                        T.C. Memo. 2010-169



                     UNITED STATES TAX COURT



          CARL M. UPCHURCH, TRANSFEREE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

          BRUCE M. UPCHURCH, TRANSFEREE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 14827-07, 14959-07.     Filed August 2, 2010.



     Jonathan P. Decatorsmith, for petitioners.

     H. Barton Thomas, for respondent.



                        MEMORANDUM OPINION


     MORRISON, Judge:   In notices of liability dated March 28,

2007, respondent Commissioner of Internal Revenue determined that

petitioners, Bruce M. Upchurch (Bruce) and Carl M. Upchurch

(Carl), are liable for an estate tax deficiency of $46,758.12,

plus interest “as provided by law” up to a total of $53,500 each,
                               - 2 -

as transferees of assets of the estate of Judith D. Upchurch.

The issues for decision are:   (i) whether Bruce and Carl are

transferees of property of Judith’s estate, (ii) whether Bruce

and Carl are liable as transferees under Illinois State law or

equity principles, (iii) whether the attorney’s fees paid to

enforce their claims on Judith’s estate should be included in the

total amounts for which they are liable, and (iv) whether they

are liable for interest on the transferred assets, and if so, in

what amounts.

                            Background

     The facts have been stipulated and are so found.     The

stipulation of facts and the attached exhibits are incorporated

in this opinion by this reference.     Bruce and Carl resided in

Illinois and North Carolina, respectively, at the time they filed

their petitions.   The respondent is the Commissioner of Internal

Revenue, whom we refer to here as the IRS.

     Tasker M. Upchurch (Tasker) and Judith D. Upchurch (Judith)

each had natural-born children from prior marriages at the time

of their marriage.   Bruce and Carl are Tasker’s natural-born

sons; Judith never adopted them.   Judith had three natural-born

children at the time of her marriage to Tasker:     Rodney Upchurch

(Rodney), Ronald Upchurch (Ronald), and Robin Wojnarowski

(Robin).   Tasker adopted Judith’s three natural-born children.

Judith died on August 20, 2000 (after Tasker’s death in 1994),
                               - 3 -

leaving a will dated June 7, 1999.     Article II of her will

bequeathed specific items of personal property to the five

children, Carl, Bruce, Rodney, Ronald, and Robin, and her

grandchildren.   Article II also directed that her “remaining

household furnishings and equipment, automobiles, silverware,

books, pictures, and, in general, all of the tangible personal

property” of her estate should be distributed to the five

children and divided however they agreed.     Article III directed

that 80 percent of her cash and investments be equally divided

among her three natural-born children, Rodney, Ronald, and Robin,

and the remaining 20 percent be divided among her 11

grandchildren.   Article IV of the will directed that the interest

in her house at 1305 Lewis Avenue, Winthrop Harbor, Illinois, be

divided equally among the five children.     Her three natural-born

children were to be the recipients of the residue of her estate.

     After Judith executed her will, she subdivided the land on

which her house at 1305 Lewis Avenue was located, splitting it

into two parcels.   The parcel on which the house was located

retained the 1305 Lewis Avenue address, and the other parcel was

assigned the address 1343 Lewis Avenue.     On March 19, 2000,

Judith conveyed the 1343 Lewis Avenue parcel to Ronald and his

wife, Laura, by quitclaim deed.   Ronald built a house on the 1343

Lewis Avenue parcel at a time not indicated by the record.       On

August 8, 2000, Judith conveyed the 1305 Lewis Avenue parcel to
                                 - 4 -

Robin, also by quitclaim deed.    When Judith died on August 20,

2000, Larry Smith, Judith’s brother, was appointed executor in

accordance with the terms of the will.    The house on the 1305

Lewis Avenue parcel was not divided into equal interests and

distributed to the five children, nor was the 1343 Lewis Avenue

parcel, because neither parcel was part of Judith’s estate at the

time of her death.

     On August 17, 2001, Bruce and Carl filed a lawsuit in the

Circuit Court of the Nineteenth Judicial Circuit in Lake County,

Illinois, against Rodney, Ronald, Laura, and Robin, as

individuals, and Larry Smith, as executor of the estate, seeking

(i) to impose a constructive trust on the two Lewis Avenue

parcels in favor of the estate and its devisees and legatees,

including Bruce and Carl, or, in the alternative, (ii) to obtain

a declaratory judgment that both quitclaim deeds were invalid.

The claim alleged that Judith, in poor health at the time of the

parcels’ conveyance, used inaccurate, overlapping legal

descriptions to convey the parcels and thus “there * * * [were]

no valid deeds in the chain of title * * * which would have

deprived the estate of the ownership of those parcels.”    The

claim further alleged that Ronald, Laura, and Robin had a

fiduciary duty to Judith “because of other facts and

circumstances present in the last months of her life”.    The claim

asserted that “The purported deeds, if valid, were made in
                                 - 5 -

violation of fiduciary relationship” because the quitclaim deeds

operated to Judith’s detriment by leaving her no interest in the

parcels while she was alive and living in her house, located on

one of the parcels.

     In November 2001, all of the parties to the litigation

signed a settlement agreement.    The agreement stated that

Judith’s estate would pay $53,500 to Bruce and his attorney and

$53,500 to Carl and his attorney.    The agreement required that,

upon its execution, Bruce and Carl would instruct their attorney

“to file [on behalf of each of them] a claim in probate against

the estate” for $53,500, “which claim will be allowed by the

estate and which claim will be declared paid upon the payment of”

$53,500 by the estate for each claim.    Judith’s estate paid

Bruce, Carl, and their attorney a total of $107,000 (or $53,500

allocable to each of Bruce and Carl).    The payments were made

directly to their attorney.    The attorney retained out of the

proceeds of each claim his one-third contingency fee of $17,833,

and transmitted $35,667 each to Bruce and Carl on December 21,

2001.

     The estate’s tax return, Form 706,1 was due on May 20, 2001,

9 months after Judith’s death, see sec. 6075,2 but the estate


     1
      Form 706 is entitled “United States Estate (and Generation-
Skipping Transfer) Tax Return”.
     2
        Unless otherwise indicated, all section references are to
                                                     (continued...)
                                 - 6 -

filed its return on May 27, 2003.     On or about August 25, 2003,

Judith’s estate distributed a $28,500 tax refund to Ronald and

Laura.   The estate distributed substantially all of its other

assets before receiving a final determination of the estate’s tax

liability from the IRS.     At a time not revealed in the record,

the IRS audited the tax return.     The IRS disallowed the estate’s

claims to deduct as debts of the estate the settlement payments

made to Bruce and Carl, and disallowed a few minor deductions.3

Disallowance of the settlement payments was explained in Form

3228, Adjustments to Taxable Estate:     “Debts claimed by family

members disallowed as not being an obligation of the Estate but

only a family disagreement”.     The audit resulted in the

determination in Form 3228, Adjustments to Taxable Estate, of a

$46,758.12 deficiency in estate tax.     On April 22, 2005, Smith,

as executor of Judith’s estate, and Ronald and Laura, as

“successor executors” of the estate, signed a Form 890, Waiver of

Restrictions on Assessment and Collection of Deficiency and



     2
      (...continued)
the Internal Revenue Code (Code), and all Rule references are to
the Tax Court Rules of Practice and Procedure.
     3
      Although the return was not timely, the IRS’s examiner
noted on Form 3228 that

     PENALTY SECTION 6651

     AFFIDAVIT attached satisfies possible penalties as
     being reasonable as an excuse and should not be
     assessed.
                                - 7 -

Acceptance of Overassessment--Estate, Gift, and Generation-

Skipping Transfer Tax, in which they agreed to immediate

assessment and collection of the proposed deficiency.4    On July

11, 2005, the IRS assessed the deficiency of $46,758.12 and

interest of $7,162.53 and reversed a credit of $151.18 for

interest due to the estate on the tax refund.

       The IRS did not collect any of the assessed tax liability

from Judith’s estate or from any of the beneficiaries of Judith’s

estate (other than Bruce and Carl).     On March 28, 2007, the IRS

sent separate notices of liability to Bruce and Carl.    Each of

the notices stated:

       The determination of the estate tax liability of the
       Estate of Judith D. Upchurch, Deceased, 1305 Lewis
       Avenue, Winthrop Harbor, IL 60096, discloses a
       deficiency in the amount of $46,758.12, as shown on the
       attached statement. This amount, plus interest as
       provided by law, up to $53,500.00 constitutes your
       liability as transferee of assets of the estate of the
       decedent and will be assessed against you. This is
       your NOTICE OF LIABILITY, as required by law.

Bruce and Carl separately petitioned this Court on July 2, 2007,

and June 29, 2007, respectively.    On November 12, 2007, the IRS


       4
        In an affidavit attached to the Form 890 Smith claimed to
have

       delegated [his] authority as Executor to resolve * * *
       [audit-related matters] to my nephew, Ronald Upchurch,
       and his wife, Laura Upchurch, as Successor Co-Executors
       and they agreed to accept that authority and to resolve
       this matter with the Internal Revenue Service and to
       pay any and all unpaid federal estate taxes which may
       be determined to be owed by the Estate of Judith D.
       Upchurch.
                                - 8 -

assessed a 25 percent “failure to pay penalty” of $11,727.32

against Judith’s estate.    The IRS filed a motion to consolidate

the cases on February 4, 2008, which the Court granted on March

5, 2008.    The parties agreed to submit the cases without a trial

under Rule 122.

                             Discussion

     The Federal estate tax is imposed “on the transfer of the

taxable estate of * * * [a] decedent”, sec. 2001(a), but the tax

is literally “paid” by the executor of the estate, sec. 2002.5

The amount of the Federal estate tax is an arithmetical function

of the taxable estate.    Sec. 2001(b).   The taxable estate is

defined as the value of the gross estate minus deductions.     Sec.

2051.    The value of the gross estate includes the value of all

property owned by the decedent at death.     Sec. 2031.

     The notices of liability in these cases were based on

section 6901(a)(1)(A)(ii), which provides:




     5
      Stephens et al., Federal Estate and Gift Taxation, par.
2.02, at 2-15 (8th ed. 2002), discusses whether the liability of
an executor reaches the executor’s personal funds and whether an
executor could sue someone else to obtain reimbursement for the
amounts the executor paid to satisfy the liability. See also id.
par. 8.03, at 8-11.

     The term “executor” is defined by the Code as “the executor
or administrator of the decedent, or, if there is no executor or
administrator appointed, qualified, and acting within the United
States, then any person in actual or constructive possession of
any property of the decedent.” Sec. 2203.
                                   - 9 -

          SEC. 6901(a). Method of Collection.--The amounts
     of the following liabilities shall * * * be assessed,
     paid, and collected in the same manner and subject to
     the same provisions and limitations as in the case of
     the taxes with respect to which the liabilities were
     incurred:

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

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

     *         *            *       *         *         *       *

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

Section 6901(a) does not independently impose tax liability upon

a transferee, but provides a procedure through which the IRS may

collect unpaid taxes owed by the transferor of the assets from a

transferee if an independent basis exists under applicable State

law or State equity principles for holding the transferee liable

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

45 (1958).   The law and equity principles of Illinois govern

Bruce’s and Carl’s transferee liability because Judith was an

Illinois resident at the time of her death and her estate was

administered under Illinois law.        See Berliant v. Commissioner,

729 F.2d 496, 499 (7th Cir. 1984), affg. Magill v. Commissioner,

T.C. Memo. 1982-148.      The IRS bears the burden of proving that
                              - 10 -

the transferee is liable as “a transferee of property of a

taxpayer”.   Sec. 6902(a).6


     6
      The Tax Court in Gumm v. Commissioner, 93 T.C. 475, 480
(1989), affd. without published opinion 933 F.2d 1014 (9th Cir.
1991), listed the following general requirements for transferee
liability:

     (1) That the alleged transferee received property of
     the transferor; (2) that the transfer was made without
     consideration or for less than adequate consideration;
     (3) that the transfer was made during or after the
     period for which the tax liability of the transferor
     accrued; (4) that the transferor was insolvent prior to
     or because of the transfer of property or that the
     transfer of property was one of a series of
     distributions of property that resulted in the
     insolvency of the transferor; (5) that all reasonable
     efforts to collect from the transferor were made and
     that further collection efforts would be futile; and
     (6) the value of the transferred property (which
     determines the limit of the transferee's liability).

Id. (citations omitted). Bruce and Carl state in their opening
brief that the IRS must show the requirements have been met to
establish transferee liability. But the Tax Court in Hagaman v.
Commissioner, 100 T.C. 180, 183-184 (1993), explained that

         Professors Bittker and Lokken have stated that
    “This distillation of what is sometimes called the
    trust fund theory is a useful guide, but, to the extent
    it implies there is a common body of national law
    protecting the rights of creditors, it must yield to
    the Supreme Court’s admonition in Stern that ‘the
    existence and extent of [transferee] liability should
    be determined by state law.’” 4 Bittker & Lokken,
    Federal Taxation of Income, Estates and Gifts, par.
    111.6.7, at 111-188 (2d ed. 1992) (quoting Commissioner
    v. Stern, supra at 45) (fn. ref. omitted). We agree
    with Professors Bittker and Lokken. We would therefore
    emphasize that Gumm’s distillation of the trust fund
    theory is viable only as a generalization of typical
    State law; section 6901 does not itself impose those
    requirements. We would further caution that Gumm’s
    distillation of the trust fund theory, which theory
                                                   (continued...)
                              - 11 -

I.   Transfer of Estate Property

     The first issue is whether Bruce and Carl are in fact

transferees of property of Judith’s estate.   An estate is a legal

entity comprised of the property of a decedent.   Section 6901(h)

provides that the term “transferee” includes “donee, heir,

legatee, devisee, and distributee”.    Bruce and Carl do not deny

that they are transferees under section 6901(h), but they deny

that they are transferees “of property * * * of a decedent” under

section 6901(a)(1)(A)(ii).   Transfers by the “decedent” under

section 6901(a)(1)(A)(ii) include transfers by the decedent’s

estate.   Sec. 301.6901-1(b), Proced. & Admin. Regs.   But Bruce

and Carl argue that the individual defendants in the estate

litigation (i.e., Rodney, Ronald, Laura, and Robin), not Judith’s

estate, should be considered the transferors of the property they

received.   They reason that if their lawsuit had resulted in a

judgment, the individual litigants, not Judith’s estate, would



     6
      (...continued)
     pertains to transferee liability in equity, is not a
     useful guide regarding transferee liability at law
     (e.g., under a corporate merger statute or bulk sales
     law), whose elements typically are quite different.

          Moreover, even with regard to transferee liability
     in equity, certain of the elements described in Gumm
     frequently are unnecessary under State law. * * *
     [Citation and fn. ref. omitted.]

Thus, we do not follow Gumm’s requirements here to the extent
they do not reflect Illinois law, as indicated by Commissioner v.
Stern, 357 U.S. 39 (1958).
                              - 12 -

have been liable for and would have paid the damages.     This last

premise, we think, is dubious.   One of the defendants named in

the lawsuit was the executor of Judith’s estate.     Thus, the

estate was at least potentially liable for any future judgment.

Even if we were to accept the premise that the individual

defendants would have been solely liable for a judgment, this

does not change the fact that a “transfer” took place from

Judith’s estate to Bruce and Carl.     The $53,500 payments were

actually made by Judith’s estate to Bruce and Carl.     The payments

were compelled by the settlement agreement, which expressly

required Bruce and Carl to file a $53,500 claim against Judith’s

estate, and which expressly required Judith’s estate to pay the

claim.   Thus, the record establishes that Bruce and Carl received

property from Judith’s estate.   It may be that Bruce and Carl

mean to argue that the transfer from Judith’s estate should be

recharacterized as two transfers:    (1) constructive payments from

the estate to the individual defendants, and (2) payments from

the individual defendants to Bruce and Carl.     Although it may be

appropriate to deconstruct a transfer into two transfers for some

federal tax purposes,7 this treatment should not be afforded here

in applying transferee liability principles.    We consider the

transfers to have been made from Judith’s estate to Bruce and


     7
      See Stephens et al., supra, par. 10.01[2][e], at 10-10
(“If, for no consideration, A discharges B’s legal obligation to
C, A may have made a gift to B.”).
                                - 13 -

Carl.     But even if we were to consider the transfer in question

to be in reality separate transfers, such a characterization

would not relieve Bruce and Carl of liability for the estate tax.

The reason is that a transferee of a transferee is also liable.

See sec. 6901(c)(2); Bos Lines, Inc. v. Commissioner, 354 F.2d

830, 835 (8th Cir. 1965) (“the tenor of numerous decisions we

have examined makes it convincingly clear that the term

‘transferee’, as used in the statute, encompasses a ‘transferee

of a transferee’”), affg. T.C. Memo. 1965-71.     Therefore,

transfers from Judith’s estate to the individual defendants

followed by transfers from the individual defendants to Bruce and

Carl would still burden Bruce and Carl with liability for the

estate tax.

        Bruce and Carl argue that they were not transferees of

estate property within the meaning of section 6901(a) because the

settlement payment they received was an arm’s-length exchange for

the waiver of their right to sue to enforce the terms of the

will.     But the settlement payment they received was a substitute

for the real property that was devised to them in Judith’s will

but was not available for distribution to them upon her death.

For tax purposes, it is appropriate to treat the settlement

payment as a transfer from the estate.     Cf. Estate of Taracido v.

Commissioner, 72 T.C. 1014, 1023 (1979) (tax treatment of a

settlement payment as lost profits as opposed to tax-free return
                              - 14 -

of capital is determined by the character of the underlying legal

claim that gave rise to the settlement payment), affd. per order

(2d Cir., Sept. 29, 1980); Freeman v. Commissioner, 33 T.C. 323,

327 (1959).   Thus, Bruce and Carl are transferees of property

from Judith’s estate within the meaning of section 6901(a).

II.   Transferee Liability for Deficiency and “Failure To Pay
      Tax” Penalty

      The IRS argues that Bruce and Carl are liable as transferees

(i) under equity principles long recognized in Illinois and (ii)

at law under the Illinois Uniform Fraudulent Transfer Act

(IUFTA).   As explained below, we hold that they are liable for

the estate’s tax deficiency under Illinois equity principles, and

thus we need not consider the IRS’s claim at law.8   Bruce and

Carl deny that they are liable as transferees under Illinois

equity principles because they claim that according to Berliant



      8
      The IRS argues that Bruce and Carl are liable under IUFTA
because the transfers to them constituted “fraud in law” as the
transfers occurred without adequate consideration and rendered
the estate insolvent and unable to pay a purportedly foreseeable
tax deficiency. Bruce and Carl deny that they are liable under
the IUFTA because they claim the transfer of property to them was
made for adequate consideration under the settlement agreement.

     The IRS also argues that the period of limitations for
assessment of transferee liability under sec. 6901(a), (c)(1),
and (f) against Bruce and Carl has not expired. As Bruce and
Carl do not contest the issue, we deem the point conceded. The
IRS also conceded that sec. 6324(a)(2) does not provide an
alternative basis for imposing transferee liability, as initially
asserted in its answer (sec. 6324(a)(2) holds a transferee
personally liable for estate tax “not paid when due”).
                                - 15 -

v. Commissioner, 729 F.2d 496 (7th Cir. 1984), an estate tax

transferee liability case, the IRS was required to file a

petition in the probate court requesting an order to return

funds.     It is true that the Court of Appeals for the Seventh

Circuit in Berliant v. Commissioner, supra at 499-500, held that

under Illinois statutory law (as then in effect), the IRS was

required to file a probate petition requesting a return of funds

to establish transferee liability for unpaid estate taxes.        But

the Court of Appeals expressly noted that it was not necessary

for the IRS to prove Berliant’s liability under Illinois law

because it could prove Berliant’s liability at equity.     Id. at

500.

       The transferee in Berliant was held liable as a transferee

for the Federal estate tax because such liability was required by

principles of Illinois equity:     “As a matter of equity, Illinois

has long imposed on estate transferees liability to creditors of

the estate.”     Id. at 500 (citing Union Trust Co. v. Shoemaker,

101 N.E. 1050, 1053 (1913)).     Bruce and Carl have failed to

distinguish their cases from Berliant or the Illinois equity

principles applied in Berliant.     We hold that Illinois equity

principles establish transferee liability for the estate’s tax

deficiency of $46,758.12 at issue in these cases.9


       9
      The Berliant Court stated that “Because we conclude that
transferee liability is based on Illinois equity principles, it
                                                   (continued...)
                              - 16 -

     The “Failure to Pay Tax” penalty of $11,727.32 is a

different matter, over which we have no jurisdiction.    The IRS

assessed the amount against the estate on November 12, 2007,

after the notices of liability were issued to Bruce and Carl on

March 28, 2007.   Thus, the penalty was not mentioned in either

notice of liability.   The record does not even establish directly

the statutory authority for the penalty, other than to refer to

it as the “Failure to Pay Tax” penalty in Form 4340, Certificate

of Assessments, Payments, and Other Specified Matters.    The IRS

mentions in its brief only that a “25% failure to pay tax”

penalty was assessed without explaining why it was assessed.    We

believe that the “Failure to Pay Tax” penalty mentioned in Form

4340 refers to the section 6651(a)(3) addition to tax, not the

section 6651(a)(2) addition to tax.    The section 6651(a)(2)

addition to tax applies only when the taxpayer does not pay the

tax shown on his or her return.   See sec. 6651(a)(2).   Here the

estate paid the tax shown on its return.    The section 6651(a)(3)

addition to tax applies in the case of a taxpayer’s failure

     to pay any amount in respect of any tax required to be
     shown on a return * * * which is not so shown
     (including an assessment made pursuant to section


     9
      (...continued)
is not necessary to decide the government’s alternative argument
that liability might also be established under Illinois’
fraudulent conveyance statutes.” Berliant v. Commissioner, 729
F.2d 496, 501 n.9 (7th Cir. 1984). Similarly, we need not
examine the merits of the IRS’s argument that Bruce and Carl are
liable for estate taxes under the IUFTA.
                              - 17 -

     6213(b)) within 21 calendar days from the date of
     notice and demand therefor * * *, unless it is shown
     that such failure was due to reasonable cause and not
     due to willful neglect * * *.

Sec. 6651(a)(3).   The addition to tax is 0.5 percent per month of

the amount of the tax stated in the notice and demand for

payment, up to a maximum of 25 percent.   Id.   Form 4340 states

that a notice of balance due was sent on July 11, 2005.   Even

though 50 months had not passed when the addition to tax was

assessed on November 12, 2007 in the approximate amount of 25

percent of the deficiency, we conclude that the reference to the

“Failure to Pay Tax” penalty in Form 4340 must be to the section

6651(a)(3) addition to tax.

     We do not have jurisdiction to determine this addition to

tax in this proceeding.   The Tax Court can redetermine matters

raised by the IRS in the notice of deficiency or liability, or in

the answer to a petition (or amendments to the answer) only if

the Court has jurisdiction over the issues so raised.   See

Kellogg v. Commissioner, 88 T.C. 167, 175 (1987); Rollert

Residuary Trust v. Commissioner, 80 T.C. 619, 636 (1983), affd.

752 F.2d 1128 (6th Cir. 1985); Medeiros v. Commissioner, 77 T.C.

1255, 1260 (1981); Markwardt v. Commissioner, 64 T.C. 989, 997

(1975).   This Court has exercised jurisdiction over the section

6651(a)(3) addition to tax in a transferee liability proceeding

when the addition to tax was specifically mentioned in the notice

of liability.   See generally Ewart v. Commissioner, 85 T.C. 544
                             - 18 -

(1985), affd. 814 F.2d 321 (6th Cir. 1987); Solaas v.

Commissioner, T.C. Memo. 1998-25.     But in these cases the IRS did

not raise the addition to tax as an issue until it filed its

brief, omitting it from the notice of liability.    The IRS thus

gave no notice to Bruce and Carl that the section 6651(a)(3)

addition to tax would be at issue.    See Markwardt v.

Commissioner, supra at 997 (“Whether an issue has been properly

raised depends upon whether the opposing party has been given

fair notice of the matter in controversy.” (citing Rule 31(a))).

This Court has held that “when the Commissioner does mail to a

transferee a notice of liability under section 6901 * * *, he

must inform the transferee of the extent and nature of the tax

deficiency which he is claiming against the transferor.”

Kuckenberg v. Commissioner, 35 T.C. 473, 483-484 (1960), affd. in

part and revd. in part 309 F.2d 202 (9th Cir. 1962).     The same

logic applies to additions to tax.    We cannot determine additions

to tax against a taxpayer who does not have fair notice of them.

Thus, we hold that we do not have jurisdiction to determine the

section 6651(a)(3) addition to tax.

III. Limit of Transferee Liability

     The parties agree that if Bruce and Carl are liable as

transferees, they are each individually liable only for the value

of the property transferred to each of them.    The issue in

dispute is the dollar amount of the transfer to each of them.
                               - 19 -

The settlement agreement provided that “the estate will pay * * *

to Bruce Upchurch and his attorney Hercules Paul Zagoras * * *

[$53,500] * * *, and to Carl Upchurch and his attorney Hercules

Paul Zagoras * * * [$53,500]”.    Zagoras’s settlement statement

reflects that Judith’s estate directly paid him the entire

settlement amount, $107,000, and that he then transmitted $35,667

each to Bruce and to Carl, retaining the balance of the proceeds

as a one-third contingency fee.    Bruce and Carl argue that the

value of the property transferred to them was equal to the

amounts each actually received net of their attorney’s fees,

$35,667.    The IRS contends that Bruce and Carl were transferred

the full amount of the settlement payments, $53,500 per person,

without reduction for the $17,833 Bruce and Carl each paid to

their attorney.

     The United States Supreme Court has addressed a similar

issue in a way instructive here.    In Commissioner v. Banks, 543

U.S. 426, 430 (2005), the Supreme Court held that the amount of

damage payments includable in a plaintiff’s gross income should

not be reduced by the contingent fee paid to the plaintiff’s

attorney.    The Court reasoned that “In the case of a litigation

recovery the income-generating asset is the cause of action that

derives from the plaintiff’s legal injury.    The plaintiff retains

dominion over this asset throughout the litigation.”    Id. at 435.

It explained further that “although the attorney can make
                                - 20 -

tactical decisions without consulting the client, the plaintiff

still must determine whether to settle or proceed to judgment and

make, as well, other critical decisions.”    Id. at 436.    It

concluded that the plaintiff relied on the attorney “to realize

an economic gain, and the gain realized by the * * * [attorney’s]

efforts is income to the * * * [plaintiff].”     Id. at 437.

Similarly, Bruce and Carl ultimately controlled the entire

litigation process to enforce their rights under the will.       They

authorized the payment to their attorney.    Thus, the property

procured by their agent, Zagoras, is attributable to them even

though Zagoras’s fee did not pass directly through Bruce and

Carl’s hands.    The limit of transferee liability of each of Bruce

and Carl is therefore the total payment made to each of them

($53,500 each), including the portion paid to Zagoras as his fee.

IV.   Interest

      The IRS has determined interest on the deficiency.    Bruce

and Carl do not address the issue of interest.    We have

jurisdiction over interest in transferee liability cases, and

thus we proceed to determine the legal basis for the calculation

of interest.     See 508 Clinton St. Corp. v. Commissioner, 89 T.C.

352, 354 (1987); LTV Corp. v. Commissioner, 64 T.C. 589, 597 n.15

(1975).   In Estate of Stein v. Commissioner, 37 T.C. 945, 959

(1962), this Court bifurcated the calculation of interest into

two periods separated by the date when the notice of liability is
                                   - 21 -

issued.     In discussing the interest period before the notice of

liability is issued, the Court explained:

     In cases where the transferred assets exceed the total
     liability of the transferor, the interest charged is
     upon the deficiency, and is therefore a right created
     by the Internal Revenue Code. However, where, as here
     [in Estate of Stein v. Commissioner], the transferred
     assets are insufficient to pay the transferor’s total
     liability, interest is not assessed against the
     deficiencies because the transferee’s liability for
     such deficiencies is limited to the amount actually
     transferred to him. Interest may be charged against
     the transferee only for the use of the transferred
     assets, and since this involves the extent of
     transferee liability, it is determined by State law.
     Commissioner v. Stern, supra.

Id. at 961.     The Court stated that after the notice of transferee

liability is issued, interest is determined under Federal law

pursuant to section 6601(a)10 regardless of whether the value of

the transferred assets exceeds the deficiency for which the

transferee is liable.     Id. at 959.       Thus, interest after the

notice of liability is issued is determined under section 6601.

We must determine only whether Federal or State law governs the

running of interest for the period before the notice of liability

is issued.



     10
          Sec. 6601(a) provides:

     If any amount of tax imposed by this title (whether
     required to be shown on a return, or to be paid by
     stamp or by some other method) is not paid on or before
     the last date prescribed for payment, interest on such
     amount at the underpayment rate established under
     section 6621 shall be paid for the period from such
     last date to the date paid.
                              - 22 -

     As Estate of Stein directs, Federal law governs the running

of interest for the period before the notice of liability is

issued if the value of the transferred assets is more than the

deficiency.   We have already determined that the amount

transferred to Bruce and Carl was $53,500 each, an amount which

exceeds the estate’s deficiency of $46,758.12 determined in each

notice of transferee liability.   Following the rule of Estate of

Stein, interest for the period before the notice of liability is

issued is determined by Federal law.11   Section 6601(a) provides

that interest is due from the due date of the estate’s tax return

to the date the estate’s tax liability is paid.   Thus, interest

in these cases is determined entirely under Federal law pursuant

to section 6601 for both interest periods; i.e., the period

before March 28, 2007 (the date the notices of liability were

issued), and the period after March 28, 2007.

     The IRS asserts that the period of interest before the

notice of liability is issued should commence with the date Bruce



     11
      We do not include the $11,727.32 “Failure to Pay Tax
Penalty” in the calculation of the estate’s (transferor’s)
liability for purposes of the Estate of Stein comparison because
it was assessed after the notice of liability was issued (and
after the executors signed a waiver agreeing to assessment of
only the deficiency and underpayment interest). Also, the Court
in Estate of Stein indicated that the transferor’s liability
includes only the amounts included in the notice of deficiency
issued to the transferor. Estate of Stein v. Commissioner, 37
T.C. 945, 961 (1962). The “Failure to Pay Tax Penalty” amount is
thus not included as part of the transferor’s total liability for
purposes of the Estate of Stein test.
                              - 23 -

and Carl received the funds, December 21, 2001, and that the rate

should be determined under Illinois law.    The IRS thus requests

that interest begin to accrue on the date of the transfer, not

the date the estate’s return was due (May 20, 2001).    Although

the IRS does not specifically state what the exact interest rate

should be, it suggests this Court has discretion to raise the

rate from the typical 5 percent prejudgment rate to the prime

rate.   We need not decide the correct amount of interest to be

awarded under Illinois law for the period before the issuance of

the notice of liability because we have determined that Federal

law, not Illinois law, determines the rate of interest applicable

for all relevant periods in these cases.    Federal law also

requires that the accrual of interest begin on the date the

estate’s return was due, not the date of the transfer.    Thus, we

hold that interest accrual shall commence on the date the

estate’s return was due.

     In reaching out holdings here, we have considered all

arguments made, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                               Appropriate decisions

                                           will be entered.
