Schussel v. Werfel

United States Court of Appeals
For the First Circuit

No. 13-1717

GEORGE SCHUSSEL, Transferee,

Petitioner, Appellant,

v.

DANIEL I. WERFEL, Acting Commissioner of the
Internal Revenue Service,

Respondent, Appellee.

APPEAL FROM THE UNITED STATES TAX COURT
[Hon. Mary Ann Cohen, Judge, U.S. Tax Court]

Before

Thompson, Stahl, and Kayatta,
Circuit Judges.

Francis J. DiMento, with whom Jason A. Kosow and DiMento
& Sullivan were on brief, for appellant.
Regina S. Moriarty, Attorney, Tax Division, Department of
Justice, with whom Richard Farber, Attorney, Tax Division,
Department of Justice, and Kathryn Keneally, Assistant Attorney
General, were on brief, for appellee.

July 8, 2014
 KAYATTA, Circuit Judge. George Schussel appeals a

decision of the United States Tax Court holding him liable, as the

recipient of a fraudulent transfer from his former company, for the

company's back taxes (including penalties) of over $4.9 million,

plus interest of at least $8.7 million. On appeal, he does not

dispute that his company fraudulently transferred millions of

dollars to him in an effort to avoid paying income taxes to the

IRS. What he disputes is how much he owes the IRS as a result of

those transfers. First, he argues that the tax court erred in

applying the federal tax interest statute, and that he should only

have to pay the likely much lower amount of prejudgment interest

that would be due under Massachusetts law. Second, he claims that

the tax court should have accepted his corrected tax returns as

establishing the amount of the assets he misappropriated. Third,

he maintains that he should have received credit for money he

loaned back to his company, which the company then used to pay his

legal bills. Concluding that the tax court calculated prejudgment

interest under the wrong statute, we affirm in part, reverse in

part, and remand for further proceedings.

I. Background

We have previously recounted George Schussel's efforts to

circumvent U.S. tax law, affirming his convictions for tax evasion

and conspiracy to defraud the United States. See United States v.

Schussel, 291 F. App'x 336 (1st Cir. 2008). We recount the basics

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here, adding only the details necessary to resolve this appeal

(most of which were stipulated by the parties).

Beginning in the early 1980s, Schussel operated a

Massachusetts corporation called Digital Consulting, Inc. ("DCI").

Until 1996, DCI was a subchapter C corporation.1 During the

relevant period, Schussel controlled 95% of DCI.2 Schussel set up

an offshore shell company to siphon DCI income into accounts that

he controlled, all without paying the requisite corporate or

individual taxes. DCI failed to report all of its income to the

IRS, and eventually, the IRS issued a notice of deficiency

regarding DCI's 1993, 1994, and 1995 tax returns. DCI neither

contested nor paid the assessed liabilities. It has been insolvent

since 2004.

As we explain below, the IRS can, by statute, collect a

person's tax debt by reclaiming assets the debtor has transferred

to someone else (a "transferee"). See 26 U.S.C. § 6901. On

November 24, 2010, the IRS sent Schussel a notice of liability

("Notice"), claiming that he was liable as a transferee for DCI's

1993-1995 tax deficiencies. The Notice claimed that DCI had tax

deficiencies of $1,796,477.71, $2,596,817.21, and $3,878,275.77 for

1
In 1996, DCI became a subchapter S corporation. It was
later converted into a Massachusetts business trust, and its name
was changed to the Driftwood Massachusetts Business Trust. We refer
simply to "DCI" for clarity.
2
Schussel testified that he owned 90% and his wife 5%, but
that he controlled all 95%.

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those three years "as shown in the attached statement," and that

"[t]his portion of total assessed income tax deficiencies, plus

interest as provided by law, constitute your liability as

transferee . . . ." In summary, the attached statement provided:

1993 1994 1995
DCI Tax Assesed $622,455.00 $889,445.00 $1,321,449.00
Fraud Penalty $466,841.25 $667,083.75 $991,086.75
Interest $2,249,268.11 $2,752,369.18 $5,467,439.663
DCI Funds
Diverted to $2,044,106.00 $2,522,944.00 $4,356,279.004
Schussel

The statement also said that, of DCI's tax liability,

"only $2,044,106.00, $2,522,944.00 and $4,356,279.00 [i.e. the

amounts transferred] for these respective tax years, plus interest

as provided by law from the date of this notice, will be assessed

against George Schussel as transferee . . . ." (These sums, not

including interest, add up to $8,923,329.) A note at the base of

the page explained that Schussel was:

liable for the lesser of the value of the property
transferred, plus interest as provided by law, or the
balance of the liability, plus accrued interest.
Accordingly, the transferee's liability for the 1993,
1994 and 1995 assessed liability of the transferor is
limited to the above stated value of property transferred
to him for the three years.

3
The parties later stipulated that the $5 million interest
figure was incorrect.
4
The "1995" transfers to Schussel occurred in 1995-1997.

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 Schussel challenged the Notice in tax court, claiming

(among other things) that he should receive credit against any

transferee liability for money that he loaned back to DCI. Most of

that money, Schussel readily admits, DCI used to cover expenses

related to his tax litigation.5 According to the stipulated facts

and evidence at trial, DCI's gross receipts, legal and consulting

expenses, and loans from Schussel amounted to:

Year Gross Legal Consulting Loans
Receipts

2001 $26,773,417 $34,152 $513,440 $500,000
2003 $12,325,807 $21,288 $522,000 $200,000
2004 $4,615,479 $1,034,291 $0 ($75,000)
2005 $0 $477,709 $0 $549,194
2006 $0 $409,391 $0 $187,900
2007 $0 $543,790 $0 $77,132
2008 $0 $35,866 $0 $585,747
2009 $0 $22,835 $0 $37,167
2010 $0 $2,834 $0 $4,646

The IRS's answer to Schussel's petition for review asked

that the Notice of Liability simply be confirmed. However, its

later-filed pretrial memorandum abandoned the limited theory of

Schussel's liability for interest advanced in the Notice and

Statement. Instead, it argued that Schussel was liable for DCI's

5
Not all of the money came out of a DCI account; some
appears to have come from accounts of other companies run by
Schussel. He claims, however, that these expenditures were
attributed to DCI for accounting purposes.

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back taxes, plus interest as determined under the federal tax

interest statute from the due date of DCI's tax returns, and that

his liability was not limited to the amount of assets that DCI

fraudulently transferred to him.6

After trial, the tax court ruled on a large number of

issues, only a few of which are relevant to this appeal. As

pertinent here, it first determined that Schussel received from DCI

fraudulent transfers in the amounts of $2,044,106 during 1993,

$2,522,944 during 1994, and $4,356,279 during 1995 to 1997, for a

total of $8,923,329. Then, at the IRS's request, the court held

Schussel liable for DCI's back taxes, plus prejudgment interest at

the federal rate from the respective dates on which DCI's income

taxes were due for 1993, 1994, and 1995.7 So calculated,

prejudgment interest alone totaled approximately $8.7 million by

the time the IRS issued the Notice, leaving Schussel liable for

over $13.6 million plus further accruing interest at the federal

rate. Finally, the tax court refused to give Schussel credit

against his liability for the amount he loaned back to DCI from

2001 to 2010, or to limit his liability to the amount of assets he

received (no matter how that figure was calculated).

6
The tax court evidently accepted this shift, and although
Schussel mentions the shift in his brief, he does not directly
challenge its allowance.
7
By statute and regulation, the federal rate varies over
time.

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 Schussel timely appealed, Fed. R. App. P. 13(a)(1),

challenging each of those conclusions. First, he argues that his

total liability should have been limited to $7,358,394, the

undeclared income figure the IRS used to correct his individual tax

returns, or at most to the $8.9 million of DCI assets that the

IRS's Notice and Statement claimed he received. Second, he

contends that any prejudgment interest on the fraudulently

transferred funds should have been assessed at the Massachusetts

rate of 12% per year, but only from the date of the 2010 IRS Notice

rather than the dates on which DCI's unpaid taxes were due in 1993-

1995, resulting in a substantial reduction in his total liability.

Third, he argues that he should receive credit, to be counted

against his liability, for roughly $2.1 million in loans he made to

DCI between 2001 and 2010.

We have jurisdiction under 26 U.S.C. § 7482. We address

each of Schussel's arguments, assessing first the question of

interest, then the amount transferred, and then whether Schussel

should receive credit for any alleged retransfers.

II. Standard of Review

Our review of the tax court's ruling is "in most respects

similar to our review of district court decisions: factual findings

for clear error and legal rulings de novo." Drake v. Comm'r, 511

F.3d 65, 68 (1st Cir. 2007); see also 26 U.S.C. § 7482(a)(1),

(c)(1). "The clear error standard of review extends to factual

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findings based on inferences from stipulated facts." Capital Video

Corp. v. Comm'r, 311 F.3d 458, 463 (1st Cir. 2002) (internal

quotation marks omitted). "A finding is clearly erroneous when,

although there is evidence to support it, the reviewing court on

the entire evidence is left with the definite and firm conviction

that a mistake has been committed." Interex, Inc. v. Comm'r, 321

F.3d 55, 58 (1st Cir. 2003) (internal quotation marks omitted).

Although the burden is usually on the taxpayer to demonstrate that

an IRS ruling is wrong, in transferee cases the IRS bears the

burden of showing that the petitioner "is liable as a transferee of

property of a taxpayer, but not [of showing] that the taxpayer was

liable for the tax." 26 U.S.C. § 6902(a); see generally U. S. Tax

Ct. R. 142(a), (d).8

8
Tax Court Rule 142 provides:
The burden of proof shall be upon the petitioner, except
as otherwise provided by statute or determined by the
Court . . . . In any case involving the issue of fraud
with intent to evade tax, the burden of proof in respect
of that issue is on the respondent . . . by clear and
convincing evidence. . . . The burden of proof is on the
respondent to show that a petitioner is liable as a
transferee of property of a taxpayer, but not to show
that the taxpayer was liable for the tax.

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 III. Analysis

A. The Tax Court Applied the Wrong Framework to Assess How Much
Schussel Owes.

1. The Fraudulent Transfer Claim

In its effort to recover sums transferred to Schussel by

DCI, the IRS availed itself of the procedures set forth in 26

U.S.C. § 6901. Section 6901 specifies the procedures by which the

IRS may administratively assert (among other claims) state law

remedies for fraudulent transfers, subject to challenge in tax

court.9 While the procedures are federal, state substantive law

controls in determining whether and to what extent the transferee

is liable. See Frank Sawyer Trust of May 1992 v. Comm'r, 712 F.3d

597, 602-03 (1st Cir. 2013).10 Here, nearly all of the transfers

are covered by the now-repealed Massachusetts Uniform Fraudulent

Conveyance Act ("MUFCA"). Mass. Gen. Laws ch. 109A, §§ 1 et seq.

(1995). The few made after October 1996 fall under the

Massachusetts Uniform Fraudulent Transfer Act ("MUFTA"). Id. §§ 1

et seq. (2014).

9
Section 6901 provides, as most relevant here, that "[t]he
amount[]" of "[t]he liability, at law or in equity, of a transferee
of property" "of a taxpayer" "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." 26 U.S.C. § 6901(a).
10
There is a federal fraudulent transfer law, see 28 U.S.C.
§ 3304, but neither party suggests that the government has invoked
it here. See generally id. § 3002(2) (excluding the tax court from
the definition of "court" for that chapter).

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 Schussel did not appeal the tax court's finding that the

transfers in this case were made with the actual intent to defraud

DCI's creditors--specifically, the IRS. Therefore, the transfers

are invalid both as to creditors with claims against DCI at the

time of the transfer and as to those whose claims arose later. See

id. § 7 (1995); id. § 5(a)(1) (2014).

Both the MUFCA and MUFTA generally permit a creditor with

a matured claim to avoid a fraudulent conveyance (i.e., secure a

return of the transferred funds in favor of the creditor) "to the

extent necessary to satisfy his claim." David v. Zilah, 325 Mass.

252, 256 (1950); Mass. Gen. Laws ch. 109A, § 8(a)(1), § 9(b), (c)

(2014) (allowing avoidance "to the extent necessary to satisfy the

creditor's claim," but limiting the judgment to the lesser of a)

the amount of the claim, and b) the value of the assets "adjusted"

"as the equities may require"); 48A Jordan L. Shapiro et al.,

Massachusetts Practice: Collection Law § 14:57 (3d ed. 2000)

(describing remedies under the MUFCA). Each statute gives the

court some discretion to fashion an equitable remedy in some cases.

See Mass. Gen. Laws ch. 109A, § 8(a)(3)(iii) (2014) (subject to

section 9, allowing "any other relief the circumstances may

require"); id. § 10(d) (1987) (allowing courts to "[m]ake any order

which the circumstances of the case may require" to protect

creditors with immature claims).

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 2. Interest

In discussing the issues raised by this appeal, it is

helpful to distinguish between interest accrued on the tax

obligation of the taxpayer-transferor, and interest accrued on the

transferred funds recovered from the transferee by a creditor.

Federal interest on a tax obligation accrues automatically, usually

from the date when the tax payment first becomes late. 26 U.S.C.

§ 6601(a), (e).11 That interest is simply a part of the debt owed

by the taxpayer-transferor to the IRS, see § 6601(e), all of which

may usually be collected from a fraudulent transferee to the extent

of the amount fraudulently transferred. See, e.g., Lowy v. Comm'r,

35 T.C. 393, 394 (1960); cf. also United States v. Verduchi, 434

F.3d 17, 21-22 & n.6, 25 (1st Cir. 2006) (under Rhode Island

fraudulent transfer law--but not section 6901--treating the IRS's

claim against the transferor as including the accumulated

interest). Thus, for example, if the taxpayer owes $100 in taxes,

upon which $30 in interest accrues, and the taxpayer then

11
Section 6601 provides that, generally, "[i]f any amount of
tax imposed by this title . . . is not paid on or before the last
date prescribed for payment, interest on such amount at [the
federally-set rate] shall be paid for the period from such last
date to the date paid." 26 U.S.C. § 6601(a). Generally, that
interest has to be paid upon notice and demand, and almost any
reference in the tax code to a "tax" must be read to include
section 6601 interest. Id. § 6601(e)(1).

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fraudulently transfers $150 to a transferee, the IRS can certainly

recover a judgment of no less than $130 against the transferee.12

What is at issue in this case is prejudgment interest

asserted against the transferee on the amount of the transfer

deemed to be avoidable (that is, the amount that the transferee

must give back). Suppose, again, that a taxpayer owed $100 in

taxes and accrued $30 in interest; but, this time, he transferred

$101 to a third-party transferee. The transferee would be liable

for a judgment that he pay over to the IRS the entire $101

transferred to him. Like most other litigants against whom a

monetary liability is established, he might also owe some amount of

prejudgment interest--the question is how much.

According to the IRS, it depends on when the interest

accrued. If, as in our example, it accrued before the taxpayer

transferred the $101 (so that on the day of transfer, the taxpayer

owed more to the IRS than he gave away to the transferee), the IRS

concedes that state fraudulent transfer law would apply to limit

the IRS to recovering from the transferee the $101 he received,

plus such prejudgment interest as might be available under that

state law. But if the additional interest owed by the taxpayer to

12
Moreover, even in a case where the interest did not accrue
until after the date of the transfer, the government would seem to
be able to recover the $30, at least where, as here, the
transferor's actual fraudulent intent renders the transfer invalid
as to both present and future creditors. Mass. Gen. Laws ch. 109A,
§ 7 (1995); id. § 5(a)(1) (2014).

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the IRS accrued after the transfer (so that on the day of transfer,

the taxpayer gave away more than he owed at that time), the IRS

claims that the transferee would owe the entire $30 in interest

accrued under federal law. That interest, it says, accrued on the

transferee's own liability (not just on the taxpayer's underlying

debt) and ran under section 6601 at the same rate and from the same

date as against the original taxpayer on the underlying tax debt.

Essentially, the IRS argues that where state law provides the basis

for transferee liability, the ratio of IRS debt to assets

transferred on the date of transfer operates as a toggle switch to

pick whether state or federal law controls prejudgment interest.

The language of the two statutes is sufficiently abstract

that it could be read as providing partial support for the IRS.

Under section 6901, transferee liability is to be assessed 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." 26 U.S.C. § 6901(a). And the tax

interest statute, section 6601, provides that "[a]ny reference in

this title [except for in the subchapter relating to deficiency

procedures] to any tax imposed . . . shall be deemed also to refer

to interest imposed by this section on such tax." Id.

§ 6601(e)(1). There is some appeal, therefore, in the IRS's claim

that section 6601 is simply one of the same tax "provisions and

limitations" to which transferee liability is subject under

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section 6901. See Robinette v. Comm'r, 139 F.2d 285, 288 (6th Cir.

1943) (so holding, before the Supreme Court ruled in Comm'r v.

Stern, 357 U.S. 39 (1958), that state law governs the substance of

fraudulent transferee liability under section 6901); cf. Nicholas

v. United States, 384 U.S. 678, 690-91 (1966) (interpreting the

similarly-worded 26 U.S.C. § 7501 to mean that where a Chapter 11

bankruptcy trustee was not liable for interest on the debtor's

taxes after a certain point, a trust fund collectable in the same

manner as those taxes would not garner interest); Baptiste v.

Comm'r, 29 F.3d 1533, 1541-42 (11th Cir. 1994) (where a federal

statute created the transferee liability, concluding that "subject

to the same provisions and limitations" in section 6901 means that

the IRS can charge interest on transferee liability "as if it were

a tax liability").13

Statutory history can also be read as providing some

support for the (more limited) idea that interest accrues at the

federal rate from the date of the transfer. The original draft of

section 6901's precursor, section 280 of the Revenue Act of 1926,

44 Stat. 61 (1926), specified that no interest would accrue on a

13
To avoid any confusion, we note that the tax court's
opinion in Baptiste was appealed to two circuit courts. Those
courts reached conflicting conclusions about whether a transferee,
liable under federal law for estate taxes, could owe more than he
had received. Compare Baptiste, 29 F.3d at 1541-42 (yes), with
Baptiste v. Comm'r, 29 F.3d 433, 437 (8th Cir. 1994) (no). The
Baptiste cases dealt with substantive transferee liability created
and limited by federal law rather than state law; we express no
opinion on their outcomes.

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transferee's liability until he received a notice and demand.

S. Rep. No. 69-52 (1926), reprinted in 1939-1 Cum. Bull. (Pt. 2)

354-55. In conference, that language was changed; the committee

asserted that section 280 did not alter the extent of transferee

liability, but went on to add that no interest accrued on the

transferee's assumed liability after the transfer, except interest

"for failure to pay upon notice and demand . . . and interest at

6 per cent a year for reimbursing the Government at the usual rate

for the loss of the use of the money due it." H.R. Rep. No. 69-

356, at 44 (1926)(Conf. Rep.), reprinted in 1939-1 Cum. Bull. (Pt.

2) 371-73.14 This might suggest that Congress expected a standard

federal interest rate to apply, and did not view that choice as

much altering existing transferee liability law. But as a number

of cases point out, it is hardly crystal clear.15

14
The 1926 act included several different interest rates; for
example, taxpayers owed six percent per year on tax deficiencies,
increasing to one percent per month after the IRS sent a notice and
demand for payment. Revenue Act of 1926, ch. 27, §§ 274(j),
276(b), 44 Stat. 9, 56-58 (1926). Thus it is unclear whether the
reference in the legislative history to "the usual rate" of six
percent refers to the deficiency rate, see Poinier v. Comm'r, 858
F.2d 917, 921 (3d Cir. 1988) (concluding so), or just anticipated
that an equitable grant of interest might adopt a rate used
elsewhere in the Act. Cf. Billings v. United States, 232 U.S. 261,
286 (1914) (affirming the IRS's entitlement to interest); cf. also
Leighton v. United States, 289 U.S. 506, 509 (1933) (affirming, as
not an abuse of discretion, interest awarded against a
corporation's transferee-stockholders at six percent per year from
the date of the assessment against the corporation. See Leighton
v. United States, 61 F.2d 530, 534 (9th Cir. 1932)).
15
See Patterson v. Sims, 281 F.2d 577, 580 n.4 (5th Cir.
1960) (noting that the legislative history "seems to indicate that
the United States is entitled to interest accruing after the

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 Ultimately, we are saved from having to search for an

answer in ambiguous statutory language and unclear legislative

history. Instead, we find our answer in the U.S. Supreme Court's

interpretation of a prior version of this same statute. In

Commissioner v. Stern, 357 U.S. 39 (1958), the Supreme Court held

that another of section 6901's predecessor statutes, section 311 of

the Internal Revenue Code of 1939, 26 U.S.C. § 311 (1939), provided

only the procedure by which the IRS could assert substantive rights

against transferees created by other laws--it did not create any

such rights. Stern, 357 U.S. at 42-45. Thus, where, as there,

state fraudulent transfer law supplied the substantive rule, state

law controlled "the existence and extent of [transferee]

liability." Id. at 45. Although the statutory language has

changed some since then,16 the parties agree that Stern still

transfer, if under state law a transferee would be so liable to a
private creditor"); Estate of Stein v. Comm'r, 37 T.C. 945, 961
n.18 (1962) ("The legislative history, although not of sufficient
clarity for judicial reliance, tends to support the running of
interest on transferee liability from the date of transfer,
although in 1926 the issue resolved in [Stern] was not
considered."); cf. Poinier, 858 F.2d at 922 (rejecting the early
20th century history as unhelpful because the various interest
provisions were later combined into section 6601).
16
The key language of section 311 read:
The amounts of the following liabilities shall, except as
hereinafter in this section provided, be assessed,
collected, and paid in the same manner and subject to the
same provisions and limitations as in the case of a
deficiency in a tax imposed by this chapter (including
the provisions in case of delinquency in payment after
notice and demand. . .): (1) TRANSFEREES.--The liability,
at law or in equity, of a transferee of property of a
taxpayer, in respect of the tax (including interest,

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controls, and requires that state law dictate the existence and

extent of Schussel's transferee liability.

In turn, both Massachusetts and federal courts treat

prejudgment interest as a substantive part of a state-law remedy.

See, e.g., Tobin v. Liberty Mut. Ins. Co., 553 F.3d 121, 146 (1st

Cir. 2009) (in a discrimination case, noting that "[i]t is well

established that prejudgment interest is a substantive remedy

governed by state law when state-law claims are brought in federal

court"); Militello v. Ann & Grace, Inc., 411 Mass. 22, 26 & n.4

(1991) ("[A]n award of prejudgment interest is a substantive

remedy."). Since section 6901 governs only procedure, and since

prejudgment interest is generally a matter of substance, it follows

that section 6901 does not govern prejudgment interest where the

substantive law is state law.

Resisting this conclusion, the IRS points to several

cases in which the IRS was in fact able to recover prejudgment

interest under federal law. But it offers little authority

expressly adopting its position--that is, few state-law-based

transferee cases where a court held that because the transferor

gave away more than he owed to the IRS that day, section 6601

interest runs on the transferee's liability from the date that the

transferor's taxes were due, even though that interest has grown

additional amounts, and additions to the tax provided by
law) imposed upon the taxpayer by this chapter.
26 U.S.C. § 311, 53 Stat. 1, 90 (1939).

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the debt well beyond what the transferee received (and regardless

of when the transferee learned about the debt). And even those few

cases it identifies offer little informative analysis. See

Upchurch v. Comm'r, 100 T.C.M. (CCH) 85 (2010) (under Illinois

estate transferee liability rules, where the transferee received

more than the estate owed as a deficiency but less than the

deficiency plus interest, concluding that interest ran under

section 6601 on the transferee's liability for the deficiency from

the date the estate tax return was due); see also Nat'l Pneumatic

Co. v. United States, 176 Ct. Cl. 660, 666 (1966) (where the assets

transferred were adequate to satisfy the total taxes, penalties,

and interest, describing the interest charged as upon the

transferee's liability, rather than the transferor's tax debt);

Butler v. Comm'r, 84 T.C.M. (CCH) 681 (2002) (in a case applying

Minnesota fraudulent transfer law, explicitly comparing the roughly

$4.6 million transferred with the transferor's $1.1 million tax

liability on the date of the transfer).

On the whole, the weight of the case law is consistent

with the basic logic of our Stern analysis. This precedent

includes two of the cases upon which the IRS itself relies, Estate

of Stein v. Commissioner, 37 T.C. 945 (1962), and Lowy v.

Commissioner, 35 T.C. 393 (1960). In Lowy, the tax court explained

that federal law determines "the quantum of" the IRS's claim

against the taxpayer-transferor, and that that claim includes

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statutory interest. 35 T.C. at 395 (interpreting the 1939 code).

Therefore, where the assets in the hands of the transferee were

"more than ample to discharge the full Federal liability of the

transferor (including interest)," there was no need to resort to

state-law interest principles to make the IRS whole. See id. at

397. Here, of course, the IRS would not be made whole by

recovering the funds transferred to Schussel because DCI's debt,

including penalties and interest, was larger than the amount

transferred. This type of situation was presented in Estate of

Stein, where the tax court explained that because the transferred

assets were "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. . . [as] determined by State law." 37

T.C. at 961. Accord, e.g., Stanko v. Comm'r, 209 F.3d 1082,

1087-88 (8th Cir. 2000) (in a constructive fraudulent transfer

case, rejecting an argument similar to the IRS's here as unsound

under Nebraska law); Stansbury v. Comm'r, 102 F.3d 1088, 1089, 1092

(10th Cir. 1996) (where the transferees received less than the

transferor's "total amount owed to the IRS," concluding that under

Stern their interest liability before receiving a notice was

governed by state law); Patterson v. Sims, 281 F.2d 577, 580 (5th

Cir. 1960) (where the taxpayer's liability, even before interest,

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exceeded the transferee's net benefit, concluding that the

transferee's substantive liability was controlled by state law, and

using state law to assess the "liability of a transferee in

addition to the value of the property received").

We therefore accept the IRS's invitation to follow Lowy

and Estate of Stein, but we follow the actual reasoning of the

opinions in those cases, not the caricature of them reflected in

the IRS's position. The resulting rule, we believe, is consistent

with Stern's mandate that Massachusetts law dictate Schussel's

substantive liability. Stern, 357 U.S. at 45. That rule is

simple: The IRS may recover from Schussel all amounts DCI owes to

the IRS (including section 6601 interest accruing on DCI's tax

debt), up to the limit of the amount transferred to Schussel, with

any recovery of prejudgment interest above the amount transferred

to be determined in accord with Massachusetts law.17 This rule, in

our view, appropriately defers to Massachusetts fraudulent transfer

law and avoids the arbitrary effects of the government's focus on

the ratio of the debt to the transferred assets on the date of

transfer. Our comfort with this conclusion is buttressed by (but

not predicated on) the fact that the IRS itself appears to have

17
Thus, the IRS will recover from Schussel the penalties and
interest owed to the IRS by DCI to the extent the funds
fraudulently transferred to Schussel exceeded DCI's unpaid taxes.

-20-
taken a similar approach in non-precedential guidance.18 Similarly,

the Notice of Liability in this very case tracked that guidance,

rather than the position the IRS later advanced at trial and on

appeal.

Schussel contends, and the IRS does not dispute, that

under Massachusetts law, no interest would have begun to accrue

18
See Internal Revenue Service, Chief Counsel Advisory
200916027 (April 17, 2009) ("If the asset transferred exceeds the
transferor's liability on the date of transfer, interest under 6601
continues to run from the date of transfer until the earlier of
exhaustion of the value of the asset or the beginning of interest
on the transferee's liability. . . . If the value of the asset
exceeded the transferor's liability but has been exhausted and time
still remains before interest begins to run on the transferee's
liability, state law may impose interest from the point of
exhaustion of the value of the assets until interest begins to run
on the transferee's liability."); Internal Revenue Service, Chief
Counsel Advisory 200915038 (April 10, 2009) ("Where the total value
of assets transferred exceeded the transferor's total liability on
the date of transfer, and the excess of value of assets has been
exhausted by the imposition of section 6601 interest but time
remains in the second period, imposition of interest under state
law may apply . . . ."); Internal Revenue Service, Chief Counsel
Advisory 200851072 (Dec. 19, 2008) ("Where the total value of the
transferred assets exceeds the transferor's total liability on the
date of transfer, 6601 interest may be imposed for the second
period until the value of the asset is exhausted. . . . [W]here the
excess in value of assets transferred has been exhausted, state law
may impose interest for the second period or remainder of the
second period."); cf. United States v. Craft, 535 U.S. 274, 300 n.9
(2002) (Thomas, J., dissenting) (citing a variety of formal and
informal IRS guidance, including a Chief Counsel Advisory).

-21-
until the date of the Notice of Liability.19 Cf. Mass. Gen. Laws

ch. 231, § 6B (providing for prejudgment interest as of "the date

of commencement of the action."); Lassman v. Keefe (In re Keefe),

401 B.R. 520, 527 (B.A.P. 1st Cir. 2009) (applying section 6B to a

Massachusetts fraudulent transfer action in bankruptcy court). We

accept (without deciding) that uncontested description of

Massachusetts law. Schussel therefore owes no prejudgment interest

on his own liability as transferee (that is, on the amounts

transferred to him) for the time period pre-dating the Notice.

The reader might think (and hope) we are done with this

interest(ing) issue, but this is tax law, and it should surprise no

one that a bit more need be said regarding the subsequent period of

time that passed between the Notice and the judgment (as opposed to

the longer periods that passed between the due date of the tax and

the issuance of the Notice, or between the date of the transfer and

the Notice). Section 6601 provides that when a tax is "not paid on

or before the last date prescribed for payment," interest shall

accrue, and that where the last date for payment is not prescribed

19
It may be that Massachusetts law contains some equitable
principle that would allow interest to accrue earlier than that.
Compare Stansbury, 102 F.3d at 1092 (where a transferee was
intimately involved in the fraud, Colorado law let interest run
from the date of the transfer), with, e.g., Wood v. Robbins, 11
Mass. 504, 506 (1814) (in an action for money had and received,
"where the defendant obtained the plaintiff's money by fraud and
imposition, interest ought to be allowed from the receipt of the
money, and not merely from the service of the writ"). However, the
IRS affirmatively waived the opportunity to challenge Schussel's
characterization of Massachusetts law in its post-trial briefing.

-22-
anywhere else, that date "in no event shall be later than the date

notice and demand for the tax is made by the Secretary." 26 U.S.C.

§ 6601 (a), (b)(5); cf. Internal Revenue Service, Chief Counsel

Advisory 200848068 (Nov. 28, 2008) (noting that section 6901 does

not prescribe a "last date" for the transferee to pay a tax and

that a transferee's liability for the tax arguably arises upon the

date of transfer, but that section 6601 imposes liability for

interest on the transferee at least as of the date of notice and

demand for payment of the transferee liability). This language

suggests that "the question of prejudgment interest after the date

of the Commissioner's notice of transferee liability . . . may well

be a matter of federal law." Stanko, 209 F.3d at 1088. See also

Patterson, 281 F.2d at 580.

Schussel, however, affirmatively volunteers that, from

the date of the Notice until judgment, he is subject to prejudgment

interest under Mass. Gen. Laws ch. 231, § 6B. And because the

Massachusetts rate (twelve percent) exceeds the current federal

rate (three percent), the IRS has had no cause to oppose Schussel's

position that Massachusetts interest rules also apply to the period

between the Notice and the judgment. See Mass. Gen. Laws ch. 231,

§ 6B; 26 U.S.C. §§ 6601(a), 6621; IRS Rev. Rul. 2014-11.

Accordingly, on remand in this particular case, the "simple rule"

stated above should control for the entire prejudgment time period,

-23-
with any prejudgment interest assessed above the amount transferred

calculated at the Massachusetts rate from the date of the Notice.

B. How Much Did DCI Transfer to Schussel?

We turn next to divining the size of the transfer.

Schussel argues first that that amount is $7,358,394, which is the

amount the IRS determined he received as constructive dividends

from DCI when the IRS corrected his personal tax returns for

1993-1995. In the alternative, he argues that the amount should be

$8,923,329--the amount identified in the Notice of transferee

liability (and adopted by the tax court). The IRS did not

cross-appeal, but claims (apparently as an alternate basis for

affirmance) that the record shows that over the life of the scheme,

Schussel used DCI to divert over $15 million to himself (not just

the $8.9 million listed in the Notice).

Addressing first Schussel's arguments for limiting the

amount deemed to have been fraudulently transferred to him to $7.3

million, we agree with the tax court that the constructive

dividends determination is not controlling. Schussel concedes that

the $8.9 million figure represents the amount of DCI's gross

receipts diverted from 1993 to 1997 into accounts that he

controlled. And on appeal, Schussel offers no sufficient

explanation for why the amount of his constructive dividend income

is also the correct measure of assets fraudulently transferred

-24-
under Massachusetts law.20 Accordingly, we see no error in the tax

court's decision to accept as a proper measure of the assets he

received during 1993-1997 the actual amount transferred from DCI

into Schussel-controlled accounts as stipulated by the parties.

We turn next to the IRS's argument for increasing the

amount deemed to have been transferred by DCI to Schussel. The IRS

argues that there is record evidence demonstrating that, in

addition to the $8,923,329 transferred in 1993-1997, DCI also

diverted roughly $6 million more to Schussel (largely comprised of

amounts transferred to him before 1993.) Assuming that these

transfers were also made with fraudulent intent, Massachusetts law

renders all of the money available to pay both prior and subsequent

claims. See David v. Zilah, 325 Mass. 252, 256 (1950). Therefore,

the IRS asks us to conclude that the amount transferred to Schussel

was roughly $15 million.

The IRS's argument for using this increased figure

confronts a nettlesome problem of notice and procedure--namely that

20
Schussel argues that the IRS took DCI's unreported income
and then made "adjustments" to that amount to calculate the
adjusted "dividend income" it attributed to him and his wife. The
only such adjustment that Schussel describes on appeal is for money
paid to Ronald Gomes. The record suggests Schussel gave Gomes that
money to keep him happy with the cash-diversion arrangement and so
Schussel may well be ineligible to claim credit for those payments.
See generally Northborough Nat'l Bank v. Risley, 384 Mass. 348,
350-51 (1981). In addition, more than $450,000 of the discrepancy
appears to relate to assets transferred in 1996, which naturally
would not appear on the Schussels' income tax adjustments for
1993-1995.

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the IRS never (it seems) sought to amend its Notice of Liability or

other pleadings to clearly warn Schussel that it would seek to use

the $15 million figure. Cf. 26 U.S.C. § 6214(a) (granting the tax

court jurisdiction to determine increases in deficiencies asserted

at or before a hearing or rehearing); U.S. Tax Ct. R. 41

(specifying the procedure, much like Fed. R. Civ. P. 15, for

amending pleadings). The Notice assured him that his liability was

limited to $8,923,329 plus interest as provided by law. When

Schussel filed his petition with the tax court challenging the

liability imposed on him by the Notice, the IRS filed an answer,

largely affirming the position taken in the Notice, but referring

(without specific dollar amounts) to transfers dating back to 1988.

Apparently deciding (but not announcing) that it had

erred in its more limited initial approach, the IRS's pretrial

memorandum did indeed add allegations of additional transfers and

diversions (with dollar figures) dating back to 1985. At trial,

the IRS also offered evidence reflecting the alleged diversions

from 1985 on. Schussel, for his part, objected to this awkward

attempt to establish transfers in excess of those claimed in the

Notice, although he failed to identify any prejudice the shift had

caused him. In reply, the IRS asserted that it was not seeking,

and need not seek, an increased deficiency (because DCI's

underlying tax deficiency was the same as it has always been); it

then simply asserted that it had amply proved the greater amount of

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assets transferred to Schussel. The tax court never clearly

addressed the issue, possibly because, by accepting the IRS's

theory of prejudgment interest, the court pretty much affirmed a

recovery that equaled the taxpayer-transferor's entire tax

liability.

On appeal, the IRS again pays scant attention to the

procedural niceties. Rather, it simply asserts that it proved

transfers in the larger amount. Maybe so, but that is hardly the

point. The point is that the record available to us on appeal

contains neither a notice of liability, nor an amendment, nor a

ruling under Tax Court Rule 41(b) that could provide a basis for

affirming the decision of the tax court on the alternative $15

million figure now urged by the IRS. Cf. O'Rourke v. Comm'r, 73

T.C.M. (CCH) 2443 (1997) (explaining that the tax court cannot

generally determine a greater deficiency than that listed in the

Notice where the IRS has not pleaded such an increase); U.S. Tax

Ct. R. 41. We therefore leave this entire question (i.e., whether

the tax court may or should accept a belated motion to amend or

consider any other available relief) to the discretion of the tax

court on remand.

C. Schussel's Loans to DCI to Pay Schussel's Litigation Expenses
Did Not Reduce the Net Amount Transferred to Him.

Generally, a fraudulent transferee can reduce or

eliminate his liability by returning the property to the original

transferor before he receives a notice of transferee liability.

-27-
See Eyler v. Comm'r, 760 F.2d 1129, 1134 (11th Cir. 1985); Ginsberg

v. Comm'r, 35 T.C. 1148, 1155-56 (1961), aff'd, 305 F.2d 664 (2d

Cir. 1962); 14A Mertens Law of Federal Income Taxation § 53:11

(Thompson Reuters/West 2014).21

Even if there is no actual retransfer, a transferee might

reduce his liability by showing that he used the property to pay

the transferor's debts (at least if those debts had priority over

the transferor's tax liability). See, e.g., Eyler v. Comm'r, 53

T.C.M. (CCH) 308 (1987) and cases cited therein; 14A Mertens Law of

Federal Income Taxation § 53:11 ("While a transferee who pays the

debts of the transferor will not be relieved of liability to the

extent of payment unless the debts paid held priority over the tax

claimed by the Government, a transferee . . . [who] retransfers the

property to the transferor can avoid liability as a fraudulent

transferee.").

With these principles in mind, we turn to Schussel's

claim that the tax court erred in denying him credit for just over

21
Neither side addressed whether state or federal law
controls this question, or cited to any Massachusetts law on point.
Because it implicates the extent of transferee liability, we are
inclined to conclude that under Stern, Massachusetts law controls.
See Griffin v. Comm'r, 74 T.C.M. (CCH) 433 n.17 (1997). As neither
party has pressed such a position, however, we follow their lead,
noting that the result would likely be the same in any event. Cf.
Northborough Nat'l Bank v. Risley, 384 Mass. 348, 350-51 (1981);
Modin v. Hanron, 346 Mass. 629, 631 (1964); Richman v. Leiser, 18
Mass. App. Ct. 308, 314 (1984).

-28-
$2 million that he "loaned" to DCI between 2001 and 2010.22 Most

of that money was used to pay expenses relating to Schussel's own

criminal and civil tax cases. Schussel argues that his legal costs

were properly deductible as business expenses, suggesting that

there is no irregularity in DCI paying them, and hence in his

giving DCI money to do so. The IRS objects that these were loans,

not retransfers, and that the only point of the loans was to let

Schussel count personal expenses as DCI expenses and maximize his

tax deductions. Although the IRS bears the burden of proof in

transferee liability cases, see 26 U.S.C. § 6902(a), Schussel bore

the burden "of going forward with the evidence . . . to refute

transferee liability once the . . . [IRS] made a prima facie

showing of such liability." Eyler, 53 T.C.M. (CCH) 308 (citation

omitted).

The tax court, siding with the IRS, evidently found that

the "loan" transactions lacked economic substance. It found that

DCI was out of business when the loans were made, "had nothing to

gain or lose by defending or not defending the charges," and never

contested the tax deficiency. Schussel v. Comm'r, 105 T.C.M. (CCH)

1223, at *7-8 (2013). It held that "[t]he amounts loaned to the

corporation were never available to pay its tax liabilities." Id.

at *7. The tax court declined to address Schussel's arguments

22
Schussel transferred $2,141,786 to DCI between 2000 and
2010, of which $75,000 was repaid in 2004, leaving a net "loan" to
DCI of $2,066,786.

-29-
about whether the claimed expenses were deductible to either

Schussel or DCI, or to apportion them between the two, deciding

"only whether loans by petitioner to the corporation should reduce

the transfer liabilities in issue;" it noted, however, that

"recording loans to a defunct entity, paying expenses and deducting

them on an S corporation return, and passing through the resulting

losses to petitioner's personal income tax returns was simply a way

to create the appearance that personal expenses were business

expenses." Id. at *7-8. "In any event," the court noted, Schussel

was bound by the contemporaneous characterization of these

transactions as loans. Id. at *8. "In sum," the court found

unjustified by "law or reason" the idea that Schussel's "liability

as a transferee for corporate income taxes that he caused to be

evaded should be reduced by the costs of defending himself from the

consequences of his fraud." Id.

Schussel objects to the tax court's findings and

conclusions on only two grounds. First, he attacks the court's

observation that nothing in "law or reason" justified reducing

Schussel's liability by the amount of his own legal fees. Not so,

Schussel contends: precedent makes clear that legal defense costs

related to one's business may be deductible as a business expense.

See, e.g., Comm'r v. Tellier, 383 U.S. 687 (1966). While true,

this helps him little. We view the tax court's remark as a passing

comment upon the equities of the case--not as holding that

-30-
Schussel's suit-related expenses were per se nondeductible. This

is especially clear in light of the tax court's explicit refusal to

decide the deductibility question. This passing comment affords no

basis for reversal.

Second, Schussel takes aim at the tax court's conclusion

that the loaned funds were never available to pay DCI's tax bill,

and its resulting refusal to apportion those expenses. Regardless

of how the transfers were recorded on the corporate books, he

argues, they put cash in DCI's accounts (or really, on its ledgers)

which was then available to pay DCI's debts. Reading the court's

analysis as a whole, however, we think that it justifiably

concluded that there was no meaningful retransfer.

Viewed through the lens of federal tax doctrine (which

the parties more or less invite by failing to cite any non-federal

authority on point), the result is justified by the power to

disregard the form of transactions that have no business purpose or

economic substance beyond tax evasion. See Fidelity Int'l Currency

Advisor A Fund, LLC ex rel. Tax Matters Partner v. United States,

661 F.3d 667, 670 (1st Cir. 2011) ("Tax considerations are

permissibly taken into account by taxpayers . . . but where a

transaction has no economic purpose other than to reduce taxes, the

IRS may disregard the reported figures as fictions and look through

to the underlying substance."). Why else would the tax court

specify that the services paid for were rendered to Schussel

-31-
personally, or that DCI was out of business and had nothing to gain

by defending the charges, before concluding that the loans were

"not available" to pay DCI's debts? (We note that Schussel offers

no challenge to those first two findings.) It thus appears that

the tax court found no economic substance or business purpose for

DCI in the loans, and that their only function was to manipulate

tax liability.23 Cf. Bergersen v. Comm'r, 109 F.3d 56, 60 (1st Cir.

1997) (declining to credit the characterization of purported loans

from a company to stakeholders, and instead treating them as

dividends, where the effect of the whole transaction was to give

the taxpayers "permanent tax-free control over the moneys" and

repayment of the loans amounted to "a meaningless exchange of

checks." (internal quotation marks omitted)). We see no basis for

disturbing the tax court's ruling on this point.

IV. Conclusion

For the foregoing reasons, the judgment of the tax court

is affirmed in part and reversed in part, and the matter is

remanded for further proceedings consistent with this opinion. No

costs are awarded.

23
Thus, this case differs from one in which a transferee
might give the transferor general funds which were then paid out to
other creditors. When there is a genuine retransfer, the use to
which those funds are then put by the original transferor does not
bear on the liability of the original transferee.

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