T.C. Memo. 2010-172
UNITED STATES TAX COURT
AMY RUTH JEFFRIES, TRANSFEREE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16504-07. Filed August 4, 2010.
Amy Ruth Jeffries, pro se.
Richard J. Hassebrock, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined that petitioner was
liable, as a transferee of the Amy Ruth Jeffries Trust in
Bankruptcy, Marc Preston Gertz, Trustee (bankruptcy estate), for
its 2001 tax year for an assessed income tax liability of
$118,310, an addition to tax pursuant to section 6651(a)(1) of
$26,620, an addition to tax pursuant to section 6651(a)(2) of
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$29,578, and an addition to tax pursuant to section 6654 of
$4,682.1 We must decide whether petitioner is liable as a
transferee of the bankruptcy estate for the bankruptcy estate’s
tax liability and additions to tax pursuant to section 6901.
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of fact are incorporated in this
opinion by reference and are found accordingly.
At the time she filed her petition, petitioner resided in
Ohio.
Petitioner began working at Wal-Mart’s Fairlawn, Ohio, store
as a courtesy desk clerk and customer service manager on November
5, 1992, and was promoted to “lead” customer service manager on
June 8, 1993. Petitioner expressed an interest in being promoted
and was permitted to work alongside the storewide personnel
manager. The personnel manager resigned from Wal-Mart in March
1997, and petitioner and another employee applied to fill the
position permanently. Petitioner scheduled a meeting with the
Ohio Civil Rights Commission (OCRC) because she feared being
passed over for a promotion on the basis of racial
discrimination. Another employee was promoted to the position of
1
Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all section
references are to the Internal Revenue Code, as amended, for the
year in issue. Amounts are rounded to the nearest dollar.
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storewide personnel manager. On April 14, 1997, petitioner filed
charges against Wal-Mart with the OCRC, alleging a discriminatory
failure to promote her.
On May 21, 1998, petitioner’s discrimination charges
proceeded to litigation in the U.S. District Court for the
Northern District of Ohio (District Court), where she also
alleged retaliation under title VII of the Civil Rights Act of
1964, as amended, Pub. L. 88-352, tit. VII, 78 Stat. 253,
codified at 42 U.S.C. secs. 2000e-2000e-17 (2006), and Ohio law
(Wal-Mart suit). The jury found in petitioner’s favor on her
retaliation claim and awarded her $8,500 in compensatory damages,
$425,000 in punitive damages, and $119,073 in accrued interest,
and the district court entered judgment in accordance with the
verdict. Wal-Mart appealed the judgment to the U.S. Court of
Appeals for the Sixth Circuit.
On July 26, 1999, with the appeal of the judgment in the
Wal-Mart suit still pending, petitioner filed a petition for
protection under chapter 7 of the Bankruptcy Code in the U.S.
Bankruptcy Court for the Northern District of Ohio (bankruptcy
court). Petitioner did not list respondent as a creditor. As a
result of the filing, the bankruptcy estate was created and Marc
Preston Gertz (Mr. Gertz) was named trustee. Upon creation of
the bankruptcy estate, the potential proceeds of the Wal-Mart
suit (proceeds) became property of the bankruptcy estate.
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On July 21, 2001, the U.S. Court of Appeals for the Sixth
Circuit affirmed the District Court judgment. On October 10,
2001, Wal-Mart satisfied the judgment and issued a $552,573 check
for the proceeds to the bankruptcy estate. The proceeds were
deposited into the bankruptcy estate’s bank account. The
bankruptcy estate earned interest of $3,217 on the deposited
funds during the 2001 tax year.
On June 18, 2002, petitioner received a distribution of
$200,000 from the bankruptcy estate after indicating to Mr. Gertz
that she and her husband “desperately needed funds”. Following
the distribution the bankruptcy estate had $133,014 in funds
remaining and still owed trustee’s fees of $18,533 and expenses
of $96 to Mr. Gertz and $60,741 to creditors named in the
bankruptcy petition. On October 3, 2003, petitioner received a
final disbursement of $53,935 from the bankruptcy estate,
representing all remaining assets following payments to all
listed creditors. On June 23, 2004, Mr. Gertz filed a final
report with the bankruptcy court. The bankruptcy estate did not
file a Federal income tax return or pay Federal income tax for
its 2001 tax year. On July 10, 2004, Mr. Gertz filed a final
account with the bankruptcy court and indicated that the
bankruptcy estate’s bank account had a zero balance. On
September 24, 2004, the bankruptcy court issued a final decree
and closed petitioner’s bankruptcy case.
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On October 17, 2003, petitioner filed a Form 1040, U.S.
Individual Income Tax Return, jointly with her husband for their
2002 tax year.2 Petitioner’s 2002 return included $232,252 in
distributions and $126,090 in interest income from the bankruptcy
estate. On December 7, 2004, petitioner filed a Form 1040X,
Amended U.S. Individual Income Tax Return, jointly with her
husband for their 2002 tax year. On the amended return
petitioner and her husband decreased their adjusted gross income
by $311,675, claiming that the proceeds of the Wal-Mart suit were
exempt from Federal income tax pursuant to Rev. Rul. 78-134,
1978-1 C.B. 197.3
The Internal Revenue Service (IRS) examined the bankruptcy
estate’s 2001 tax year, and, on December 16, 2005, respondent
mailed a notice of deficiency to the bankruptcy estate for its
2001 tax year determining a deficiency in income tax of $116,824,
an addition to tax pursuant to section 6651(a)(1) of $26,285, and
an addition to tax pursuant to section 6654 of $4,669, as well as
an addition to tax in an undetermined amount pursuant to section
6651(a)(2). Mr. Gertz did not file a petition in this Court on
behalf of the bankruptcy estate in response to the notice of
deficiency. On June 5, 2006, respondent assessed a tax liability
2
Mr. Jeffries is not a party to these proceedings.
3
The $311,675 included $185,585 in distributions from the
bankruptcy estate and $126,090 in interest income from the
bankruptcy estate.
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against the bankruptcy estate of $118,310, as well as additions
to tax totaling $29,578, and interest of $29,878.4
On January 23, 2007, petitioner submitted a “Letter of
Protest” contesting respondent’s transferee liability examination
claiming that she is not a transferee because the surplus funds
were not assets of the bankruptcy estate, the bankruptcy estate
was solvent at the time of distribution, any distributions were
made pursuant to the final order of the bankruptcy court, and
that the Government has not exhausted all reasonable efforts to
collect from the bankruptcy estate.
On February 22, 2007, petitioner filed a motion in the
bankruptcy court to reopen her bankruptcy case, which the
bankruptcy court granted on February 26, 2007.
4
The Dec. 16, 2005, notice of deficiency sent to the
bankruptcy estate determined a deficiency of $116,824. On June
5, 2006, respondent assessed a tax liability against the
bankruptcy estate of $118,310. The $118,310 assessment is the
same amount determined in the Apr. 26, 2007, notice of transferee
liability sent to petitioner. The Dec. 16, 2005, notice of
deficiency sent to the bankruptcy estate was based upon the
allowance of a standard deduction of $3,800 in the calculation of
taxable income, but the June 5, 2006, calculations omitted the
standard deduction. The calculations of the additions to tax are
based upon the amount determined in the notice of deficiency and
contain a similar discrepancy. See secs. 6651(a)(1) and (2),
6654. In a bankruptcy proceeding where the debtor is an
individual, if the bankruptcy estate does not itemize deductions,
it is entitled to a standard deduction equivalent to that allowed
for a married individual filing a separate return. Sec. 1398(c).
For tax year 2001 the standard deduction for a married individual
filing a separate return was $2,500. Sec. 63(c)(2)(D).
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On April 26, 2007, respondent mailed petitioner a notice of
transferee liability determining that petitioner was liable, as
transferee of the bankruptcy estate for its 2001 tax year, for an
income tax deficiency of $118,310, an addition to tax pursuant to
section 6651(a)(1) of $26,620, an addition to tax pursuant to
section 6651(a)(2) of $29,578, and an addition to tax pursuant to
section 6654 of $4,682. On July 23, 2007, petitioner timely
filed a petition for review of the notice of transferee liability
with this Court.
On October 15, 2007, petitioner and Mr. Gertz filed a joint
motion to have the bankruptcy court determine the tax liability
of the bankruptcy estate for its 2001 tax year. In response, the
United States filed a motion to dismiss the action. Among the
contentions in its motion for dismissal, the United States
contends that petitioner elected to proceed in the Tax Court for
adjudication of petitioner’s liability for the tax deficiency.
On December 24, 2007, petitioner and Mr. Gertz filed an objection
to the United States’ motion to dismiss. Among the contentions
in the joint objection, petitioner and Mr. Gertz contend that the
bankruptcy case was reopened before the Tax Court case, that the
Tax Court case has nothing to do with the administrative issues
in the bankruptcy case, and that the bankruptcy court has
exclusive jurisdiction to determine the tax liability of the
bankruptcy estate. On March 6, 2008, petitioner and Mr. Gertz
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withdrew their joint motion to determine the tax liability of the
bankruptcy estate, which the bankruptcy court permitted. Mr.
Gertz then filed on behalf of the bankruptcy estate a Form 1041,
U.S. Income Tax Return for Estates and Trusts, reporting a total
Federal income tax due of $160,731 for tax year 2001.
On April 4, 2008, the United States filed a motion in the
bankruptcy court to vacate the order of distribution, to order
disgorgement from petitioner and Mr. Gertz, and to order an
accounting because the previous distributions to petitioner were
erroneous and Mr. Gertz failed to file for and pay the bankruptcy
estate’s Federal income tax liability. Mr. Gertz filed a brief
in partial opposition, claiming that the disgorgement of his
trustee fee should represent the extent of his liability.
On September 4, 2008, this Court set the instant transferee
liability case for trial in Columbus, Ohio, for the trial session
beginning February 9, 2009, and on February 10, 2009, the instant
case was tried.
We take judicial notice of several filings made and orders
entered after trial. On December 21, 2009, an agreed order was
entered by the bankruptcy court in which Mr. Gertz was ordered to
disgorge his trustee fee of $18,533. On February 24, 2010, the
bankruptcy court ordered that $3,012 of Mr. Gertz’ trustee fee
would be distributed to the State of Ohio and $15,521 would be
distributed to respondent. The bankruptcy court also stated that
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“This order is without prejudice as it regards the rights and
remedies of the Internal Revenue Service to seek disgorgement
from Debtor [petitioner], or to impose transferee liability on
her under 26 U.S.C. § 6901.” On April 30, 2010, Mr. Gertz filed
an amended chapter 7 “Trustee’s Final Account and Distribution
Report Certification” stating that the bankruptcy estate had been
fully administered and an application for discharge. On May 25,
2010, the United States filed a response. In that response the
United States stated that “there should be no presumption that
the case has been fully administered because the United States
has filed this objection within the 30-day period after the
filing of the trustee final account.” However, the United States
“does not necessarily object to the final report- i.e., it only
objects if the Court would construe its approval to have
preclusive force with respect to the United States’ suit against
[Mr. Gertz].”
On May 25, 2010, the United States also filed a suit in the
U.S. District Court for the Northern District of Ohio against Mr.
Gertz seeking to recover:
damages equal to the full unpaid balance due upon its
administrative claim, $281,300.56, plus interest from May
24, 2010 for [F]ederal income taxes, penalties and interest
due from the Chapter 7 estate of [petitioner] for the year
ended December 31, 2001.
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See United States v. Gertz, No. 5:10-cv-1171 (N.D. Ohio May 25,
2010) (complaint).5
On July 9, 2010, the bankruptcy court entered an agreed
order closing the bankruptcy case. Additionally, the bankruptcy
court stated that the order closing the case: “in no way bars
the United States’ action for damages against [Mr. Gertz] * * *
or any other action to collect the tax liabilities of the debtor
from the debtor or other sources.”
OPINION
As a preliminary matter, we discuss whether we are barred by
either the automatic stay of 11 U.S.C. sec. 362 (1994), or the
permanent injunction of 11 U.S.C. sec. 524 (1994), from hearing
the instant case.
Upon the filing of a bankruptcy petition an automatic stay
arises to temporarily bar actions against or concerning the
debtor or property of the debtor or the bankruptcy estate. 11
U.S.C. sec. 362(a); Kovitch v. Commissioner, 128 T.C. 108, 111
(2007). The automatic stay operates as a stay against: “the
5
Respondent asserts that he is entitled to seek relief in
both the District Court and the Tax Court. While the bankruptcy
court might have been able to provide more complete relief, we
see no barrier to deciding the instant case as the parties have
presented it to us.
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commencement or continuation of a proceeding before the United
States Tax Court concerning the debtor.” 11 U.S.C. 362(a)(8).6
The Court has jurisdiction to determine whether the
automatic stay prevents us from proceeding in the instant case.
See Kovitch v. Commissioner, supra at 112. We have construed the
phrase “concerning the debtor” to mean that the automatic stay
should not apply unless the Tax Court proceeding possibly would
affect the tax liability of the debtor in bankruptcy. Id.
The automatic stay continues until the earliest of the
following occurrences: The case is closed, the case is
dismissed, or a discharge is granted or denied. 11 U.S.C. sec.
362(c)(2). A discharge operates, among other things, as an
injunction against: “the commencement or continuation of an
action, the employment of process, or an act, to collect, recover
or offset any such debt as a personal liability of the debtor”.
11 U.S.C. sec. 524(a)(2). However, a discharge applies only to
those debts that arose before the date of the order for relief.
6
At the time of the original bankruptcy filing, July 26,
1999, 11 U.S.C. sec. 362(a)(8) read: “(8) the commencement or
continuation of a proceeding before the United States Tax Court
concerning the debtor.” The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, Pub. L. 109-8, sec. 709, 119
Stat. 127, amended 11 U.S.C. sec. 362(a)(8), effective in cases
commenced on or after Oct. 17, 2005. Id. sec. 1501, 119 Stat.
216. The amended version removed the phrase “the debtor” and
replaced it with the phrase “a corporate debtor’s tax liability
for a taxable period the bankruptcy court may determine or
concerning the tax liability of a debtor who is an individual for
a taxable period ending before the date of the order for relief
under this title”.
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11 U.S.C. 727(b) (1994). The commencement of a voluntary
bankruptcy case constitutes an order for relief. 11 U.S.C. sec.
301 (1994).
Petitioner’s bankruptcy case was originally closed on
September 24, 2004, as of which date the automatic stay
terminated. See 11 U.S.C. secs. 362(c)(2), 524. Following the
commencement of the bankruptcy case, the bankruptcy estate
received $552,573 in satisfaction of the Wal-Mart suit during tax
year 2001. The income tax liability associated with that income
became due and owing at the close of the bankruptcy estate’s 2001
tax year.7 See Hagaman v. Commissioner, 100 T.C. 180, 185
(1993). The additions to tax would have accrued when the tax
return went unfiled and the tax liability went unpaid. See secs.
6012(a)(9), 6072(a), 6151(a), 6651(a)(1) and (2), 6654.
Accordingly, the permanent injunction of 11 U.S.C. section 524
does not bar respondent from seeking the tax liability or the
additions to tax of the bankruptcy estate against petitioner as a
transferee as those liabilities are debts that arose after July
26, 1999, the date petitioner filed her voluntary bankruptcy
case. See 11 U.S.C. sec. 727(b).
7
In its return filed with respondent the bankruptcy estate
claims to be a calendar year taxpayer. The record contains no
evidence that the bankruptcy estate elected a different tax year.
Secs. 441(g), 1398(j)(1).
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The bankruptcy case was reopened pursuant to 11 U.S.C.
section 350(b) (1994) to establish the tax liability of the
estate pursuant to 11 U.S.C. section 505 (1994). The reopening
of a bankruptcy case does not automatically continue or
reactivate the automatic stay. Mass. Dept. of Revenue v.
Crocker, 362 Bankr. 49, 56 (B.A.P. 1st Cir. 2007); Allison v.
Commissioner, 97 T.C. 544, 546 (1991). A bankruptcy court may
reinstate a stay under its broad equitable powers under 11 U.S.C.
section 105(a) (1994). Mass. Dept. of Revenue v. Crocker, supra
at 56-57. However, the bankruptcy court has not done so in the
instant case. Additionally, the reopened bankruptcy case has
been closed. See 11 U.S.C. sec. 362(c)(2). Consequently, we
hold that we are not barred from proceeding with the instant
case.
Section 6901(a) provides that the liability, at law or in
equity, of a transferee of property “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”. Section 6901
does not impose liability on the transferee, but merely gives the
Commissioner a procedure or remedy to enforce the transferor’s
existing liability. See Commissioner v. Stern, 357 U.S. 39, 42
(1958) (discussing statutory predecessor of section 6901); see
also Hagaman v. Commissioner, supra at 183. The burden of proof
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is on the Commissioner to show that the taxpayer is liable, at
law or in equity, as a transferee, but not to show that the
transferor taxpayer was liable for the underlying tax. Sec.
6902(a); Rule 142(d).
Depending on the provisions of the particular State law and
the rules of equity that are involved in a case, factors
generally relevant in considering transferee liability have been
described as follows:
(1) That the alleged transferee received property of the
transferor; (2) that the transfer was made without adequate
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).
Gumm v. Commissioner, 93 T.C. 475, 480 (1989) (citations
omitted), affd. without published opinion 933 F.2d 1014 (9th Cir.
1991). The foregoing list of factors is a generalization of
equity principles under State law. Hagaman v. Commissioner,
supra at 184. However, as section 6901 does not enumerate such
factors, the existence and extent of liability must be determined
under State law. Id.
Typically, the principles relating to transferee liability
in equity in a given State will be codified in the State’s
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fraudulent conveyance law. Id. Both petitioner and the
bankruptcy estate trustee reside in the State of Ohio. See Ohio
Rev. Code Ann. secs. 1336.01-1336.11 (LexisNexis 2006).
Accordingly, we analyze whether petitioner may be held liable,
pursuant to Ohio law, as a transferee of the bankruptcy estate
for the bankruptcy estate’s 2001 assessed income tax liability
and related additions to tax.
Ohio has adopted the Uniform Fraudulent Transfer Act (UFTA),
which provides as follows:
A transfer made or an obligation incurred by a debtor is
fraudulent as to a creditor whose claim arose before the
transfer was made or the obligation was incurred if the
debtor made the transfer or incurred the obligation without
receiving a reasonably equivalent value in exchange for the
transfer or obligation and the debtor was insolvent at that
time or the debtor became insolvent as a result of the
transfer or obligation.
Ohio Rev. Code Ann. sec. 1336.05(A). Ohio Revised Code section
1336.07(A) allows a creditor to collect the assets from the
transferee if a transfer is fraudulent under Ohio Revised Code
section 1336.05. Consequently, if the bankruptcy estate’s
transfer of funds to petitioner was fraudulent under Ohio Revised
Code section 1336.05, respondent is entitled to collect the
bankruptcy estate’s deficiency and additions to tax from
petitioner pursuant to section 6901.
The bankruptcy estate transferred to petitioner, for no
consideration, an initial cash disbursement of $200,000 on June
18, 2002, and a final cash disbursement of $53,935 on October 3,
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2003. As noted above, the bankruptcy estate’s tax liability
regarding the Wal-Mart suit was a preexisting debt that was due
and owing to respondent at the close of the bankruptcy estate’s
2001 tax year. See Hagaman v. Commissioner, 100 T.C. at 185.
The bankruptcy estate became insolvent as a result of the
June 18, 2002, distribution to petitioner. A party is insolvent
once its liabilities exceed its assets. Ohio Rev. Code Ann. sec.
1336.02(A)(1). In addition to the $60,741 owed to the
outstanding named creditors and the $18,629 owed to Mr. Gertz as
compensation for his role as trustee, the bankruptcy estate owed
$118,310 in Federal income tax, for total liabilities of
$197,680.8 Following the June 18, 2002, distribution to
petitioner, the bankruptcy estate’s then-existing liabilities of
$197,680 exceeded its then-existing assets of $133,014.
Petitioner argues that she has done nothing wrong. However,
the intent of the parties is not controlling. See Ohio Rev. Code
Ann. sec. 1336.05(A); Comer v. Calim, 716 N.E.2d 245, 250 (Ohio
Ct. App. 1998) (fraudulent conveyance may be set aside regardless
of the motives of the parties). As to petitioner’s contention
8
The bankruptcy estate would have been insolvent if either
the tax liability of $116,824 from the Dec. 16, 2005, notice of
deficiency or of $160,731 shown due on the 2001 Form 1041 filed
by the bankruptcy estate had been used to calculate total
liabilities.
This calculation excludes additions to tax which would have
accrued when the tax return went unfiled and the tax liability
went unpaid. See secs. 6651(a)(1) and (2), 6654.
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that respondent has not exhausted all reasonable efforts to
collect the tax liability from the bankruptcy estate, we note the
proceedings in the District Court and the recently concluded
proceedings in the bankruptcy court. However, the Ohio UFTA does
not require a creditor to prove that it exercised all reasonable
efforts to collect the liability from the transferor before
proceeding against the transferee. See Ohio Rev. Code Ann. secs.
1336.01-1336.11.
Accordingly, we conclude that the distributions of cash from
the bankruptcy estate to petitioner during June 2002 and October
2003 were fraudulent transfers under Ohio law.9
Generally, a taxpayer may challenge the underlying tax
liability of the transferor. Sec. 6901(a) (underlying tax
liability 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”); see also United States v. Williams, 514 U.S. 527, 539
(1995) (“certain transferees may litigate the tax liabilities of
the transferor; if the transfer qualifies as a fraudulent
conveyance under state law, the Code treats the transferee as the
taxpayer”); L.V. Castle Inv. Group, Inc. v. Commissioner, 465
9
Because we conclude that the transfers were fraudulent
under the Ohio UFTA, we need not address additional Ohio
equitable principles or the factors described in Gumm v.
Commissioner, 93 T.C. 475 (1989), affd. without published opinion
933 F.2d 1014 (9th Cir. 1991).
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F.3d 1243, 1248 (11th Cir. 2006) (“transferee is ‘free to
litigate the[ ] transferor’s liability’ after it receives a
notice of transferee liability”) (quoting Great Falls Bonding
Agency, Inc. v. Commissioner, 63 T.C. 304, 307 (1974)). However,
if the transferor’s tax liability is subject to a closing
agreement or if res judicata applies, the transferee may not
litigate the transferor’s underlying liability. Pert v.
Commissioner, 105 T.C. 370, 377 (1995); Krueger v. Commissioner,
48 T.C. 824, 830-832 (1967). Petitioner has not contested the
assessments against the bankruptcy estate, and she failed to make
any such arguments. Accordingly, we deem conceded any issue
regarding the transferor’s underlying liability.
The value of the funds transferred in the distributions to
petitioner ($253,935) is greater than the amount respondent
sought in the notice of transferee liability ($179,910).10
Accordingly, we hold that petitioner is liable as a
transferee of the bankruptcy estate for its 2001 tax year
pursuant to section 6901 for the bankruptcy estate’s assessed
income tax liability of $118,310, the addition to tax pursuant to
section 6651(a)(1) of $26,620, the addition to tax pursuant to
10
As the $179,910 liability does not include interest or
account for the disgorged trustee’s fees paid to respondent,
$253,934 represents the upper limit of petitioner’s liability.
See Gumm v. Commissioner, supra at 480; Stokes v. Commissioner,
22 T.C. 415, 428 (1954).
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section 6651(a)(2) of $29,578, and the addition to tax pursuant
to section 6654 of $4,682.
The Court has considered all other arguments made by the
parties, and to the extent we have not addressed them herein, we
consider them moot, irrelevant, or without merit.
On the basis of the foregoing,
Decision will be entered
for respondent.