Stanko v. Commissioner

Rudy Stanko owned Nebraska-based Stanko Packing (Packing). In April 1984, Rudy was indicted for violating federal meatpacking law, which jeopardized Packing’s meat-inspection license. In June, Packing sold most of its assets for $3.9 million, receiving $900,000 in cash and the remainder via a five-year installment note. On September 17, Packing transferred the note and other assets to Rudy for no consideration, rendering Packing insolvent. On September 19, Rudy transferred the note to his wife, Jean Stanko (plaintiff). Jean filed for divorce in July 1985, and the parties were divorced in July 1986, with Jean receiving no property, maintenance, or child support and virtually no alimony. Jean, who received the first note payment in July 1985, kept the note until maturity in 1989, receiving more than $4.1 million. Upon receiving payments, Jean paid deferred capital-gains taxes. Packing dissolved in June 1985 without paying the tax, penalties, and interest that it owed. After failing to collect from Rudy, the commissioner (defendant) of the Internal Revenue Service (IRS) sought to collect the deficiency from Jean on the theory that her acquisition of the note was a fraudulent conveyance. Jean challenged the commissioner’s effort in the United States Tax Court. The Tax Court ruled for the commissioner, concluding that Rudy intended to defraud creditors by transferring the note to Jean, that Jean did not pay adequate compensation, and that the note’s fair market value (FMV) was $2,806,979 when Jean received it. Jean appealed, arguing that Rudy did not intend to defraud creditors, that she paid fair consideration because she gave up monetary claims in the divorce and agreed to pay capital-gains taxes on the note, and that the Tax Court overstated the note’s FMV because it did not account for a prospective buyer’s tax liability. However, Jean conceded that the transfer to Rudy was a fraudulent conveyance.