UNITED STATES TAX COURT



FRANK SAWYER TRUST OF MAY 1992, TRANSFEREE, CAROL S. PARKS,
                   TRUSTEE, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



  Docket No. 5526-07.                Filed August 24, 2009.



       P owned the stock of four corporations: TT, CT,
  St. Botolph, and Sixty-Five Bedford. The four
  corporations held assets with high fair market values
  and low adjusted bases. During 2000 and 2001 the
  corporations sold their assets, leaving the
  corporations with large cash reserves and facing large
  contingent tax liabilities.

       Shortly after the respective asset sales, P sold
  its stock in the corporations to F. F, after
  purchasing the stock, transferred assets with inflated
  bases to the corporations. The corporations then sold
  these assets, generating losses. The losses were used
  to offset the corporations’ large capital gains. As a
  result of the claimed losses, the corporations did not
  pay tax on the asset sales. Later F stripped the
  proceeds of the asset sales from the corporations.
                         - 2 -

     R issued notices of deficiency to P, determining
deficiencies in P’s fiduciary income tax on account of
the sale of the corporations’ stock and imposing sec.
6662, I.R.C., accuracy-related penalties. P petitioned
this Court, and P and R entered into decision documents
finding that there were no deficiencies in tax and that
P was not liable for sec. 6662, I.R.C., accuracy-
related penalties. These decision documents were the
result of a stipulated decision between the parties and
not a trial on the merits.

     R later examined the corporations’ tax returns. R
and the corporations entered into closing agreements
which disallowed the claimed losses and imposed sec.
6662, I.R.C., accuracy-related penalties on the
underpayments of tax. The corporations, having been
stripped of the proceeds of the asset sales, lacked the
funds necessary to pay the assessed tax.

     R issued notices of transferee liability to P
attempting to collect the corporations’ unpaid tax
liabilities from their former shareholder. P
petitioned this Court and has filed a motion for
summary judgment arguing that: (1) Res judicata bars
the instant transferee liability action; and (2) in the
alternative R is collaterally estopped from arguing in
this transferee liability action that there were deemed
liquidating distributions from the corporations to P.

     Held: Res judicata does not bar the instant
action because the cause of action in the earlier
deficiency cases is not the same as the cause of action
in the instant transferee liability action.

     Held, further, R is not collaterally estopped from
arguing in this proceeding that there were deemed
liquidating distributions because the decision
documents entered into by P and R to resolve the
deficiency cases do not indicate that the parties
intended to resolve the questions whether there were
deemed liquidating distributions from the corporations
to P and the deficiency cases dealt with deficiencies
in P’s fiduciary income tax, while the instant action
deals with P’s liability as a transferee of the
corporations.
                                 - 3 -

     David R. Andelman and Juliette Galacia Pico, for petitioner.

     Kevin G. Croke, for respondent.


                                OPINION

     GOEKE, Judge:   This case is before the Court on the trust’s

motion for summary judgment filed pursuant to Rule 121.1

Respondent has asserted transferee liability against the trust.

The trust argues in its motion papers that the doctrines of res

judicata and collateral estoppel bar this transferee liability

action.   The trust argues that the issue of whether the trust is

liable for the unpaid tax liabilities at issue was decided in a

prior deficiency action after respondent issued notices of

deficiency to the trust.   The parties agree that there are no

material facts in dispute.   For the reasons stated herein, we

will deny the trust’s motion.

                             Background

     The trust has a mailing address in Boston, Massachusetts.

Respondent issued notices of transferee liability asserting that

the trust is liable as transferee for the unpaid income tax

liabilities of four corporations:    (1) TDGH, Inc. (Town Taxi);




     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.
                                 - 4 -

(2) CDGH, Inc. (Checker Taxi); (3) St. Botolph Holding Co. (St.

Botolph); and (4) Sixty-Five Bedford Street, Inc. (Sixty-Five

Bedford) (collectively, the corporations).

      Two types of transactions occurred during the 2000 and 2001

tax years.   First, the corporations sold substantially all of

their assets to unrelated third parties.       The asset sales were

followed by the trust’s sale of its stock in the corporations to

a different unrelated third party.2      The trust owned all of the

stock of the corporations before 2000.

A.   Asset Sales

      Town Taxi and Checker Taxi provided taxicab services in

Massachusetts.     The two companies’ primary assets were taxicab

medallions that were required by the State licensing agencies in

order to provide taxicab services.       St. Botolph and Sixty-Five

Bedford owned real estate used in the operation of Town Taxi’s

and Checker Taxi’s taxicab businesses.       St. Botolph owned a

parking garage, while Sixty-Five Bedford owned two additional

parcels of land.




      2
      In notices of deficiency and the notices of transferee
liability discussed below, respondent asserted that the asset
sale followed by the stock sale was part of an integrated plan
known as an “intermediary transaction” entered into by the trust
solely to lower its tax liability. See Notice 2001-16, 2001-1
C.B. 730. We do not determine at this stage of the proceeding
whether respondent’s characterization of the asset sales and
stock sales as an intermediary transaction is correct.
                               - 5 -

     In 2000 Town Taxi and Checker Taxi sold substantially all of

their assets to unrelated third-party purchasers.    Town Taxi and

Checker Taxi recognized gain on the sales and were left with

large cash holdings.   Unless able to offset those gains with

losses, Town Taxi and Checker Taxi would face large contingent

tax liabilities.   Town Taxi filed a Schedule D, Capital Gains and

Losses, with its Form 1120, U.S. Corporation Income Tax Return,

showing proceeds of $18,468,900 from the sale of the medallions.

Town Taxi claimed a basis of $2,740,000 in the medallions,

resulting in gain of $15,728,900.   Checker Taxi’s Schedule D

indicated proceeds of $17,578,000 from its sale of the taxicab

medallions.   Checker Taxi claimed a basis of zero in its

medallions, resulting in gain of $17,578,000 on the sale.

     In 2001 St. Botolph and Sixty-Five Bedford sold their

respective parcels of real estate to two different section

501(c)(3) educational institutions.    Like Town Taxi and Checker

Taxi, St. Botolph and Sixty-Five Bedford recognized gain on the

sales and were left holding large amounts of cash.   St. Botolph’s

Schedule D showed proceeds from the land sale of $22 million.

St. Botolph’s claimed a basis of $1,102,509 in the land,

resulting in gain of $20,897,491.   Sixty-Five Bedford’s Schedule

D showed proceeds of $1,180,000 from the sale of two properties.

Sixty-Five Bedford claimed a basis of $942,000 in these

properties.   Sixty-Five Bedford also reported on its Schedule D
                                - 6 -

gain of $4,253,474 on its Form 4797, Sales of Business Property.

This resulted in total gain of $5,195,474.

B.   Stock Sales

      A representative of the trust received a promotional letter

from Midcoast Credit Corp. (Midcoast) before Town Taxi and

Checker Taxi’s sales of the taxicab medallions.    The promotional

letter indicated that Midcoast was interested in acquiring C

corporations with significant capital gains.    Town Taxi and

Checker Taxi were corporations with a potential to realize

significant capital gains, and the trust’s representatives

contacted Midcoast.    Because the corporations’ potential capital

gains were so large, Midcoast brought in Fortrend International,

L.L.C. (Fortrend).    Fortrend was involved in the stock sales

because its business relationships provided it with greater

access to capital than Midcoast had.    Representatives of the

trust met with representatives of Fortrend, and Fortrend

indicated that it was looking to purchase the stock of companies

that had liquidated or were in the process of liquidating all

their assets and had incurred or would incur large capital gains

tax liabilities as a result.    Fortrend indicated that it would

pay a purchase price for the stock of such a company equal to the

value of the cash and other assets less 50 percent of the amount

of the income tax liability.    The trust decided to sell the
                                 - 7 -

corporations’ stock to Fortrend, and the sales were consummated

in 2000 and 2001.

     1.   Taxi Companies

     The trust and Fortrend agreed that the total purchase price

for the stock of Town Taxi and Checker Taxi would be the amount

the trust would have received if Town Taxi and Checker Taxi had

sold their assets, paid their tax liabilities, and distributed

the remaining cash to the trust, plus 50 percent of the taxes

which Town Taxi and Checker Taxi would ordinarily have to pay.3

     The trust entered into stock purchase agreements dated

August 7, 2000, with Fortrend under which the trust agreed to

sell to Fortrend the stock of Town Taxi and Checker Taxi.4    The

stock purchase agreements provide a formula for the calculation

of the purchase price:     the purchase price would be equal to the


     3
      Assume a corporation with $1 million of income and a 35-
percent tax rate. The corporation would normally pay $350,000 of
tax and distribute $650,000 to its sole shareholder as a
liquidating distribution in exchange for his stock. The
shareholder would then pay tax on any gain on the exchange of his
stock. See sec. 331. Instead, by involving Fortrend, the trust
would sell the stock of the corporation (holding $1 million cash)
for $825,000. The trust would receive $175,000 (half of the
corporation’s tax liability) more than if it had liquidated the
corporation. The $175,000 excess of cash in the corporation ($1
million) over the amount paid by Fortrend ($825,000) would be
Fortrend’s fee for entering into the transaction.
     4
      In October 2000 the trust requested of Fortrend that it be
allowed to retain the corporate names “Town Taxi” and “Checker
Taxi”. Fortrend agreed, and the two corporations whose stock was
purchased by Fortrend were renamed TDGH, Inc., and CDGH, Inc.,
respectively. For purposes of continuity, we will refer to Town
Taxi and Checker Taxi by the original names.
                                 - 8 -

value of Town Taxi’s and Checker Taxi’s assets less 50 percent of

the “specified remaining tax liability” of each.     The specified

remaining tax liabilities were the Federal and State tax

liabilities arising from the sale of each corporation’s assets.

The purchase price for the stock of Town Taxi was $14,850,701.

The purchase price for the stock of Checker Taxi was $17,880,694.

     2.     Land Companies

     As discussed above, St. Botolph and Sixty-Five Bedford owned

parcels of land.     The trustee of the trust decided after the

taxicab medallions were sold in 2000 to sell these parcels of

land.     After the land sales were completed, St. Botolph and

Sixty-Five Bedford were in the same position that Town Taxi and

Checker Taxi had just been in--holding large amounts of cash and

facing large capital gains tax liabilities.     Representatives of

the trust contacted Midcoast to determine whether Midcoast was

interested in purchasing the stock of St. Botolph and Sixty-Five

Bedford.     Midcoast was interested and again involved Fortrend.

     The formula used to determine the total purchase price was

similar to the one used to calculate the purchase price of the

Town Taxi and Checker Taxi stock--the value of St. Botolph’s and

Sixty-Five Bedford’s assets minus a percentage of their specified

remaining tax liabilities.     The only difference was the

applicable percentage, which was applied at 50 percent for both

Town Taxi and Checker Taxi and 50 percent for Sixty-Five Bedford.
                                      - 9 -

However, St. Botolph qualified for a lower rate of 37.2 percent.

Fortrend paid $18,456,187 for the stock of St. Botolph and

$4,916,834 for the stock of Sixty-Five Bedford.

C.   The Trust’s Tax Returns

      The trust reported the stock sales on its fiduciary income

tax returns for tax years 2000 and 2001.            The trust reported the

following on its 2000 income tax return:

         Entity        Date of Sale      Sale Price        Basis        Gain

      Town Taxi         10/9/2000       $14,850,702     $14,850,702      -0-
      Checker Taxi      10/9/2000        17,880,694      17,880,694      -0-

      The trust reported the following on its amended 2001 income

tax return:

        Entity       Date of Sale     Sale Price       Basis          Gain

      St. Botolph     2/26/2001       $18,480,194     $6,985,296   $11,494,898
      Sixty-Five
         Bedford      10/4/2001         6,096,834      3,725,341      2,371,493

D.   Notices of Deficiency and Examination of the Corporations’
     Tax Returns

      Respondent examined both the trust’s and the corporations’

tax returns.      Respondent issued statutory notices of deficiency

to the trust for tax years 2000 and 2001 (the 2000 notice and the

2001 notice, respectively; collectively, the notices of

deficiency).      The notices of deficiency determined that the trust

was liable for the following:

                                               Penalty
      Tax Year          Deficiency            Sec. 6662

        2000            $3,130,547             $626,109
        2001               843,090              168,618
                               - 10 -

     The 2000 notice included an explanation of adjustments.    It

explained in pertinent part that the adjustments made to the

trust’s tax liability were due to changes in the trust’s bases in

the Checker Taxi and Town Taxi stock.     It further explained that

“In the alternative to stock sales, these adjustments reflect

additional gains from the sale of assets by Checker Taxi Company

* * * and Town Taxi, Inc. * * * and deemed distributions in

liquidation.”

     The 2000 notice further explained that the Internal Revenue

Service (IRS) position was that Town Taxi and Checker Taxi in

effect sold all of their assets, paid off all of their

liabilities, and liquidated.   Because the trust was the sole

shareholder of both Town Taxi and Checker Taxi, the trust

received the liquidation proceeds and was required pursuant to

section 331(a) to report the gain.5     The notice in effect

required the trust to recognize and pay tax on the entire amount

received in the asset sales.

     The 2001 notice also included an explanation of adjustments.

It explained in pertinent part that “In lieu of the reported

stock sales of these two corporations, your return is adjusted to

reflect gains from deemed distributions in liquidation from the



     5
      Sec. 331(a) provides that amounts received by a shareholder
in a distribution in complete liquidation of a corporation shall
be treated as in full payment in exchange for the stock. See
Mueller v. Commissioner, T.C. Memo. 2001-178.
                               - 11 -

corporations following the corporations’ sales of assets.”      The

explanation of adjustments also included a memorandum explaining

the legal basis for the changes made to the trust’s Federal

income tax return.   The recharacterization of the stock sales

resulted in the following treatment:    (1) The corporations’

selling their assets; (2) the corporations’ liquidating and

distributing all of the cash proceeds to the trust; (3) the

trust’s paying Fortrend its fee for entering into the

transaction; and (4) the trust’s not being entitled to a

deduction for amounts paid to Fortrend.    The notice calculated

the trust’s increased income and the deficiency by disallowing

deductions for the amounts paid to Fortrend.    In effect, the

trust was treated as having sold the assets and distributed to

itself all of the proceeds without paying any taxes.    Thus

because the deductions for payments to Fortrend were disallowed,

the trust had a higher income than that reported on its return,

the difference being the amounts paid to Fortrend.

     The trust filed petitions in this Court contesting

respondent’s determinations.   The trust filed a petition in

docket No. 3702-05 for tax year 2000 on February 25, 2005, and in

docket No. 12474-05 for tax year 2001 on July 7, 2005.    On

February 14, 2006, this Court entered decisions in both dockets,

deciding that there was no deficiency in the trust’s Federal tax

liability for either of the tax years 2000 and 2001 and that the
                                 - 12 -

trust was not liable for section 6662 accuracy-related penalties.

The decision documents reflected a compromise by the parties and

were not the result of a trial on the merits.      Neither this Court

nor the decision documents addressed any of respondent’s theories

for determining a deficiency.      Nor were there any pertinent

stipulations between the parties other than that the trust did

not have a deficiency in tax or owe any penalties.

E.   The Corporations’ Returns

      As discussed above, Fortrend-controlled entities purchased

the stock of the corporations.      After the asset sales the

corporations held large amounts of cash and faced large

contingent tax liabilities.      After purchasing the stock of the

corporations, Fortrend transferred assets with inflated bases to

the corporations.    These assets consisted mostly of stock,

discussed below.    The corporations then sold these assets,

generating an artificial loss.      These artificial losses were used

to offset the capital gains recognized on the sales of the

taxicab medallions and the parcels of real estate.      As a result,

Town Taxi and Checker Taxi did not pay taxes on the income earned

from the medallion sales while St. Botolph and Sixty-Five Bedford

did not pay taxes on the gain from the land sales.

      Town Taxi filed its Form 1120 for tax year 2000 on September

17, 2001, reporting proceeds of $18,468,900, and a basis in the

medallions of $2,740,000.    On Schedule D Town Taxi recognized
                              - 13 -

gain of $15,728,900 on the sale of the taxicab medallions.

During 2000 Town Taxi sold stock in Trex Communications, which

had been contributed by Fortrend to the corporation’s capital.

Town Taxi reported a sale price of $87,812 and a basis of

$18,583,000, resulting in a loss of $18,495,188 on the sale.

This resulted in a net long-term capital loss of $2,766,288.

     Checker Taxi also filed its Form 1120 for tax year 2000 on

September 17, 2001, reporting proceeds of $17,578,000 and a basis

of zero.   This resulted in Checker Taxi’s recognizing gain of

$17,578,000 on the sale of its taxicab medallions.    During 2000

Checker Taxi sold stock in Paclaco Equities, Inc., and Trex

Communications for $19,846 and $62,188, respectively.    The

Paclaco Equities, Inc. and Trex Communications stock had been

contributed by Fortrend.   Checker Taxi claimed bases in this

stock of $3,786,000 and $13,160,000, respectively.    This resulted

in losses of $3,766,154 and $13,097,812 on the sales of the

Paclaco Equities, Inc. and Trex Communications stock,

respectively.   This resulted in a net long-term loss of $714,034.

     St. Botolph filed its Form 1120 for tax year 2001 on August

25, 2002, reporting the sale of a parking garage.    St. Botolph

reported a sale price of $22 million and a basis of $1,102,509 in

the parking garage.   This resulted in gain of $20,897,491 on the

sale of the parking garage.   During 2001 St. Botolph sold stock

in Telcel Equity and Theodor Tower, Inc., contributed by
                               - 14 -

Fortrend, for $67,000 and $47,000, respectively.    St. Botolph

claimed bases of $8,467,000 and $15,867,000 in this stock.    This

resulted in losses of $8,400,000 and $15,820,000 on the sale of

Telcel Equity and Theodor Tower, Inc. stock, respectively.    This

resulted in a net long-term loss of $3,322,509.

     Sixty-Five Bedford filed its Form 1120 for tax year 2001 on

September 9, 2002, reporting total gain of $$5,195,474 on the

sale of land.   Sixty-Five Bedford sold U.S. Treasury bills during

2001.   These Treasury bills had been contributed by Fortrend.

Sixty-Five Bedford reported a sale price of $14,735 and a basis

of $5,185,210 in the Treasury bills.    This resulted in a loss on

the sale of $5,170,475.    Sixty-Five Bedford reported a long-term

capital gain of $24,999.

     Fortrend distributed to itself the proceeds of the asset

sales, taking as profit the difference between those amounts and

the amounts it paid for the stock.

     Respondent examined the corporations’ Federal tax returns.

After examination the corporations and respondent entered into

closing agreements memorializing the agreed-upon changes to the

corporations’ returns.    The Town Taxi, Checker Taxi, and St.

Botolph closing agreements were fully executed on August 1, 2005.

The Sixty-Five Bedford closing agreement was fully executed on

January 26, 2006.
                             - 15 -

     The closing agreement for Town Taxi provided in pertinent

part that Town Taxi recognized an additional $1,925,100 on the

sale of the taxicab medallions.   The closing agreement also

provided that Town Taxi did not recognize any of the claimed

$18,495,188 loss on the sale of Trex Communications stock.     The

closing agreement imposed a 40-percent accuracy-related penalty

under section 6662 on the portion of the underpayment

attributable to the disallowed loss and a 20-percent accuracy-

related penalty on a portion of the increased gain on the sale of

the taxicab medallions.

     The closing agreement for Checker Taxi provided in pertinent

part that Checker Taxi was not entitled to any of the claimed

losses of $3,766,154 and $13,097,812 on the sale of Paclaco

Equities, Inc. and Trex Communications stock, respectively.     The

closing agreement also imposed a 40-percent accuracy-related

penalty on a portion of the disallowed losses.

     The closing agreement for St. Botolph provided in pertinent

part that St. Botolph was not entitled to any of the claimed

losses of $8,400,000 and $15,820,000 on the sale of Telcel Equity

and Theodor Tower, Inc. stock, respectively.   The closing

agreement also imposed a 40-percent accuracy-related penalty on a

portion of the disallowed losses.

     The closing agreement for Sixty-Five Bedford provided in

pertinent part that Sixty-Five Bedford was not entitled to any of
                              - 16 -

the claimed loss of $5,170,475 on the sale of U.S. Treasury

Bills.   The closing agreement also imposed a 40-percent accuracy-

related penalty on a portion of the disallowed loss.

     The closing agreements set forth the following liabilities:

                                               Penalty
     Entity          Year         Tax         Sec. 6662

     Town Taxi       2000      $6,100,159     $1,145,027
     Checker Taxi    2000       5,722,441      1,142,019
     St. Botolph     2001       6,839,682      1,367,936
     Sixty-Five      2001       1,644,315        328,863
       Bedford

     Respondent was unable to collect against the corporations

because they were insolvent at the time the closing agreements

were entered into and the taxes and penalties were assessed.    On

December 8, 2006, respondent issued four statutory notices of

liability to the trust (notices of transferee liability)

determining that the trust is liable as transferee for the unpaid

Federal income tax liabilities and penalties of the corporations

set out in the table above.

     On March 7, 2007, the trust filed a petition contesting

respondent’s determination that it was liable as transferee.    On

April 11, 2008, the trust filed its motion for summary judgment.

On May 19, 2008, respondent filed his objection, and on June 26,

2008, the trust filed a reply to respondent’s objection.
                              - 17 -

                            Discussion

I.   Summary Judgment

      Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.    Fla. Peach Corp. v.

Commissioner, 

, 681 (1988).    The Court may grant

summary judgment where there is no genuine issue of material fact

and a decision may be rendered as a matter of law.    Rule 121(a)

and (b); Sundstrand Corp. v. Commissioner, 

, 520

(1992), affd. 

(7th Cir. 1994).   The moving party

bears the burden of proving that there is no genuine issue of

material fact, and the Court will draw any factual inferences in

the light most favorable to the nonmoving party.     Dahlstrom v.

Commissioner, 

, 821 (1985).    Rule 121(d) provides that

where a party properly makes and supports a motion for summary

judgment, “an adverse party may not rest upon the mere

allegations or denials of such party’s pleading” but must set

forth specific facts, by affidavits or otherwise “showing that

there is a genuine issue for trial.”

      The parties agree that there are no material facts in

dispute.   Barring stipulation to the contrary, the venue for

appeal would appear to be the Court of Appeals for the First

Circuit.   See sec. 7482(b)(1) (flush language) and (2).
                                 - 18 -

II.   Res Judicata

      Res judicata serves “the dual purpose of protecting

litigants from the burden of relitigating an identical issue and

of promoting judicial economy by preventing unnecessary or

redundant litigation.”      Meier v. Commissioner, 

, 282

(1988).   Under the doctrine of res judicata, when a court of

competent jurisdiction enters a final judgment on the merits of a

cause of action, the parties to the action are bound “‘not only

as to every matter which was offered and received * * * but as to

any other admissible matter which might have been offered for

that purpose.’”      Commissioner v. Sunnen, 

, 597 (1948)

(quoting Cromwell v. County of Sac, 

, 352 (1877)); see

also Aunyx Corp. v. Canon U.S.A., Inc., 

, 6 (1st Cir.

1992) (“The doctrine of res judicata bars all parties and their

privies from relitigating issues which were raised or could have

been raised in a previous action, once a court has entered a

final judgment on the merits in the previous action.”).

      The essential elements of res judicata are:    (1) A final

judgment on the merits in an earlier action; (2) an identity of

parties or privies in the two suits; and (3) an identity of the

cause of action in the earlier and later suits.      Hambrick v.

Commissioner, 

, 351 (2002); see also Commissioner v.

Sunnen, supra at 597; Aunyx Corp. v. Canon U.S.A., Inc., supra at

6; Sands v. Commissioner, T.C. Memo. 1997-146, affd. without
                                - 19 -

published opinion sub nom. Murphy v. Commissioner, 

(2d Cir. 1998).   The parties agree that the first and second

elements are met.   The entry of decisions in the trust’s

deficiency cases was a final judgment on the merits, and the

parties are identical.   The parties dispute the third element.

     For purposes of determining whether two proceedings share

the same cause of action, 1 Restatement, Judgments 2d, sec. 24

(1982), states:

               (1) When a valid and final judgment rendered
          in an action extinguishes the plaintiff’s claim
          pursuant to the rules of merger or bar * * * , the
          claim extinguished includes all rights of the
          plaintiff to remedies against the defendant with
          respect to all or any part of the transaction, or
          series of connected transactions, out of which the
          action arose.

               (2) What factual grouping constitutes a
          “transaction”, and what groupings constitute a
          “series”, are to be determined pragmatically,
          giving weight to such considerations as whether
          the facts are related in time, space, origin, or
          motivation, whether they form a convenient trial
          unit, and whether their treatment as a unit
          conforms to the parties’ expectations or business
          understanding or usage.

See Manego v. Orleans Bd. of Trade, 

, 5 (1st Cir.

1985); see also Aunyx Corp. v. Canon U.S.A., Inc., supra at 6-7

(quoting 1 Restatement, supra sec. 24); Hemmings v. Commissioner,

, 231-232 (1995).

     Applying the transactional approach, identity between causes

of action will be found if “both sets of claims--those asserted

in the earlier action and those asserted in the subsequent
                              - 20 -

action--derive from a common nucleus of operative facts.”

Gonzalez v. Banco Cent. Corp., 

, 755 (1st Cir. 1994).

Even if both claims derive from a common nucleus of operative

facts, however, res judicata will not bar a subsequent claim not

available during the earlier action.    See In re Newport Harbor

Associates, 

, 24 (1st Cir. 1978).

     Section 6901(a)(1) authorizes the assessment of transferee

liability in the same manner as in the case of the taxes in

respect of which the liability was incurred.    It does not create

a new liability but merely provides a remedy for enforcing the

existing liability of the transferor.     Coca-Cola Bottling Co. v.

Commissioner, 

, 877 (9th Cir. 1964), affg. 

(1962); Mysse v. Commissioner, 

, 700-701 (1972).

Section 6902 provides that the Commissioner has the burden of

proving the taxpayer’s liability as a transferee but not that of

proving that the transferor was liable for the tax.

     The existence and extent of transferee liability is

determined under State law.   Massachusetts adopted the Uniform

Fraudulent Transfer Act (UFTA), Mass. Ann. Laws ch. 109A (Lexis

Nexis 2005), effective October 6, 1996.    Respondent alleges that

the trust violated UFTA.   Respondent’s position is that the

deemed transfers from the corporations to the trust were both

actual and constructive fraud under UFTA.
                               - 21 -

     A.   The Trust’s Arguments

     The trust argues that res judicata bars respondent’s

attempts to collect the corporations’ tax liabilities from the

trust as a transferee.    The trust contends that the liabilities

asserted in both the notices of deficiency and the notices of

transferee liability arise out of the following transactions and

factual events:    (1) The asset sales by the corporation, which

resulted in substantial long-term gains; (2) the stock sales; and

(3) the failure of the corporations to pay the taxes attributable

to the asset sales.    The trust argues that the deficiency

proceedings and the instant proceeding are closely related in

time, space, origin, and motivation.

     The trust argues that the deficiency action and the instant

action are related in time and space because the cause of action

underlying both is the same--the corporations’ failures to pay

taxes.    The trust contends that respondent made a tactical

decision to attempt to collect the corporations’ unpaid tax

liabilities by issuing the notices to the trust that gave rise to

the deficiency cases.

     The trust argues that the deficiency cases and the instant

action have the same origin because both arise out of the same

transactions and the failure of the corporations to pay their tax

liabilities.    The trust contends that the fact that the

deficiency cases arose out of an examination of the trust’s tax
                             - 22 -

returns and the instant action arises out of an attempt to

collect the unpaid tax of the corporations does not negate the

fact that the origins of both are the same underlying

transactions.

     The trust argues that the motivation behind the deficiency

cases and the instant case is the same--to hold the trust liable

for the unpaid tax liabilities of the corporations.    The trust

points to respondent’s characterization of the asset sales and

the stock sales as parts of a prearranged “intermediary

transaction” of the kind described in Notice 2001-16, 2001-1 C.B.

730, as support for this argument.    The trust points to

respondent’s determination of penalties in the deficiency cases

as further evidence that both actions share the same motivation.

The trust also quotes a sentence in the explanation of items

attached to the notices of deficiency:    “the intermediary entity

served no legitimate business purpose and was nothing more than a

diversion to avoid paying corporate income tax.”

     The trust further argues that the facts underlying the two

actions would form a convenient trial unit, that the underlying

injury in both actions is the same, and that both actions rest on

the same cause of action and identical factual bases.

     The trust argues that both the deficiency cases and the

instant action arise because the corporations failed to pay taxes

on income earned by the corporations on the asset sales.    The
                                - 23 -

trust contends that the unpaid tax liabilities of the

corporations were the underlying cause of both the deficiency

cases and the instant action.    The trust again points to

respondent’s characterization of the stock sales as “intermediary

transactions” described in Notice 

, and argues that

this supports the conclusion that the corporate taxes were at

issue in the deficiency cases.

     The trust contends that although the earlier cases involved

notices of deficiency increasing the trust’s tax liabilities and

the instant cases involve collection of the corporations’ unpaid

tax liabilities, both arose because, following respondent’s

theory that the corporations transferred property (cash) to the

trust in a deemed liquidation of the corporations, the

corporations failed to pay taxes on the gain from the asset sale.

The trust contends that both the deficiency cases and the instant

action rely upon respondent’s theory of constructive

liquidations.

     B.   Respondent’s Arguments and the Trust’s Rejoinder

     Respondent disputes the trust’s contentions and argues that

res judicata does not bar the instant action.    Respondent argues

that the causes of action are not identical, contending that the

notices of deficiency concerned deficiencies in the trust’s

fiduciary income tax arising from the sale of stock, while the
                              - 24 -

notices of liability concern a collection action for the

corporations’ assessed but unpaid tax liabilities.

     Respondent further disagrees that the operative facts of the

two cases are related in time, space, origin, and motivation.

Respondent argues that the two cases differ in time and space

because the deficiency cases involved the trust’s 2000 and 2001

tax deficiencies, specifically whether the trust reported the

appropriate amounts of capital gains on its returns, while the

instant case involves the collection of the corporations’ tax

liabilities.

     Respondent contends that the deficiency cases originated in

an examination of the trust’s 2000 and 2001 income tax returns

while the instant action originates from the examination of the

corporations’ 2000 and 2001 income tax returns.

     Respondent argues that the motivation behind the deficiency

cases was to determine the correct amounts of income tax due from

the trust for 2000 and 2001, while the motivation behind the

instant action is to collect from the trust as transferee the

unpaid tax liabilities of the corporations.

     Respondent argues that the deficiency cases and the instant

action would not form a convenient trial unit because respondent

was unable to raise transferee liability during the deficiency

cases.   Respondent contends that the requirements of section 6901

prevented him from asserting the transferee liability claim
                               - 25 -

during the pendency of the deficiency cases.    Respondent further

argues that the trust’s deficiency cases and the transferee

liability case could not be consolidated because the trust’s

transferee liability case was not docketed with this Court until

after the deficiency cases were closed.    The deficiency cases

were resolved on February 14, 2006, before the transferee case

was docketed on March 7, 2007.

     The trust disputes respondent’s contention that transferee

liability could not be at issue in the deficiency cases.    The

trust contends that respondent made a tactical decision not to

raise transferee liability during the deficiency cases or to have

the deficiency cases joined with the instant action.

     The trust further contends that respondent’s characterizing

the deficiency cases as so-called intermediary transactions shows

his awareness that the corporate tax was at issue in those

proceedings.    The trust relies on Aunyx Corp. v. Canon U.S.A.,

Inc., 

(1st Cir. 1992), and argues that respondent knew

enough about the facts of the transactions to have issued a

notice of transferee liability rather than the notices of

deficiency.    The trust further contends that respondent could

have asserted transferee liability during the deficiency cases,

rather than letting the deficiency cases close and “trying to get

a second bite at the apple”.
                              - 26 -

     C.   Conclusion

     We agree with respondent that res judicata does not bar the

instant action.   The cause of action in the deficiency cases is

not the same as that in the instant action.   The deficiency cases

dealt with the trust’s gain on the sale of its stock in the

corporations.   The issue to be determined was the trust’s

fiduciary income tax liability.    Had respondent’s determinations

in the notices of deficiency been upheld, the trust would have

paid more tax on the sale of the corporations’ stock.    However,

that determination would not have required the trust to pay the

unpaid tax liabilities of the corporations.

     The instant action deals with the trust’s liability as

transferee for the unpaid tax liabilities of the corporations.

The trust’s liability as transferee is not the same as the

trust’s fiduciary tax liability.   The corporations’ tax

liabilities arose from the disallowance of the claimed losses and

the corporations’ entering into closing agreements with the IRS.

Because the corporations held no assets, respondent was forced to

attempt to collect the unpaid tax from the trust.

     The trust’s contention that a statement in the notice of

deficiency shows respondent’s intention to collect the

corporations’ tax by issuing the notices of deficiency is

misplaced.   The notices of deficiency stated that the

intermediary entity served no purpose other than to avoid paying
                              - 27 -

corporate tax.   This avoidance of corporate tax, however, does

not mean that the notice was an attempt by respondent to collect

that unpaid corporate tax.

     The time, space, origin, and motivation of the deficiency

cases and the instant action differ.    It is a longstanding

principle that the Commissioner can collect the unpaid tax

liabilities of a corporation from transferee shareholders.     See

Phillips v. Commissioner, 

(1931); Shepard v.

Commissioner, 

(7th Cir. 1939), affg. 

(1937); Hunn v. United States, 

(8th Cir. 1932);

McDonald v. Commissioner, 

(4th Cir. 1931), revg. 

(1930); Humbert v. Commissioner, 

(1931);

Gideon-Anderson Co. v. Commissioner, 

(1930);

Castorina v. Commissioner, T.C. Memo. 1986-540; Fugate v.

Commissioner, T.C. Memo. 1977-18.    The Commissioner likewise can

determine a deficiency against a taxpayer by adjusting the

taxpayer’s claimed basis in stock.     See Coloman v. Commissioner,

(9th Cir. 1976), affg. T.C. Memo. 1974-78; Gleason

v. Commissioner, T.C. Memo. 2006-191; Arnold v. Commissioner,

T.C. Memo. 2003-259.

     Res judicata does not bar the Commissioner from:    (1)

Issuing a notice of deficiency to a taxpayer determining a

deficiency; and (2) issuing a notice of transferee liability to a

taxpayer in an attempt to collect from the taxpayer the unpaid
                              - 28 -

tax of another.   See Milk Bottle Exchange, Inc. v. Commissioner,

, 34-36 (1940); see also S-K Liquidating Co. v.

Commissioner, 

(1975) (allowing issuance of a second

notice of deficiency because the two notices were based upon two

separate returns covering different taxable periods, and the

determined deficiencies originated from taxes enacted for

different purposes).

     Although the deficiency cases and the instant action arise

out of similar facts, there is no identity between the causes of

action, and the third element required for res judicata to apply

has not been met.   See Enos v. Commissioner, 

, 303-

304 (2004); Milk Bottle Exchange, Inc. v. Commissioner, supra at

34-36.   Res judicata does not bar respondent’s attempts to

collect the corporations’ tax liabilities in this transferee

proceeding.

     Further, even if we were to agree with the trust that the

cause of action in the deficiency cases arose from the same

common nucleus of operative facts as the instant action, 1

Restatement, supra sec. 26, provides an exception to 1

Restatement, supra sec. 24, that allows respondent to assert

transferee liability against the trust:   the general rule of

section 24 does not apply to bar a claim for relief if there was

a jurisdictional barrier or limit on the authority of the

tribunal hearing the first action that did not allow the
                               - 29 -

plaintiff to put forward that claim for relief.    Respondent could

not assert transferee liability in the deficiency cases because

the trust’s fiduciary tax liabilities and the trust’s liability

as transferee could not be litigated in one proceeding.    See Milk

Bottle Exchange, Inc. v. Commissioner, supra at 36; Locke v.

Commissioner, T.C. Memo. 1996-541, affd. without published

opinion 

(9th Cir. 1998).

       Although the deficiency cases and the instant action share

some of the same facts, respondent could not raise transferee

liability in the deficiency cases because the two proceedings

present two distinct causes of action.    Therefore res judicata

does not bar respondent’s attempts to collect the corporations’

unpaid tax liabilities from the trust.

III.    Collateral Estoppel

       The trust argues in the alternative that respondent is

collaterally estopped from arguing in this case that the stock

sales were in substance deemed liquidating distributions from the

corporations to the trust.

       Collateral estoppel has the “dual purpose of protecting

litigants from the burden of relitigating an identical issue and

of promoting judicial economy by preventing unnecessary or

redundant litigation.”    Meier v. Commissioner, 

;

see also Montana v. United States, 

, 153-154 (1979);

Parklane Hosiery Co. v. Shore, 

, 326 (1979).     In
                              - 30 -

general, the doctrine of collateral estoppel forecloses

relitigation of issues actually litigated and necessarily decided

in a prior suit.   Parklane Hosiery Co. v. Shore, supra at 326

n.5; Meier v. Commissioner, supra at 282; Peck v. Commissioner,

, 166 (1988), affd. 

(9th Cir. 1990).

     This Court has set forth five prerequisites necessary for

the application in factual contexts of collateral estoppel:

          (1) The issue in the second suit must be identical
     in all respects with the one decided in the first suit.

          (2) There must be a final judgment rendered by a
     court of competent jurisdiction.

          (3) Collateral estoppel may be invoked against
     parties and their privies to the prior judgment.

          (4) The parties must actually have litigated the
     issues and the resolution of these issues must have
     been essential to the prior decision.

          (5) The controlling facts and applicable legal
     rules must remain unchanged from those in the prior
     litigation.

Peck v. Commissioner, supra at 166-167 (citations omitted). The

trust focuses on the fourth element--that the parties must have

actually litigated the issues and the resolution of the issue

must have been essential to the prior decision.   The trust

concedes that there was no trial during the deficiency cases but

argues that the parties’ pleadings put in issue whether the trust

was the recipient of liquidating distributions from the

corporations.   The trust points to Klingman v. Levinson, 

, 1296 (7th Cir. 1987), arguing that collateral estoppel can
                              - 31 -

apply to issues not litigated if the parties to the first

proceeding could reasonably have foreseen the conclusive effect

of their actions.

     The trust contends that respondent’s theory in the

deficiency cases was that there were deemed liquidating

distributions.   Because respondent conceded that there were no

deficiencies in tax, the trust argues that respondent implicitly

conceded that there could not have been liquidating

distributions.   Therefore the trust cannot be liable as

transferee because there were no transfers of property from the

corporations to the trust.

     Respondent argues that collateral estoppel is inapplicable

because the issues underlying the trust’s potential transferee

liability were not actually litigated or necessarily decided in

the deficiency cases.   Respondent argues that the exception in

Klingman v. 

, does not apply because the trust and

respondent did not agree to any stipulations in the deficiency

cases other than what appears in the decision documents, and

those stipulations, as embodied in the final decisions, do not

concede that the stock sales should be respected for Federal tax

purposes, that the trust received no distributions from the

corporations, or that the trust was not liable as transferee.

Respondent concludes that there is no basis to read the
                                  - 32 -

stipulated decisions as a concession that the sales of stock were

reported properly or that the trust is not liable as transferee.

      In Klingman v. 

, the Court of Appeals for the

Seventh Circuit was asked to decide whether a judgment obtained

by Ms. Klingman against Mr. Levinson was dischargeable in

bankruptcy.   Ms. Klingman and Mr. Levinson entered into a trust

agreement with Mr. Levinson as trustee.       

  Later, Ms.

Klingman filed suit against Mr. Levinson in State court alleging

dissipation of trust assets.      

was resolved by

consent judgment, and pursuant to that judgment Mr. Levinson was

to pay Ms. Klingman $37,550 plus interest and $10,000 of

attorney’s fees.    

stipulated a number of facts

in the consent judgment, including that Mr. Levinson allowed or

caused the dissipation and loss of the trust corpus and that Mr.

Levinson’s obligation to Ms. Klingman was not to be dischargeable

in any bankruptcy or similar proceeding filed by Mr. Levinson.

also indicated that if there were to be any

further proceedings, the facts included in the consent judgment

would be taken as true.     

later filed for

bankruptcy.   

filed a response claiming that her

judgment against Mr. Levinson was not dischargeable under

bankruptcy laws because it resulted from fraud by Mr. Levinson.

court granted Ms. Klingman’s motion for

summary judgment and held in part that Mr. Levinson was barred
                                  - 33 -

from relitigating the issue of defalcation because he had

stipulated the finding (contained in the consent judgment) that

he had violated his fiduciary duties by defalcating assets of the

trust.   

     The District Court affirmed the bankruptcy

court’s order.       

of Appeals for the Seventh Circuit affirmed the

decisions of the bankruptcy court and the District Court.      The

Court of Appeals first had to determine whether a State court

judgment was entitled to any weight in determining whether

collateral estoppel applied in a Federal proceeding.       Klingman v.

at 1295.       The Court of Appeals answered in the

affirmative, stating that “Where a state court determines factual

questions using the same standards as the bankruptcy court would

use, collateral estoppel should be applied to promote judicial

economy by encouraging the parties to present their strongest

arguments.”    

of Appeals then applied the doctrine

to the facts of the case.      After laying out the four factors

required for collateral estoppel to apply, the court focused on

the requirement that the issue be “actually litigated”.       

   The Court of Appeals, quoting Kaspar Wire Works, Inc. v.

Leco Engg. & Mach., Inc., 

, 539 (5th Cir. 1978),

stated that “if the parties to a consent decree ‘indicated

clearly the intention that the decree to be entered shall not

only terminate the litigation of claims but, also, determine
                                - 34 -

finally certain issues, then their intention should be

effectuated.’”     

rule to the case before it, the Court of

Appeals held that collateral estoppel applied to bar Mr. Levinson

from challenging the facts in the consent decree because it “is

certainly reasonable to conclude that the parties understood the

conclusive effect of their stipulation in a future bankruptcy

proceeding.”     

with respondent that he is not collaterally

estopped from arguing in this proceeding that there were deemed

liquidating distributions from the corporations to the trust.

The deficiency cases and the instant action concern different

liabilities.     The deficiency cases concerned the trust’s

fiduciary tax liabilities while the instant case concerns the

trust’s liability as transferee.     The notices of deficiency laid

out alternative grounds for respondent’s adjustments:     (1) An

adjustment to the trust’s claimed bases in the stock; or (2) an

increase in the amounts received as the result of liquidating

distributions.     The decision documents, however, do not mention

either alternative, let alone stipulate that respondent was

conceding on either or both theories.

     As the Supreme Court stated in United States v. Intl. Bldg.

Co., 

, 506 (1953), in denying the application of the

principle of collateral estoppel to a later proceeding in this
                             - 35 -

Court after the parties entered into a compromise in an earlier

proceeding:

     A judgment entered with the consent of the parties may
     involve a determination of questions of fact and law by
     the court. But unless a showing is made that that was
     the case, the judgment has no greater dignity, so far
     as collateral estoppel is concerned, than any judgment
     entered only as a compromise of the parties.

See also Apparel Art Intl., Inc. v. Amertex Enters. Ltd., 

, 583 n.9 (1st Cir. 1995) (“Although Apparel’s allegations of

fraudulent conveyance were raised in Apparel II and dismissed by

the district court, neither factual determinations nor

conclusions as to the legal merit of these claims were made by

the trial court.”).

     In United States v. Intl. Bldg. 

, the Court was

unable to tell whether the agreement of the parties was based

upon the merits or on some collateral consideration.   See also

Massaglia v. Commissioner, 

, 386 (1959), affd. 

(10th Cir. 1961), in which we stated:   “A decision by

this Court, entered upon a stipulation of deficiencies, without a

hearing on the merits, is not a decision on the merits such as

will support a plea of collateral estoppel”.   See also Estate of

Cavett v. Commissioner, T.C. Memo. 2000-91.

     Respondent’s decision to concede the deficiency cases could

have been based on any number of considerations.   We cannot

determine, on the basis of the parties’ stipulations, why

respondent conceded those cases.   Because the question whether
                              - 36 -

there were liquidating distributions was not actually litigated,

nor was it essential to the decisions in the deficiency actions,

collateral estoppel does not bar respondent from asserting in the

instant action that there were liquidating distributions from the

corporations to the trust.

     The exception in Klingman v. Levinson, 

(7th

Cir. 1987), does not apply.   The stipulated decisions do not

include stipulations of the type present in Klingman v. 

, where Mr. Levinson attempted to argue that his debt was

dischargeable even though he had stipulated the contrary.   The

decision documents in the deficiency cases do not identify the

basis underlying respondent’s concession.   It would be

unreasonable to read those decision documents as a concession by

respondent that the stock sales were to be respected or that the

trust was not a transferee.

     Because the issue of whether there were liquidating

distributions was not actually litigated in the deficiency cases,

respondent is not collaterally estopped from arguing in the

instant transferee liability action that there were liquidating

distributions.
                              - 37 -

IV.   Conclusion

      Because res judicata and collateral estoppel do not bar the

instant action, the trust’s motion will be denied.

      To reflect the foregoing,


                                         An appropriate order

                                    denying the trust’s motion

                                    will be issued.