Code sec. 3439.02 states that a person is insolvent when a sale of his assets would not realize sufficient cash to satisfy his liabilities. And Cal. Civ. Code sec. 3439.03 defines "fair consideration" as follows: Fair consideration is given for property, or obligation: (a) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or (b) When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained. The question we must decide is whether petitioner's naked promise to repay the sums advanced to him can qualify as a "fair consideration," a "good faith equivalent," or a "present advance" under the Act. Unfortunately, California courts have never ruled on this precise issue. In general, what constitutes "fair consideration" under the Act must be determined from the standpoint of the creditors. Hansen v. Cramer, 39 Cal. 2d 321, 245 P. 2d 1059 (Sup. Ct. 1952); Patterson v. Missler, 238 Cal. App. 2d 759, 48 Cal. Rptr. 215 (Dist. Ct. App. 1965); Bailey v. Leeper, 142 Cal. App. 2d 460, 298 P. 2d 684 (Dist. Ct. App. 1956). Gross disparity in the value of the items exchanged will cause the California courts to set the transfer aside as fraudulent within the meaning of the Act. Stearns v. Los Angeles City School District, 244 Cal. App. 2d 696, 53 Cal. Rptr. 482 (Dist. Ct. App. 1966). Seemingly, almost anything of sufficient value can be received as "fair consideration." Although the specific question as to whether a naked promise to pay is "fair consideration" within the meaning of section 3439.03 has never been considered by the California courts, the problem has arisen in other jurisdictions which have enacted the Uniform Fraudulent Conveyance Act. New Jersey enacted the Act in 1919, adopting the relevant sections verbatim. N.J. Rev. Stat. secs. 25:2-8-25:2-11 (1937). In Hollander v. Gautier, 114 N.J. Eq. 485, 168 Atl. 860 (1933), the Court of Chancery of New Jersey declared in broad language that an enforceable promise to pay a nonspecified amount of money made at the time of transfer is fair consideration within the meaning of the Act. This conclusion was reached by following the holding in the Minnesota case of Schlecht v. Schlecht, 168 Minn. 168, 209 N.W. 883 (1926), where an enforceable promise to provide labor and materials was held to be adequate under the Minnesota version of the Uniform Act, enacted verbatim in relevant sections by Minnesota in 1926. Minn. Stat. Ann. secs. 513.21-513.24 (1947). In Freitag v. The Strand of Atlantic City, 205 F.2d 778 (C.A. 3, 1953), the New Jersey Act was again construed. Relying on both Schlecht and Hollander the Court of Appeals for the Third Circuit declared that "an executory promise may be very valuable. It may be 'property' and 'fair consideration' within the meaning of the Act." 205 F. 2d at 784. In Hay v. Duskin, 9 Ariz. App. 599, 455 P. 2d 281 (1969), the Court of Appeals of Arizona held that a promise of future legal services is fair consideration within the meaning of the Arizona version of the Uniform Act, identical in relevant sections to the California statute. Ariz. Rev. Stat. Ann. secs. 44-1002-44-1005 (1969). This view comports with that of the Supreme Court of New Hampshire in Osgood v. Massachusetts Mut. Life Ins. Co., 93 N.H. 160, 37 A. 2d 12 (1944), where the New Hampshire version of the Act, N.H. Rev. Stat. Ann. secs. 545:2-545:5 (1955), identical in the relevant sections, was read to allow an annuity purchased from an insurance company to qualify as "fair consideration" despite the fact that an annuity is a promise to make periodic payments. But not all of the States which have adopted the relevant portions of the Uniform Act are in agreement. Wisconsin and South Dakota courts have reached the opposite conclusion. Running v. Widdes, 52 Wis. 2d 254, 190 N.W. 2d 169 (1971); Village of West Milwaukee v. Bergstrom Mfg. Co., 242 Wis. 137, 7 N.W. 2d 587 (1943); Angers v. Sabatinelli, 235 Wis. 422, 293 N.W. 173 (1940); Virgil State Bank v. Wahl, 56 S.D. 318, 228 N.W. 392 (1930); Hulsether v. Sanders, 54 S.D. 412, 223 N.W. 335 (1929). The commentators, like the courts, do not agree. James Angell McLaughlin, a noted expert in the bankruptcy area writes that "An executory promise is not a fair consideration according to the unequivocal language of [the Act]," admitting however that "this does not seem to have been given full effect in the cases." McLaughlin, "Application of the Uniform Fraudulent Conveyance Act," 46 Harv. L. Rev. 404, 414 (1933). He labels Schlecht as "clearly erroneous" (id. at 447, fn. 215), and cites Hulsether with approval (id. at 414, fn. 51). Writing under the names James Angell MacLachlan, Professor McLaughlin reiterated this view in his treatise, Handbook of the Law of Bankruptcy, sec. 238, p. 273 (1956). See also Cowans, Bankruptcy Law and Practice, sec. 759, p. 407 (1963). A more flexible approach, however, is advanced in 4 Collier, Bankruptcy, sec. 67.33, pp. 510-512 (14th ed. 1971): it has been held under the Uniform Act that promises to support the transferor and even to discharge his obligations do not constitute fair equivalents. On the other hand, several cases have held executory promises to be sufficient. In some of these, the courts calculated the worth of the promises by adding up expenditures pursuant thereto. This procedure would seem to be at war with the notion expressed earlier that the fairness of the consideration must be determined as of the time of the transfer. Where the thing promised cannot be beneficial or of avail to the creditors, an executory promise is certainly to be condemned. Where, however, the promisor is solvent and the promise is enforceable, it seems doubtful that a transfer to him in exchange for his promise should be held to be necessarily and automatically without fair consideration ** [Fns. omitted.] We conclude that the majority and better view is that a bona fide enforceable promise to pay money in the future may constitute "fair consideration" under the Uniform Act. Such a promise, while as subject to subsequent diminution in value as any other asset which has value when transferred, is clearly an asset on which a creditor can levy, and if, due to the promisor's financial condition, it provides the transferor with a sufficient quid pro quo when given, the fact that later events may deprive the promise of value should be of no greater significance than the fact that corporate stocks, for example, may also later become worthless. The test should be value when given, not the exercise of hindsight. See MacLachlan, Bankruptcy, sec. 236, pp. 271– 272 (1956). Accordingly, we hold that a bona fide promise constitutes "fair consideration" within the meaning of the California statute." This conclusion of law leads us to the question whether petitioner's promise when made-was bona fide and of sufficient value. The burden of proof is upon respondent to prove that petitioner is liable as a transferee in this proceeding. Sec. 6902 (a). Respondent has not shown that petitioner's promises when given were of insufficient value to support the transfer. We have therefore found as a fact that the loans made by Company to and on behalf of petitioner during the years 1962 through 1964 were bona fide loans and were made for a fair consideration. We therefore hold that petitioner is not a transferee of Company and is not liable for its taxes and additions thereto. 3. Miscellaneous Determinations In the statutory notices of deficiency in docket Nos. 5660-69 and 3460-69, respondent made numerous determinations in addition to the constructive dividend issue regarding petitioners' individual tax liabilities for the years 1962 through 1967 (exclusive of 1966). Petitioners introduced no evidence relating to these determinations. Since the burden of proof pertaining to these determinations rests with petitioners (Rule 142, Tax Court Rules of Practice and Procedure), we have no choice but to sustain respondent's determinations contained in the statutory notices of deficiency with the exception of the constructive dividend issue. Decisions will be entered under Rule 155. We note that the California Supreme Court has generally been solicitous of debtors' rights in recent years. See, e.g., Blair v. Pitchess, 5 Cal. 3d 258, 486 P. 2d 1242, 96 Cal. Rptr. 42 (Sup. Ct. 1971), and Randone v. Appellate Dept. of Sup. Ct. of Sacramento Co., 5 Cal. 3d 536, 488 P. 2d 13, 96 Cal. Rptr. 709 (Sup. Ct. 1971). 436 61 UNITED STATES TAX COURT REPORTS LONE MANOR FARMS, INC., PETITIONER V. COMMISSIONER OF INTERNA REVENUE, RESPONDENT Docket No. 2204-72. Filed January 3, 1974. On its income tax return for 1967, petitioner reported and paid Leroy A. Brill and Benjamin Stolper, for the petitioner. OPINION TANNENWALD, Judge: Respondent determined a deficiency of $59,863.57 in petitioner's income tax for the taxable year ended January 31, 1969.1 The entire deficiency arises from respondent's disallowance of the net operating loss deduction petitioner claims for that year. The facts of the case have been stipulated. Petitioner is a Delaware corporation engaged in the business of farming. Its principal place of business was in Middletown, Del., at the time the petition was filed in this case. Petitioner filed its Federal income tax return for 1969 with the Internal Revenue Service Center at Philadelphia, Pa. The table below shows petitioner's taxable income before any net operating loss deduction and its net operating losses for the taxable years 1965 through 1970: 1 Petitioner's taxable years ending Jan. 31 will hereinafter be denoted by the calendar years in which they end. In 1967 petitioner had a net long-term capital gain of $313,531.39, no net short-term capital loss, and deductions in excess of ordinary income (exclusive of any net operating loss deduction) of $53,910.27. In 1969 petitioner had a net long-term capital gain of $227,576.32, no net short-term capital loss, and deductions in excess of ordinary income (exclusive of any net operating loss deduction) of $92,445.43. Petitioner filed a timely Federal income tax return for 1967. In computing its tax liability for that year, petitioner used both the "regular" and "alternative" methods of computation. The regular method is prescribed in section 11 and the alternative method for corporations is prescribed in section 1201 (a).2 The regular method produced the following result: 313, 531. 39 0 0 Less: Excess of net long-term capital gain over net Balance Sec. 1201 (a) (1): 22% X 0--- Sec. 1201 (a) (2): 25% × $313,531.39. Alternative tax. 78, 382.85 78, 382.85 2 Statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. SEC. 1201. ALTERNATIVE TAX. (a) CORPORATION.-If for any taxable year the net long-term capital gain of any corporation exceeds the net short-term capital loss, then, in lieu of the tax imposed by sections 11, 511, 821 (a) or (c), and 831 (a), there is hereby imposed a tax (if such tax is less than the tax imposed by such sections) which shall consist of the sum of— › (1) a partial tax computed on the taxable income reduced by the amount of such excess, at the rates and in the manner as if this subsection had not been enacted, and (2) an amount equal to 25 percent of such excess, * * * The provisions of sec. 1201 (a) were amended by sec. 511 (b) of Pub. L. 91-172, 83 Stat. 635, effective for taxable years beginning after Dec. 31, 1969, in respects not pertinent to the issues involved herein. |