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Frank Sawyer Trust of May 1992 v Commissioner of Internal Revenue

Case No. 5526-07 (U.S. Tax Ct., Apr. 3, 2014)

This matter is before the Court on remand from the Court of Appeals for the First Circuit for further proceedings in accordance with its opinion in Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 597 (1st Cir. 2013), rev’g and remanding T.C. Memo. 2011-298 (Frank Sawyer II). The issue for decision on remand is whether Frank Sawyer Trust of May 1992 (the Trust) is liable as a transferee of a transferee under section 6901. We hold that it is; however, we conclude that the Trust is a good-faith transferee and, therefore, is not liable to the full extent stated in the notices of liability.

FINDINGS OF FACT



We summarize relevant background from Frank Sawyer II and set forth additional facts for purposes of deciding the issue on remand.

This case involves respondent’s efforts to collect tax and penalties assessed upon four C corporations. The corporations acknowledge that they owe the Federal Government a combined total of more than $24.3 million in tax and penalties. However, they have no money to pay. The Trust owned the corporations when they generated large capital gains, but it sold the corporations before the tax on the gains came due. The purchasing companies stripped the assets from the corporations before respondent could collect, and respondent now seeks to recover the tax and penalties from the Trust. The issue for decision is whether the Trust is liable to the IRS for the corporations’ unpaid tax and penalties.

The Trust held 100 % of the stock of the four C corporations--two taxi corporations and two real estate corporations. Carol S. Parks, as trustee, decided to sell the stock of the corporations to Fortrend International, LLC (Fortrend). The stock sale involved two steps. First, the corporations liquidated their assets and satisfied all of their nontax liabilities, leaving the corporations with nothing but cash and tax liabilities. Second, the Trust sold all of its stock in the corporations to various acquisition corporations Fortrend had formed (Fortrend acquisition vehicles).
 

 

Judge(s): Robert Goeke
Jurisdiction: U.S. Tax Court
Related Categories: Taxation
 
Circuit Court Judge(s)
Robert Goeke

 
Petitioner Lawyer(s) Petitioner Law Firm(s)
David Andelman
Juliette Galicia

 
Respondent Lawyer(s) Respondent Law Firm(s)
Kevin Croke Internal Revenue Service
Yvonne Walker Internal Revenue Service

 

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we afforded the trust an opportunity to supplement the record on remand,3 the existence of frank sawyer i, frank sawyer trust of may 1992 v. the term “fortrend acquisition vehicles” refers collectively to three wood,5 the court of appeals acknowledged that the transferee-of-transferee- because three wood believed it could avoid the tax, it was willing to pay fortrend financed the stock purchase of one of the real estate corporations states v. matthews, 643 f.3d 9, 13 (1st cir. 2011). the rule prevents relitigating liabilities) was roughly $25.3 million, but three wood paid about $32.4 million to and reasonable expectation” that transaction would prove to be profitable). accordingly, the transfer violated the first prong of mufta’s fraudulent transfer respectively. the amounts in the notices of liability substantially exceed the the irs issued notices of liability to the trust, stating that it owed between the parties, this court held that the trust was not liable for deficiencies or we do not require an exact exchange, and we consider both direct and indirect their tax avoidance strategy. as we determined above, they should have known controlled the acquisition vehicles. 0.404[1] (2d ed. 1991)). excess value the trust received for the corporations. under massachusetts law, a cir. 2004). “‘when a case is appealed and remanded, the decision of the appellate out of context from mertens law of federal income taxation and bos lines, inc. engaged or about to engage in a business or transaction for which its remaining from one of its controlled entities. at the time of the respective stock sales, the states that “the trust is quite clearly ‘a transferee of a transferee’ of each of the newly acquired corporations.11 respondent now seeks to recover the tax and penalties from the trust. the issue baritone, tremolo, monte mar, and swrr unless otherwise noted. fortrend not pay. accordingly, we conclude the fortrend acquisition vehicles violated the matters in the trial court that were explicitly or implicitly decided by an earlier liabilities. the fortrend acquisition vehicles’ solvency depended on the success of be respected. gregory v. helvering, 293 u.s. 465, 469-470 (1935). its rabobank loan and caused the taxi corporations to make numerous transfers satisfied all of their nontax liabilities, leaving the corporations with nothing but their combined income tax liabilities remained at $10.5 million. before three wood purchased the taxi companies, its only assets were the knowledge of relevant facts.’” united states v. cartwright, 411 u.s. 546, 551 the trust received a fraudulent transfer from the fortrend entit[ies].” id. at 611. again is time barred from doing so. given the procedural posture of this case, we 1. prong 1 i. jurisdiction is; however, we conclude that the trust is a good-faith transferee and, therefore, is amount the trust received in excess of the corporations’ fair value. companies’ combined book value was roughly $16.9 million, but the fortrend meet the purchase price. three wood could not repay the loan and pay the $14.3 transfers to the trust. petitioner based upon transferee-of-transferee liability, and respondent is now time corporation (i.e., fortrend) did not receive a reasonably equivalent value in -6- see, e.g., mellon bank, n.a. v. metro commc’ns, inc., 945 f.2d 635, 6479 (1973) (quoting section 20.2031-1(b), estate tax regs.). petitioner contends that benefits. mcbirney v. paine furniture co., 2003 mass. super. lexis 115, at *25 a transferee of a transferee nor to evaluate its legal effect.’” frank sawyer trust of eliminated except for the contingent federal and state tax liabilities. the record once the fortrend acquisition vehicles extracted $23.9 million in cash to repay purchase prices to the trust. therefore, we must determine whether the trust received a fraudulent transfer procedure. trust’s capital gains tax liabilities, but pursuant to an out-of-court agreement federal government a combined total of more than $24.3 million in tax and fortrend acquisition vehicles’ inability to satisfy the tax liabilities was reasonably however, it remanded the case for us to determine (1) whether, at the time of we also hold that three wood did not legitimately and reasonably expect and, to the extent not mentioned above, we conclude they are moot, irrelevant, or government preserved its claims and placed in the record substantial evidence to petitioner also argues that the court of appeals relied on language it took companies’ federal and state tax liabilities. fortrend financed the acquisition of transferee of a transferee. respondent can collect from the trust only if it was a $32.4 million represented the taxi corporations’ fair market value because three -14- demonstrates that fortrend did not intend to maintain the corporations as going that the strategy would fail. consequently, they should have known that its tax avoidance strategy to succeed. three wood purchased these companies companies, it planned to avoid paying the tax with a common tax shelter. in a corporations’ combined fair market value. fair market value is the price at which foreseeable. remand.’” united states v. rivera-martinez, 931 f.2d 148, 150 (1st cir. 1991) to various acquisition corporations fortrend had formed (fortrend acquisition t.c. memo. 2014-59 $11,822,600 and $8,483,997 in federal tax for the taxi and real estate for decision is whether the trust is liable to the irs for the corporations’ unpaid consider any synergy or goodwill justification. for the same reasons we stated because these are real estate corporations and not businesses, we need not the fortrend entit[ies]’s creditor, the irs can recover from the trust provided that 610. corporations had about $27.5 million in cash and $10.5 million in tax liabilities. [*7] complied. there being no need for trial or further hearing, we review the (quoting 1b j. moore, j. lucas, & t. currier, moore’s federal practice, para. [*16] 2. prong 2 assessments against the fortrend acquisition vehicles, as initial transferees, and [*11] the value three wood received and the obligation it assumed will have the four c corporations are as follows: (1) tdgh, inc.; (2) cdgh, inc.;4 the court of appeals affirmed our holding that the trust lacked actual or (1st cir. 2013), rev’g and remanding t.c. memo. 2011-298 (frank sawyer ii).1 the other real estate corporation with a cash loan of approximately $4.9 million consequently, three wood purchased two companies possessing nothing but cash aff’d, 354 f.2d 830 (8th cir. 1965), we also said: “this identification may be opinion because they had large tax liabilities, and it planned to make money from the good-faith transferee is entitled to a judgment liability reduction to the extent of petitioner argues that this premium was not a premium at all. rather, the liability was immaterial. however, we need not address this argument because8 in sum, the trust received fraudulent transfers from the fortrend acquisition the issue for decision on remand is whether frank sawyer trust of may 1992 (the docket no. 5526-07. filed april 3, 2014. taxes from a transferee of a transferee (rather than a direct transferee), ‘it is not carol s. parks, trustee, petitioner v. [*8] respondent in his arguments before this court and the court of appeals. vehicles paid $23.4 million to acquire the real estate corporations. the about to engage in a business or transaction for which the remaining assets were wood was a willing buyer offering to pay that amount. we disagree; three wood acquisition vehicles paid about $23.4 million to acquire them. fortrend offered to buy the stock of the taxi corporations after the capital- and contingent income tax liabilities of about $10.5 million. in total, fortrend prove that the trust knew of the new shareholders’ asset-stripping scheme, and (2) the value it gave the debtor for the transfer. see mass. ann. laws ch. 109a, sec. [*3] corporations when they generated large capital gains, but it sold the see allstate ins. co. v. countrywide fin. corp., 842 f. supp. 2d 1216,10 as above, we evaluate these transactions under mufta’s two-pronged the rule of mandate is a branch of the law of the case doctrine. united7 transferee under the massachusetts uniform fraudulent transfer act (mufta), acquisition vehicles overpaid book value by only $7,145,047 and $6,350,023, for the corporations’ taxes and penalties for two reasons: (1) the irs failed to -13- the second prong of mufta’s fraudulent transfer test. sawyer trust of may 1992 v. commissioner, 712 f.3d at 611-612. four companies”, and the trust may still have transferee-of-transferee liability corporations and an aggregate long-term capital gain of approximately $14.4 above, we believe fortrend and its entities did not legitimately and reasonably $30 million rabobank loan proceeds and the $2.7 million fortrend contributed to would cause it to incur debts beyond its ability to pay as they became due. we have jurisdiction, we need not address the wisdom in bos lines. the two taxi corporations with a $30 million loan from rabobank and a in reaching our holdings herein, we have considered all arguments made, consequently, three wood should have known that purchasing the taxi companies (3d cir. 1991) (analyzing “reasonably equivalent value” for purposes of 11 u.s.c. the two taxi corporations ceased their operations, terminated all employee five bedford for $4.9 million, and those two corporations subsequently merged. support a transferee-of-transferee liability theory. frank sawyer trust of may and reasonably expected that it could avoid paying the taxi companies’ tax sec. 548). kevin g. croke and yvonne m. walker, for respondent. corporations, respectively. however, the parties have stipulated that the from the fortrend acquisition vehicles. compan[ies] to the fortrend entit[ies] made the irs a creditor of the latter, and as [*12] property would “‘change hands between a willing buyer and a willing seller, exchange for the transfer and (2) the corporation either (i) was engaged or was repaid its loans and caused the real estate corporations to make numerous transfers petitioner’s argument is inconsistent with the mandate. acquisitions by offsetting those liabilities. however, the law is quite clear that v. commissioner, t.c. memo. 1965-71, aff’d, 354 f.2d 830 (8th cir. 1965), in (3) st. botolph holding co.; and (4) sixty-five bedford street, inc. find petitioner’s objections reasonable; however, we believe our jurisdiction over liability theory is not identical to the transferee-liability theory adopted by concerns. rather, fortrend’s plan was to borrow enough money to acquire cash- findings of fact [*17] iii. liability amount purchase, the fortrend acquisition vehicles received reasonably equivalent value upon four c corporations. the corporations acknowledge that they owe the premium over the book value of the real estate companies. the real estate tax and penalties. more than fair market value for the corporations. because it paid more than fair the parties’ agreement did not resolve whether the trust is liable as a 9(d). may 1992 v. commissioner, 712 f.3d 597, 612 n.5 (1st cir. 2013) (quoting 14a [*15] b. real estate corporations sale mufta’s equitable purposes and recognize that any significant disparity between incur, debts beyond its ability to pay as they became due. see mass. ann. laws million in tax liabilities it assumed in the purchase. three wood’s solvency expect their tax avoidance strategy to succeed. therefore, we conclude that the (which by that point consisted only of cash) minus a percentage of the value of the -17- acquire them. we must determine whether three wood anticipated any however, the mandate explicitly states that “there is no waiver” and that the with a $19 million loan from rabobank. fortrend financed the stock purchase of -8- taxi companies’ book value. their combined book value (cash assets minus tax 1992 v. commissioner, 712 f.3d at 599, 612. the irs failed to prove that any of the corporations’ assets were transferred united states tax court corporate transfer is fraudulent. mass. ann. laws ch. 109a, sec. 5(a)(2). a test. purchasing the real estate corporations would leave them with liabilities they could this issue is implicit in the mandate.7 finding that respondent’s failure to issue a notice of transferee-of-transferee owed a combined $20.3 million in tax and nearly $4 million in penalties. -10- mertens law of federal income taxation sec. 53:24, at 53-68). in bos lines, inc. accordingly, massachusetts law limits respondent’s recovery to $13,495,070, the we must determine whether those values were “reasonably equivalent”. to make petitioner argues that for two reasons we do not have jurisdiction to in a footnote, the court of appeals stated: “when the irs seeks to collect8 we summarize relevant background from frank sawyer ii and set forth in frank sawyer ii that the trust was not liable as a transferee under section 6901 -9- without merit. the amount of the trust’s liability. depended on its ability to avoid the tax liabilities. as we discussed above, three two real estate corporations were solvent. they had cash of about $27.5 million cause them to incur debts beyond their ability to pay. the fortrend acquisition parties’ respective positions in the light of the court of appeals’ opinion. in exchange for the purchase prices of the four corporations, and (2) whether the although fortrend agreed to assume the tax liabilities of each of the four into the corporations. the corporations sold those built-in loss assets and reported -18- market value, it did not receive reasonably equivalent value when it transferred cash and tax liabilities. second, the trust sold all of its stock in the corporations -4- barred from doing so. second, respondent made no timely transferee-liability million on the sale of the real estate corporations. initially, the irs disputed the mass. ann. laws ch. 109a, secs. 1-12 (lexisnexis 2005). however, the mandate state their respective positions regarding the issue on remand, and both parties planned. consistent with that holding, we believe the trust acted in good faith. the trust even stripped the names from the corporations before sale. corporations’ tax liabilities. “synergy” or received any “goodwill” that justified this $7.1 million premium.9 10 f.3d 597 (1st cir. 2013). premium to “synergy”, “goodwill”, or any other going-concern value. to sell the stock of the corporations to fortrend international, llc (fortrend). the as we stated in frank sawyer ii, we are convinced that the trust lacked [*14] 2. prong 2 penalties. however, they have no money to pay. the trust owned the liabilities. see, e.g., mellon bank n.a. v. metro commc’ns, inc., 945 f.2d 635, mar and st. botolph subsequently merged. similarly, swrr purchased sixty- penalties with respect to their 2000 and 2001 returns. ann. laws ch. 109a, secs. 1-12 (lexisnexis 2005); fed. refinance co. v. klock, large losses to offset the capital gains. 647 (3d cir. 1991) (finding no fraudulent transfer where parties had “legitimate decision will be entered under 1. prong 1 “creditor” of the fortrend acquisition vehicles. id. at 607 (citing mass. ann. laws required to specifically label the asserted liability as being that of a transferee or of the trust is liable for the unpaid tax, interest, and penalties of the four c intended to incur, or believed or reasonably should have believed that it would the case of a second transfer is involved”. because the mandate implicitly decides [*18] from interest and penalties, is limited to the difference between the purchase and tax liabilities. accordingly, we see no reason to attribute the $7.1 million three wood purchased two taxi corporations from the trust for $32.4 -7- [*2] opinion in frank sawyer trust of may 1992 v. commissioner, 712 f.3d 597 this case involves respondent’s efforts to collect tax and penalties assessed supplemental memorandum findings of fact and opinion this determination, we compare the values of the property the parties exchanged; meanwhile, the trust reported no tax liability on its sale of the taxi under mufta. frank sawyer trust of may 1992 v. commissioner, 712 f.3d at corporations as a transferee of a transferee. however, because we find the trust unreasonably small, or (ii) intended to incur, believed, or reasonably should have massachusetts has adopted the uniform fraudulent transfer act. mass.6 neither being under any compulsion to buy or to sell and both having reasonable repay the loans, then shift loss deductions from other fortrend entities into the the court of appeals affirmed our holding that the trust was not liable as a not liable to the full extent stated in the notices of liability. under mufta, we apply a two-pronged test to determine whether a 352 f.3d 16, 23 n.2 (1st cir. 2003). of appeals for the first circuit for further proceedings in accordance with its acquisition vehicles. first, respondent failed to issue transferee-liability notices to million. we evaluate each prong of the two-pronged test below. second prong of mufta’s fraudulent transfer test when they transferred the stock sale involved two steps. first, the corporations liquidated their assets and additional facts for purposes of deciding the issue on remand.3 iv. conclusion gain-producing asset sales, but it wanted all existing and potential liabilities cash to pay the purchase price. the value ($25.3 million) three wood received a. taxi corporations sale purchase price resulted from an arm’s-length negotiation and represented the contracts, and sold all their assets before the stock sale; all that remained was cash. alternatively, we must determine whether three wood or fortrend legitimately rich corporations saddled with large capital gains, use those corporations’ cash to was a good-faith transferee under massachusetts law, respondent’s recovery, apart consider whether the trust received a fraudulent transfer from the fortrend monte mar purchased st. botolph from the trust for $18.5 million. monte -11- transferee of a transferee for the deficiencies and penalties assessed on the four assets were unreasonably small in relation to the business or transaction or (ii) [*9] ii. transferee-of-transferee liability net book value was approximately $25.3 million. before yearend, fortrend repaid was not reasonably equivalent to the value ($32.4 million) it transferred. believed that it would incur, debts beyond its ability to pay as they became due. 1224 (c.d. cal. 2012) (applying illinois ufta). was willing to pay that amount only because it believed it could avoid the constructive knowledge of the new shareholders’ tax-avoidance intentions. [*4] fortrend offered to pay a price equal to the value of the companies’ assets this opinion supplements our previously filed opinion frank sawyer trust* rule 155. (super. ct. mar. 31, 2003). in comparing what was exchanged, we keep in mind goeke, judge: this matter is before the court on remand from the court deductions the shelter generated. the companies ultimately conceded that they id. should have reasonably believed that their purchases of the corporations would $90,000, respectively; their income tax liabilities remained at about $14.3 million. to reflect the foregoing, corporations before the tax on the gains came due. the purchasing companies -3- consistent with the mandate, we call this opinion frank sawyer ii and note1 wood should have known that its tax avoidance strategy would fail. fortrend caused its subsidiaries to transfer high-basis, low-value assets11 vehicles).5 directly to the trust. significantly harmed innocent creditors. id. the court of appeals recognized that monte mar and swrr paid a price and the fair market value of each of the acquired companies. see frank subsequent examination of the four companies’ returns, the irs disallowed loss corporations and two real estate corporations. carol s. parks, as trustee, decided4 unless otherwise indicated, all section references are to the internal2 -2- -15- court establishes the law of the case and it must be followed by the trial court on revenue code, and all rule references are to the tax court rules of practice and [*6] c corporations. relying on massachusetts fraudulent transfer law, we held6 [*10] corporate transfer is fraudulent if it meets two statutory criteria: (1) the [*13] transactions having no business purpose other than avoiding taxes will not stripped the assets from the corporations before respondent could collect, and v. commissioner, t.c. memo. 1965-71, 1965 tax ct. memo. lexis 259, at *31, frank sawyer trust of may 1992, transferee, fortrend acquisition vehicles did not receive reasonably equivalent value for their of may 1992 v. commissioner, t.c. memo. 2011-298, rev’d and remanded, 712 accordingly, when three wood paid the purchase price to the trust, it violated trust) is liable as a transferee of a transferee under section 6901. we hold that it2 ch. 109a, secs. 5(a), 6). the mandate states: “the fraudulent transfer from the david r. andelman and juliette m. galicia, for petitioner. but it declined. commissioner of internal revenue, respondent* million in cash and about $14.3 million of contingent income tax liabilities. that ultimately left them with yearend cash balances of roughly $300,000 each; again under prong 2 we consider whether the fortrend acquisition vehicles the first prong concerns the value each party to the transaction received. fortrend paid the trust more than $32.4 million for the taxi corporations, whose that ultimately left them with yearend cash balances of roughly $300,000 and [*5] combined net values of only about $16.9 million. before yearend, fortrend appellate decision in the same case. united states v. moran, 393 f.3d 1, 7 (1st ch. 109a, sec. 5(a)(2). paid the trust about $23.4 million for the real estate corporations, which had -5- -12- vehicles and, accordingly, is liable as a transferee of a transferee. we now turn to the court of appeals recognized that three wood paid a premium over the fraudulent-transfer test. after the court of appeals issued the mandate, we ordered the parties to of the stock sale, the two taxi corporations were solvent. they had about $39.6 commissioner, 133 t.c. 60 (2009), which is not discussed herein. the next question under mufta is whether three wood either (i) was contribution of about $2.7 million from one of its controlled entities. at the time necessary if and when the additional one-year period of the statute of limitations in the trust held 100 % of the stock of the four c corporations--two taxi their loans, only about $3.6 million remained to satisfy $10.5 million in tax first, we address respondent’s ability to collect from the trust as a -16- actual or constructive knowledge of the postclosing activities fortrend had


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