                          T.C. Memo. 2010-238



                      UNITED STATES TAX COURT



          DOROTHY R. DIEBOLD, TRANSFEREE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24675-07.                Filed October 26, 2010.



     A. Duane Webber, Jaclyn Pampel, Catlin A. Urban, Summer

Austin, and Ryan J. Kelly, for petitioner.

     John R. Mikalchus, Frederick C. Mutter, and Jessica R.

Browde, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   In a notice of liability respondent

determined that Dorothy R. Diebold (petitioner) is liable as a

transferee for the assessed Federal income tax liability of the
                                -2-

Double-D Ranch, Inc. (Double-D Ranch), for its short taxable year

ending July 2, 1999.   The issue for decision is whether

petitioner is liable as a transferee pursuant to section

69011 for the unpaid tax and section 6662 accuracy-related

penalty owed by Double-D Ranch for that taxable year.    For the

reasons stated herein, we find that petitioner is not liable as a

transferee.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulation

of facts is incorporated herein by this reference.    Petitioner

resided in New York at the time she filed her petition.

     Petitioner sold, in form, the stock of Double-D Ranch.    The

parties for the most part agree on the form of the transaction at

issue but disagree as to its substance.     Respondent argues that

petitioner in substance sold the assets of Double-D Ranch and

received a liquidating distribution of the proceeds.    Petitioner

contends that the substance of the transaction matches its form

and the substance was a sale of stock.

     Petitioner was married to A. Richard Diebold (Mr. Diebold).

The Diebolds had three children:   Diane D. Terni (Ms. Terni), A.



     1
      All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
                                  -3-

Richard Diebold, Jr. (Mr. Diebold, Jr.), and Dudley G. Diebold

(Mr. D. Diebold).

     Mr. Diebold died on June 18, 1996.   Pursuant to a trust

agreement dated July 29, 1985, the Dorothy R. Diebold Marital

Trust (the marital trust) was created upon the death of Mr.

Diebold on June 18, 1996.   As sole beneficiary of the marital

trust, petitioner was entitled to the net income of the marital

trust in quarterly installments for the rest of her life.   At the

time of Mr. Diebold’s death, the marital trust owned 3,835 shares

of stock in Double-D. Ranch.   The 3,835 shares comprised all of

the issued and outstanding shares of Double-D Ranch.   From the

time of Mr. Diebold’s death to the purported sale of Double-D

Ranch’s stock in 1999, the assets of Double-D Ranch consisted

primarily of stock in American Home Products (AHP), a publicly

traded company; stock in other publicly traded companies; U.S.

Treasury securities; cash; and real estate.    These assets will be

discussed in more detail below.

     The various securities and real estate had high fair market

values, but low bases for tax purposes.   If they were to be sold

by Double-D Ranch, the corporation would be left with a large tax

liability on the recognized gain.

     The marital trust had three cotrustees:   (1) Petitioner; (2)

Bessemer Trust Co., N.A. (Bessemer Trust); and (3) Andrew W.
                                 -4-

Bisset (Mr. Bisset).   Bessemer Trust was a national bank that

served as trustee, asset custodian, and investment adviser to the

marital trust.   Austin Power, Jr. (Mr. Power), a senior vice

president at Bessemer Trust, served as counsel and account

manager for both the marital trust and petitioner.   Mr. Power was

Bessemer Trust’s representative in its role as trustee of the

marital trust.   Mr. Bisset is an attorney licensed to practice

law in Connecticut and New York.   He served in effect as

petitioner’s personal attorney after her husband’s death and was

involved in nearly all of petitioner’s dealings.

     Petitioner was also a director of the Diebold Foundation,

Inc. (the Diebold Foundation), a section 501(c)(3) charitable

organization.    Mr. Bisset and petitioner’s three children served

as the other directors of the Diebold Foundation.

     On May 28, 1999, approximately one-third of the outstanding

stock of Double-D Ranch (1,280 shares) was transferred from the

marital trust to The Diebold Foundation.   Petitioner requested

this transfer, and it was approved by Mr. Power and Bessemer

Trust in their capacity as trustees of the marital trust.

     On the marital trust’s 1999 Form 1041, U.S. Income Tax

Return for Estates and Trusts, Bessemer Trust, as cotrustee for

the marital trust, prepared and filed with the Internal Revenue
                                  -5-

Service (IRS) a statement identifying petitioner as the marital

trust’s “Grantor/Owner”.

Decision To Sell Double-D Ranch

     At some point in May or early June 1999, the cotrustees of

the marital trust and the directors of the Diebold Foundation

decided to sell the stock of Double-D Ranch.     Mr. Power was

primarily responsible for implementing the decision to sell the

stock; Stephen A. Baxley (Mr. Baxley), a senior vice president in

Bessemer Trust’s tax department, Morton Grosz (Mr. Grosz),

Richard Leder (Mr. Leder), and Adam Braverman assisted in the

sale.   Messrs. Grosz and Leder were attorneys at Chadbourne &

Parke, LLP, a nationally known law firm.

     The representatives for petitioner discussed a potential

sale with two groups of purchasers:     (1) James M. Rhodes (Mr.

Rhodes), Harry Zelnick (Mr. Zelnick) of River Run Financial

Advisors, L.L.C. (River Run), and Ari Bergmann of Sentinel

Advisors, L.L.C. (Sentinel); and (2) Fortrend International,

L.L.C. (Fortrend).   River Run, Sentinel, and Fortrend all

presented a similar interest:   purchasing the stock of closely

held corporations holding assets with high fair market values but

low tax bases.   After learning of these companies, petitioner’s

advisers decided to sell Double-D Ranch stock.
                                -6-

     On June 1, 1999, petitioner’s representatives met with Mr.

Zelnick of River Run, Mr. Bergman of Sentinel, and separately,

Craig Hoffman (Mr. Hoffman) of Fortrend, and ultimately decided

to sell the Double-D Ranch stock to Sentinel.   On or before June

9, 1999, Mr. Power, acting as the representative of Bessemer

Trust, and Mr. Bisset concluded that the Double-D Ranch stock

should be sold and recommended to petitioner and her children, in

their various capacities, to approve the sale as well; all

agreed.   Shap Acquisition Corp. II (Shap II) was the entity

created and designated to serve as the acquirer of the Double-D

Ranch stock.   Mr. Zelnick and Mr. Rhodes served as directors and

officers of Shap II.

The Sale Transaction

     Representatives for both the seller and the purchaser

negotiated the price and drafted the transaction documents.    On

June 17, 1999, Shap II and the Double-D Ranch shareholders

executed a letter of intent confirming the terms of the stock

sale.   The letter of intent was signed by Mr. Rhodes, Mr. Power,

and Mr. Bisset, acting on behalf of Shap II, the marital trust,

and The Diebold Foundation, respectively.
                                 -7-

     Attached to the letter of intent was a term sheet defining

the terms of the sale.    The term sheet reflected that Shap II2

would purchase all issued and outstanding Double-D Ranch stock

for cash in an amount equal to the fair market value of the

corporation’s assets minus an agreed-upon discount.

     As discussed above, Double-D Ranch held mostly marketable

securities and real estate.    These assets were easily valued on

various securities exchanges, and the term sheet indicated that

was the preferred method for their valuation.    However, one

Double-D Ranch asset was more difficult to value--the AHP stock.

Because Double-D Ranch owned such a large block of AHP stock,

simply dumping it into the stock market would have an impact on

the stock’s value.    Accordingly, the parties to the Double-D

Ranch sale decided to value the AHP stock according to a formula.

The price would be determined by taking the “Volume Weighted

Average Price” for the 5 consecutive trading days before the

closing.    These five weighted prices would then themselves be

averaged.    The result would be the price given to the AHP stock

owned by Double-D Ranch.



     2
      The letter of intent indicated that the purchaser was to be
“XYZ Corporation, a special purpose entity” until the actual
purchaser was identified or formed. On June 21, 1999, Shap II
was incorporated in the State of Delaware to purchase the Double-
D Ranch stock.
                                   -8-

     The Double-D Ranch assets were valued as follows:

                   Description              Amount

                Cash                      $21,125,554
                AHP stock                 129,085,440
                Other securities          162,335,803
                Land--farm                  6,340,000

Double-D Ranch’s marketable securities were held in two accounts

with Bessemer Trust; the remaining marketable securities were

held in an account with the Bank of New York.

     The agreed-upon discount applied to the fair market value of

Double-D Ranch’s assets was 4.25 percent of the fair market value

of Double-D Ranch’s assets minus Double-D Ranch’s tax bases in

those assets.

Shap II’s Financing and the Future Asset Sale

     Shap II financed its purchase of the Double-D Ranch stock

with a loan from Utrecht-America Finance Co. (Utrecht), a wholly

owned subsidiary of Rabobank Nederland (Rabobank).      Utrecht

issued a commitment letter to Shap II indicating its agreement to

lend up to $325 million to Shap II for the acquisition of the

Double-D Ranch stock.

     Rabobank imposed certain conditions on Shap II as part of

its agreement to lend the $325 million.   The biggest condition

was that Shap II enter into a binding agreement to sell the

Double-D Ranch assets after Shap II purchased the corporate
                                -9-

stock.   To that end, Shap II entered into a letter agreement with

Morgan Stanley.

     Shap II and Morgan Stanley executed a document titled

“Execution by Morgan Stanley of Volume-Weight Average Price and

Market-on-Close Trades on Risk Basis” (the Shap II-Morgan Stanley

agreement or the agreement).   Pursuant to the agreement, Shap II

agreed to sell the AHP stock and other securities held by Double-

D Ranch to Morgan Stanley on the “closing date”.    The Shap II-

Morgan Stanley agreement initially listed the closing date as

July 1, 1999, but it was later changed to July 6, 1999.

     The securities to be sold pursuant to the Shap II-Morgan

Stanley agreement were to be valued according to the same method

used by Shap II to value the Double-D Ranch assets.

Execution of the Stock Sale

     On June 25, 1999, Shap II and the Double-D Ranch

shareholders executed a stock purchase agreement.    Petitioner,

Mr. Power (representative for Bessemer Trust), and Mr. Bisset

signed on behalf of the marital trust.   Mr. Bisset signed on

behalf of The Diebold Foundation, and Mr. Rhodes signed on behalf

of Shap II.   The stock purchase agreement indicated that the

closing for the sale would occur on July 1, 1999.

     The parties established additional bank accounts to handle

the various funds transfers made pursuant to the stock purchase
                                -10-

agreement.    On July 1, 1999, the Double-D Ranch stockholders

entered into a “Contribution Escrow Agreement” (the escrow

agreement) with Bessemer Trust.    Pursuant to the escrow

agreement, Bessemer served as the stockholders’ representatives

for all matters relating to the stock purchase agreement.

Further, the escrow agreement established an escrow account with

Bessemer Trust.    Bessemer Trust agreed to act as escrow agent

with respect to the escrow account.

     Both the Double-D Ranch stockholders and Shap II agreed to

deposit a portion of their funds into the escrow account for the

purpose of satisfying any outstanding business obligations of the

marital trust and the Diebold Foundation that may have preexisted

the sale.    The Double-D Ranch stockholders would deposit a

portion of their proceeds from the sale of their stock, which

would be used in a like manner.    Shap II agreed to hold back $10

million from the purchase price and to deposit that held-back

amount into the escrow account.    The held-back amount would then

be released from the escrow account and paid to the Double-D

Ranch stockholders on July 9, 1999, subject to certain

adjustments relating to certain liabilities of the Double-D Ranch

which might have arisen.

     The closing was delayed from July 1 to July 2, 1999, and the

stock purchase agreement was amended to reflect the changed date.
                               -11-

Before the closing, Mr. Bisset informed the Bank of New York that

he would provide written confirmation of the stock sale and that

after receiving that confirmation, the Bank of New York should

transfer the Double-D Ranch assets held there to various accounts

of Shap II.

     On July 2, 1999, in connection with the closing, Bessemer

Trust, Double-D Ranch, and Shap II executed a letter agreement

that irrevocably instructed Bessemer Trust to transfer custody of

Double-D Ranch’s marketable securities to Morgan Stanley on July

6, 1999.   Also on that date, Mr. Rhodes, as president of Shap II,

instructed Morgan Stanley to transfer $258,546,764 to Shap II’s

Rabobank account.

     Pursuant to the amended stock purchase agreement, Shap II

agreed to pay $307 million for the Double-D Ranch stock.   Of that

$307 million, $297 million would be paid immediately, with $10

million deposited into the escrow account to satisfy Shap II’s

obligation to provide the held-back amount.

     The various closing documents relating to the sale by

Double-D Ranch’s shareholders of its common stock to Shap II were

executed on July 2, 1999, and Shap II became the owner of all of

the outstanding shares of Double-D Ranch stock.   On July 2, 1999,

Rabobank deposited $295,975,000 into Shap II’s Rabobank account,

$297 million was transferred to the escrow account, and $975,000
                                -12-

was transferred back to Rabobank as its fee for assisting in the

transaction.

     On July 9 and July 12, 1999, Shap II paid the Double-D Ranch

shareholders the held-back amount and additional amounts to

reflect certain price adjustments.

     Ultimately, the Double-D Ranch shareholders received the

following consideration for the corporation stock:3

          Description                  Date               Amount

     Payment at closing           7/2/99               $297,000,000
     Held back and adjustment     7/9/99                 11,556,321
     Price adjustment             7/12/99                   608,800
     Price adjustment             7/12/99                    34,066

     The following amounts were distributed from the escrow

account to the marital trust:

                        Date                  Amount

                    7/6/1999           $183,879,480
                    7/12/1999             8,276,028
                    11/8/1999            10,541,167
                    3/26/2004             3,754,850
                    4/15/2004                 6,989

     The following amounts were distributed from the escrow

account to The Diebold Foundation:

                        Date                  Amount

                    7/6/1999             $92,120,520
                    7/12/1999              4,156,098
                    11/8/1999              5,280,900


     3
      All amounts are rounded to the nearest dollar.
                                 -13-

The transfers from the escrow account to the marital trust and

The Diebold Foundation were made by Bessemer Trust pursuant to

the escrow agreement.   The 2004 distributions to the marital

trust corrected a misallocation made at the time of the stock

sale.

Real Estate Dealings

     Double-D Ranch owned more than 500 acres in Connecticut.      As

of July 2, 1999, the farm had a fair market value of $6,340,000.

The value was determined by an appraisal requested by Mr. Power.

     Mr. D. Diebold formed Toplands Farm, LLC (Toplands Farm), to

purchase and operate the farm.    On July 2, 1999, Toplands Farm

paid $1,000 for an option to purchase the farm at its fair market

value, $6,340,000.   On July 28, 1999, Toplands Farm paid Shap II

$317,000 as a downpayment for the farm.    On August 27, 1999,

Toplands Farm made a final payment of $6,022,000 for the farm.

The $1,000 option, the $317,000 downpayment, and the $6,022,000

final payment added up to the $6,340,000 Toplands Farm paid for

the farm, in accord with its fair market value per the appraisal.

 After-Closing Asset Transfers

     On July 2, 1999, after the stock sale had been completed,

Mr. Rhodes, acting as Double-D Ranch president, directed Bessemer

Trust to transfer the marketable securities owned by Double-D

Ranch to Morgan Stanley on July 6, 1999.    Double-D Ranch and
                                -14-

Morgan Stanley also executed a pledge and security agreement

which granted Morgan Stanley a security interest in the

securities held by Bessemer Trust.     Morgan Stanley agreed not to

take possession of the securities before July 6, 1999.

     On that date Bessemer Trust transferred the Double-D Ranch

assets from its own accounts to Shap II’s Morgan Stanley

accounts.   The Bank of New York also transferred its Double-D

Ranch asset holdings to Shap II’s accounts at Morgan Stanley.

     The proceeds of the securities sold to Morgan Stanley were

initially placed on Shap II’s Morgan Stanley account.      Shortly

thereafter they were transferred to Shap II’s Rabobank account

and used in part to repay Rabobank’s loan to Shap II.

     Shap II received the following from its sale of the Double-D

Ranch’s assets:

                  Description                 Amount

                  Securities               $291,230,614
                  Land                        6,340,000
                  Cash                       21,126,554
                    Total                   318,697,168

Dissolution of the Diebold Foundation

     The Diebold Foundation adopted a “Plan of Dissolution and

Distribution of Assets”, effective January 29, 2001.      The plan

was approved by the Supreme Court of the State of New York.
                              -15-

     The assets of The Diebold Foundation were divided and

distributed in equal shares to three new charitable foundations:

(1) The Salus Mundi Foundation; (2) the Diebold Foundation, Inc.

(the Diebold Foundation--Connecticut); and (3) the Ceres

Foundation, Inc. (the Ceres Foundation).    All three foundations

are section 501(c)(3) charitable foundations, and each received

$32,918,670 from the Diebold Foundation.

Return Filings

     Petitioner

     The marital trust and petitioner reported the stock sale

according to its form for Federal income tax purposes.

Petitioner timely filed a Form 1040, U.S. Individual Income Tax

Return, for 1999, reporting capital gain of $100,376,799 on the

sale of the Double-D Ranch stock.    Petitioner timely paid an

income tax liability of $18,399,332 for 1999, including tax on

the above-referenced capital gain.

     Double-D Ranch and Shap II

     Double-D Ranch filed a Form 1120, U.S. Corporation Income

Tax Return, for its July 2, 1999, tax year.    The parties have

stipulated that this return was timely if the form of the

transaction as a stock sale is upheld.

      Shap II filed a Form 1120 on December 20, 2000, on behalf

of a consolidated group of which Shap II and the former Double-D
                                -16-

Ranch were the only members.   The Form 1120 reported as part of

its consolidated income the built-in gain from the sale of the

Double-D Ranch assets on July 6, 1999.      The consolidated return

also reported artificial losses that offset those gains.

Ultimately, the Form 1120 did not show a tax liability resulting

from the sale of the Double-D Ranch’s assets.      On March 10, 2006,

respondent issued a notice of deficiency to Double-D Ranch for

its tax year ending July 2, 1999.      The notice determined that

Double-D Ranch was liable for a tax deficiency of $81,120,064 on

gain from the sale of its assets, plus an accuracy-related

penalty.   Double-D Ranch did not petition this Court in response

to the notice.

     The deficiency determined was based upon respondent’s

recharacterization of the transaction as a sale of the Double-D

Ranch assets followed by a liquidating distribution to the

corporation’s shareholders.    Further, the notice was issued more

than 3 years after Double-D Ranch filed its return.      Respondent

contends that the 6-year period of limitations under section

6501(e) applies.   This argument is also based on respondent’s

characterizing the transaction as an asset sale followed by

dissolution, rather than as a stock sale.

     On July 31, 2006, respondent assessed the following amounts

against Double-D Ranch:
                                    -17-

                      Description                Amount

                  Tax                         $81,120,064
                  Sec. 6662 penalty            16,224,013
                  Interest                      3,171,631

     On August 2, 2007, respondent issued a notice of transferee

liability to petitioner.    The notice asserted transferee

liability against petitioner of $97,344,077, plus interest,

determining that petitioner was liable as a transferee of the

Double-D Ranch.    On July 11, 2008, respondent issued notices of

liability to the Salus Mundi Foundation, the Ceres Foundation,

and the Diebold Foundation--Connecticut.    The notices of

liability issued to the three foundations are attempts by

respondent to collect from them as transferees of The Diebold

Foundation.

     Petitioner filed a petition on October 26, 2007, in response

to the notice of liability.    A trial was held in Washington, D.C.

                                OPINION

     Section 6901(a)(1) is a procedural statute authorizing the

assessment of transferee liability in the same manner and subject

to the same provisions and limitations as in the case of the

taxes with respect to which the transferee liability was

incurred.     Section 6901(a) does not create or define a

substantive liability but merely provides the Commissioner a

remedy for enforcing and collecting from the transferee of the
                               -18-

property the transferor’s existing liability.   Coca-Cola Bottling

Co. v. Commissioner, 334 F.2d 875, 877 (9th Cir. 1964), affg. 37

T.C. 1006 (1962); Mysse v. Commissioner, 57 T.C. 680, 700-701

(1972).   Section 6902 provides that the Commissioner has the

burden of proving the taxpayer’s liability as a transferee but

not of showing that the transferor was liable for the tax.

     Under section 6901(a) the Commissioner may establish

transferee liability if a basis exists under applicable State law

or State equity principles for holding the transferee liable for

the transferor’s debts.   Commissioner v. Stern, 357 U.S. 39, 42-

47 (1958); Bresson v. Commissioner, 111 T.C. 172, 179-180 (1998),

affd. 213 F.3d 1173 (9th Cir. 2000).

     We must determine whether respondent has shown that

petitioner was liable as a transferee.

I.   Notice of Transferee Liability

     On August 2, 2007, respondent issued a notice of liability

to petitioner asserting transferee liability of $97,344,077, plus

interest, for the tax liability of Double-D Ranch.   We note that

the proceeds of the stock sale went to the marital trust and the

Diebold Foundation, not to petitioner.

     Under New York State law, properly created trusts are

independent legal entities with separate juridical status.   See

Pinckney v. City Bank Farmers Trust Co., 292 N.Y.S. 835, 838
                              -19-

(App. Div. 1937) (trust created under New York law is a legal

entity and continues as such to the end fixed by its own terms).

Thus, the separate legal existence of a marital trust must be

respected for purposes of determining any transferee liability

unless it can be shown that the marital trust should be

disregarded under New York law.

     The New York Court of Appeals has held that courts may

disregard the form of a trust when the trust was formed for an

illegal purpose or if there is not the requisite separation

between beneficiary and trustee.   Natl. Union Fire Ins. Co. of

Pittsburgh, Pa. v. Eagle Equip. Trust, 633 N.Y.S.2d 308, 309

(App. Div. 1995).

     A.   Respondent’s Position

     Respondent argues that the marital trust acted as a mere

conduit for the transfer of the proceeds from the sale of the

assets of Double-D Ranch to petitioner.   To support this

argument, respondent points to the 1999 fiduciary tax returns

filed by the marital trust reporting that petitioner was the

“grantor/owner” of the marital trust.   Respondent then concludes

that petitioner should be treated as the owner of the marital

trust assets for Federal tax purposes and that therefore

petitioner should also be treated as the owner of the marital

trust assets for transferee liability purposes.
                               -20-

      Respondent also argues that regardless of the marital

trust’s status under New York law, the marital trust constituted

a mere conduit for the transfers between Double-D Ranch and

petitioner.   More specifically, respondent contends that

petitioner acted as the beneficial owner of the marital trust,

dealing with the marital trust assets as if she owned and

controlled them.   Additionally, respondent argues that Double-D

Ranch sold all of its assets and then distributed all of the

proceeds to petitioner through the marital trust and the Diebold

Foundation in de facto liquidation, without retaining any funds

to pay the corporate-level tax generated by the sale of its

assets.

      B.   Petitioner’s Position

      Petitioner contends that the marital trust was a separate

entity and must be respected for Federal income tax purposes.

Petitioner claims that although the marital trust identified

itself as a “grantor trust” on its income tax returns, the

marital trust did not constitute a grantor trust in 1999 or at

any time after Mr. Diebold’s death on June 18, 1996.

II.   Discussion

      Respondent asserts that regardless of the marital trust’s

status under New York State law, the marital trust constituted a

mere conduit for the transfers between Double-D Ranch and
                                   -21-

petitioner.    Respondent believes that the marital trust should be

disregarded.    We disagree.

     We can find no caselaw in New York or elsewhere to the

effect that a trust’s being a grantor trust plays a role in

determining the transferee liability of the grantor.       As stated

above, we look to New York State law to determine transferee

liability.    However, even if a trust’s status as a grantor trust

were relevant to transferee liability of the grantor, we do not

find that the marital trust was a grantor trust.

     A grantor trust is created when a person contributes cash or

property to a trust but continues to be treated as owner of the

cash or property, at least in part.       See secs. 671-679.   A

reading of the marital trust agreement makes it clear that this

was not a grantor trust.4      Mr. Diebold, not petitioner, was


     4
        The trust agreement which created the marital trust read in
part:

     The Trustees shall pay or apply to the Settlor's said wife
     all or such sums of principal of this trust as the Trustees
     (other than Settlor's said wife should she then be acting
     as a Co-trustee of such trust) in their absolute discretion
     may deem necessary or advisable from time to time for her
     proper medical. care, support and comfortable maintenance,
     or for any other purpose or purposes, without limitation,
     of the Settlor's said wife deemed prudent and advisable to
     the trustees, giving primary consideration to her needs or
     desires, without regard to any other income or property
     available to her for such purposes from any other sources,
     it being intended that this power shall be liberally
     construed in favor of the Settlor's said wife so that she
     shall have sufficient income and principal available from
                                                    (continued...)
                                -22-

responsible for creating the marital trust, and during his life

he retained the right to withdraw and take possession of any

property held by the marital trust or to revoke the marital trust

agreement entirely.    Petitioner held no such powers.

     Thus, since petitioner did not create the marital trust, she

can be treated as its owner under the grantor trust rules only if

she had a power exercisable solely by herself to vest the corpus

or the income of any portion of the trust in herself or to apply

the corpus or income for the satisfaction of her legal

obligations.    See secs. 1.678(a)-1 and 1.678(b)-1, Income Tax

Regs.    Petitioner did not have any such right under the marital

trust agreement and therefore should not be treated as owner of

the marital trust for Federal income tax purposes.    Petitioner

had only the rights or fiduciary duties relating to the marital

trust that were granted to her by Mr. Diebold through the terms

of the marital trust agreement.    Petitioner’s rights and powers

under the marital trust agreement were limited and did not vest

in her ownership or control of the assets of the marital trust.

The marital trust agreement required the trustees to exercise

their discretion over any distribution of the marital trust

income or principal to petitioner, to provide for her medical


     4
      (...continued)
     all sources to enable her to maintain the standard of
     living to which she was accustomed during the Settlor's
     lifetime.
                               -23-

care, support, and maintenance, and to ensure that she had

sufficient resources to maintain the standard of living to which

she was accustomed.5

     Next, respondent asserts that petitioner was the beneficial

owner of the assets of the marital trust, exercising dominion and

control over those assets, and that any discretionary approval by

her cotrustees was a mere formality.   As evidence for this

beneficial ownership, respondent points to several requests that

petitioner made through the trustees for various sums to be

distributed to either herself or the Diebold Foundation.

Respondent claims that when petitioner approached the trustees,

she used the word “directed” rather than “requested”, which

indicated that petitioner controlled the assets of the marital

trust.   The use of “directed” rather than “requested” does not

change the terms of the marital trust agreement.    Every step that

petitioner took in requesting transfers was taken through the

trustees as the marital trust agreement required.   The trustees

were notified in writing of petitioner’s requests and agreed to

have the requested funds placed into her account or into that of



     5
      Respondent also argues that the duty of consistency should
be applied and thus the marital trust should be deemed a grantor
trust since it was identified as such for the years 1999-2004.
Respondent incorrectly applies the duty of consistency. Under
the duty of consistency, petitioner is bound by the facts
asserted in her returns for Federal income tax purposes. See
Blonien v. Commissioner, 118 T.C. 541 (2002). Respondent did not
present any tax benefit that petitioner received from the marital
trust characterization.
                               -24-

the Diebold Foundation.   Respondent believes that petitioner had

control over all the assets of the marital trust, but we have not

seen any evidence of such power.   The marital trust was

established by Mr. Diebold for petitioner’s care and support, but

she was not given ownership of the assets.   None of petitioner’s

requests were unreasonable or contrary to the marital trust

agreement.   Under New York State law, the trustees were at all

relevant times required to act reasonably and in good faith in

complying with the terms of the marital trust agreement.     Estate

of Stillman, 433 N.Y.S.2d 701, 707-708 (Sur. Ct. 1980) (court

will interfere with exercise of discretion by trustee who acts in

bad faith or “beyond the bounds of a reasonable judgment”).

     Additionally, respondent claims that the marital trust

should be disregarded because petitioner participated in a

fraudulent transfer of the assets of Double-D Ranch.   Respondent

asserts that there was a de facto liquidation plan in place from

the start of the transactions and that without a liquidation,

petitioner would not have been able to give her children any

distributions.

     As of June 30, 1999, the marital trust owned assets worth

$138 million, in addition to the shares of Double-D Ranch common

stock.   Presuming the sale of the stock is treated as a plan of

liquidation, respondent has failed to prove that petitioner
                                 -25-

participated in a fraudulent conveyance as a result of a plan of

liquidation of Double-D Ranch.

     Respondent has not directly raised the issue of whether

petitioner is a transferee of a transferee with the marital trust

being the initial transferee.    Because we reject the position

that the marital trust may be disregarded, respondent must prove

that petitioner is liable as a transferee from the marital trust.

However, we first note that respondent has not raised this

argument in the pleadings or the notice of liability which

asserted transferee liability against petitioner.    Because

respondent’s argument on brief might be construed to raise the

issue, we will address it.

     It is well settled that transferee liability may be asserted

against a transferee of a transferee.    Berliant v. Commissioner,

729 F.2d 496 (7th Cir. 1984), affg. Magill v. Commissioner, T.C.

Memo. 1982-148.    The Commissioner may collect unpaid income taxes

of a transferor of assets from a transferee or a successor

transferee of those assets.   Sec. 6901(a), (c)(2); Commissioner

v. Stern, 357 U.S. at 42; Stansbury v. Commissioner, 104 T.C.

486, 489 (1995).   State law generally determines the extent of

the transferee’s liability.     Commissioner v. Stern, supra at 45;

Gumm v. Commissioner, 93 T.C. 475, 479 (1989), affd. without

published opinion 933 F.2d 1014 (9th Cir. 1991).    Therefore, we

apply New York law in deciding whether petitioner is liable as a
                                  -26-

transferee under section 6901.6    The Commissioner bears the burden

of proving that the taxpayer is liable as a transferee under

State law or in equity.    Sec. 6902(a); Rule 142(d); Gumm v.

Commissioner, supra at 479-480.

     For respondent to establish that petitioner is liable as a

transferee from the marital trust requires more than simply the

assertion that distributions were made from the marital trust.

Respondent must prove that the distributions caused the marital

trust to be insolvent at the time they were made and that the

distributions from the marital trust should be treated as

fraudulent conveyances under New York law.    There is no such

evidence in the record.    Respondent has simply failed to carry

the burden of proving that petitioner is liable as a transferee

from the marital trust, and we will not assume such liability on

the basis of conjecture.




     6
      The New York Uniform Fraudulent Conveyance Act includes
provisions imposing transferee liability on grounds of both
actual and constructive fraud. See N.Y. Debt. & Cred. Law secs.
273, 276 (McKinney 2001). With regard to constructive fraud, New
York law provides that “Every conveyance made and every
obligation incurred by a person who is or will be thereby
rendered insolvent is fraudulent as to creditors without regard
to is his actual intent if the conveyance is made or the
obligation incurred without a fair consideration.” N.Y. Debt. &
Cred. Law sec. 273. N.Y. Debt. & Cred. Law sec. 273 been
interpreted as requiring the satisfaction of three elements to
establish transferee liability: (1) A conveyance; (2) made
without fair consideration; and (3) by a person who was or will
be rendered insolvent by the conveyance. See United States v.
McCombs, 30 F.3d 310, 323 (2d Cir. 1994).
                                   -27-

III.    Conclusion

       In summary, we find that the marital trust should not be

disregarded and that respondent has not met the burden of showing

petitioner is liable as a transferee from the marital trust.        As

a result, we hold that petitioner is not liable as a transferee.

       To reflect the foregoing,


                                               Decision will be entered

                                          for petitioner.
