Court Opinion

ID: 4329975
Source: CourtListenerOpinion
Date Created: 2018-11-13 18:01:30.009672+00
Date Added: 2024-06-11T14:20:34.531800
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 MICHAEL A. TRICARICHI, Transferee,              No. 16-73418
               Petitioner-Appellant,
                                                  Tax Ct. No.
                     v.                            23630-12

 COMMISSIONER OF INTERNAL
 REVENUE,                                          OPINION
             Respondent-Appellee.

                Appeal from a Decision of the
                  United States Tax Court

           Argued and Submitted February 7, 2018
                    Pasadena, California

                   Filed November 13, 2018

        Before: William A. Fletcher, Carlos T. Bea, *
            and John B. Owens, Circuit Judges.

                   Opinion by Judge Owens

    *
       Judge Bea was drawn to replace Judge Reinhardt on the panel
following his death. Ninth Circuit General Order 3.2h. Judge Bea has
read the briefs, reviewed the record, and listened to oral argument.
2                       TRICARICHI V. CIR

                          SUMMARY **

                                Tax
    The panel affirmed the Tax Court’s decision on a petition
challenging a notice of transferee liability to a sole
shareholder regarding unpaid corporate taxes.

    Taxpayer was the sole shareholder of West Side Cellular,
Inc. After West Side received a $65 million litigation
settlement that exposed it to significant tax liabilities,
taxpayer sold his stock in West Side. After the sale, the
Internal Revenue Service was unable to collect corporate
taxes from West Side. The IRS then issued a notice of
transferee liability to taxpayer for the unpaid taxes.

    The Tax Court concluded that taxpayer is liable for the
“pre-notice interest” component of West Side’s tax liability,
which amounted to over $13 million. The panel held that the
Tax Court properly concluded that because the value of
assets transferred from West Side to taxpayer was more than
West Side’s total federal tax liability, the federal Internal
Revenue Code determines pre-notice interest (see 26 U.S.C.
§ 6601), and there is no need to consult state law regarding
such interest.

    In a concurrently filed memorandum disposition, the
panel affirmed the Tax Court’s conclusion that taxpayer is
liable for West Side’s unpaid taxes under 26 U.S.C. § 6901
and the Ohio Uniform Fraudulent Transfer Act.

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
                      TRICARICHI V. CIR                        3

                         COUNSEL

Michael J. Desmond (argued), Law Offices of Michael J.
Desmond APC, Santa Barbara, California, for Petitioner-
Appellant.

Clint A. Carpenter (argued), Francesca Ugolini, and Gilbert
S. Rothenberg, Attorneys; David A. Hubbert, Acting
Assistant Attorney General; Tax Division, United States
Department of Justice, Washington, D.C.; for Respondent-
Appellee.

                          OPINION

OWENS, Circuit Judge:

    Taxpayer Michael A. Tricarichi appeals from the tax
court’s decision on his petition challenging a notice of
transferee liability regarding West Side Cellular, Inc.’s
(“West Side”) unpaid taxes. We have jurisdiction under
26 U.S.C. § 7482. In this opinion, we affirm the tax court’s
conclusion that Tricarichi is liable for the “pre-notice
interest” component of West Side’s tax liability.
Specifically, we hold that because Tricarichi received
transferred assets worth more than West Side’s total federal
tax liability, the federal Internal Revenue Code determines
pre-notice interest, and the availability of interest under state
law is irrelevant.

                     I. BACKGROUND

    Tricarichi was the sole shareholder of West Side. In
2003, West Side received a $65 million litigation settlement
that exposed it to significant tax liabilities. Tricarichi then
sold his stock in West Side and received about $35.2 million
4                    TRICARICHI V. CIR

through a so-called “Midco” tax-shelter transaction.
Following the sale, West Side failed to pay its corporate
taxes for 2003 and the IRS was unable to collect from West
Side.

    In June 2012, the IRS issued a notice of transferee
liability to Tricarichi, seeking to collect West Side’s unpaid
taxes from Tricarichi as a “transferee” of about $35.2 million
of West Side’s assets. Tricarichi then filed a petition in tax
court, challenging the IRS’s notice of transferee liability.
After a bench trial, the tax court ruled in the IRS’s favor,
holding that Tricarichi was liable as a transferee for the full
amount of West Side’s 2003 tax deficiency and associated
penalties and interest, totaling about $35.1 million.

    In a concurrently filed memorandum disposition, we
affirmed the tax court’s conclusion that Tricarichi is liable
for West Side’s unpaid taxes under 26 U.S.C. § 6901 and the
Ohio Uniform Fraudulent Transfer Act (“UFTA”).
Specifically, we agreed with the tax court that, under
Commissioner v. Stern, 357 U.S. 39 (1958), Tricarichi was a
“transferee” of West Side’s assets. See Slone v. Comm’r,
810 F.3d 599, 604–05 (9th Cir. 2015) (Slone I) (setting forth
two-pronged Stern test); see also Slone v. Comm’r, 896 F.3d
1083, 1086 (9th Cir. 2018) (Slone II) (applying Stern test).
Here, we affirm the tax court’s conclusion that Tricarichi is
also liable for the pre-notice interest component of West
Side’s tax liability.

                     II. DISCUSSION

A. Standard of Review

   Because the parties dispute only the legal question of
whether federal or state law determines pre-notice interest,
we decide de novo whether Tricarichi is liable for such
                          TRICARICHI V. CIR                                 5

interest. See Hongsermeier v. Comm’r, 621 F.3d 890, 899
(9th Cir. 2010).

B. Pre-Notice Interest

    The parties dispute whether Tricarichi is liable for pre-
notice interest, meaning interest that accrued on West Side’s
2003 tax liability between the date its tax was due to be paid
(March 15, 2004) and the date the IRS issued Tricarichi a
notice of transferee liability (June 25, 2012).             The
Commissioner argues that the federal Internal Revenue
Code—specifically 26 U.S.C. § 6601—controls whether
Tricarichi is liable for pre-notice interest.            If the
Commissioner is correct, Tricarichi owes more than
$13 million in pre-notice interest. 1 In contrast, Tricarichi
contends that state law (here, Ohio law) determines any
liability for pre-notice interest, and that under state law, he
owes $0 in pre-notice interest. The tax court agreed with the
Commissioner and ordered that Tricarichi pay pre-notice
interest of nearly $13.9 million.

    For over half a century, tax courts have generally held
that whether federal or state law determines the right to and
amount of pre-notice interest depends on whether the value
of assets received by the transferee exceeds the total federal

    1
       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).      Tricarichi does not question the accuracy of the
Commissioner’s $13.9 million calculation if federal law applies.
Tricarichi also agrees that he is liable for “post-notice interest,” i.e., the
interest that accrued on West Side’s tax liability under § 6601 after the
IRS issued the notice of transferee liability.
6                        TRICARICHI V. CIR

tax liability owed by the transferor, including statutory
penalties and interest. See, e.g., Estate of Stein v. Comm’r,
37 T.C. 945, 961 (1962); Lowy v. Comm’r, 35 T.C. 393,
395–97 (1960); see also 14A Mertens Law of Federal
Income Taxation § 53:41 (August 2018). Where, as here, a
transferee has received assets worth more than the
transferor’s total federal tax liability, pre-notice interest is
determined under the federal Internal Revenue Code and
there is no need to consult state law regarding interest. 2 See
Lowy, 35 T.C. at 397. But, where a transferee has received
assets worth less than the transferor’s total federal tax
liability, the IRS’s recovery is limited to the value of the
assets transferred, and the IRS can then look to state law to
attempt to recover any interest in excess of that amount from
the transferee. See Estate of Stein, 37 T.C. at 961.

    In Lowy, the tax court explained the rationale for this
distinction. See 35 T.C. at 395–97. Under the Supreme
Court’s decision in Stern, “the existence and extent of
transferee liability should be determined by State law.” Id.
at 396. However, as the tax court explained, the federal
Internal Revenue Code creates the right to and determines
the “quantum” of the IRS’s underlying claim that it is
seeking to enforce against the transferee, including the
statutory interest accrued upon the tax deficiency. Id. at
395–96. Therefore, where the assets transferred “are more
than ample to discharge the full Federal liability of the
transferor (including interest),” it is unnecessary “to look to
State law for the creation of any right to interest” to satisfy
the IRS’s claim. Id. at 397 (emphasis added). On the other

    2
      It is undisputed that Tricarichi received from West Side a transfer
of assets worth more than West Side’s total federal tax liability. He
received a transfer of $35.2 million, and West Side’s total tax liability
was $35.1 million (including pre-notice interest of $13.9 million).
                     TRICARICHI V. CIR                        7

hand, “where the amount of the transferred assets is less than
the amount of the [IRS’s] claim,” to make the IRS whole,
under state law the IRS “may have a further right to collect
interest from the transferee, based upon the wrongful use of
those assets by the transferee prior to payment” of the
transferor’s tax liability. Id. at 395, 397 (emphasis added);
see also Estate of Stein, 37 T.C. at 961 (further explaining
rationale for distinction).

     In our only decision related to this issue, we followed
this line of tax court cases, holding that “[w]here transferee
liability is found to exist but the transferred assets are
insufficient to satisfy the transferor’s total tax liability, a
transferee’s liability for interest is controlled by state law.”
Edelson v. Comm’r, 829 F.2d 828, 834 (9th Cir. 1987)
(citing Estate of Stein, 37 T.C. at 961). However, we have
not yet addressed the situation presented in Lowy and the
instant case, where the transferee received assets worth more
than the transferor’s total federal tax liability.

    The First Circuit recently followed the reasoning of
Lowy and Estate of Stein to derive the “simple” rule that
“[t]he IRS may recover from [the transferee] all amounts
[the transferor] owes to the IRS (including section 6601
interest accruing on [the transferor’s] tax debt), up to the
limit of the amount transferred to [the transferee], with any
recovery of prejudgment interest above the amount
transferred to be determined in accord with [state] law.”
Schussel v. Werfel, 758 F.3d 82, 92–93 (1st Cir. 2014). In
so holding, the First Circuit explained that “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.” Id. at 88–89. “Federal interest on a tax obligation
accrues automatically . . . [and] is simply a part of the debt
8                        TRICARICHI V. CIR

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.” Id. at 89 (citing Lowy, 35 T.C. at 394). As a
result, there is no need to consult state law where the value
of the transferred assets is more than the transferor’s total tax
liability. “[F]or example, if the taxpayer owes $100 in taxes,
upon which $30 in interest accrues, and the taxpayer then
fraudulently transfers $150 to a transferee, the IRS can
certainly recover a judgment of no less than $130 against the
transferee.” Id. “Therefore, where the assets in the hands of
the transferee [are] ‘more than ample to discharge the full
Federal liability of the transferor (including interest),’ there
[is] no need to resort to state-law interest principles to make
the IRS whole.” 3 Id. at 92 (quoting Lowy, 35 T.C. at 397).

    We agree with the First Circuit’s reasoning in Schussel
and the tax court’s decision in Lowy, and hold that because
the value of assets transferred from West Side to Tricarichi
is more than West Side’s total federal tax liability, the
federal Internal Revenue Code determines Tricarichi’s pre-
notice interest liability, and there is no need to consult state
law regarding such interest.

   Despite acknowledging the above case law, Tricarichi
argues that the pre-notice interest here must be determined
under Ohio law, which purportedly would immunize him
from liability for any pre-notice interest. Emphasizing the

    3
      In the particular facts of Schussel, “the IRS would not be made
whole by recovering the funds transferred to [the transferee] because [the
transferor’s] debt, including penalties and interest, was larger than the
amount transferred.” 758 F.3d at 92. As such, the First Circuit remanded
to the tax court to apply the proper standard—i.e., the “simple rule”
stated previously—“with any prejudgment interest assessed above the
amount transferred calculated at the Massachusetts rate.” Id. at 94.
                         TRICARICHI V. CIR                               9

Supreme Court’s holding that “the existence and extent of
[transferee] liability should be determined by state law,”
Stern, 357 U.S. at 45 (emphasis added), Tricarichi contends
that state law should determine pre-notice interest because it
affects the “extent” of transferee liability.

    However, contrary to Tricarichi’s contention, our
decision here is consistent with Stern. Under Stern, the Ohio
UFTA determines the “existence and extent” of Tricarichi’s
transferee liability. 357 U.S. at 45. In turn, the Ohio UFTA
generally limits the extent of the IRS’s recovery, like any
other creditor’s, to “the value of the asset transferred . . . or
the amount necessary to satisfy the claim of the creditor or
agency, whichever is less.” Ohio Rev. Code Ann.
§ 1336.08(B)(1). But, it is the federal Internal Revenue
Code—not state law—that determines the amount of the
IRS’s underlying “claim,” which includes the tax deficiency,
applicable penalties, and statutory interest. See Lowy,
35 T.C. at 395–97. Because “the value of the asset[s]
transferred” from West Side to Tricarichi is more than “the
amount necessary to satisfy the [IRS’s] claim,” Ohio law
allows the IRS to recover the full extent of its claim for West
Side’s tax liability, including pre-notice interest accrued on
the tax deficiency as determined under federal law. 4 Ohio

    4
       In contrast, if Tricarichi had received assets worth less than the
amount of the IRS’s claim, then the extent of the IRS’s recovery under
Ohio Rev. Code Ann. § 1336.08(B)(1) would have been limited to the
value of the assets transferred, and the IRS would have to look to other
provisions of Ohio law to attempt to recover any interest in excess of that
amount. Such interest would not be federal pre-notice interest under the
Internal Revenue Code, but rather whatever interest is available under
state law, such as pre-judgment interest or interest allowed as a matter of
equity. See, e.g., Ohio Rev. Code Ann. § 1336.08(B)(2) (providing that
the amount of judgment may be “subject to adjustment as the equities
may require”).
10                   TRICARICHI V. CIR

Rev. Code Ann. § 1336.08(B)(1). Notably, the above
decisions we join today all post-date Stern and did not adopt
Tricarichi’s contention that using federal law to determine
pre-notice interest always conflicts with Stern. See, e.g.,
Schussel, 758 F.3d at 92 (noting that its holding “is
consistent with Stern’s mandate”); Estate of Stein, 37 T.C. at
961 (relying on Stern); Lowy, 35 T.C. at 395–97 (relying on
Stern).

                    III. CONCLUSION

    In sum, the tax court properly held that because
Tricarichi received transferred assets worth more than West
Side’s total federal tax liability, the federal Internal Revenue
Code determines pre-notice interest, and the availability of
interest under state law is irrelevant. Accordingly, the tax
court properly ordered that Tricarichi was liable for pre-
notice interest of almost $13.9 million.

     AFFIRMED.