Federal Circuit Affirms Federal Claims Court's $79 Million Transferee Liability Judgment

(Parker Tax Publishing June 2026)

The Federal Circuit affirmed the Court of Federal Claims and held that several family trusts were liable under Code Sec. 6901 for $79 million in transferee liabilities for the unpaid taxes and penalties of a holding company that purchased all of the outstanding stock of two C corporations owned by the trusts and that used abusive tax shelter transactions to general artificial losses to offset the gains from the sales. The court also found that the IRS did not abuse its discretion in not applying deposits that successor trusts made under Code Sec. 6603 as payments of the tax liabilities of the original trusts. Dillon Trust Company LLC v. U.S., 2026 PTC 117 (Fed. Cir. 2026).

Background

In the 1930s, Clarence and Anne Dillon created numerous trusts for the benefit of their descendants (Dillon trusts). By 2000, the assets held by these trusts had appreciated in value to approximately $90 million. The Dillon Trust Company (Dillon Trust) was eventually formed to serve as a corporate trustee for all of the Dillon trusts.

The Dillon trusts owned stock in two C corporations: Humboldt Corporation and Shelby Corporation. These corporations, in turn, owned assets consisting almost entirely of blue-chip stocks and prime farmland. A new generation of beneficiaries were ready, however, to pass the value of the assets on to the individual trusts or their beneficiaries. That posed a problem: at that time, the two corporations had relatively low bases in those assets, approximately $16 million, leaving over $71 million in unrealized gains. Disposing of the assets and distributing the proceeds therefore meant paying a very substantial tax, not just at the corporate level when the assets were sold, but then a second time when the corporations were dissolved and the assets distributed. The prospect of this dual taxation meant that the net benefit could be reduced almost in half.

In December of 2002, the Dillon family sold the stock of Humboldt and Shelby to Humboldt Shelby Holding Company (HSHC), a holding company incorporated a month earlier. By the time of the stock sale, Humboldt and Shelby had liquidated their physical assets and were no longer operating businesses; each corporation retained only cash, a portfolio of blue-chip stocks (investment portfolios), and installment notes whose principal payments were due in three years. In exchange for 100 percent of the stock of Humboldt and Shelby, HSHC paid $86.8 million in cash to the nine Dillon trusts, approximately 95 percent of the fair market value of the assets, using money borrowed from Rabobank.

As a result of the stock sale, Humboldt and Shelby passed on to HSHC significant unrealized gains on the underlying assets. Within hours of the stock sale, HSHC sold Humboldt and Shelby's investment portfolios, triggering substantial realized, taxable gains to the corporations. In January 2003, HSHC pledged one of the Humboldt and Shelby installment notes to Rabobank in exchange for an additional loan. In the meantime, between December 24, 2002, and May 5, 2003, James Haber, the sole shareholder and president of HSHC, caused Humboldt and Shelby to engage in a series of Son-of-BOSS transactions that generated artificial losses to offset the gains. The parties agreed that those loss-generating transactions were entirely bogus. The Dillon trusts were not participants in any part of the Son-of-BOSS transactions.

On its 2003 corporate income tax return, HSHC reported $73.2 million in gains and $74.1 million in losses, which theoretically offset any tax liability for the gains. The IRS determined that the Son-of-BOSS transactions were abusive tax shelters and that HSHC owed $25.6 million in income tax and $10.2 million as a gross valuation misstatement penalty, along with underpayment interest. In Humboldt Shelby Holding Corp. v. Comm'r, T.C. Memo. 2014-47, the Tax Court upheld the IRS's decision and, in 2015 PTC 183 (2d. Cir. 2015), the Second Circuit affirmed. HSHC never paid those taxes, interest, and penalties.

In 2014, the IRS notified the nine Dillon trusts that were parties to the stock sale that they might be held liable as transferees under Code Sec. 6901 for HSHC's unpaid taxes, penalties, and interest. The trusts then made a $71.7 million deposit under Code Sec. 6603 in the event that the IRS asserted transferee liability. The IRS asserted such liability in October of 2016, issuing notices of transferee liability to the Dillon trusts that were parties to the stock sale. The Dillon trusts paid the assessed transferee liabilities in full, approximately $79.9 million, in October of 2017.

The Dillon trusts filed suit in the Court of Federal Claims, seeking a refund of all taxes, penalties, and interest paid as purported transferees of HSHC. In Dillon Trust Company LLC et al. v. U.S., 2023 PTC 283 (Fed. Cl. 2023), the Court of Federal Claims held that the stock sale between the Dillon trusts and HSHC and the subsequent asset sales by HSHC could be collapsed into one transaction. Thus, under New York law, the Dillon trusts were transferees of HSHC and therefore liable under Code Sec. 6901 for HSHC's unpaid taxes, penalties, and interest. The Court of Federal Claims also held that the continued accrual of interest by the IRS after the Dillon trusts made their Code Sec. 6603 deposit did not violate the law and therefore Dillon Trust could not pursue an illegal exaction claim.

The Dillon trusts appealed to the Federal Circuit. The trusts argued that they did not have inquiry notice of Haber's scheme to sell Humboldt and Shelby's assets and fraudulently evade the resulting tax liability. In addition, the trusts argued that under New York law they could not be held liable for the $10.2 million gross valuation statement penalty incurred by HSHC. The trusts further argued that the IRS committed an illegal exaction by declining to apply the deposits as payments of their tax liabilities.

Analysis

The Federal Circuit affirmed the Court of Federal Claims' determinations that the Dillon trusts were liable as transferees and that their liability included the HSHC's gross valuation misstatement penalty. The Federal Circuit also held that the accrual by the IRS of interest after the trusts made their Code Sec. 6603 deposits was not an illegal exaction.

In the view of the Federal Circuit, the Court of Federal Claims correctly applied the transferee liability framework set forth in Diebold Foundation, Inc. v. Comm'r (2013 PTC 362 (2d Cir. 2013). In Deibold, the Second Circuit held that multilateral transactions may be collapsed when the transferees have actual or constructive knowledge of the entire scheme that renders the exchange fraudulent. The circumstances identified by the Second Circuit as indicating constructive knowledge include the transferees' awareness of the tax liability arising from built-in gains, the sophistication of the parties and of their understanding of the structure of the transaction, and their awareness that the buyer is a newly-created entity formed for the sole purpose of purchasing the stock. The court found that the Dillon trusts knew they were marketing assets with a built-in tax liability of $26 million. The court also found that the trusts were sophisticated parties whose representatives had a sophisticated understanding of the transaction structure. The trusts also knew, the court noted, that HSHC was a newly formed entity with de minimis assets which borrowed substantially all of the purchase price using Humboldt's and Shelby's assets as collateral. In the court's view, the trusts' awareness of these circumstances, and their failure to further inquiry into Haber and HSHC, and thus gave them constructive knowledge of the entire scheme.

On the issue of the trusts' liability for HSHC's gross valuation misstatement penalty, the Federal Circuit began by noting the existence of a circuit split on transferee liability for tax penalties. The trusts relied on an Eighth Circuit decision, Stanko v. Comm'r, 209 F.3d 1082 (2000), for their contention that transfers under NYUFCA Section 273 are only "fraudulent as to creditors," not as to future creditors. The Court of Federal Claims, however, determined that the amount HSHC owed, and whether it could be collected from a transferee, was subject to federal law under Code Sec. 6901. The Court of Federal Claims cited the Ninth Circuit's decision in Tricarichi v. Comm'r, 2018 PTC 392 (9th Cir. 2018)), as well as Kreps v. Comm'r, 42 T.C. 660, 670 (1964), aff'd, 351 F.2d 1 (2d Cir. 1965)). In addition, the government cited case law in the Eleventh and First Circuits holding that a creditor's rights against a fraudulent transferee extend to both the underlying claim and accruals on that claim, as long as the total amount of transferee liability does not exceed the value of the asset transferred (Shockley v. Comm'r, 2017 PTC 446 (11th Cir. 2017); Schussel v. Werfel, 2014 PTC 336 (1st Cir. 2014)). The Federal Circuit observed that the Court of Federal Claims' decision was thus supported by First, Ninth, and Eleventh Circuit precedent, as well as by the Tax Court's decision in Kreps, which was affirmed by the Second Circuit. Based on these precedents, the Federal Circuit upheld Court of Federal Claims' decision to include the penalties owed by HSHC in the Dillon trusts' transferee liability.

Lastly, the Federal Circuit rejected the trusts' argument that the Court of Federal Claims should have refunded the $11 million in underpayment interest that accrued after May 2015, when Dillon Trust deposited $71 million with the IRS pursuant to Code Sec. 6603. The court noted that to establish an illegal exaction, the trusts had to show that the IRS violated the law by exacting underpayment interest when it was forbidden from doing so. But the court found that Code Sec. 6603(a) explicitly grants the IRS discretion in choosing whether to apply a deposit as a payment against a taxpayer's liability. Thus, although the trusts had the right to request that their deposits be used to pay the later assessed tax liability, they had no statutory entitled to that request being honored.

For a discussion of transferee liability, see Parker Tax ¶262,530. For a discussion of taxpayer deposits to stop the running of interest on potential underpayments, see Parker Tax ¶261,510.

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