T.C. Memo. 2010-238
UNITED STATES TAX COURT
DOROTHY R. DIEBOLD, TRANSFEREE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24675-07. Filed October 26, 2010.
A. Duane Webber, Jaclyn Pampel, Catlin A. Urban, Summer
Austin, and Ryan J. Kelly, for petitioner.
John R. Mikalchus, Frederick C. Mutter, and Jessica R.
Browde, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: In a notice of liability respondent
determined that Dorothy R. Diebold (petitioner) is liable as a
transferee for the assessed Federal income tax liability of the
-2-
Double-D Ranch, Inc. (Double-D Ranch), for its short taxable year
ending July 2, 1999. The issue for decision is whether
petitioner is liable as a transferee pursuant to section
69011 for the unpaid tax and section 6662 accuracy-related
penalty owed by Double-D Ranch for that taxable year. For the
reasons stated herein, we find that petitioner is not liable as a
transferee.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulation
of facts is incorporated herein by this reference. Petitioner
resided in New York at the time she filed her petition.
Petitioner sold, in form, the stock of Double-D Ranch. The
parties for the most part agree on the form of the transaction at
issue but disagree as to its substance. Respondent argues that
petitioner in substance sold the assets of Double-D Ranch and
received a liquidating distribution of the proceeds. Petitioner
contends that the substance of the transaction matches its form
and the substance was a sale of stock.
Petitioner was married to A. Richard Diebold (Mr. Diebold).
The Diebolds had three children: Diane D. Terni (Ms. Terni), A.
1
All section references are to the Internal Revenue Code,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
-3-
Richard Diebold, Jr. (Mr. Diebold, Jr.), and Dudley G. Diebold
(Mr. D. Diebold).
Mr. Diebold died on June 18, 1996. Pursuant to a trust
agreement dated July 29, 1985, the Dorothy R. Diebold Marital
Trust (the marital trust) was created upon the death of Mr.
Diebold on June 18, 1996. As sole beneficiary of the marital
trust, petitioner was entitled to the net income of the marital
trust in quarterly installments for the rest of her life. At the
time of Mr. Diebold’s death, the marital trust owned 3,835 shares
of stock in Double-D. Ranch. The 3,835 shares comprised all of
the issued and outstanding shares of Double-D Ranch. From the
time of Mr. Diebold’s death to the purported sale of Double-D
Ranch’s stock in 1999, the assets of Double-D Ranch consisted
primarily of stock in American Home Products (AHP), a publicly
traded company; stock in other publicly traded companies; U.S.
Treasury securities; cash; and real estate. These assets will be
discussed in more detail below.
The various securities and real estate had high fair market
values, but low bases for tax purposes. If they were to be sold
by Double-D Ranch, the corporation would be left with a large tax
liability on the recognized gain.
The marital trust had three cotrustees: (1) Petitioner; (2)
Bessemer Trust Co., N.A. (Bessemer Trust); and (3) Andrew W.
-4-
Bisset (Mr. Bisset). Bessemer Trust was a national bank that
served as trustee, asset custodian, and investment adviser to the
marital trust. Austin Power, Jr. (Mr. Power), a senior vice
president at Bessemer Trust, served as counsel and account
manager for both the marital trust and petitioner. Mr. Power was
Bessemer Trust’s representative in its role as trustee of the
marital trust. Mr. Bisset is an attorney licensed to practice
law in Connecticut and New York. He served in effect as
petitioner’s personal attorney after her husband’s death and was
involved in nearly all of petitioner’s dealings.
Petitioner was also a director of the Diebold Foundation,
Inc. (the Diebold Foundation), a section 501(c)(3) charitable
organization. Mr. Bisset and petitioner’s three children served
as the other directors of the Diebold Foundation.
On May 28, 1999, approximately one-third of the outstanding
stock of Double-D Ranch (1,280 shares) was transferred from the
marital trust to The Diebold Foundation. Petitioner requested
this transfer, and it was approved by Mr. Power and Bessemer
Trust in their capacity as trustees of the marital trust.
On the marital trust’s 1999 Form 1041, U.S. Income Tax
Return for Estates and Trusts, Bessemer Trust, as cotrustee for
the marital trust, prepared and filed with the Internal Revenue
-5-
Service (IRS) a statement identifying petitioner as the marital
trust’s “Grantor/Owner”.
Decision To Sell Double-D Ranch
At some point in May or early June 1999, the cotrustees of
the marital trust and the directors of the Diebold Foundation
decided to sell the stock of Double-D Ranch. Mr. Power was
primarily responsible for implementing the decision to sell the
stock; Stephen A. Baxley (Mr. Baxley), a senior vice president in
Bessemer Trust’s tax department, Morton Grosz (Mr. Grosz),
Richard Leder (Mr. Leder), and Adam Braverman assisted in the
sale. Messrs. Grosz and Leder were attorneys at Chadbourne &
Parke, LLP, a nationally known law firm.
The representatives for petitioner discussed a potential
sale with two groups of purchasers: (1) James M. Rhodes (Mr.
Rhodes), Harry Zelnick (Mr. Zelnick) of River Run Financial
Advisors, L.L.C. (River Run), and Ari Bergmann of Sentinel
Advisors, L.L.C. (Sentinel); and (2) Fortrend International,
L.L.C. (Fortrend). River Run, Sentinel, and Fortrend all
presented a similar interest: purchasing the stock of closely
held corporations holding assets with high fair market values but
low tax bases. After learning of these companies, petitioner’s
advisers decided to sell Double-D Ranch stock.
-6-
On June 1, 1999, petitioner’s representatives met with Mr.
Zelnick of River Run, Mr. Bergman of Sentinel, and separately,
Craig Hoffman (Mr. Hoffman) of Fortrend, and ultimately decided
to sell the Double-D Ranch stock to Sentinel. On or before June
9, 1999, Mr. Power, acting as the representative of Bessemer
Trust, and Mr. Bisset concluded that the Double-D Ranch stock
should be sold and recommended to petitioner and her children, in
their various capacities, to approve the sale as well; all
agreed. Shap Acquisition Corp. II (Shap II) was the entity
created and designated to serve as the acquirer of the Double-D
Ranch stock. Mr. Zelnick and Mr. Rhodes served as directors and
officers of Shap II.
The Sale Transaction
Representatives for both the seller and the purchaser
negotiated the price and drafted the transaction documents. On
June 17, 1999, Shap II and the Double-D Ranch shareholders
executed a letter of intent confirming the terms of the stock
sale. The letter of intent was signed by Mr. Rhodes, Mr. Power,
and Mr. Bisset, acting on behalf of Shap II, the marital trust,
and The Diebold Foundation, respectively.
-7-
Attached to the letter of intent was a term sheet defining
the terms of the sale. The term sheet reflected that Shap II2
would purchase all issued and outstanding Double-D Ranch stock
for cash in an amount equal to the fair market value of the
corporation’s assets minus an agreed-upon discount.
As discussed above, Double-D Ranch held mostly marketable
securities and real estate. These assets were easily valued on
various securities exchanges, and the term sheet indicated that
was the preferred method for their valuation. However, one
Double-D Ranch asset was more difficult to value--the AHP stock.
Because Double-D Ranch owned such a large block of AHP stock,
simply dumping it into the stock market would have an impact on
the stock’s value. Accordingly, the parties to the Double-D
Ranch sale decided to value the AHP stock according to a formula.
The price would be determined by taking the “Volume Weighted
Average Price” for the 5 consecutive trading days before the
closing. These five weighted prices would then themselves be
averaged. The result would be the price given to the AHP stock
owned by Double-D Ranch.
2
The letter of intent indicated that the purchaser was to be
“XYZ Corporation, a special purpose entity” until the actual
purchaser was identified or formed. On June 21, 1999, Shap II
was incorporated in the State of Delaware to purchase the Double-
D Ranch stock.
-8-
The Double-D Ranch assets were valued as follows:
Description Amount
Cash $21,125,554
AHP stock 129,085,440
Other securities 162,335,803
Land--farm 6,340,000
Double-D Ranch’s marketable securities were held in two accounts
with Bessemer Trust; the remaining marketable securities were
held in an account with the Bank of New York.
The agreed-upon discount applied to the fair market value of
Double-D Ranch’s assets was 4.25 percent of the fair market value
of Double-D Ranch’s assets minus Double-D Ranch’s tax bases in
those assets.
Shap II’s Financing and the Future Asset Sale
Shap II financed its purchase of the Double-D Ranch stock
with a loan from Utrecht-America Finance Co. (Utrecht), a wholly
owned subsidiary of Rabobank Nederland (Rabobank). Utrecht
issued a commitment letter to Shap II indicating its agreement to
lend up to $325 million to Shap II for the acquisition of the
Double-D Ranch stock.
Rabobank imposed certain conditions on Shap II as part of
its agreement to lend the $325 million. The biggest condition
was that Shap II enter into a binding agreement to sell the
Double-D Ranch assets after Shap II purchased the corporate
-9-
stock. To that end, Shap II entered into a letter agreement with
Morgan Stanley.
Shap II and Morgan Stanley executed a document titled
“Execution by Morgan Stanley of Volume-Weight Average Price and
Market-on-Close Trades on Risk Basis” (the Shap II-Morgan Stanley
agreement or the agreement). Pursuant to the agreement, Shap II
agreed to sell the AHP stock and other securities held by Double-
D Ranch to Morgan Stanley on the “closing date”. The Shap II-
Morgan Stanley agreement initially listed the closing date as
July 1, 1999, but it was later changed to July 6, 1999.
The securities to be sold pursuant to the Shap II-Morgan
Stanley agreement were to be valued according to the same method
used by Shap II to value the Double-D Ranch assets.
Execution of the Stock Sale
On June 25, 1999, Shap II and the Double-D Ranch
shareholders executed a stock purchase agreement. Petitioner,
Mr. Power (representative for Bessemer Trust), and Mr. Bisset
signed on behalf of the marital trust. Mr. Bisset signed on
behalf of The Diebold Foundation, and Mr. Rhodes signed on behalf
of Shap II. The stock purchase agreement indicated that the
closing for the sale would occur on July 1, 1999.
The parties established additional bank accounts to handle
the various funds transfers made pursuant to the stock purchase
-10-
agreement. On July 1, 1999, the Double-D Ranch stockholders
entered into a “Contribution Escrow Agreement” (the escrow
agreement) with Bessemer Trust. Pursuant to the escrow
agreement, Bessemer served as the stockholders’ representatives
for all matters relating to the stock purchase agreement.
Further, the escrow agreement established an escrow account with
Bessemer Trust. Bessemer Trust agreed to act as escrow agent
with respect to the escrow account.
Both the Double-D Ranch stockholders and Shap II agreed to
deposit a portion of their funds into the escrow account for the
purpose of satisfying any outstanding business obligations of the
marital trust and the Diebold Foundation that may have preexisted
the sale. The Double-D Ranch stockholders would deposit a
portion of their proceeds from the sale of their stock, which
would be used in a like manner. Shap II agreed to hold back $10
million from the purchase price and to deposit that held-back
amount into the escrow account. The held-back amount would then
be released from the escrow account and paid to the Double-D
Ranch stockholders on July 9, 1999, subject to certain
adjustments relating to certain liabilities of the Double-D Ranch
which might have arisen.
The closing was delayed from July 1 to July 2, 1999, and the
stock purchase agreement was amended to reflect the changed date.
-11-
Before the closing, Mr. Bisset informed the Bank of New York that
he would provide written confirmation of the stock sale and that
after receiving that confirmation, the Bank of New York should
transfer the Double-D Ranch assets held there to various accounts
of Shap II.
On July 2, 1999, in connection with the closing, Bessemer
Trust, Double-D Ranch, and Shap II executed a letter agreement
that irrevocably instructed Bessemer Trust to transfer custody of
Double-D Ranch’s marketable securities to Morgan Stanley on July
6, 1999. Also on that date, Mr. Rhodes, as president of Shap II,
instructed Morgan Stanley to transfer $258,546,764 to Shap II’s
Rabobank account.
Pursuant to the amended stock purchase agreement, Shap II
agreed to pay $307 million for the Double-D Ranch stock. Of that
$307 million, $297 million would be paid immediately, with $10
million deposited into the escrow account to satisfy Shap II’s
obligation to provide the held-back amount.
The various closing documents relating to the sale by
Double-D Ranch’s shareholders of its common stock to Shap II were
executed on July 2, 1999, and Shap II became the owner of all of
the outstanding shares of Double-D Ranch stock. On July 2, 1999,
Rabobank deposited $295,975,000 into Shap II’s Rabobank account,
$297 million was transferred to the escrow account, and $975,000
-12-
was transferred back to Rabobank as its fee for assisting in the
transaction.
On July 9 and July 12, 1999, Shap II paid the Double-D Ranch
shareholders the held-back amount and additional amounts to
reflect certain price adjustments.
Ultimately, the Double-D Ranch shareholders received the
following consideration for the corporation stock:3
Description Date Amount
Payment at closing 7/2/99 $297,000,000
Held back and adjustment 7/9/99 11,556,321
Price adjustment 7/12/99 608,800
Price adjustment 7/12/99 34,066
The following amounts were distributed from the escrow
account to the marital trust:
Date Amount
7/6/1999 $183,879,480
7/12/1999 8,276,028
11/8/1999 10,541,167
3/26/2004 3,754,850
4/15/2004 6,989
The following amounts were distributed from the escrow
account to The Diebold Foundation:
Date Amount
7/6/1999 $92,120,520
7/12/1999 4,156,098
11/8/1999 5,280,900
3
All amounts are rounded to the nearest dollar.
-13-
The transfers from the escrow account to the marital trust and
The Diebold Foundation were made by Bessemer Trust pursuant to
the escrow agreement. The 2004 distributions to the marital
trust corrected a misallocation made at the time of the stock
sale.
Real Estate Dealings
Double-D Ranch owned more than 500 acres in Connecticut. As
of July 2, 1999, the farm had a fair market value of $6,340,000.
The value was determined by an appraisal requested by Mr. Power.
Mr. D. Diebold formed Toplands Farm, LLC (Toplands Farm), to
purchase and operate the farm. On July 2, 1999, Toplands Farm
paid $1,000 for an option to purchase the farm at its fair market
value, $6,340,000. On July 28, 1999, Toplands Farm paid Shap II
$317,000 as a downpayment for the farm. On August 27, 1999,
Toplands Farm made a final payment of $6,022,000 for the farm.
The $1,000 option, the $317,000 downpayment, and the $6,022,000
final payment added up to the $6,340,000 Toplands Farm paid for
the farm, in accord with its fair market value per the appraisal.
After-Closing Asset Transfers
On July 2, 1999, after the stock sale had been completed,
Mr. Rhodes, acting as Double-D Ranch president, directed Bessemer
Trust to transfer the marketable securities owned by Double-D
Ranch to Morgan Stanley on July 6, 1999. Double-D Ranch and
-14-
Morgan Stanley also executed a pledge and security agreement
which granted Morgan Stanley a security interest in the
securities held by Bessemer Trust. Morgan Stanley agreed not to
take possession of the securities before July 6, 1999.
On that date Bessemer Trust transferred the Double-D Ranch
assets from its own accounts to Shap II’s Morgan Stanley
accounts. The Bank of New York also transferred its Double-D
Ranch asset holdings to Shap II’s accounts at Morgan Stanley.
The proceeds of the securities sold to Morgan Stanley were
initially placed on Shap II’s Morgan Stanley account. Shortly
thereafter they were transferred to Shap II’s Rabobank account
and used in part to repay Rabobank’s loan to Shap II.
Shap II received the following from its sale of the Double-D
Ranch’s assets:
Description Amount
Securities $291,230,614
Land 6,340,000
Cash 21,126,554
Total 318,697,168
Dissolution of the Diebold Foundation
The Diebold Foundation adopted a “Plan of Dissolution and
Distribution of Assets”, effective January 29, 2001. The plan
was approved by the Supreme Court of the State of New York.
-15-
The assets of The Diebold Foundation were divided and
distributed in equal shares to three new charitable foundations:
(1) The Salus Mundi Foundation; (2) the Diebold Foundation, Inc.
(the Diebold Foundation--Connecticut); and (3) the Ceres
Foundation, Inc. (the Ceres Foundation). All three foundations
are section 501(c)(3) charitable foundations, and each received
$32,918,670 from the Diebold Foundation.
Return Filings
Petitioner
The marital trust and petitioner reported the stock sale
according to its form for Federal income tax purposes.
Petitioner timely filed a Form 1040, U.S. Individual Income Tax
Return, for 1999, reporting capital gain of $100,376,799 on the
sale of the Double-D Ranch stock. Petitioner timely paid an
income tax liability of $18,399,332 for 1999, including tax on
the above-referenced capital gain.
Double-D Ranch and Shap II
Double-D Ranch filed a Form 1120, U.S. Corporation Income
Tax Return, for its July 2, 1999, tax year. The parties have
stipulated that this return was timely if the form of the
transaction as a stock sale is upheld.
Shap II filed a Form 1120 on December 20, 2000, on behalf
of a consolidated group of which Shap II and the former Double-D
-16-
Ranch were the only members. The Form 1120 reported as part of
its consolidated income the built-in gain from the sale of the
Double-D Ranch assets on July 6, 1999. The consolidated return
also reported artificial losses that offset those gains.
Ultimately, the Form 1120 did not show a tax liability resulting
from the sale of the Double-D Ranch’s assets. On March 10, 2006,
respondent issued a notice of deficiency to Double-D Ranch for
its tax year ending July 2, 1999. The notice determined that
Double-D Ranch was liable for a tax deficiency of $81,120,064 on
gain from the sale of its assets, plus an accuracy-related
penalty. Double-D Ranch did not petition this Court in response
to the notice.
The deficiency determined was based upon respondent’s
recharacterization of the transaction as a sale of the Double-D
Ranch assets followed by a liquidating distribution to the
corporation’s shareholders. Further, the notice was issued more
than 3 years after Double-D Ranch filed its return. Respondent
contends that the 6-year period of limitations under section
6501(e) applies. This argument is also based on respondent’s
characterizing the transaction as an asset sale followed by
dissolution, rather than as a stock sale.
On July 31, 2006, respondent assessed the following amounts
against Double-D Ranch:
-17-
Description Amount
Tax $81,120,064
Sec. 6662 penalty 16,224,013
Interest 3,171,631
On August 2, 2007, respondent issued a notice of transferee
liability to petitioner. The notice asserted transferee
liability against petitioner of $97,344,077, plus interest,
determining that petitioner was liable as a transferee of the
Double-D Ranch. On July 11, 2008, respondent issued notices of
liability to the Salus Mundi Foundation, the Ceres Foundation,
and the Diebold Foundation--Connecticut. The notices of
liability issued to the three foundations are attempts by
respondent to collect from them as transferees of The Diebold
Foundation.
Petitioner filed a petition on October 26, 2007, in response
to the notice of liability. A trial was held in Washington, D.C.
OPINION
Section 6901(a)(1) is a procedural statute authorizing the
assessment of transferee liability in the same manner and subject
to the same provisions and limitations as in the case of the
taxes with respect to which the transferee liability was
incurred. Section 6901(a) does not create or define a
substantive liability but merely provides the Commissioner a
remedy for enforcing and collecting from the transferee of the
-18-
property the transferor’s existing liability. Coca-Cola Bottling
Co. v. Commissioner, 334 F.2d 875, 877 (9th Cir. 1964), affg. 37
T.C. 1006 (1962); Mysse v. Commissioner, 57 T.C. 680, 700-701
(1972). Section 6902 provides that the Commissioner has the
burden of proving the taxpayer’s liability as a transferee but
not of showing that the transferor was liable for the tax.
Under section 6901(a) the Commissioner may establish
transferee liability if a basis exists under applicable State law
or State equity principles for holding the transferee liable for
the transferor’s debts. Commissioner v. Stern, 357 U.S. 39, 42-
47 (1958); Bresson v. Commissioner, 111 T.C. 172, 179-180 (1998),
affd. 213 F.3d 1173 (9th Cir. 2000).
We must determine whether respondent has shown that
petitioner was liable as a transferee.
I. Notice of Transferee Liability
On August 2, 2007, respondent issued a notice of liability
to petitioner asserting transferee liability of $97,344,077, plus
interest, for the tax liability of Double-D Ranch. We note that
the proceeds of the stock sale went to the marital trust and the
Diebold Foundation, not to petitioner.
Under New York State law, properly created trusts are
independent legal entities with separate juridical status. See
Pinckney v. City Bank Farmers Trust Co., 292 N.Y.S. 835, 838
-19-
(App. Div. 1937) (trust created under New York law is a legal
entity and continues as such to the end fixed by its own terms).
Thus, the separate legal existence of a marital trust must be
respected for purposes of determining any transferee liability
unless it can be shown that the marital trust should be
disregarded under New York law.
The New York Court of Appeals has held that courts may
disregard the form of a trust when the trust was formed for an
illegal purpose or if there is not the requisite separation
between beneficiary and trustee. Natl. Union Fire Ins. Co. of
Pittsburgh, Pa. v. Eagle Equip. Trust, 633 N.Y.S.2d 308, 309
(App. Div. 1995).
A. Respondent’s Position
Respondent argues that the marital trust acted as a mere
conduit for the transfer of the proceeds from the sale of the
assets of Double-D Ranch to petitioner. To support this
argument, respondent points to the 1999 fiduciary tax returns
filed by the marital trust reporting that petitioner was the
“grantor/owner” of the marital trust. Respondent then concludes
that petitioner should be treated as the owner of the marital
trust assets for Federal tax purposes and that therefore
petitioner should also be treated as the owner of the marital
trust assets for transferee liability purposes.
-20-
Respondent also argues that regardless of the marital
trust’s status under New York law, the marital trust constituted
a mere conduit for the transfers between Double-D Ranch and
petitioner. More specifically, respondent contends that
petitioner acted as the beneficial owner of the marital trust,
dealing with the marital trust assets as if she owned and
controlled them. Additionally, respondent argues that Double-D
Ranch sold all of its assets and then distributed all of the
proceeds to petitioner through the marital trust and the Diebold
Foundation in de facto liquidation, without retaining any funds
to pay the corporate-level tax generated by the sale of its
assets.
B. Petitioner’s Position
Petitioner contends that the marital trust was a separate
entity and must be respected for Federal income tax purposes.
Petitioner claims that although the marital trust identified
itself as a “grantor trust” on its income tax returns, the
marital trust did not constitute a grantor trust in 1999 or at
any time after Mr. Diebold’s death on June 18, 1996.
II. Discussion
Respondent asserts that regardless of the marital trust’s
status under New York State law, the marital trust constituted a
mere conduit for the transfers between Double-D Ranch and
-21-
petitioner. Respondent believes that the marital trust should be
disregarded. We disagree.
We can find no caselaw in New York or elsewhere to the
effect that a trust’s being a grantor trust plays a role in
determining the transferee liability of the grantor. As stated
above, we look to New York State law to determine transferee
liability. However, even if a trust’s status as a grantor trust
were relevant to transferee liability of the grantor, we do not
find that the marital trust was a grantor trust.
A grantor trust is created when a person contributes cash or
property to a trust but continues to be treated as owner of the
cash or property, at least in part. See secs. 671-679. A
reading of the marital trust agreement makes it clear that this
was not a grantor trust.4 Mr. Diebold, not petitioner, was
4
The trust agreement which created the marital trust read in
part:
The Trustees shall pay or apply to the Settlor's said wife
all or such sums of principal of this trust as the Trustees
(other than Settlor's said wife should she then be acting
as a Co-trustee of such trust) in their absolute discretion
may deem necessary or advisable from time to time for her
proper medical. care, support and comfortable maintenance,
or for any other purpose or purposes, without limitation,
of the Settlor's said wife deemed prudent and advisable to
the trustees, giving primary consideration to her needs or
desires, without regard to any other income or property
available to her for such purposes from any other sources,
it being intended that this power shall be liberally
construed in favor of the Settlor's said wife so that she
shall have sufficient income and principal available from
(continued...)
-22-
responsible for creating the marital trust, and during his life
he retained the right to withdraw and take possession of any
property held by the marital trust or to revoke the marital trust
agreement entirely. Petitioner held no such powers.
Thus, since petitioner did not create the marital trust, she
can be treated as its owner under the grantor trust rules only if
she had a power exercisable solely by herself to vest the corpus
or the income of any portion of the trust in herself or to apply
the corpus or income for the satisfaction of her legal
obligations. See secs. 1.678(a)-1 and 1.678(b)-1, Income Tax
Regs. Petitioner did not have any such right under the marital
trust agreement and therefore should not be treated as owner of
the marital trust for Federal income tax purposes. Petitioner
had only the rights or fiduciary duties relating to the marital
trust that were granted to her by Mr. Diebold through the terms
of the marital trust agreement. Petitioner’s rights and powers
under the marital trust agreement were limited and did not vest
in her ownership or control of the assets of the marital trust.
The marital trust agreement required the trustees to exercise
their discretion over any distribution of the marital trust
income or principal to petitioner, to provide for her medical
4
(...continued)
all sources to enable her to maintain the standard of
living to which she was accustomed during the Settlor's
lifetime.
-23-
care, support, and maintenance, and to ensure that she had
sufficient resources to maintain the standard of living to which
she was accustomed.5
Next, respondent asserts that petitioner was the beneficial
owner of the assets of the marital trust, exercising dominion and
control over those assets, and that any discretionary approval by
her cotrustees was a mere formality. As evidence for this
beneficial ownership, respondent points to several requests that
petitioner made through the trustees for various sums to be
distributed to either herself or the Diebold Foundation.
Respondent claims that when petitioner approached the trustees,
she used the word “directed” rather than “requested”, which
indicated that petitioner controlled the assets of the marital
trust. The use of “directed” rather than “requested” does not
change the terms of the marital trust agreement. Every step that
petitioner took in requesting transfers was taken through the
trustees as the marital trust agreement required. The trustees
were notified in writing of petitioner’s requests and agreed to
have the requested funds placed into her account or into that of
5
Respondent also argues that the duty of consistency should
be applied and thus the marital trust should be deemed a grantor
trust since it was identified as such for the years 1999-2004.
Respondent incorrectly applies the duty of consistency. Under
the duty of consistency, petitioner is bound by the facts
asserted in her returns for Federal income tax purposes. See
Blonien v. Commissioner, 118 T.C. 541 (2002). Respondent did not
present any tax benefit that petitioner received from the marital
trust characterization.
-24-
the Diebold Foundation. Respondent believes that petitioner had
control over all the assets of the marital trust, but we have not
seen any evidence of such power. The marital trust was
established by Mr. Diebold for petitioner’s care and support, but
she was not given ownership of the assets. None of petitioner’s
requests were unreasonable or contrary to the marital trust
agreement. Under New York State law, the trustees were at all
relevant times required to act reasonably and in good faith in
complying with the terms of the marital trust agreement. Estate
of Stillman, 433 N.Y.S.2d 701, 707-708 (Sur. Ct. 1980) (court
will interfere with exercise of discretion by trustee who acts in
bad faith or “beyond the bounds of a reasonable judgment”).
Additionally, respondent claims that the marital trust
should be disregarded because petitioner participated in a
fraudulent transfer of the assets of Double-D Ranch. Respondent
asserts that there was a de facto liquidation plan in place from
the start of the transactions and that without a liquidation,
petitioner would not have been able to give her children any
distributions.
As of June 30, 1999, the marital trust owned assets worth
$138 million, in addition to the shares of Double-D Ranch common
stock. Presuming the sale of the stock is treated as a plan of
liquidation, respondent has failed to prove that petitioner
-25-
participated in a fraudulent conveyance as a result of a plan of
liquidation of Double-D Ranch.
Respondent has not directly raised the issue of whether
petitioner is a transferee of a transferee with the marital trust
being the initial transferee. Because we reject the position
that the marital trust may be disregarded, respondent must prove
that petitioner is liable as a transferee from the marital trust.
However, we first note that respondent has not raised this
argument in the pleadings or the notice of liability which
asserted transferee liability against petitioner. Because
respondent’s argument on brief might be construed to raise the
issue, we will address it.
It is well settled that transferee liability may be asserted
against a transferee of a transferee. Berliant v. Commissioner,
729 F.2d 496 (7th Cir. 1984), affg. Magill v. Commissioner, T.C.
Memo. 1982-148. The Commissioner may collect unpaid income taxes
of a transferor of assets from a transferee or a successor
transferee of those assets. Sec. 6901(a), (c)(2); Commissioner
v. Stern, 357 U.S. at 42; Stansbury v. Commissioner, 104 T.C.
486, 489 (1995). State law generally determines the extent of
the transferee’s liability. Commissioner v. Stern, supra at 45;
Gumm v. Commissioner, 93 T.C. 475, 479 (1989), affd. without
published opinion 933 F.2d 1014 (9th Cir. 1991). Therefore, we
apply New York law in deciding whether petitioner is liable as a
-26-
transferee under section 6901.6 The Commissioner bears the burden
of proving that the taxpayer is liable as a transferee under
State law or in equity. Sec. 6902(a); Rule 142(d); Gumm v.
Commissioner, supra at 479-480.
For respondent to establish that petitioner is liable as a
transferee from the marital trust requires more than simply the
assertion that distributions were made from the marital trust.
Respondent must prove that the distributions caused the marital
trust to be insolvent at the time they were made and that the
distributions from the marital trust should be treated as
fraudulent conveyances under New York law. There is no such
evidence in the record. Respondent has simply failed to carry
the burden of proving that petitioner is liable as a transferee
from the marital trust, and we will not assume such liability on
the basis of conjecture.
6
The New York Uniform Fraudulent Conveyance Act includes
provisions imposing transferee liability on grounds of both
actual and constructive fraud. See N.Y. Debt. & Cred. Law secs.
273, 276 (McKinney 2001). With regard to constructive fraud, New
York law provides that “Every conveyance made and every
obligation incurred by a person who is or will be thereby
rendered insolvent is fraudulent as to creditors without regard
to is his actual intent if the conveyance is made or the
obligation incurred without a fair consideration.” N.Y. Debt. &
Cred. Law sec. 273. N.Y. Debt. & Cred. Law sec. 273 been
interpreted as requiring the satisfaction of three elements to
establish transferee liability: (1) A conveyance; (2) made
without fair consideration; and (3) by a person who was or will
be rendered insolvent by the conveyance. See United States v.
McCombs, 30 F.3d 310, 323 (2d Cir. 1994).
-27-
III. Conclusion
In summary, we find that the marital trust should not be
disregarded and that respondent has not met the burden of showing
petitioner is liable as a transferee from the marital trust. As
a result, we hold that petitioner is not liable as a transferee.
To reflect the foregoing,
Decision will be entered
for petitioner.