminole County zoning ordinances, regulations, and rules

generally did not permit topless bars.       However, House of Babes

was permitted to operate because it opened before Seminole County

prohibited topless bars (i.e., it was grandfathered).       Under the

terms of the grandfathering, if it were closed as a sanction for

violating any county rule or regulation, it could not reopen.
                                  - 4 -


     House of Babes received revenue from cover charges, the sale

of nonalcoholic beverages, vending machines, video games, and a

juke box.    Most customers paid in cash, but some used credit

cards.

     2.     Shareholders

     Tom Godby (Godby) bought a 50-percent interest in House of

Babes from Waldorf.    Nelson Arencibia (Arencibia) bought a 10-

percent interest from Waldorf and a 10-percent interest from

Godby.    Waldorf, Godby, and Arencibia owned House of Babes from

January to September 1984.     Arencibia owned a 22.5-percent

interest in House of Babes in September 1984.

     Wiltzius bought Arencibia's 22.5-percent interest on October

1, 1984, for $25,000.      Arencibia was making about $1,500 per week

from House of Babes when he sold his interest.     Wiltzius owned

22.5 percent and Waldorf owned 32.5 percent of the shares of

House of Babes from October 1984 to August 1986.

     3.     Skimmed Income

     Around May 1984, Waldorf, Godby, and Arencibia agreed to

keep two sets of records for House of Babes.     Waldorf kept the

second set of books to pay less taxes.

     Waldorf wrote a memo at a time not stated in the record to

the other shareholders explaining how they would skim gross

receipts.    The memo said that each shareholder's share of the

profits would be paid in cash from 50 percent of the gross
                                - 5 -


receipts on the day the receipts were earned; the rest would be

paid by check from the accountant after any expenses for that day

had been paid.   Waldorf asked the other shareholders to destroy

the memo after reading it.

     House of Babes paid its shareholders their share of the

profits in cash before April 1985.      Around April 1985, House of

Babes began to pay its shareholders half in cash and half by

check.

     Waldorf, Godby, and Wiltzius agreed to skim receipts of

House of Babes and to divert funds for their personal use.     They

skimmed 50 percent of the gross receipts earned from Monday to

Friday.

     House of Babes' officers gave the accountant incomplete

information to prepare House of Babes' tax returns.     The

accountant used the false records to prepare the 1984 and 1985

corporate income tax returns for House of Babes.     Waldorf, as

president, signed House of Babes' corporate income tax returns

for 1984 and 1985, knowing that they were materially false

because the shareholders diverted about 50 percent of the

corporation's weekday gross receipts to their personal use.

House of Babes did not report to the IRS income of $153,755.50

for 1984 and $200,620.50 for 1985.

     Wiltzius was not involved in the operation of House of

Babes.    He did not establish House of Babes' accounting system or
                                 - 6 -


handle cash received by House of Babes.    However, he knew about

the system House of Babes used to pay shareholders and to keep

records.   He was not directly responsible for House of Babes'

income tax filings and did not give false and incomplete records

to House of Babes' accountant, but he knew that Waldorf and Godby

were doing so.

     4.    Criminal Investigation of House of Babes

     Special Agent Brister (Brister) investigated House of Babes

and petitioners for tax crimes.    Brister investigated the income

tax liabilities of House of Babes from skimmed receipts and the

income tax liabilities of House of Babes' shareholders from

constructive dividends for 1984 and 1985.    He interviewed Waldorf

on July 24, 1986.

C.   Sale of the Assets of House of Babes

     1.    Terms of the Sale

     On August 14, 1986, the shareholders sold the assets of

House of Babes, i.e., the building, land, fixtures, and

equipment, to 6400 HWY. 17-92, Inc. (the buyer), for $999,103.

Norman Kagen (Kagen) was a shareholder of the buyer and was its

accountant.   The buyer assumed a $305,814 mortgage, paid $179,387

in cash, and gave a $525,000 promissory note bearing 10 percent

interest per year (the note).1    The buyer agreed to pay $100,000

     1
      These amounts total $1,010,201, although the parties
stipulated that the sale was for $999,103. This inconsistency
                                                   (continued...)
                               - 7 -


of the amount due on the note, with interest of $10,000, 12

months after the closing date of the agreement.   The balance was

to be amortized over 10 years and payable in equal monthly

installments of $6,598.85.   The monthly payments were due on the

first of each month.   The buyer would be in default if it did not

make the monthly payment by the 25th day of the month.   If the

buyer defaulted, the seller could repossess the property subject

to a lien favoring the holder of the mortgage.    The buyer was to

maintain hazard and liability insurance of $800,000 and name the

sellers as additional insureds on the policy.

     The contract of sale was signed by Waldorf as president,

Godby as vice president, and Wiltzius as secretary.

     As part of the contract, the buyer agreed to comply with all

Federal, State, and county laws, ordinances, codes, regulations,

and rules, including zoning and easement requirements and

building, fire, safety, and health codes.   The buyer and seller

understood that it was important for the buyer to maintain House

of Babes' grandfathered status by continuously complying with

Seminole County rules and regulations.

     Waldorf knew that the IRS was investigating House of Babes,

and he knew that House of Babes had corporate tax liability for


     1
      (...continued)
does not affect our decision. There is testimony that the buyer
paid $250,000 in cash, which we disregard because the parties
stipulated that the buyer paid $179,387 in cash.
                                 - 8 -


skimmed gross receipts when he sold its assets on August 14,

1986.

     Waldorf's share of the monthly payment on the note was

$2,144.   The buyer initially made the monthly payment to Waldorf,

who paid each shareholder.    The buyer later paid each shareholder

directly.

     House of Babes and the two other adult entertainment

businesses that were operating in Seminole County in 1985 were

still operating at the time of trial.

     2.     Prospects for Payment of the Note

     The buyer's shareholders believed that they could repay the

note if they made $13,000 per week.      Waldorf or Godby told the

buyer that House of Babes had been making about $13,000 per week

before the sale.    House of Babes reported gross receipts in the

following amounts on its tax returns:

                                     Gross Receipts
                                             Approximate
            Year             Total          Weekly Average

            1984           $236,668             $4,500
            1985            310,105              6,000
            1986            336,830             10,200

     The year after the assets of House of Babes were sold, the

buyer reported weekly gross receipts of more than $20,000 per

week.
                                   - 9 -


D.     Liquidation and Dissolution of House of Babes

       House of Babes was liquidated in August 1986.    House of

Babes reported on its 1986 corporate income tax return that it

was undergoing a complete liquidation under section 337 and that

all of its assets were to be distributed to its shareholders

within 12 months.    The liquidating distribution from House of

Babes to its shareholders occurred on August 14, 1986.      The State

of Florida dissolved House of Babes on August 20, 1987.

       The buyer made the $100,000 payment in August 1987 and fully

paid the note ahead of schedule.

E.     Waldorf's Sale of His Interest in the Note

       Waldorf offered to sell his $170,625 ($525,000 x 32.5

percent) interest in the note to the buyer's shareholders for

$50,000.    They did not buy it.    Waldorf also asked five or six

friends if they wanted to buy his interest in the note.        They did

not.

       On February 3, 1988 (about 16 months after the liquidation

of House of Babes), Waldorf assigned 47.69 percent of his

interest in the note (i.e., $81,371) to Wiltzius' wife, Darlene

Wiltzius, in exchange for a limousine.      Waldorf sold the

limousine for $22,500 at a time not specified in the record.       On

March 9, 1988, Waldorf assigned 52.31 percent of his interest in
                             - 10 -


the note (i.e., $89,254) to Darlene Wiltzius for $9,000 plus

$1,000 that Waldorf owed to her.   Thus, Waldorf, in effect,

received $32,500 for his $170,625 interest in the note.

     Waldorf sold his interest in the note because he was late in

paying some bills, he had no other source of income, and he was

in danger of having the mortgage on his house foreclosed.

Waldorf knew about the IRS investigation and believed that the

IRS was going to take all of the monthly payments that the buyer

was making on the note.

     Wiltzius signed a document on February 3, 1988, for House of

Babes as secretary.

F.   Petitioners' Criminal Convictions and Plea Agreements

     1.   Wiltzius' Conviction and Plea Agreement

     On November 10, 1991, Wiltzius pled guilty to violating

section 7206(1) (filing a false return) for 1984 and 1985 because

he skimmed income from House of Babes which he did not report on

his personal income tax returns.   Wiltzius' plea agreement

provided that the U.S. District Court could order him to make

restitution up to $11,329.94 to the IRS.   Paragraph 1(c) of

Wiltzius' plea agreement states:   "Defendant agrees to make

restitution to the Internal Revenue Service in an amount of
                               - 11 -


$11,329.94 or any lesser amount as determined and ordered by the

Court."

     On February 20, 1992, Waldorf pled guilty to violations of

section 7201 and 18 U.S.C. section 371 with respect to his

personal income tax returns.

     Bruce Hinshelwood (Hinshelwood), an assistant U.S. attorney,

represented the United States, Marc L. Lubet (Lubet) represented

Wiltzius, and Mark H. Randall represented Waldorf in their

criminal cases.   Lubet and Hinshelwood negotiated the amount of

restitution that Wiltzius was to pay the IRS.   Lubet believed the

agreement covered the total amount of Wiltzius' Federal

individual tax liability for 1984 and 1985; i.e., the liability

on his personal Form 1040, including fraud and interest.   There

was no discussion about transferee liability for the taxes of

House of Babes.

     Wiltzius paid the $11,329.94 restitution shortly after he

was sentenced.

     2.   Waldorf's and Wiltzius' Plea Agreements

     Waldorf's and Godby's plea agreements stated that they aided

House of Babes in filing false returns and that they filed false

individual returns.   Wiltzius' plea agreement does not state that
                              - 12 -


he aided House of Babes in filing false tax returns.   Godby

agreed to pay restitution.   Waldorf did not.

     Waldorf's plea agreement states at paragraph 1(d):

          If the Court accepts the plea agreement, the
          government agrees not to charge defendant with
          committing any other federal criminal offenses
          known to the government at the time of the
          execution of this agreement, arising out of his
          association with House of Babes of Fern Park, Inc.

     Wiltzius' plea agreement states at paragraph 1(f):

          If the Court accepts the plea agreement, the
          government agrees not to charge defendant
          with committing any other federal criminal
          offenses known to the government at the time
          of the execution of this agreement, arising
          out of his association with William R.
          Waldorf, William T. Godby, and House of Babes
          of Fern Park, Inc., during 1980 through 1990.

     Paragraph 16 of Wiltzius' plea agreement and paragraph 15 of

Waldorf's plea agreement state:

          It is further understood that this agreement
          is limited to the Office of the United States
          Attorney for the Middle District of Florida
          and cannot bind other federal, state or local
          prosecuting authorities.

G.   House of Babes' Income Tax Returns and Respondent's
     Determinations and Notices of Transferee Liability

     House of Babes filed its 1985 corporate income tax return on

March 20, 1986.

     Respondent determined that House of Babes was liable for (1)

deficiencies in income tax of $50,662 for 1984 and $81,388 for
                              - 13 -


1985; and (2) additions to tax for (a) fraud of $25,331 for 1984

and $40,694 for 1985 and 50 percent of the interest due on the

deficiencies for 1984 and 1985, and (b) substantial

understatement of tax of $12,666 for 1984 and $20,347 for 1985.

     Respondent issued notices of transferee liability to

Wiltzius and Waldorf on June 8, 1993.   In the notices of

liability, respondent determined that House of Babes failed to

report gross receipts of $153,755
                             OPINION
                                  in 1984 and $200,620 in 1985.

A.   Transferee Liability

     The Commissioner may collect unpaid income taxes of a

transferor of assets from a transferee of those assets.     Sec.

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

Stansbury v. Commissioner, 104 T.C. 486, 489 (1995), affd. 102

F.3d 1088 (10th Cir. 1996).   Respondent contends that petitioners

are liable as transferees for income tax and additions to tax

owed by House of Babes for 1984 and 1985.   Petitioners disagree.

     Petitioners bear the burden of proving that House of Babes

is not liable for tax and additions to tax.   Sec. 6902(a).

Petitioners concede that House of Babes is liable for the tax in

the amounts determined by respondent.

     Respondent bears the burden of proving that petitioners are

liable as transferees.   Sec. 6902(a); Rule 142(d); Gumm v.
                                - 14 -


Commissioner, 93 T.C. 475, 479-480 (1989), affd. without

published opinion 933 F.2d 1014 (9th Cir. 1991).    State law

generally determines the extent of a transferee's liability for

the debts of a transferor.     Commissioner v. Stern, supra at 45;

Gumm v. Commissioner, supra.    We apply Florida law in deciding

whether petitioners are liable as transferees under section 6901

because all of the transfers occurred there.    Fibel v.

Commissioner, 44 T.C. 647, 657 (1965).

     Under Florida law, one of the ways a transferee may be held

liable for the debts of a transferor is if the transferor

fraudulently conveys assets to the transferee; i.e., the transfer

is made with actual or constructive intent to delay, hinder, or

defraud the transferor's creditors and is made without adequate

consideration.   Fla. Stat. Ann. sec. 726.01 (West 1969);2 Hagaman


     2
      Fla. Stat. Ann. sec. 726.01 (West 1969) provides:

          Every * * * gift, grant, * * * conveyance, [or]
     transfer * * * and of goods and chattels, * * * by
     writing or otherwise, * * * which shall at any time
     hereafter be had, made or executed, contrived or
     devised of fraud, covin, collusion or guile, to the
     end, purpose or intent to delay, hinder or defraud
     creditors or others of their just and lawful actions,
     suits, debts, accounts, damages, demands, penalties or
     forfeitures, shall be from henceforth as against the
     person or persons * * * his, her or their successors,
     executors, administrators and assigns, and every one of
     them so intended to be delayed, hindered or defrauded,
                                                   (continued...)
                               - 15 -


v. Commissioner, 100 T.C. 180, 184 (1993) (transferee liability

established by applying Florida fraudulent conveyance law); Schad

v. Commissioner, 87 T.C. 609, 614 (1986), affd. without published

opinion 827 F.2d 774 (11th Cir. 1987); Advest, Inc. v. Rader, 743

F. Supp. 851, 854 (S.D. Fla. 1990); Bay View Estates Corp. v.

Southerland, 154 So. 894, 900 (Fla. 1934); Stelle v. Dennis, 140

So. 194 (Fla. 1932); McKeown v. Allen, 20 So. 556 (Fla. 1896).

The creditor must prove that the debtor intended to delay or

hinder creditors at the time of the transfer.   Bay View Estates

Corp. v. Southerland, supra.   The party seeking to prove that a

conveyance was fraudulent has the burden of proof.   Headley v.

Pelham, 366 So. 2d 60, 63 (Fla. Dist. Ct. App. 1978); Scott v.

Dansby, 334 So. 2d 331 (Fla. Dist. Ct. App. 1976).



     2
      (...continued)
     deemed, held, adjudged and taken to be utterly void,
     frustrate and of none effect, any pretense, color,
     feigned consideration, expressing of use or any other
     matter or thing to the contrary notwithstanding;
     provided, that this section, or anything therein
     contained, shall not extend to any estate or interest
     in lands * * * [or] goods or chattels which shall be
     had, made, conveyed or assured if such estate shall be,
     upon good consideration and bona fide, lawfully
     conveyed or assured to any person or persons, or body
     politic or corporate, not having at the time of such
     conveyance or assurance to them made any manner of
     notice or knowledge of such covin, fraud, or collusion
     as aforesaid, anything in this section to the contrary
     notwithstanding.
                               - 16 -


     There is a divergence of opinion under Florida law as to

whether a creditor must prove that a conveyance was fraudulent by

a preponderance of the evidence or by clear and convincing

evidence.   See Wieczoreck v. H&H Builders, Inc., 450 So. 2d 867,

872 (Fla. Dist. Ct. App. 1984).    However, that issue does not

affect our decision because we find that respondent has proven by

clear and convincing evidence that the conveyance of assets from

House of Babes to petitioners was fraudulent.

     1.     Intent of the Transferor

     Fraudulent intent may be established if a sufficient number

of badges of fraud are present.    Advest, Inc. v. Rader, supra at

854; Johnson v. Dowell, 592 So. 2d 1194, 1197 (Fla. Dist. Ct.

App. 1992); Wieczoreck v. H&H Builders, Inc., supra at 873;

Banner Constr. Corp. v. Arnold, 128 So. 2d 893, 896 (Fla. Dist.

Ct. App. 1961).    Badges of fraud under Florida law include:    (a)

The transfer of all of the debtor's assets; (b) the existence of

a close relationship between the transferor and transferee; (c)

lack of consideration for the transfer; (d) the transfer of

assets with knowledge of pending liability; and (e) the

insolvency or substantial indebtedness of the transferor.       Eyler

v. Commissioner, 760 F.2d 1129 (11th Cir. 1985), affg. in part

and revg. in part T.C. Memo. 1983-397; United States v. Fernon,
                               - 17 -


640 F.2d 609, 613 (5th Cir. 1981); Harper v. United States, 769

F. Supp. 362, 367 (M.D. Fla. 1991); United States v. Ressler, 433

F. Supp. 459 (S.D. Fla. 1977), affd. 576 F.2d 650 (5th Cir.

1978); Cleveland Trust Co. v. Foster, 93 So. 2d 112, 114 (Fla.

1957).

            a.   Transfer of All of the Debtor's Assets

     The parties stipulated, and we have found, that House of

Babes was liquidated in August 1986.    The liquidating

distribution occurred on August 14, 1986.

     Petitioners contend that the $525,000 note from the buyer

was not distributed to House of Babes' shareholders in 1986.    We

disagree.    The buyer of House of Babes and House of Babes'

shareholders treated the note as belonging to the shareholders of

House of Babes because (at a time not stated in the record) the

buyer began to pay the interest on the note directly to House of

Babes' shareholders.3   We are not persuaded by petitioners'

contention that because House of Babes did not formally assign

assets to its shareholders, it had assets after August 1986.

     Petitioners contend that House of Babes had assets after

August 1987 because the buyers sent a check to the IRS for Godby.


     3
      Secrecy or concealment of a transfer is a badge of fraud in
Florida. Cleveland Trust Co. v. Foster, 93 So. 2d 112, 114 (Fla.
1957).
                                - 18 -


We disagree.     Kagen testified that the buyers received a letter

from the IRS directing that a check be paid directly to the IRS

on Godby's account.    This does not show that House of Babes had

assets.

       Petitioners contend that under Fla. Stat. Ann. sec. 607.1405

(West 1993), House of Babes kept title to the note after Florida

dissolved the corporation in 1987.       We disagree.   That section

became effective July 1, 1990.     1989 Fla. Laws ch. 89-154, sec.

125.

            b.    The Existence of a Close Relationship Between
                  Transferor and Transferee

       A conveyance is more likely to be fraudulent if there is a

close relationship between the transferor and transferee.        Scott

v. Dansby, supra at 333; see Hagaman v. Commissioner, supra;

Schad v. Commissioner, supra.     There was a close relationship

between House of Babes and petitioners.       Petitioners owned and

controlled House of Babes.     Waldorf was a 32.5-percent

shareholder and president, and Wiltzius was a 22.5-percent

shareholder and signed documents as secretary for House of Babes.

       Petitioners contend that respondent must prove that Wiltzius

is an insider under Fla. Stat. Ann. sec. 726.106(2) (West 1988)
                              - 19 -


to establish a close relationship.4    We disagree.   That section

was not in effect until January 1, 1988, which was after House of

Babes was liquidated.   1987 Fla. Laws ch. 87-79, sec. 6; see

Snellgrove v. Fogazzi, 616 So. 2d 527, 528 (Fla. Dist. Ct. App.

1993).

          c.    Inadequate Consideration

     Under Florida law, a conveyance made without adequate

consideration by a debtor is a badge of fraud.    Cleveland Trust

Co. v. Foster, supra at 114; Money v. Powell, 139 So. 2d 702, 704

(Fla. Dist. Ct. App. 1962).   Petitioners contend that the

liquidation of House of Babes was not a transfer of House of


     4
      Fla. Stat. Ann. sec. 726.106(1) and (2) (West 1988)
provides:

     726.106.   Transfers fraudulent as to present creditors

          (1) A transfer made or obligation incurred by a
     debtor is fraudulent as to a creditor whose claim arose
     before the transfer was made or the obligation was
     incurred if the debtor made the transfer or incurred
     the obligation without receiving a reasonably
     equivalent value in exchange for the transfer or
     obligation and the debtor was insolvent at the time or
     the debtor became insolvent as a result of the transfer
     or obligation.

          (2) A transfer made by a debtor is fraudulent as
     to a creditor whose claim arose before the transfer was
     made if the transfer was made to an insider for an
     antecedent debt, the debtor was insolvent at the time,
     and the insider had reasonable cause to believe that
     the debtor was insolvent.
                                 - 20 -


Babes' assets without consideration because they gave up their

stock in House of Babes.      We disagree.   After the liquidation,

the shareholders had House of Babes' assets, and House of Babes

was left with no ability to pay its debts.

       Petitioners contend that, to show that House of Babes was

insolvent, respondent must show that the liabilities of House of

Babes exceeded its assets when petitioners exchanged their stock

for the liquidating distribution.      We disagree.   House of Babes

had no assets and no means of paying its debts after it was

liquidated.      No further accounting is required.

            d.     Transfer of Assets With Knowledge of Pending
                   Liability

       A transfer of assets with knowledge of a pending liability

is a badge of fraud.      Cleveland Trust Co. v. Foster, supra at

114.    Waldorf knew that House of Babes was liable for Federal

corporate income tax when he sold its assets and it was

liquidated.      Wiltzius knew, or should have known, that House of

Babes had a corporate tax liability when it was liquidated

because he knew that the shareholders were skimming a large

amount of gross receipts from House of Babes.

            e.     Insolvency and Substantial Indebtedness

       Under Florida law, a conveyance is more likely to be

fraudulent if it made the debtor insolvent or if the transferor
                               - 21 -


was substantially indebted at the time of the transfer.    United

States v. Fernon, supra at 613 n.10; Bay View Estates Corp. v.

Southerland, 154 So. at 899; Banner Constr. Corp. v. Arnold, 128

So. 2d at 896.

     House of Babes was insolvent after it was liquidated in

August 1986 because it had no assets and no ability to pay its

debts thereafter.

     Petitioners contend that House of Babes was not insolvent

because there is no evidence that it formally assigned the

buyer's note to House of Babes' shareholders.    We disagree.

The parties stipulated that House of Babes was liquidated in

August 1986.    The liquidation occurred on August 14, 1986.    House

of Babes had become liable for its 1984 and 1985 Federal income

taxes by August 1986.    Hagaman v. Commissioner, 100 T.C. 180

(1993) (liable on last day of tax year).    Thus, House of Babes

was substantially indebted when it transferred the note to its

shareholders.    Even more basically, we have found, see par. A-1-

a, above, that the shareholders treated the note as theirs and

payment of the principal and interest on the note by the buyers

to House of Babes' shareholders shows that the note was

transferred to them; it is inescapable that after that transfer
                             - 22 -


House of Babes no longer had the note.    Thus, the transfer left

House of Babes insolvent.

     2.   Petitioners' Other Contentions

     Petitioners contend that, as shareholders, they are entitled

to a return of their capital in House of Babes even if respondent

establishes that they are liable as transferees.     Petitioners

offer no authority to support their claim.

     Petitioners contend that respondent could have collected the

tax liability from House of Babes.    We disagree.   The

Commissioner is not required to try to collect from a transferor

if it would be futile to do so.    Flynn v. Commissioner, 77 F.2d

180, 183 (5th Cir. 1935), affg. Cleveland v. Commissioner, 28

B.T.A. 578 (1933); City Natl. Bank v. Commissioner, 55 F.2d 1073,

1073-1074 (5th Cir. 1932), affg. National Bank of Commerce v.

Commissioner, 19 B.T.A. 1080 (1930); Gumm v. Commissioner, 93

T.C. at 484; Kreps v. Commissioner, 42 T.C. 660, 671 (1964),

affd. 351 F.2d 1 (2d Cir. 1965).   It would have been futile for

respondent to try to collect from House of Babes after August

1986 because House of Babes had no assets and no means of

generating income after August 1986.

     Petitioners contend that respondent should have tried to

collect House of Babes' tax liability from House of Babes in 1986
                               - 23 -


before the liquidation.   We disagree.   That was before the last

return for the years in issue was due from House of Babes.      The

Commissioner could assess tax for House of Babes' earliest

taxable year in issue, 1984, at least until March 15, 1988, and

beyond that if House of Babes committed fraud.

     Petitioners contend that imposing transferee liability on

them is unlawful double taxation.   We disagree.   Respondent is

trying to collect House of Babes' taxes; no prohibited double

taxation is present here.

     Petitioners contend that section 6901(a)(1)(A) does not

authorize respondent to collect an amount equal to 100 percent of

the value of the property they received from House of Babes.     We

disagree.   Respondent may collect the lesser of (1) the

transferor's tax liability, including additions to tax and

interest, or (2) the value of the assets the transferee received,

plus interest.    Peterson v. Sims, 281 F.2d 577 (5th Cir. 1960);

Mysse v. Commissioner, 57 T.C. 680, 703 (1972).

     3.     Conclusion

     We conclude from the badges of fraud that are present here

that House of Babes fraudulently intended (through its

shareholders) to transfer its assets to its shareholders with

intent to delay payment of its creditors.    Harper v. United
                                - 24 -


States, 769 F. Supp. 362 (M.D. Fla. 1991); Advest, Inc. v. Rader,

743 F. Supp. at 854.   We concluded above that House of Babes

transferred its assets without adequate consideration.    Thus,

respondent has established that House of Babes made a fraudulent

conveyance under Florida law.

B.   Value of the Transferred Assets

     1.   Positions of the Parties

     Petitioners received cash and an interest in the buyers'

note proportionate to their interest in House of Babes.    The

parties dispute the value of the note.

     Petitioners contend that Wiltzius' interest in the note

(22.5 percent of $525,000 = $118,125) had a fair market value of

$23,376.15 and that Waldorf's interest in the note (32.5 percent

of $525,000 = $170,625) had a fair market value of $34,783.

Respondent contends that the fair market value of each

petitioner's interest in the note was his proportionate share of

its full face value; i.e., $118,125 and $170,625.

     The fair market value of property is the price at which it

would change hands between a willing buyer and a willing seller,

neither under any compulsion to buy or sell and both having

reasonable knowledge of relevant facts.   United States v.

Cartwright, 411 U.S. 546, 551 (1973); Estate of Hall v.
                              - 25 -


Commissioner, 92 T.C. 312, 335 (1989).    The fair market value of

a promissory note is a question of fact which depends on factors

known or reasonably expected to exist on the valuation date.

Riss v. Commissioner, 478 F.2d 1160 (8th Cir. 1973), affg. in

part 56 T.C. 388 (1971); Estate of Johnson v. Commissioner, 77

T.C. 120, 124 (1982), revd. on other grounds 718 F.2d 1303 (5th

Cir. 1983).

     2.   Expert Opinions

     Both parties relied on the opinions of experts.    Expert

witnesses' opinions may help the Court understand an area

requiring specialized training, knowledge, or judgment.     Snyder

v. Commissioner, 93 T.C. 529, 534 (1989).    We may be selective in

deciding what part of an expert's opinion we will accept.

Helvering v. National Grocery Co., 304 U.S. 282, 295 (1938).

     Petitioners relied on the expert testimony of Dr. Charles

Brandon (Brandon).   Brandon testified that the rate of discount

for a note related to an adult entertainment business was

substantial.   Brandon based his estimate of fair market value in

part on Waldorf's sale to Darlene Wiltzius.5   Brandon assumed


     5
      Respondent does not contend   that we may not consider an
actual sale of the asset at issue   after the valuation date.
Estate of Kaplin v. Commissioner,   748 F.2d 1109, 1111 (6th Cir.
1984), revg. T.C. Memo. 1982-440;   Estate of Spruill v.
                                                     (continued...)
                              - 26 -


that Waldorf's sale of his share of the note to Darlene Wiltzius

was at arm's length and for fair market value.    We agree with

Brandon that the sale from Waldorf to Darlene Wiltzius was at

arm's length; however, we believe that Waldorf was under a

compulsion to sell.   Waldorf testified that he sold the note

because he owed creditors, he had no other income, the mortgage

on his house was about to be foreclosed, and he believed the IRS

would take the proceeds paid by the buyers on the note.    We

believe that Waldorf's sale to Darlene Wiltzius was a forced sale

for less than fair market value.

     Brandon estimated the value of the $425,000 part of the

note; he did not consider the $100,000 payment.    He admitted at

trial that the $100,000 payment would increase the value of the

note but said that this effect was offset by a lack of payment

history.   We do not believe that factor fully offsets the fact

that Brandon did not consider the $100,000 payment.    We conclude

that Brandon underestimated the value of the note.

     Respondent contends that the note is worth its face value.

Respondent relies on the expert testimony of Jack Shelton

(Shelton).   He did not consider the price paid in the arm's-



     5
      (...continued)
Commissioner, 88 T.C. 1197, 1233 (1987).
                                - 27 -


length sale of Waldorf's interest to Darlene Wiltzius or any

risks associated with the note.     Shelton believed that repayment

of the note had no more than average risk.      We disagree; we

believe that substantial risks were associated with the House of

Babes note.     We discount the note by 25 percent because of those

risks.

     Petitioners cited several cases in support of their position

relating to the value of the note.       Nothing in those cases leads

us to alter our conclusions here.     Although prior decisions can

be helpful in deciding a valuation issue, we primarily decide the

value of property based on the facts and circumstances of each

case.    Riss v. Commissioner, supra; Estate of Johnson v.

Commissioner, supra.

        3.   Conclusion

        We conclude that Wiltzius and Waldorf are liable as

transferees up to the value of the cash that they each received

from the sale of the assets of House of Babes plus the value of

the interest of each in the note.     The value of Wiltzius' 22.5-

percent share of the note is $88,593.75 ($118,125 x .75).      The

value of Waldorf's 32.5-percent share of the note is $127,968.75

($170,625 x .75).
                                - 28 -


C.   Wiltzius' Plea Agreement

     1.   Wiltzius' Contentions

     Wiltzius contends that his plea agreement (in which he pled

guilty to filing a false income tax return for 1984 and 1985 and

agreed to pay $11,329.94 in restitution) limited respondent's

right to assert that he was liable as a transferee for House of

Babes' income tax liability for 1984 and 1985.    He contends that

his payment of restitution was intended to satisfy all taxes due

from him for 1984 and 1985, including transferee liability.

     2.   Discussion

     By its terms, the plea agreement does not limit Wiltzius'

liability for tax.   At the trial of this case, Wiltzius asked his

defense counsel from his criminal case if the restitution

included transferee liability.    Wiltzius' criminal defense

counsel said it did not.   He testified that transferee liability

was not discussed as part of the plea bargain negotiations.      He

said that Wiltzius' restitution was based on Wiltzius' individual

personal income tax liability related to skimming from House of

Babes.

     Petitioners contend that the plea agreements show that Godby

paid the IRS House of Babes' tax liability.    We disagree.    The
                                - 29 -


plea agreement requires Godby to pay restitution, but it does not

state that his restitution was a payment of the tax of House of

Babes.    Also, the record does not show whether Godby paid it.

     Petitioners point out that Waldorf's and Godby's plea

agreements referred to House of Babes' tax liabilities but

Wiltzius' plea agreements did not.       Petitioners contend that this

shows that the Government had no intention of pursuing transferee

tax liability from Wiltzius.     We disagree.    The plea agreements

do not limit Wiltzius' transferee liability for House of Babes

income taxes for 1984 and 1985.

     3.    Estoppel

     Petitioners contend that res judicata, collateral estoppel,

and equitable estoppel preclude respondent from asserting that

they are liable as transferees of House of Babes' income tax

liability because of their prior criminal cases.       Petitioners

contend that the issues in both cases are identical because they

involved the same act of skimming gross receipts from House of

Babes.    We disagree.   Petitioners' criminal cases related to

their individual income tax.     The criminal cases did not involve

the claims that are at issue here.       The issue here is whether

petitioners are liable as transferees for the taxes of House of
                               - 30 -


Babes.    Res judicata and collateral estoppel do not apply.   Allen

v. McCurry, 449 U.S. 90 (1980); Montana v. United States, 440

U.S. 147, 153 (1979); Parklane Hosiery Co. v. Shore, 439 U.S.

322, 326 n.5 (1979); Commissioner v. Sunnen, 333 U.S. 591, 597

(1948).

     Equitable estoppel lies against the Government only in the

most extreme circumstances.    OPM v. Richmond, 496 U.S. 414, 424-

429 (1990); Heckler v. Community Health Serv., 467 U.S. 51, 60

(1984); Feldman v. Commissioner, 20 F.3d 1128, 1134 (11th Cir.

1994), affg. T.C. Memo. 1993-17.    The party must, at a minimum,

demonstrate:    "'(1) words, acts, conduct or acquiescence causing

another to believe in the existence of a certain state of things;

(2) wilfulness or negligence with regard to the acts, conduct or

acquiescence; and (3) detrimental reliance by the other party

upon the state of things so indicated.'"     Feldman v.

Commissioner, supra (quoting Bokum v. Commissioner, 992 F.2d

1136, 1141 (11th Cir. 1993) (citations omitted), affg. T.C. Memo.

1990-21).    Petitioners have not done so.

     Petitioners contend that they are entitled to equitable

relief to the extent that they already paid taxes.    However, they
                                - 31 -


have not shown that they paid House of Babes' taxes for 1984 and

1985.

     We conclude that Wiltzius' plea agreement does not eliminate

his liability as a transferee.

D.   Whether the Statute of Limitations Bars Respondent from
     Assessing Transferee Tax Liability

         Petitioners contend that the statututory period of

limitations bars respondent from assessing transferee tax

liability against them.     We disagree.

        The Commissioner may assess liability of an initial

transferee within 1 year after the period to assess tax against

the transferor expires.     Sec. 6901(c)(1).   Tax may be assessed at

any time if the return is false or fraudulent.     Sec. 6501(c)(1).

Respondent determined that House of Babes filed false returns for

1984 and 1985 and that the addition to tax for fraud applied.

House of Babes' 1984 and 1985 returns were fraudulent because it

intentionally did not report about 50 percent of the weekday

gross receipts.     Thus, there is no time limit for respondent to

determine a deficiency against House of Babes or its transferees.

Sec. 6501(c)(1); Pert v. Commissioner, 105 T.C. 370, 378-379

(1995).
                              - 32 -


     Petitioners contend that the Florida statututory period of

limitations on fraudulent conveyances precludes respondent from

asserting transferee liability here.   We disagree.   The

Commissioner is bound by Federal rather than State statututory

periods of limitations.   United States v. Summerlin, 310 U.S.

414, 416 (1940); United States v. Fernon, 640 F.2d at 612 (U.S.

Government sought to collect tax by applying Florida fraudulent

conveyance law).

     To reflect the foregoing and concessions,


                                              Decisions will be

                                    entered under Rule 155.
