ZADORKIN v. Commissioner
| Decision Date | 25 March 1985 |
| Docket Number | Docket No. 3115-83. |
| Citation | 1985 TC Memo 137,49 TCM (CCH) 1022 |
| Parties | Nick Zadorkin and Alice Zadorkin v. Commissioner. |
| Court | U.S. Tax Court |
Mark S. Drobny, 1006 Fourth St., Sacramento, Calif., for the petitioners. Robert J. Foley, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined that petitioners are liable under section 69011 as transferees for unpaid Federal income taxes and additions to tax owed by Mike S. Zadorkin for 1973 through 1978 in the total amounts of $4,950.72 plus interest as provided by law. Petitioners do not challenge the correctness of the amounts of the determined income tax deficiencies and additions to tax due from Mike S. Zadorkin, who is now deceased, but petitioners contend that they are not liable for those amounts as transferees, raising the following specific issues:
1. Whether Mike S. Zadorkin transferred residence located in Pacifica, California, to petitioner Nick Zadorkin on July 24, 1978, for less than full and adequate consideration.
2. Whether Mike S. Zadorkin was insolvent at the time of, or was rendered insolvent by, the transfer.
3. Whether the Internal Revenue Service made a reasonable effort to collect the unpaid tax liabilities from Mike S. Zadorkin.
At the time they filed their petition, petitioners Nick and Alice Zadorkin were legal residents of Sacramento, California. They are the brother and sister-in-law of Mike S. Zadorkin (Mike), now deceased.
Mike was born on June 4, 1921. During the 1970's, he was a self-employed jewelry salesman. From the mid-1970's until his death on April 3, 1982, he suffered from alcoholism which adversely affected his health and his ability to manage his business and personal affairs.
Mike did not file timely Federal income tax returns for 1973 through 1977. In June 1977, an officer of the Collection Division of the Internal Revenue Service (IRS) contacted Mike concerning his delinquent returns. After a period of investigation, Mike filed Federal income tax returns for 1973 through 1978 on March 30, 1979. He subsequently paid some of the liabilities shown on the delinquent returns; however, he did not pay the following income taxes and additions to tax:
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Addition to Tax
Sec. Sec. Sec
6651(a)(1) 6651(a)(2) 6654
Year Deficiency I. R. C. 1954 I. R. C. 1954 I. R. C. 1954
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1973 ....... $ 938.21 $125.29 $139.21 $ 5.61
1974 ....... 615.04 138.38 147.61 19.68
1975 ....... 1,046.00 235.35 188.28 45.35
1976 ....... 779.00 175.28 93.48 29.01
1977 ....... 63.00 14.18 3.78 2.25
1978 ....... 146.00 -0- .73 -0-
_________ _______ _______ _______
$3,587.25 $688.48 $573.09 $101.90
========= ======= ======= =======
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Petitioners do not contest that Mike was liable for the foregoing unpaid income taxes and additions to tax plus interest as provided by law.
On July 16, 1966, Mike's sister, Vera Z. Ballestrassee, died leaving Mike an interest in property located at 367 Seaside Drive, Pacifica, California (Seaside Drive property). The Seaside Drive Property was distributed to Mike by a decree of final distribution entered by the Superior Court of the State of California in and for San Mateo County on September 7, 1967.
On July 24, 1978, Mike executed a quitclaim deed transferring the Seaside Drive property to petitioner Nick Zadorkin (Nick). On the same day, Nick transferred the property to himself and his wife, Alice Zadorkin.
The consideration for Mike's transfer of the Seaside Drive property to Nick, it is stipulated, included:
1. Payment of a mortgage note and other debts to the Bank of America in the amount of $2,496.31;
2. Satisfaction of a judgment of I. N. G. Gems, Inc., in the amount of $1,323.10;
3. Payment of an overdue semi-annual property tax bill in the amount of $211.
The Seaside Drive property is a residence located in the Fairway Park neighborhood in Pacifica, California, about 15 miles south of San Francisco. The residence was built in 1955 and has three bedrooms, two bathrooms, living room, dining room, and kitchen and is located on a lot with 5,000 square feet. Most of the houses in the community were built at or about the same time and are owner-occupied. The property had a value of $60,000 at the time of the transfer.
The Collection Division of the IRS secured an information statement (Form 433-AB) from Mike on March 30, 1979, when the delinquent returns were filed. Under penalties of perjury, Mike listed assets of $1,500, including a lot in San Luis Obispo shown to have a value of $1,200, and liabilities of $9,777. On January 25, 1980, Mike updated the information on his financial condition by assenting to corrections written by an IRS collection officer on the face of the statement. Although the corrections adjusted his estimated income and expenses, he did not amend the statement of his assets and liabilities.
With respect to the Seaside Drive property, the IRS Form 433-AB signed by Mike contains an asset entry of $60,000. A line is drawn through this figure and the form states: The form also states:
Transferred home to my brother Nick Zadorkin *** was going to be foreclosed on — no monies involved — am living there at no rent at present.
Among the liabilities listed on the statement is an item of $3,500 payable to "Brother Nick" with the explanation "to save the residence from foreclosure."
Mike's income tax returns show that he had the following amounts of gross income in the years 1973 through 1978:
Year Gross Income
1973 ................ $7,338
1974 ................ 4,138
1975 ................ 5,916
1976 ................ 5,080
1977 ................ 2,528
1978 ................ 1,798
Mike had an inactive savings account with a balance of $1.03 on July 24, 1978, and March 30, 1979. The account was closed on September 30, 1981, when the bank charges equaled the account's $1.13 balance.
Mike had one active bank account which had the following balances on the dates indicated:
Date Balance
August 16, 1978 ......... $ 300.00
April 13, 1979 .......... 40.28
February 13, 1980 ....... 224.22
April 29, 1982 .......... 2,335.33
Respondent issued separate notices of liability to Nick and Alice Zadorkin determining that they are liable for Mike's unpaid income tax and additions to tax plus interest according to law.
OpinionSection 6901(a)(1)(A) authorizes the assessment of transferee liability, at law or in equity, in the same manner as the liability for income taxes. This provision, however, does not create any separate liability; it merely provides a secondary method for enforcing the existing liability of the transferor. Mysse v. Commissioner Dec. 31,273, 57 T. C. 680, 700-701 (1972); C. B. C. Super Markets, Inc. v. Commissioner Dec. 30,081, 54 T. C. 882, 897-898 (1970). The substantive question of whether a transferee is liable for the transferor's obligation and the extent of his liability depends upon State law. See, e. g., Commissioner v. Stern 58-2 USTC ¶ 9594, 357 U. S. 39, 45 (1958). Because section 6901 is purely procedural, the steps taken to enforce the determined liability in this case may be viewed as a substitute for the pursuit by the Government of the remedies available to it under California law.
To support his claim, respondent relies upon Cal. Civ. Code sec. 3439.04 (West 1970) which is as follows:
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 his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
The parties are in dispute as to whether, under this State statute, the evidence shows (1) that Mike transferred the Seaside Drive property to Nick "without a fair consideration"; (2) that Mike, the transferor, was insolvent when the transfer was made or was rendered insolvent by the transfer; and, as implicitly required by the section, (3) that the IRS made a reasonable effort to collect the unpaid taxes from Mike.2 The burden of proving these facts rests with respondent. Sec. 6902(a); Rule 142(d).
Respondent contends that the Seaside Drive property had a value of $68,500 when Mike transferred it to his brother, Nick, and that the consideration approximated only about $4,000 (the mortgage note, the I. N. G. Gems, Inc., judgment, and the unpaid taxes referred to in our findings). Because the conveyance was made for a small fraction of the value of the property, respondent maintains that he has established this element of transferee liability. Petitioners, on the other hand, assert that the value of the property, as such, did not exceed $35,000, its value for real estate tax assessment purposes; that Mike retained a life estate in the property which reduces the value of the transfer to the amount of $10,986; and that Nick gave consideration in excess of that amount for the transfer. Based...
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