T.C. Mem o. 2 01 5- 20 1

UNITED STAT ES TAX COURT

MIC HAEL A. TRICARI CHI, TRANSFEREE, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No . 23 63 0- 12
. Fi le d Oct ob er 1 4, 2 01 5.

Mi ch ael Desm on d, Br ad le y A. Rid le ho ov er, an d C rai g D. Bel l, fo r pe ti ti on er. Heathe r L. Lam

pe rt, J ul ie Gasp er, Kat el ynn W in kl er, Can da ce Will ia m s, an d R ob ertMo rri so n, fo r res po nd en t.

MEMORANDUM FINDINGS OF FACT AND OPINION LAUBER, Ju dg e: In ano ti ce o f li ab il ity , th e In te rn al Rev enue Serv ic e (IR S
orres po nd en t) d et erm in edth atpe ti ti on er i s l iabl e fo r $2 1,1 99 ,34 7 p lu s i nt eres t as a tr an sf eree of t he ass et s o f W es t Si de Cel lu lar, In c. (West S id e). Pet it io ne r was- 2 -

[* 2] th e so le sh areh ol de r of W es t Si de , a C co rp or at io n, u nt il he so ldhi s s ha res to
anaffi li at e o f Fo rtr en d In te rn at io na l LLC (Fo rtr en d) inSep te m be r 20 03 . The ty

pe of tra ns act io n i n wh ic h h e so ldhi s s ha res is co m m on ly call edan“ in te rm ed iary co m pa ny” or “ Mi dc o” trans act io n. Th e und erl y in g t ax li ab il it ie s o f W es t Si de in cl ud e a t ax de fic ie nc y

of $ 15 ,18 6,5 70 an d p en al ti es of $ 6,0 12 ,77 7 fo r 20 03
. Mi dc o tran sa ct io ns , a type o f ta x s he lt er, were wid el y pro m ot eddurin g the la te 19 90 s an d e arl y

20 00 s. Mi dC oa stCred itCo rp . (Mi dC oa st ), whi chpl ay s a supp orti ng rol e in th is cas e, an d F ortre nd , whi chpl ay s the pri nc ip al rol e, were le ad in g p ro m ot ers of M id co tra ns act io ns . Bot h h av e b eenin vo lv edinnu m ero us tra ns act io ns pre vi ou sl y

co ns id eredby thi s C ou rt. In No ti ce 2 00 1- 16 , 20 01 -1 C.B. 1
Fo r Fo rtr en d, s ee Sl on e v . Comm is si on er, T.C. Mem o. 2 01 2- 57 , vac at ed 1 an d re m an de d, _

_ F .3d__ , 20 15 W L 50 61 31 5 (9 th Cir . Aug . 28 , 20 15 ); S al us Mu nd i Fo un d. v . Comm is si on er, T.C. Mem o. 2 01 2- 61 , rev ’d an d re m an de d, 7 76 F.3 d 1 01 0 (9 th Cir . 20 14 ); F ran k S awy er Tru stof M ay 19 92 v. Co m

m is si on er, T.C. Mem o. 2 01 1- 29 8, re v’d andrem an de d, 7 12 F.3d59 7 (1 stCir . 20 13 ); Di eb ol d v. Co m m is si on er, T.C. Mem o. 2 01 0- 23 8, v acat edan d re m an de d s ub no m . Dieb ol d Fo un d., In c. v. Co m

m is si on er, 7 36 F.3d17 2 (2 d C ir. 2 01 3) . For M id Co as t, s ee Stua rt v . Comm is si on er, 1 44 T.C. __ (Apr . 1, 2 01 5) ; Cu ll ife r v. C ommis si on er, T.C. Mem o. 2 01 4- 20 8; Hawk v . Comm is si on er, T.C. Mem o. 2 01 2- 25 9; Fel dm an v. Co m m is si on er, T.C. Mem o. 2 01 1- 29 7, af f’d, 77 9 F .3d44 8 (7 th Cir . 20 15 ); St arn es v. Co m

m is si on er, T.C. Mem o. 2 01 1- 63 , aff’d, 6 80 F.3d41 7 (4 th Cir
. 20 12 ); Gri ffi n v . Comm is si on er, T.C. Mem o. 2 01 1- 61 . Sam y akVeera, a p rin ci pa l of Mi dC oa st , has be enin di ct edforhi s ro le inpro m ot in g t he se arrang em en ts . Uni te d S tate s v . Veera, No . 12 -4 44 (E.D. Pa. Oct. 1 , 20 13 ) (s up ers ed in g i nd ic tm en t al le gi ng Veera’s i nv ol ve m en t i n M id Co as t s ch em es to ev ad e ta xe s b y us in g frau du le ntlo ss es to eli m in at e ta rg et ’s gai ns ).- 3 -

[* 3] 73 0, cl ari fie d b y

Not ic e 2 00 8- 11 1, 2 00 8- 51 I.R.B. 1 29 9, the IRS l is te d M id co tra ns act io ns as “ rep ortabl e tr an sa ct io ns ” fo r Fed eral in co m e ta x p ur po se s. Altho ug h M id co tra ns act io ns to okva rio us form s, the y sh aredsev eral ke y featur es , well su m

m ari zedby the Co urt o f App eal s fo r th e Sec on d C irc ui t i n Dieb ol d F ou nd . Inc . v. Co m m is si on er, 7 36 F.3d17 2, 1 75 -1 76 (2dCir . 20 13 ),
va cat in g a ndrem an di ng T.C. Mem o. 2 01 0- 23 8. Th es e tr an sa ct io ns were ch ie fly pr om ot edto sh areh ol de rs of c lo se ly hel d C co rp or at io ns th atha d l arg e b ui lt -in ga in s. Th es e sh areh ol de rs , whi le happ y ab ou t the ga in s, were typic al ly unh ap py ab ou t the tax co ns eque nc es . They face d t he pro sp ectof p ay in g t wo l ev el s o f in co m e ta x o n the se ga in s: th e u su al co rp or at e-l ev el tax , fol lo wedby a sha reho ld er-l ev el tax when th e g ai ns were d is tri bu te d t o t he m as d iv id en ds or l iqui
da ti ng di st rib ut io ns . Andth is pro bl em co ul d n otbe av oi de d b y

sel li ng th e sh ares . Any rati on al bu y er wo ul d n orm al ly ins is t o n adi sc ou ntto th e p ur ch as e p ric e equa l to th e b ui lt -in tax li ab il ity th athe wou ldbe acqui rin g. Pro m ot ers of M id co tra ns act io ns off ereda pu rp orte d s ol ut io n t o t hi s p ro ble m . An “ in te rm ed iary

co m pa ny” affi li at edwith t he pro m ot er-- typic al ly, a sh el l
co m pa ny, ofte n o rg an iz edoff sh or e--wo ul d b uy the sh ares of t he tar ge t co m pa ny. The tar ge t’s ca sh wou ldtra ns itth ro ug h t he “ in te rm ed iary co m pa ny” to th e se ll in g sh areh ol de rs . After a cqui rin g the tar ge t’s em be dd edtax li ab il ity , th e “ in te rm ed i-- 4 -

[* 4] ary co m

pa ny” wou ldpl anto en ga ge ina ta x- m ot iv at edtra ns act io n t ha t wo ul d of fs etth e ta rg et ’s real iz edga in s an d e li m in at e th e co rp or at e-l ev el tax . The p ro m ot er an d the tar ge t’s s ha reh ol de rs wou ldag ree t o s pl itth e d ol lar va lu e o f th e co rp or at e ta x thu s av oi de d. Th e p ro m ot er wo ul d k eep as i ts fee a n eg ot ia te d p ercen ta ge of t he av oi de d c or po rat e ta x. Th e ta rg et ’s sh areh ol de rs wou ldke ep th e ba lanc e o f th e av oi de d c or po rat e ta x a s a p rem iu m

ab ov e th e ta rg et ’s tru e n etass et va lu e (i .e., ass et s n etof a ccru edtax li ab il ity ). In due co ur se th e IRS wou ldau di t the Mi dc o, d is al lo w th e fi ct io na l l os se s, an d a ss es s the co rp or at e-l ev el tax . But“ [i]n m an y in st an ces , th e Mi dc o i s a n ewly fo rm eden ti ty creat edforth e so le pu rp os e o f fac il it at in g s uc h atrans act io n, wi th
ou t o th er i nc om e o r as se ts an d thu s l ik el y to be jud gm en t-p ro of

. The IR S m

us t th ensee k p aym en t fr om

othe r parti es in vo lv edinth e tr an sa ct io n i n o rd er t o s at is fy th e ta x l iabi li ty the tra ns act io n was crea te d t o a vo id .” Id . at 1 76
. Ina nu ts he ll , th atis whathapp en edhe re. Pet it io ne r en ga ge d i n aMi dc o tra ns act io n wi th a Fo rtr en d s he ll co m pa ny; th e sh el l co m

pa ny m erg edin to W es t Si de an d e ng ag edina sh am tra ns act io n t o e li m in at e West S id e’s co rp or at e ta x; th e IRS d is al lo wedth os e fi ct io na l l os se s an d a ss es se d t he co rp or at e-l ev el tax ag ai ns t W es t Si de ; b utW es t Si de , as was pl an ne d a ll alo ng , is jud gm en t p ro of . The IR S
acco rd in gl y

see ks to co ll ectW es t Si de ’s tax fro m pe ti ti on er as th e tr an sf

eree of- 5 -

[* 5] W es t Si de ’s cas h. We ho ldth atpe ti ti on er i s l iabl e fo r W es t Si de ’s tax un de r th e Ohi o Un ifo rm

Frau du le ntTran sf

er Actan d t ha t the IRS m ay co ll ectW es t Si de ’s tax li ab il it ie s i n fu ll fro m pe ti ti on er u nd er s ect io n 6 90 1( a)(1 ) as adi rector 2 in di recttra ns fere e o f W es t Si de . W e acc or di ng ly rule forres po nd en t o n a ll is su es . FINDINGS OF FACT The pa rti es fil edst ip ul at io ns of f act s wi th acco m

panyin g e xh ib it s tha t ar e in co rp or at edby thi s re fere nc e. At the ti m e th e Mi dc o t ran sa ct io ns were ex ecu te d, pe ti ti on er re si de d i n Oh io . He m ov edsh ortl y th erea fte r to Neva da , andhe res id ed in Neva daat t he clo se of t he 20 03 tax ab le y ear a ndwhen he pe ti ti on edth is Co urt. Pet it io ne r gr adua te d fr om Cas e Weste rnRes erv e Uni ve rs ity an d e m ba rk ed
on a care er i n the cel lu lar te le ph on e (ce ll ph on e) b us in es s. He i nc or po rat edW es t Si de in19 88 as aC co rp or at io n. Pe ti ti on er was th e p res id en t an d s ol e sh areh ol de r of W es t Si de , andhe an d h is wife , Barb ara Tri cari ch i, s erv edas i ts di rect or s. Altho ug h p et it io ne r ha d n o fo rm al tax tra in in g, h e d is pl ay edfam il iarity with ta x c on cep ts . At tri al he sp ok e eas il y ab ou t C c or

po rat io ns an d S co rp or at io ns , co rp or at e ta x ra te s, an d o th er t ax m at te rs . He exp la in edth athe org an iz edW es t
Unl es s o th erwi se no te d, al l s ta tu to ry refe ren ces are t o t he Int ern al Rev enue 2 Co de as i n e ffec t atall rel ev an t t im es , andall Ru le refe ren ces are t o the Tax C ou rt Ru le s o f Prac ti ce an d P ro cedur e. W e ro un d a ll do ll ar am ou nt s t o t he ne ares t do ll ar.- 6 -

[* 6] Si de as aC co rp or at io n b ecau se he th ou gh t i t m ig htul ti m at el y have m or e sh areh ol de rs th ananS co rp or at io n wo ul d b e p erm itte d t o h av e. In19 91 pe ti ti on er ap pr oa ch edVeri zo n a ndot he r m ajorcel lu lar se rv ic e pr ov id ers with apro po sa l tha t WestSid e wou ldbe co m e a res el le r of cel l p ho ne se rv ic es . From 19 91 th ro ug h 2 00 3 WestSid e en ga ge d i n v ari ou s t el eco m m un ic ati on s ac ti vi ti es inOhi o, i nc lu di ng th e res al e o f cel l p ho ne servi ces . W es t Si de ha d a ret ai l p res en ce i n Oh io , cus to m er an d v en do r rel at io ns hi ps , go od wil l, kno w-h ow, a workf or ce i n p la ce, trad e n am es , andot he r tang ib le an d i nt an gi bl e as se ts . At it s pe akW es t Si de ha d abo ut15 ,00 0 s ub sc rib ers th ro ug ho utOhi o. Beg in ni ng in19 91 , W es t Si de pu rch as edne two rkacce ss fro m th e m ajor cel lu lar se rv ic e p ro vi de rs inord er t o s erv e it s cu st om ers . Peti ti on er s oo n c am e to be li ev e th atcert ai n o f th es e p ro vi de rs were d is cri m in at in g a ga in stW es t Si de . In 19 93 he en ga ge d the Cle ve landlaw fi rm of Hahn Loes er & Pa rk s, LLP (Hah n Loe se r), to fil e a co m

pl ai ntwith t he Publ ic Uti li ti es Co m mis si on of Oh io (PUCO) ag ai ns t ce rta in of the se pro vi de rs , all eg in g a nt ic om pe ti ti ve tra de pra ct ic es . The PUCO la wsu itwas a“be t the co m pa ny” m at te r fo r pe ti ti on er, an d h e to oka ha nd son rol e in th e le ng th y

li ti ga ti on th aten su ed . HahnLoes er l awy ers de sc rib edhi m as a co ns tantpre se nc e atth e fi rm th ro ug ho utth is pe rio d.- 7 -

[* 7] The PUCO ru le d i n WestSid e’s fav oron th e li ab il ity is su e an d t he Ohi o Supr em e Co urt af

firm edth atde ci si on . In ea rly 20 03 W es t Si de returne d t o t he Co urt o f Co m

m onPle as to co m

m en ce the da m ag es ph as e o f th e li ti ga ti on . Not lo ng th erea fte r a s et tl em en t was reac he d, p ur su an t t o wh ic h WestSid e u lt im at el y rece iv ed , du rin g Ap ril an d M ay 20 03 , to ta l s et tl em en t p ro ceed s o f $6 5,0 50 ,14 1. Inex ch an ge W es t Si de was re qu ire d t o t erm in at e it s b us in es s as a ret ai l p ro vi de r of cel l p ho ne servi ce an d t o e ndall servi ce t o i ts cu st om ers as o f Ju ne 10 , 20 03
. Pet it io ne r’s “ Tax Pro bl em ” Ant ic ip at in g alar ge set tl em en t, p et it io ne r be ga n t o re gr ethi s d eci si on , 15 y ears earl ie r, to org an iz e West S id e as a C co rp or at io n. He as ke d J effr ey Fo lkm an , a Hah n Lo es er t ax pa rtn er, t o i nv es ti ga te ho w to “ m ax im iz e wha te ve r aft er-t ax pr oc eed s wer e av ai labl e” fr om th e an ti ci pa te d s et tl em en t. Pet it io ne r’s go al was t o

“pa y les s t ax th anwhatth e st rai gh t up, you kno w, 35 % or wh at ev er the co rp or at e ta x ra te was” an d a vo idth e two -le ve l t ax on th e se tt le m en t p ro ceed s. Mr. Fo lkm anha d e xp eri en ce wi th Mi dC oa stan d t ho ug htitm ig hthe lp so lv e pe ti ti on er’s p ro bl em . He arran ge d am eet in g o n F eb ru ary 19 , 20 03 , with p et it io ne r an d M id Co as t re pr es en tati ve s. Inpre pa rat io n fo r th is m eet in g, Hah n Lo es er atto rne y s d ev ot edfiv e d ay s o f res earc h a nddi sc us si on to th e “ sh am tra ns act io n” do ctri ne , “rep ortabl e tr an sa ct io ns ,” an d No ti ce 2 00 1- 16 . Thei r bi ll in g re co rd s- 8 -

[* 8] de sc rib e Not ic e 2 00 1- 16 as a dd res si ng (am on g o th er thi ng s) a tr an sa ct io n i nvo lv in g a“ sh areh ol de r who want s t o s el l s to ckof atar ge t” an d “ anin te rm ed iary co rp or at io n.” At th e Feb ru ary 19 m eet in g, M id Co as t’s re pr es en ta ti ve s ex pl ai ne d to pe ti ti on er tha t i t was inth e “ de btco ll ect io n b us in es s” an d t ha t, as pa rt o f it s bu si ne ss m od el , itpu rch as edco m pani es th at“ ha d l arg e ta x o bl ig at io ns .” Sh ortl y aft er the m eet in g wi th Mi dC oa st , pet it io ne r’s br ot he r, Ja m es Tricari ch i (J am es ), in tro du cedhi m to Fo rtr en d. OnFeb ru ary 24 , 20 03 , pet it io ne r recei ve d alet te r fro m

Fo rtr en d; he subs eque nt ly hadsev eral co nf eren ce ca ll s an d a t le as t o ne face -to -fac e m eet in g wi th Fo rtr en d re pr es en ta ti ve s. Pet it io ne r un de rst oo d tha t Fo rtr en d a ndMi dC oa stwere b ot h i nv ol ve d wi th “ di st res se d d eb t re cei vabl es ” an d h adba si cal ly the same bu si ne ss m od el . Fort ren d t ol d p et it io ne r th atitwou ldpu rch as e h is W es t Si de st oc k a ndwou ldoff se t the tax ab le ga in with lo ss es , th ereb y

eli m in at in g WestSid e’s co rp or at e in co m e ta x l iabi li ty. Mi dC oa stan d F ortre ndeach ex pr es se d i nt eres t i n a cqui rin g p et it io ne r’s W es t Si de st oc k, an d e achm ad e anoff er p ro po si ng ess en ti al ly the same tran sa cti on al stru ctur e. An i nt erm ed iary co m pa ny woul d b orro w m on ey to purch as e th e st oc k. Th e cas h h el d b y

W es t Si de wou ldbe us edimm ed ia te ly to re pa y th e lo an . The cas h p et it io ne r rec ei ve d fr om th e in te rm ed iary

co m pa ny woul d s ub st an ti al ly
ex ceedW es t Si de ’s netass etva lu e. The i nt erm ed iary co m pa ny woul d re cei ve a- 9 -

[* 9] fee e qu al to a ne go ti at edpe rcen ta ge of WestSid e’s ta x l iabi li ti es . Andaft er th e sa le clo se d, the in te rm ed iary co m pa ny, after m erg in g i nt o WestSid e, wou ld
us e b adde btde du ct io ns to eli m in at e th os e ta x l iabi li ti es . Bec au se pe ti ti on er re ga rd edMi dC oa stan d F ortre ndas c om pe ti to rs , he b ega n n eg ot ia ti ng with b ot h i n the ho pe of s ti rri ng up a bi dd in g war . Jam es arrang ed furth er co nf

eren ce ca ll s wi th bo th co m pa ni es . Rath er tha n c om

pe te , Mid Co as t s ecret ly agree d wi th Fo rtr en d t o s te p a way fro m th e tr an sa ct io n i n e xc ha ng e fo r a fee of $1 ,18 0,0 00 (ul ti m at el y

pa idby W es t Si de on Sep te m be r 14 , 20 03 ). Mi dC oa st ’s fin al off er was ad jus te d t o m ak e itsee m

un attra ct iv e, an d p et it io ne r th eref or e ch os e to pu rs ue di sc us si on s wi th Fo rtr en d i n o rd er t o “ m ax im iz e” h is pro fit s. Bri ng in g i n P ric ewat erh ou se Co op ers Ja m es reco m

m en de d tha t p et it io ne r ret ai n P ric ewat erh ou se Co op ers (PwC) to advi se hi m

ab ou t the pro po se d s to cksal e. Acti ng as aco ndui t b etweenpe ti
ti on er an d P wC, Ja m es sen t a l et te r da te d Ap ril 8, 2 00 3, t o P wC pa rtn er Ri ch ard St ov sky . This let te r reque st edadvi ce co nc ern in g ast oc k s al e to Mi dC oa stor F or tre ndan d afal lb ackstrat eg y to m it ig at e p et it io ne r’s ta x l iabi li ty if th e st oc k s al e di d n otoc cu r. PwC se ntpe ti ti on er a draften ga ge m en t l et te r on Apri l 1 0, 2 00 3. By th is ti m e p et it io ne r ha d h adex te ns iv e d is cu ss io ns with M r. Fo lkm an ab ou t No ti ce 2 00 1- 16 , andth e ri skth atth e co nt em pl at edst oc k s al e wou ldgi ve- 10 -

[* 10 ] ris e to a “ rep ortabl e tr an sa ct io n.” Upo n re cei ptof P wC’s dr aften ga ge m en t le tt er, p et it io ne r rea ct edne ga ti ve ly to the fol lo win g s en te nc e: “ Youag ree t o a dvi se us if you d et erm in e th atany m at te r co ve redby thi s Ag reem en t i s a r ep ortabl e tra ns act io n tha t i s re qu ire d t o b e d is cl os ed .” Pet it io ne r st ru ckth is sen te nc e fro m th e en ga ge m en t l et te r, in it ia le d the ch an ge , andsen t the dra ft b ackto PwC. 3 Pet it io ne r te st ifi edth athe stru ckth is sen te nc e fro m th e draften ga ge m en t le tt er b ecau se he want edto en su re tha t PwC wou ldth or ou gh ly inv es ti ga te all rel ev an t i ss ue s. Th e Co urt d idno t fi ndth is tes ti m on y cred ib le . Mr. St ov sky ’s dr aften ga ge m en t l et te r st at edth atPwC wou ldin ve st ig at e th e rel ev an t i ss ue s; th e se nt en ce ab ou t “ rep ortabl e tr an sa ct io ns ” was in cl ud edas am at te r of PwC’s du e di li ge nc e to en su re tha t the cli en t d is cl os edall rel ev an t fa ct s t o i t. The Co urt fi nd s th atpe ti ti on er s tru ckth is sen te nc e fro m th e draften ga ge m en t l et te r be cau se he
wan te d t o k eep th e p ap er trai l fr ee, t o t he m ax im um ex te ntpo ss ib le , of any referen ces to “ rep ortabl e tr an sa ct io ns .” W orki ng with t ax pro fes si on al s fr om sev eral PwC o ffi ces , Mr. St ov sky pre pa redanin te rn al m em or an du m ad dr es si ng th e p ro po se d s al e o f W es t Si de st oc k t o Fo rtr en d o r Mi dC oa st . This m em or an du m was re vi se d m

ul ti pl e ti m es as the ne go Pet it io ne r’s effo rt t o s tri ke th is lan gu ag e fro m th e en ga ge m en t l et te r was ul
3 ti m at el y un su cces sf

ul . Mr. St ov sky

in si st edon ret ai ni ng th is lan gu ag e an d, af te r furth er n eg ot ia ti on s, p et it io ne r acqui es ced
.- 11 -

[* 11 ] ti at io ns ev ol ve d, an d v ari ou s draft s wer e d is cu ss edwith p et it io ne r an d h is advi se rs . The fi rs t draftof t he m em or an du m , dat edApri l 1 3, 2 00 3, s ta te d the fo ll owi ng ass um

pt io ns ab ou t the pro po se d t ran sa ct io n:

• [Bu y er wi ll ] bo rro w $3 6,0 00 ,00 0 a ndpu rch as e 1 00 % of t he W es ts id e sh ares ou ts tand in g fr om

* * * [p et it io ne r]. * * *

• [Bu y er wi ll ] co nt rib ut e to W es ts id e * * * hi gh ba si s/ lo w fai r m ark et va lu e p ro pe rty (th e as su m pt io n i s tha t the se are d el in qu en t re cei vabl es ).

• W es ts id e is no w inth e b us in es s o f pu rch as in g “ di st res se d/ ch arg ed
of f” cr ed itcardde bt* * * atpe nn ie s o n t he do ll ar an d c ol le ct in g o n th is de bt
.

• The bu si ne ss pu rp os e fo r th e acqui si ti on of West si de is ba se d o n the ne w bu si ne ss ’ ne edforcas h t o p ur ch as e th e ch arg ed -o ff cre di t ca rd de btas c omm erci al fin an ci ng forsu chpu rch as es is ap pa ren tl y di ffic ul t. Wests id e’s cas h a ndacco un ts rece iv ab le wil l p ro vi de su ch ne ed edcas h (n ot e th atm os t o f th e $ 40 ,00 0,0 00 cas h i n West si de wil l be di st rib ut edou t o f W es ts id e an d u se d b y * * * [t he bu y er] to pa y ba ckth e cas h b orro wedto pu rch as e * * * [pe ti ti on er’s] W es ts id e st oc k)
.

• W es ts id e wri te s o ff (ap pa ren tl y de du ct ib le forfed eral in co m e ta x pu rp os es ) so m e o f th e h ig h b as is /l ow fa ir m ark etva lu e p ro pe rty co nt rib ut edby * * * [th e b uyer]. The d educ ti on off se ts th e ta xabl e in co m e cre at edwithi n West si de up on th e rec ei ptof t he $6 5,0 00 ,00 0 fro m th e le ga l v erd ic t.

• W es ts id e, no w a ch arg edoff de btbu si ne ss , ut il iz es “ co streco ve ry tax acco un ti ng ” whi ch , app aren tl y , res ul ts intax de du ct io ns as apo rti on of th e p ur ch as edcred itcardde btis co ll ect ed
.

• The su gg es te d re su lt , fro m a fed eral tax pe rs pe ct iv e, is as f ol lo ws:- 12 - [* 12 ] • [Pet it io ne r] recog ni zes lo ng -te rm cap it al ga in up on th e sa le of h is sh ares inW es ts id e * * *
. • W es ts id e o ffs et s the tax ab le in co m e fro m th e le ga l v erd ic t with the writ e o ff o f hi gh ba si s p ro pe rty. The m em or an du m

no te s tha t p et it io ne r pl an ne d t o m ov e fro m Ohi o t o aSta te witho utanin co m e ta x s o tha t the re wo ul d b e n o S tate tax on hi s g ai ns . PwC u nd ers to odth atNot ic e 2 00 1- 16 ap pl ie d t o M id co tra ns act io ns de
sc rib edth erei n a ndto “ subs tant ia ll y si m il ar” t ran sa ct io ns . Marg in al no te s o n the
m em or an du m

als o s ug ge stPwC’s un de rs tand in g t ha t the term “ subs tant ia ll y

si m ilar” was to be bro ad ly con st ru ed . ButPwC co nc lu de d t ha t “ a p os it io n c anbe ta ke n” th atth e st oc k s al e wou ldno t b e a rep ortabl e tr an sa ct io n. Th is was b ecau se

“ [a] ty pi cal ‘ Mi dc o’ tra ns act io n [h as ] 3 p art ie s (t hi s tran sa ct io n o nl y ha s 2 ), an d a typic al ‘ Mi dc o’ tra ns act io n re su lt s i n a n a ss etba si s s te p up andth e as so ci at ed
am orti zat io n d educ ti on s g oi ng forward(th is tra ns act io n d oe s n otha ve th es e ch aract eri st ic s) .” The m em or an du m

co nc lu de d t ha t the pro po se d t ran sa ct io n was no t wi th ou t ris k. Itno te d apa rti cu larly hig h l ev el of r is k i n t he “hi gh ba si s/ lo w val ue ” d eb t rece iv ab le strat eg y

th atth e b uyer pro po se d t o e li m in at e West S id e’s ta x l iabi li ti es . PwC ch arac te riz edth is as a“ ve ry ag gr es si ve tax -m ot iv at ed ” st rat eg y an d i nd ic at ed th atth e IRS wou ldli ke ly chal le ng e th e d educ ti bi li ty of th e b adde btlo ss ex pe ct ed- 13 -

[* 13 ] to be rep orte d b y

W es t Si de aft er the st oc k s al e. Po in te dl y ab se ntfro m

th e m em or an du m

is an y in di cat io n tha t PwC be li ev edth is strat eg y was “ m or e li ke ly th anno t” to be su cces sf

ul . Reg ard le ss , th e m em or an du m su gg es te d t ha t “ th is is
no t * * * [pe ti ti on er’s] con cern ” si nc e th e res ul t wo ul d b e a co rp or at e ta x l iabi li ty an d n otpe ti ti on er’s l iabi li ty. The m em or an du m no te d t ha t PwC ha d p ro vi de d n o fo rm al writ te n a dv ic e to pe ti ti on er b utha d d is cu ss edit s co nc lu si on s o ral ly w ith hi m . Fo rm at io n o f LXV Pet it io ne r’s rep res en tati ve s co m m un ic at edwith F ortre ndaft er m eet in g wi th PwC. Dur in g the se co nv ers at io ns Fo rtr en d m ad e cl ear t ha t i t d idno t wan t t o a cqu ire W es t Si de ’s acco un ts rece iv ab le or a ny of it s o th er o pe rat in g a ss et s. Rath er, Fo rtr en d wan te d a ll op erat in g a ss et s s tri pp edou t o f W es t Si de be fo re the clo si ng so th atW es t Si de wou ldbe lef t wi th no th in g b utcas h a ndtax li ab il it ie s. Inord er t o m eetFo rtr en d’s re qu ire m en ts , pet it io ne r an d t hr ee WestSid e em pl oyees fo rm edLXV Group, LLC (LXV), anOhi o l im it edli ab il ity co m pa ny, on May 2, 20 03 , to acqui re WestSid e’s op erat in g a ss et s. Each co nt rib ut ed $2 5,0 00 forhi s re sp ect iv e 2 5% i nt eres t i n LXV. As m an da te d b y th e PUCO
se tt le m en t ag reem en t, WestSid e h adto di sc on ti nu e p ro vi di ng cel l p ho ne servi ce to it s cu st om ers by Jun e 1 0, 2 00 3. OnJu ne 11 , 20 03 , LXV pur ch as edall of West- 14 -

[* 14 ] Si de ’s op erat in g a ss et s, n am el y , it s g oo dwi ll an d i ts “ rev enue pro du ci ng wire le ss cu st om er b as e, acc ou nt s re cei vabl e, Trad e n am es , Trade m ark s, ch at te ls , fix tu res , so ftwa re an d e qu ip m en t” us edinth e o pe rat io n o f W es t Si de ’s bu si ne ss . The pu rch as e p ric e th atLXV pai d fo r th es e as se ts was $ 10 0,0 44 . That
am ountwas s ub st an ti al ly less th anth e su m of WestSid e’s ne t p hysic al ass et s an d
acco un ts rece iv ab le ($7 4,5 64 + $1 66 ,94 0 = $2 41 ,50 4) as s ta te d o n WestSid e’s ba lanc e sh eet . The p art ie s t o thi s tran sa ct io n t hu s ap pe ar t o h av e at ta ch eda va lu e

4 of zero to W es t Si de ’s wirel es s cu st om er b as e, tr ad e m ark s, an d trad e n am es . Mr. St ov sky vo ic edco nc ernth atif fa ir m ark etva lu e were n otpa idforth es e as se ts , pe ti ti on er m ig htface ris k b ecau se of “ th e tr an sf eree li ab il ity

is su e.” Des pi te th is
warn in g, p et it io ne r di d n otob ta in a va lu at io n o f th e as se ts th us tra ns ferr ed
. Pet it io ne r te st ifi edth athi s m ot iv at io n fo r th is sal e was to “ co nt in ue to ser vi ce WestSid e’s cu st om ers .” The C ou rt d idno t fi ndth is tes ti m on y cred ib le . The pa rti es ’ pl acement o f zer o v al ue on W es t Si de ’s in tang ib le ass et s, i nc lu di ng it s wire le ss cu st om er b as e, tr ad e n am e, an d t rad e m ark s, b el ie s an y in te nt io n t o s erv e th os e cu st om ers inth e fu tu re. In de ed , itis no t cl ear h ow LXV co ul d c on ti nu e to W es t Si de ’s bal an ce s he etat t he rel ev an t t im e li st ed$3 02 ,35 7 i n a ss et s 4 (le ss $2 27 ,79 3 i n a ccu m

ul at edde pr eci at io n) an d a cco un ts rece iv ab le of $ 50 ,93 6 an d $ 11 6,0 04 . The as se ts co ns is te d o f co m pu te rs , so ftwa re, fu rn itur e/ fix tu res , of fic e equi pm en t, s ho p e qu ip m en t, an d l eas eh ol d i m pr ov em en ts . LXV di d n ot as su m e an y

of t he li ab il it ie s re fle ct edon W es t Si de ’s bal an ce s he et .- 15 -

[* 15 ] se rv e West S id e’s cel l p ho ne cu st om ers be cau se W es t Si de ’s pri nc ip al s, wh o were al so LXV’ s p rin ci pa ls , were b arre d a fte r Ju ne 10 , 20 03 , fro m co nduc ti ng an y fo rm of c el l p ho ne bu si ne ss . The Co urt fi nd s as a factth atpe ti ti on er arran ge d the
sa le of WestSid e’s op erat in g a ss et s t o LXV in ord er t o c om pl y with F ortre nd ’s requ ire m en t tha t WestSid e h av e n ot hi ng lef t i n i t ex cep t t ax li ab il it ie s an d c as h. Neg ot ia ti on of t he Sto ckPurch as e Agr eem en t The pa rti es ad op te d a s the ir wo rk in g a ss um pt io n t ha t WestSid e’s acc ru ed ta x l iabi li ty resu lt in g fr om th e $ 65 m il li on PUCO se tt le m en t wo ul d n otbe pa id
. Si nc e West S id e atclo si ng was t o h av e o nl y cas h a ndtax li ab il it ie s, an d s in ce ca sh ha s a r ead il y

asc ert ai nabl e v al ue , th e m ajor it em forne go ti at io n was ho w to carv e up th e co rp or at e ta x l iabi li ty thu s av oi de d. Th e p art ie s re ferr edto th is ex erci se as de te rm in in g the “ Fo rtr en d p rem iu m .” Pet it io ne r act iv el y pa rti ci pa te d i n t he ne go ti at io n o f th is po in t. Nei th er Hah n Lo es er n orPwC p art ic ip at edinth e n eg ot ia ti on of th e st oc k p ur ch as e p ric e o r th e “ Fo rtr en d p rem iu m .” The tri al reco rdsh ed s l it tl e li gh t o n t he earl y st ag es of t he ne go ti at io ns , whe n M id Co as t was st il l i nv ol ve d. Du rin g l at er s ta ge s o f th e n eg ot ia ti on s, the do ll ar am ou ntof t he “ Fo rtr en d p rem iu m ” v ari ed , bu t ea chit erat io n o f th e ag reem en t co nt ai ne d the same form ul ai c cal cu la ti on . Fortren d wo ul d p ay pe ti ti on er the
am ountof c as h re m ai ni ng inW es t Si de at t he clo si ng , les s 3 1.8 75 % of West- 16 -

[* 16 ] Si de ’s to ta l Fe de ral an d S ta te tax li ab il ity for 20 03 . In o th er wo rd s, the

“ Fo rtr en d p rem iu m ” equa le d 3 1.8 75 % of WestSid e’s acc ru ed20 03 tax li ab il ity . Thi s l eftpe ti ti on er wi th a pr em iu m , abo ve an d b ey on d WestSid e’s cl os in g n et as se t v al ue , equ al to 68 .12 5% o f it s ac cru ed20 03 tax li ab il ity . At two p oi nt s i n h is tes ti m on y , pet it io ne r st at edth athe di d n otun de rs tand th e “ Fo rtr en d p rem iu m ” to ha ve an y co rrel at io n t o WestSid e’s ta x l iabi li ti es . The Co urt d idno t fi ndth is tes ti m on y cred ib le . Peti ti on er t es ti fie d t ha t h e p art ic ip at ed in ne go ti at in g F ortre nd ’s fee, an d n um ero us sp read sh eet s p rep aredby his bro th er ex pl ic it ly stat e th atFo rtr en d’s fe e was to equa l 3 1.8 75 % of WestSid e’s acc ru ed ta x l iabi li ti es for20 03 . Con fro nt edwith t hi s ev id en ce, p et it io ne r be cam e v is ib ly
un co m fo rtabl e. The C ou rt f in ds as afactth atpe ti ti on er kne w at al l t im es th atth e

“ Fo rtr en d p rem iu m ” wou ldbe co m pu te d a s a n eg ot ia te d p erce nt ag e o f W es t Si de ’s 20 03 co rp or at e ta x l iabi li ty. Inpre parat io n fo r th e st oc k s al e, Mi ll en ni um Reco ve ry

Fund , LLC (Mil le nni um ), a Fo rtr en d a ffi li at e in co rp or at edinth e Caym anIsl an ds , creat edNob Hil l, In c. (No b Hi ll ), a sh el l co m pa ny als o i nc or

po rat edinth e Caym anIsl an ds . Nob Hil l was to be th e “ in te rm ed iary co m pa ny” th atwou ldpu rch as e th e West S id e st oc k. J oh n M cNab ol a was th e so le off ic er o f Mi ll en ni um

an d No b Hi ll
.- 17 -

[* 17 ] The Hahn Loes er l awy ers ne go ti at edwith F ortre ndth e te ch ni cal de ta il s o f th e st oc k p ur ch as e ag reem en t. No b Hi ll pro vi de d c ov en an ts aim edat m it ig at in g th e ri skth atth e tr an sa ct io n wo ul d b e ch arac te riz edas a“ li qu id at io n” of West Si de . Nob Hil l re pr es en te d tha t WestSid e wou ldrem ai n i n e xi st en ce fo r atlea st fiv e y ears aft er the clo si ng , wou ld“ atall ti m es be en ga ge d i n a n a ct iv e tr ad e o r bu si ne ss ,” an d wo ul d “ m ai nt ai n ane t wo rth of n o l es s tha n $ 1 m il li on ” dur in g thi s fiv e-year pe rio d. (No ne of t he se rep res en ta ti on s was subs tant ia ll y ho no red .) Nob Hil l al so pro vi de d p ur po rte d t ax warran ti es . The ag reem en t re pr es en tedth atNob Hil l wo ul d “ cau se * * * [WestSid e] to s at is fy ful ly all Un it edSta te s * * * t ax es , pen al ti es an d i nt eres t re qu ire d t o b e p ai d b y * * * [WestSid e] attribu tabl e to in co m e earne d dur in g t he [20 03 ] ta x year.” The ag reem en t d idno t s pe ci fy ho w Nob Hil l wo ul d “ cau se ” West S id e to sat is fy it s 2 00 3 t ax li ab il it ie s o r ex pl ai n the strat eg y

itwou ldus e to off

se t WestSid e’s ga in fro m th e $ 65 mil li on PUCO s et tl em en t. No b Hi ll ag reedto in de m ni fy pe ti ti on er i n the ev en t o f li ab il ity ari si ng fro m

bre ach of i ts rep res en ta ti on to “ sa ti sf y ful ly” W es t Si de ’s 20 03 tax li ab il ity . Peti ti on er’s ex pe rt, Wayne Purcel l, ad m it te d t ha t “ th ere c anbe pro ble m s” en fo rci ng warran ti es an d c ov en an ts ag ai ns t o ffs ho re en ti ti es li ke Nob Hil l th atha ve no ass et s i n the Uni te d S ta te s.- 18 -

[* 18 ] Pet it io ne r’s lawy ers att em pt edto in cl ud e in th e st oc k p ur ch as e ag reem en t a pr ov is io n p ro hi bi ti ng W es t Si de fro m en ga gi ng ina “ li st edtra ns act io n” aft er Fo rtre ndacqui redW es t Si de . Fort ren d re fu se d t o a gr ee t o t hi s p ro vi si on . Ins te ad , th e pa rti es ne go ti at eda st at em en t tha t No b Hi ll “ ha s n o i nt en ti on ” o f cau si ng W es t Si de to en ga ge ina li st edtra ns act io n. Pet it io ne r Accep ts Fo rtr en d’s Offe r A let te r of

in te ntda te d J ul y

22 , 20 03 , setforth th e te rm s o n wh ic h No b Hi ll pr op os edto acqui re p et it io ne r’s st oc k. Itst at eda te nt at iv e p ur ch as e p ric e o f $3 4.9
m il li on , subjec t t o fi ne -tu ni ng ba se d o n WestSid e’s fi na l ca sh po si ti on . The l et te r in di cat edth atW es t Si de wou ldde po si t $ 50 ,00 0 i n e sc ro w to co ve r fee s s ho ul d the tra ns act io n fa il to clo se . Afte r th e tr an sf

er o f W es t Si de ’s op erat in g a ss et s t o LXV, W es t Si de ’s bal
an ce s he etrefl ect edto ta l as se ts of $ 40 ,57 7,1 51 , in cl ud in g $ 39 ,94 9,3 73 incas h, a $5 77 ,77 8 l oa n re cei vabl e fro m pe ti ti on er, an d t he $5 0,0 00 rece iv ab le fro m th e es cro w age nt . W es t Si de ’s agg reg at e 2 00 3 t ax li ab il it ie s wer e es ti m at edto be $1 6,8 53 ,37 9. WestSid e’s ne t as se t v al ue as o f la te Ju ly--th atis , it s as se ts m in us it s ac cru edtax li ab il ity --was thus $2 3,7 23 ,77 2. No b Hi ll off eredto pa y

pe ti ti on er $3 4.9 m il li on forhi s s to ck --$ 11 .2 m il li on m or e th anW es t Si de was wo rth --i n e x-- 19 -

[* 19 ] ch an ge fora fee ( th e “ Fo rtr en d p rem iu m ”) co m fo rtabl y inex ces s o f $5
m il li on . Peti ti on er d eci de d t o a ccep t thi s o ffer
. Pet it io ne r’s “ du e d il ig en ce” e xp ert , Mr. Pu rcel l, t es ti fie d t ha t a s el le r who
rece iv es anall -cas h o fferfor hi s s to ckis m ai nl y

co nc ern edwith m ak in g s ur e h e ge ts pa id . Mr. Purcel l ag reed , ho wev er, tha t a s el le r in pe ti ti on er’s p os it io n m us t ne ve rth el es s ex erci se a cert ai n l ev el of due di li ge nc e. Hahn Loes er’s b an krup tc y lawy ers advi se d tha t p et it io ne r ne ed edto ass ur e h im se lf t ha t No b Hi ll an d F or tre ndwou ldli ve up to th ei r po st cl os in g o bl ig at io ns . AndMr. Pu rcel l ag reedth at

“ du e d il ig en ce d idrequi re * * * [pe ti ti on er] andhi s ad vi so rs to in ve st ig at e Fo rtre nd ’s pl an s” foreli min at in g WestSid e’s 20 03 tax li ab il it ie s. Neit he r pe ti ti on er n orhi s advi se rs pe rfo rm edan y du e d il ig en ce i nt o F or tre ndor i ts tra ckreco rd . Neithe r pe ti ti on er n orhi s advi se rs pe rfo rm edan y m ean in gf ul in ve st ig at io n i nt o the “ hi gh ba si s/ lo w val ue ” sc he m e th atFo rtr en d s ug ge st edforeli m in at in g WestSid e’s acc ru ed20 03 tax li ab il ity . Peti ti on er was ev asi ve when ask edho w he e xp ect edFo rtr en d t o p ul l o ff thi s fe at ; h e te st ifi edas t o hi s b el ie f th atFo rtr en d “ ha d s om e so rt o f ta x re du ct io n p ro ces s” th atwou ldso m eho w “us e b adde btto reduc e ta x l iabi li ty.” PwC sp eci fic al ly decl in edto pro vi de
as su ran ce tha t Fo rtr en d’s b adde btstrat eg y was “ m or e li ke ly than n ot ” to su ccee d.- 20 -

[* 20 ] Prep arat io n fo r th e Cl os in g The st oc k p ur ch as e tr an sa ct io n was care fu ll y stru ctur edto en su re tha t Fo rtre ndan d i ts affi li at es m ad e n o re al ou tl ay of c as h. Fo rtr en d p lann edto bo rro w th e en ti re $ 34 .9 m il li on ten ta ti ve purch as e p ric e: $5 m il li on fro m Mo ffat t In te rn ati on al (Mo ffat t), aFo rtr en d a ffi li at e, an d $ 29 .9 m il li on fro m Co öp erat ie ve Cen
tra le Rai ffei se n- Bo eren le enba nk , B.A. (Rab ob an k) , a Dut chba nk
. W es t Si de ’s 5
cas h wo ul d b e u se d t o re pa y th es e lo an s i m

m ed ia te ly, so th atth e n om in al len de rs bo re n o ri sk
. The fin an ci ng pro ces s b eg anon Aug us t 1 3, 2 00 3, wh enFo rtr en d m ai le d Ch ris Kort landt o f Rab ob an k, re qu es ti ng a $2 9.9 m il li onsh ort-t erm lo an . Two week s l at er, Mr . Kort landt re qu es te d i nt ern al ap pr ov al of t hi s l oa n, wi th Nob Hil l
as th e n om in al bo rro wer. Mr. Ko rtl an dtun de rs to odth atW es t Si de wou ldbe requ ire d t o h av e cas h i n e xc es s o f $2 9.9 m il li on on de po si t wi th Rab ob an k wh enth e st oc k p ur ch as e cl os ed . He th eref or e co ns id eredth e ri skof n onpa ym en t o f th e lo an
The $2 9.9 m il li on lo anwas p ro vi de d t hr ou gh a Rab ob an k s ub si di ary, 5 Utre ch t-Am eri ca Fi na nc e Co . For s im pl ic ity , we wil l re fer t o t he se en ti ti es co ll ecti ve ly as Rab ob an k. Rabo ba nkfreque nt ly partne redwith F ortre ndinex ecu ti ng Mi dc o d eal s. Itha s b eenin vo lv edinnu m ero us trans act io ns pre vi ou sl y co ns id ered by thi s C ou rt. Se e, e.g ., Salu s M un di Fo un d., T.C. Memo. 20 12 -6 1; Slo ne , T.C. Mem o. 2 01 2- 57 ; Fr an k S awy er Tru stof M ay 19 92 , T.C. Mem o. 2 01 1- 29 8; Dieb ol d, T.C. Me m o. 2 01 0- 23 8; LR Dev. Co . LLC v. Co m mis si on er, T.C. Mem o. 20 10 -2 03
.- 21 -

[* 21 ] to be ess en ti al ly zero. Th e ri skrat in g s ho wn o n No b Hi ll ’s cred it ap pl ic at io n was “N/A, o r ba se d o n c ol la te ral : R- 1 (c as h) .” Rab ob an k u se s the R-1 ris k ra ti ng to de no te a lo anth atis ful ly cash co ll at eral iz ed
. On Au gu st21 , 20 03 , pet it io ne r rece iv edin st ru ct io ns to op enat R ab ob an k
anacco un t fo r W es t Si de with a cco un t num be r en di ng in15 77 , to whi chW es t Si de ’s cas h wo ul d e ve ntua ll y be tra ns ferr ed . To rece iv e th e cas h p ro ceed s fr om th e st oc k s al e, pe ti ti on er o pe ne d a n i nd iv idua l Rabo ba nkacco un t wi th acco un t nu m be r en di ng in15 95 . To sh ut tl e cas h a t the clo si ng , Nob Hil l o pe ne d aRab oba nkacco un t wi th acco un t num be r en di ng in15 68
. Inco nn ect io n wi thth e Rab ob an k fi na nc in g, M r. McNab ol a p lann edto ex ecu te two set s o f do cu m en ts at the clo si ng . He wou ldsi gn th e fi rs t s eton be ha lf o f Nob Hil l as it s p res id en t. He wo ul d s ig n t he sec on d s eton be ha lf o f W es t Si de as it s p os tc lo si ng pre si de nt -to -b e. The Nob Hil l d oc um en ts to be ex ecu te d b y Mr. Mc Nab ol a in cl ud eda pr om is so ry no te for $2 9.9 m il li on , a se cu rit y ag reem en t, an d apl ed ge ag reem en t. Purs ua ntto th e se curit y

ag reem en t, No b Hi ll gra nt edRab ob an k afir stpri or ity se cu rit y in te res t i n WestSid e’s Rab ob an k a cco un t t o s ecure No b Hi ll ’s rep aym en t ob li ga ti on . Purs ua ntto th e p le dg e ag reem en t, No b Hi ll grant edRab ob an k afir st- 22 -

[* 22 ] pri or ity

sec ur ity in te res t i n t he W es t Si de st oc k a ndth e st oc k s al e p ro ceed s as co ll at eral sec ur in g No b Hi ll ’s rep aym en t o bl ig at io n. The W es t Si de do cu m en ts to be ex ecu te d b y Mr. Mc Nab ol a in cl ud edsec ur ity andgu aran ty agree m en ts infav orof R ab ob an k a nda “ co ntro l ag reem en t.” W es t Si de un co nd it io na ll y gu aran te edpa ym en t o f Nob Hil l’s o bl ig at io ns to Rab oba nk , andth e se cu rit y

ag reem en t g ran te d R ab ob an k afir stpri or ity sec ur ity in te res t in th e West S id e Rab ob an k a cco un t. The “ co nt ro l ag reem en t” ga ve Rab ob an k
co nt ro l o ve r W es t Si de ’s acco un t-- in cl ud in g a ll “ cas h, i ns tru m en ts , andot he r fin an ci al ass et s co nt ai ne d the rei n fr om ti m e to ti m e, an d a ll sec ur ity en ti tl em en ts with re sp ectth eret o” --t o e ns ur e th atW es t Si de di d n otde fau lton it s co m m it m en ts . As p et it io ne r’s UCC ex pe rt, B ark le y Cla rk , correct ly not ed , Mr. Mc Nab ol a as Nob Hil l’s p res id en t co ul d n otgra ntRab ob an k ape rfec te d s ecu rit y in te res t i n W es t Si de ’s ass et s u nt il Nob Hil l ac qu ire d WestSid e’s st oc k. An d M r. McNab ol a as W es t Si de ’s pre si de ntco ul d n otgra ntRab ob an k ape rfec te d s ecu rit y in te res t i n W es t Si de ’s ass et s u nt il he be cam e West S id e’s pr es id en t. At the clo si ng , ho wev er, al l o f th es e d oc um en ts were t o b eco m e eff ect iv e si m

ul tane ou sl y

with t he fund in g o f th e Rab ob an k l oa n, the pa ym en t o f th e st oc k p ur ch as e p ric e, an d t he
res ig na ti on of WestSid e’s fo rm er o ffi cers an d d ire ct or s. Th es e ag reem en ts effe cti ve ly gav e Rab ob an k a“ sp rin gi ng li en ” o n WestSid e’s cas h at the m om en t i t- 23 -

[* 23 ] fun de d the lo an . For a ll pra ct ic al pu rp os es , th eref or e, th e Rab ob an k l oa n was ful ly col la te ral iz edwith the cas h i n WestSid e’s Rab ob an k a cco un t, co ns is te nt ly w ith the R-1 ris k ra ti ng th atRab ob an k a ss ig ne d t o t ha t l oa n. The Clo si ng The clo si ng was s ch edul edforSep te m be r 9, 2 00 3. Th e fi na l s to ckpu rch as e pr ic e was to be $3 4,6 21 ,59 4 i n c as h p lu s a $ 57 7,7 78 ch eckpa y ab le to pe ti ti on er t o zero ou t h is sh areh ol de r lo an . On Sep te m be r 8, Fo rtr en d d ep os it edth e $ 5 m il li on

“ lo anpro ceed s” fro m

Mo ffat t i nt o No b Hi ll ’s Rab ob an k a cco un t. Als o o n S ep te m be r 8, p et it io ne r de po si te d WestSid e’s $3 9,9 49 ,37 3 e nd in g c as h b al an ce i nt o W es t Si de ’s Rab ob an k a cco un t. The fun ds inth es e acc ou nt s ea rn edov ern ig ht in te res t o f $1 35 an d $ 1,0 76 , res pe ct iv el y . On Se pt em

be r 9, 2 00 3, the fol lo win g e ve nt s o ccu rred . Nob Hil l’s Rabo
ba nkacco un t was cred it edwith t he $2 9.9 m il li on Rab ob an k l oa n p ro ceed s an d $3 5 m il li on incas h fr om

W es t Si de ’s Rab ob an k a cco un t. Fro m th is acco un t, No b Hil l tran sf

erre d $ 34 ,62 1,5 94 in to pe ti ti on er’s Rab ob an k a cco un t; tra ns ferr ed$2 9.9
m il li on to rep ay

th e Rab ob an k l oa n (wh ic h b or e n o i nt eres t); tra ns ferr ed$5 m il li on to rep ay th e Mo ffat t l oa n (wh ic h b or e n o i nt eres t); tra ns ferr ed$1 50 ,00 0 t o c ov er Rab ob an k’s fe es ; an d tran sf erre d $ 15 0,0 00 to W es t Si de ’s Rab ob an k a cco un t. Pet it io ne r imm ed iate ly w ithd rew the en ti re b al an ce o f hi s R ab ob an k a cco un t an d- 24 -

[* 24 ] de po si te d i t i nt o ape rs on al acco un t atPers hi ng Ban k. Whenth e dus t s et tl ed atth e en d o f th e d ay , pet it io ne r’s Rab ob an k a cco un t h ada ba lanc e o f zer o; pe ti ti on er’s Per sh in g B an k a cco un t h ada ba lanc e o f $3 4,6 21 ,59 4; W es t Si de ’s Rab ob an k a cco un t h ada ba lanc e o f $5 ,10 0,4 50 ; an d No b Hi ll ’s Rab ob an k a cco un t ha d aba lanc e o f $7 8,5 41
. The ne xtda y , Nob Hil l m erg edin to W es t Si de with WestSid e su rv iv in g. The $5 ,10 0,4 50 rem ai ni ng inW es t Si de ’s Rab ob an k a cco un t an d t he $7 8,5 41
rem ai ni ng inNob Hil l’s Rabo ba nkacco un t wer e la te r tr an sf erre d i nt o aW es t Si de
acco un t atth e Bu si ne ss Ban k o f Cal ifo rn ia . W es t Si de ev en tu al ly tran sf erre d $4 ,76 6,0 00 ou t o f th atacco un t t o F ortre ndaffi li at es an d v ari ou s p ro m ot ers , in cl udi ng Mi dC oa st , whi chon Sep te m be r 14 , 20 03 , recei ve d t he pro m is ed$1 ,18 0,0 00 fo r st ep pi ng away

fro m th e tr an sa ct io n. By late 20 04 , W es t Si de ’s ban k a cco un ts ha d b eendra in edof f

un ds an d wer e cl os ed
. The BadDebtStr at eg y The ba ck gr ou ndof F ortre nd ’s strat eg y foreli m in at in g WestSid e’s 20 03 tax li ab il ity be gi ns in20 01 . On March 7, 2 00 1, Un it edFin an ce Co . Ltd . (Uni te d F ina nc e) p ur

po rte dl y co nt rib ut eda po rtf

ol io of c ha rg ed -o ff J ap an es e d eb t (J ap an es e de btpo rtf ol io ) to Mi ll en ni um

inex ch an ge forMi ll en ni um cla ss B sh ares . (Mi lle nn iu m ev en tu al ly became Nob Hi ll ’s, andth enW es t Si de ’s, par en t.) Th e Japa n-- 25 -

[* 25 ] ese de btpo rtf

ol io was v al ue d a t $ 13 7,1 09 . Two da y s l at er, Un it edFin an ce so ldth e Mi ll en ni um

cla ss B sh ares itha d ju stacqui redto Bark a Lim it ed , ano th er Caym anIsl an ds en ti ty, fo r $1 37 ,00 0. Al th ou gh Mi ll en ni um ha d a cqui redth e Japa ne se de btpo rtf

ol io with p ro pe rty worth o nl y $1 37 ,00 0, i t cl ai m edth atit s t ax ba si s i n tha t Po rtf

ol io was $ 31 4,7 04 ,03 7 a s o f Ju ne 30 , 20 03
. On No ve m

be r 6, 2 00 3, M il le nn iu m

co nt rib ut edto W es t Si de a subs etof t he Japa ne se de btpo rtf

ol io , con si st in g o f two de fau lt edlo an s (Ao y am a lo an s) . The Aoyam a lo an s h ada pu rp orte d t ax ba si s o f $4 3,3 23 ,06 9. Be twee n No ve m be r 6
an d Dec em

be r 31 , 20 03 , W es t Si de wrot e o ff the Aoyam a lo an s as wort hl es s. On it s Fo rm 11 20 , U.S. Corp or at io n In co m e Tax Return, fo r 20 03 , W es t Si de cla im ed a b adde btde du ct io n o f $4 2,4 80 ,62 2 o n a cco un t o f th atwrit eo ff. The re i s n o e vi de nc e th atW es t Si de co nduc te d m ean in gf ul bu si ne ss op erati on s af te r Sep te m

be r 10 , 20 03 . It h adno em pl oyees a fte r th atdate . It rep orte d n o gr os s re cei pt s, i nc om e, orbu si ne ss ex pe ns es rel at in g t o i ts supp os ed“ de btco ll ecti on ” b us in es s. Th ere i s n o e vi de nc e th atitm ad e an y effo rt t o c ol le ctth e Aoyam a lo an s o r co nt ract edwith a ny thi rdpa rty to d o s o. Al th ou gh Nob Hil l h adrep rese nt edth atW es t Si de wou ld“ m ai nt ai n ane t wo rthof n o l es s tha n $ 1 m il li on ” du rin g the fiv e-year pe rio d fo ll owi ng th e cl os in g, WestSid e d idno t d o s o. Th e fo ll owi ng tab le sh ows W es t Si de ’s ass etba lanc es as r ep orte d t o t he IRS:- 26 -

[* 26 ] Tax y ear Ass etba lanc e as of 1 2/ 31

20 03 $1 ,82 9,3 95 20 04 31 3,3 00 20 05 1,1 71 ,60 9 20 06 94 2,5 89 20 07 -0- Pet it io ne r of

fere d n o e vi de nc e to sh ow tha t the actua l v al ue of WestSid e’s as se ts co rres po nd edto th es e rep orte d a m ou nt s. Giv enFo rtr en d’s trackreco rd , we do no t ta ke th es e rep orte d a m ount s atface va lu e. W es t Si de ’s Tax Re tu rn s an d IR S Aud it W es t Si de ’s Form

11 20 for20 03 de sc rib editas i nc or po rat edinth e Caym an Is land s, d oi ng bu si ne ss inIrel an d, an d h av in g i ts ad dr es s i n Las Vega s, Nev ad a. It de sc rib edit s p aren t, Mi ll en ni um , as i nc or po rat edinth e Caym anIsl an ds an d d oi ng bu si ne ss inIrel an d. WestSid e rep orte d fo r 20 03 to ta l i nc om e o f $6 6,1 16 ,70 8 a nd to ta l d educ ti on s o f $6 7,8 40 ,52 1. Th e d educ ti on s i nc lu de d s al ari es an d wag es of $8 ,31 5,6 05 , othe r de du ct io ns of $ 16 ,54 2,4 48 , andba d d eb t l os se s o f $4 2,4 80 ,62 2. On J anua ry

9, 2 00 6, WestSid e fi le d F orm 11 20 X, Am en de d U.S. Co rp or ati onInc om e Tax Return, fo r 20 03 . Apartfro m co rrec ti ng m in orerro rs an d l is ti ng a n ew ad dr es s i n R en o, Nev ad a, th e am en de d re tu rndi d n otdi fferm at eri al ly from th e o rig in al . Bot h re turn s wer e p rep aredus in g t he accrua l m etho d o f acc ou nt in g.- 27 -

[* 27 ] The IRS ex am in edW es t Si de ’s 20 03 return. Du rin g t he ex am in at io n, the IRS was un ab le to fin d a ny ass et s o r cu rren t s ou rces of i nc om e fo r W es t Si de ; a Mar ch28 , 20 08 , m em or an du m de ta il s the st ep s the IRS t oo k i n s earc h t he reo f. At th e co nc lu si on of t he au di t, the IRS d is al lo wedth e $ 42 ,48 0,6 22 ba d d eb t d educ ti onan d $ 1,6 51 ,75 2 o f th e d educ ti oncla im edforleg al an d p ro fes si on al fees , on th e g ro un d tha t the se fees were i nc urredinco nn ect io n wi tha tr an sa ct io n e nt ered in to so le ly for t ax av oi da nc e. W es t Si de ’s aut ho riz edrep res en ta ti ve ex ecu te d s uc ces si ve Fo rm s 8 72 , Co ns en t t o Ex te ndth e Tim e to Ass es s Tax , th atex te nd edto Decem be r 31 , 20 09 , th e ti m e fo r as se ss in g WestSid e’s 20 03 tax li ab il ity . On Feb ru ary 25 , 20 09 , th e IRS m ai le d ati m el y

no ti ce o f de fic ie nc y

to W es t Si de de te rm in in g ade fic ie nc y of $1 5,1 86 ,57 0 a ndpe na lt ie s o f $6 1,8 51 an d $ 5,9 50 ,92 6 u nd er s ect io n 6 66 2( a) an d (h ), res pe ct iv el y . W es t Si de di d n otpe ti ti on th is Co urt an d, o n J ul y 20 , 20 09 , th e IRS a ss es se d the tax an d p en al ti es setforth inth e n ot ic e o f de fic ie nc y , pl us accru edin te res t. OnApri l 5 , 20 11 , W es t Si de ’s cor po rat e ch art er was can cel edby th e Ohi o s ecre tary

of s ta te . Not ic e o f Tran sf

eree Liab il ity Pet it io ne r an d B arb ara Tri cari ch i jo in tl y fil edFo rm

10 40 , U.S. Ind iv idua l In co m e Tax Return, fo r 20 03 sh owi ng a Nev ad a ad dr es s. Th is return re po rte d a- 28 -

[* 28 ] ta x l iabi li ty of $5 ,30 3,8 86 , res ul ti ng ch ie fly from ga inon th e sa le of pe ti ti on er’s WestSid e st oc k. OnSch edul e D, Cap it al Gain s an d Lo ss es , pet it io ne r rep orte d the pro ceed s fr om th is sal e as $3 5,1 99 ,35 7, re fle ct in g b ot h t he cas h h e rece iv edan d the $5 77 ,77 8 c he ck , res ul ti ng ina lo ng -te rm cap it al ga in of $3 5,1 70 ,79 3. The IRS d idno t au di t p et it io ne r’s Fo rm 10 40 , bu t i t d idop ena tr an sf eree li ab il ity ex am in at io n c on cern in g WestSid e’s 20 03 tax li ab il it ie s. Up onco m pl et io n o f th atex am in at io n, the IRS s en t p et it io ne r a Let te r 90 2- T, Noti ce o f Liab il ity . This no ti ce o f li ab il ity was t im el y

m ai le d t o p et it io ne r on Ju ne 25 , 20 12
. The n ot ic e d et erm in edth atpe ti ti on er i s l iabl e as tra ns fere e fo r th e fo l- 6 lo win g l iabi li ti es of WestSid e:

Inhi s p et it io n, p et it io ne r ch al le ng edth e ti m el in es s o f th e n ot ic e o f li ab il ity . 6 The Co m m is si on er g en eral ly m

us t as se ss tra ns fere e li ab il ity withi n o ne y ear a fte r ex pi rat io n o f th e p eri odof l im it at io ns on th e tr an sf ero r, bu t the ap pl ic ab le pe rio d of li m it at io ns m ay

be ex te nd edby agree m en t. See sec . 69 01 (c) and(d) . Peti ti on er ex ecu te d s uc ces si ve Fo rm s 9 77 , Con se ntto Ext en d t he Tim e to Ass es s Li ab il ity at Law or i n Equi ty for In co m e, Giftan d Es ta te Tax Ag ai ns t a Tra ns fere e o r Fi du ci
ary, ex te nd in g t o J un e 3 0, 2 01 2, the ti m e fo r as se ss in g tran sf eree li ab il ity

ag ai ns t hi m , andth e n ot ic e o f li ab il ity was t im el y

is su edon June 25 , 20 12 . Peti ti on er ab an do ne d i n h is po st tri al bri efs an y ch al le ng e to th e ti m el in es s o f th e n ot ic e o f li ab il ity , andth atarg um en t i s thu s d eem edco nc ed ed
.- 29 -

[* 29 ] Defici en cy $1 5,1 86 ,57 0 Pen al ty se c. 66 62 (a), (d ) $6 1,8 51 Pen al ty se c. 66 62 (h ) $5 ,95 0,9 26
Pet it io ne r ti m el y

pe ti ti on edth is Co urt fo r rev ie w of the no ti ce o f li ab il ity . 7

OPINION I. Leg al Sta nd ardan d B ur de n o f Pro of Pet it io ne r res id edinNeva dawhen he fil edhi s p et it io n. Th e p art ie s h av e st ip ul at edth atan y

ap pe al of t hi s ca se wil l l ie to th e U.S. Co urt o f App eal s fo r th e Nin thCir cu it . See s ec. 7 48 2( b) (1 )(A); Gol se n v . Commis si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1) . ThatCo urt h as he ldth at“ th e ta x de ci si on s o f ot he r ci rcu it s s ho ul d b e fo ll owe d u nl es s the y are d em on strab ly errone ou s o r th ere app ear c og en t re as on s fo r reject in g the m .” Po po v v . Comm is si on er, 24 6 F .3d11 90 , 11 95 (9t h C ir. 2 00 1) (qu ot in g Un ge r v. C omm is si on er, 9 36 F.2d

Inad di ti on to th e am ou nt s l is te d i n t he no ti ce o f li ab il ity , pet it io ne r pr o- 7 po se d a s a f

in di ng of f

act(to whi chres po nd en t d idno t o bjec t) t ha t re sp on de nt de te rm in ed“ as se ss edin te res t” of $ 8,4 75 ,65 5 a s wel l as “ accrue d i nt eres t an d pe na lt ie s” of $ 12 ,36 2,4 25 . In the ir p os ttria l b rie fs th e p art ie s h av e n otad dr es se d th e p ro pe r co m

pu ta ti onof i nt eres t o r th e ex is te nc e o f pe na lt ie s o th er tha n t ho se de te rm in edby resp on de ntun de r se ct io n 6 66 2( a), (d ), an d (h ). W e wil l ac
co rd in gl y en te r de ci si on inth is cas e und er Ru le 15 5.- 30 -

[* 30 ] 13 16 , 13 20 (D.C. Cir . 19 91 ), aff’g T.C. Me m o. 1 99 0- 15 ), aff’g i n p art , rev ’g in pa rt a ndrem an di ng T.C. Mem o. 1 99 8- 37 4. Und er s ect io n 6 90 1, the Co m m is si on er m ay

pro ceedag ai ns t a t ran sf

eree of pr op erty to ass es s an d c ol le ctFed eral in co m e ta x, p en al ti es , andin te res t o wedby a tra ns fero r. Res po nd en t co nt en ds th atpe ti ti on er, as tra ns fere e, is li ab le forth e unpa id20 03 Fed eral tax li ab il it ie s o f W es t Si de . Peti ti on er co nt en ds th atNob Hil l pu rch as edhi s s to ckm om en ts be fo re i t re cei ve d WestSid e’s cas h; th atRab ob an k
an d M of fatwere the so ur ce o f th e cas h u se d t o p ur ch as e h is st oc k; an d t ha t h e th us rece iv edno “ tra ns fer” fro m W es t Si de th atco ul d m ak e h im li ab le as i ts “ tra ns fere e.” Sect io n 6 90 1 d oe s n otim po se subs tant iv e li ab il ity on th e tr an sf

eree bu t s im
pl y gi ve s the Co m

m is si on er a re m edy

or p ro cedur e fo r co ll ect in g a n e xi st in g l iabi
li ty of th e tr an sf

ero r. Co m

m is si on er v . Ste rn , 35 7 U.S. 3 9, 4 2 (1 95 8) . To ta ke ad
va nt ag e o f th is pro cedur e, th e Co m m is si on er m

us t es tabl is h a n i nd ep en de ntba si s un de r ap pl ic ab le Sta te law fo r ho ld in g t he tra ns fere e li ab le forth e tr an sf ero r’s de bt s. Sec . 69 01 (a); Co m m is si on er v . Ste rn , 35 7 U.S. at45 ; Hag am anv. Co m m is
si on er, 1 00 T.C. 18 0, 1 83 (19 93 ). Sta te law thu s d et erm in es th e tr an sf eree ’s subst an ti ve li ab il ity . Gin sb erg v. Co m m is si on er, 3 05 F.2d66 4, 6 67 (2dCir . 19 62 ), aff’g 3 5 T.C. 1 14 8 (1 96 1) . In thi s re sp ect , sec ti on 69 01 pl aces th e Co m m is si on er- 31 -

[* 31 ] in“pr eci se ly the same po si ti on as t ha t o f or di na ry cred it or s u nd er s tate law.” St arn es v. Co m

m is si on er, 6 80 F.3d41 7, 4 29 (4t h C ir. 2 01 2) , aff’g T.C. Mem o. 20 11 -6 3. Th e p art ie s ag ree t ha t the Sta te law ap pl ic ab le he re i s tha t o f Ohi o, whe re p et it io ne r res id ed , W es t Si de di d b us in es s, an d t he pri nc ip al tra ns act io ns oc cu rred . See Co m

m is si on er v . Ste rn , 35 7 U.S. at45 ; Es ta te of M il le r v. C omm is
si on er, 4 2 T.C. 5 93 , 59 8 (1 96 4)
. Onc e th e tr an sf

ero r’s own tax li ab il ity

is est ab li sh ed , th e Co m

m is si on er m ay as se ss th atli ab il ity

ag ai ns t a t ran sf

eree un de r se ct io n 6 90 1 o nl y if two d is ti nc t re qu ire m en ts are m et . Firs t, the tra ns fere e m us t b e subjec t t o l iabi li ty und er ap pl icab le Sta te law, wh ic h i nc lu de s St at e equi ty prin ci pl es . Seco nd , un de r pr in ci pl es of Fed eral tax law, tha t p ers on m us t b e a “ tra ns fere e” wi th in th e m ean in g o f se cti on69 01 . See Die bo ldFo un d., In c., 73 6 F .3dat 1 83 -1 84 ; St arn es , 68 0 F .3dat 42 7; Swor ds Trus t v . Commis si on er, 1 42 T.C. 31 7, 3 36 (20 14 ). The Co m m is si on er b ears th e b ur de n o f pr ov in g tha t a p ers on is li ab le as a tra ns fere e. Sec. 6 90 2( a); Ru le 14 2( d) . The Co m m is si on er d oe s n otha ve th e b ur de n, h owe ve r, “ to sh ow tha t the tax pa y er was li ab le forth e ta x.” Sec. 6 90 2( a). Und er n orm al bu rd en -o f-p ro of rul es , th eref

or e, pe ti ti on er h as th e b ur de n o f pr ov in g tha t WestSid e is no t l iabl e fo r th e $ 21 ,19 9,3 47 of t ax an d p en al ti es th atth e IRS a ss es se d a ga in stitfor20 03 . Rul e 1 42 (a)( 1) , (d) ; Welch v. Hel ve rin g, 2 90- 32 -

[* 32 ] U.S. 11 1, 1 15 (19 33 ); s ee Un it edSta te s v . W il li am s, 5 14 U.S. 52 7, 5 39 (1 99 5) (no ti ng th at“ th e Co de tre at s the tra ns fere e as th e ta xp ay er” f orth is pu rp os e); L.V. Cast le Inv . Grp., In c. v. Co m m is si on er, 4 65 F.3d12 43 , 12 48 (11 th Ci r. 20 06 ). The bu rd enof p ro of

on factua l i ss ue s m ay

be sh ift edto th e Co m

m is si on er i f th e ta xp ay er i nt ro du ces “ cred ib le ev id en ce” wi th res pe ctth eret o a ndsat is fie s o th er requi rem en ts . Sec. 7 49 1( a)(1 ) an d (2 ). Pet it io ne r as ke d t ha t we s hi ft t o re sp on de ntth e b ur de n o f pr oo f with re sp ectto W es t Si de ’s 20 03 tax li ab il ity . W e d ecl in e th is reque st . Peti ti on er i nt ro du cedno “ cred ib le ev id en ce” c on cern in g t he $4 2,4 80 ,62 2 b adde btde du ct io n t ha t g en erat edW es t Si de ’s 20 03 de fic ie nc y . In
an y ev en t, i t d oe s n otm atte r who be ars th e b ur de n o f pr oo f be cau se th e p rep on de ran ce o f th e ev id en ce fa vo rs res po nd en t’s p os it io n a s t o a ll m at eri al fact s. 8 II. W es t Si de ’s 20 03 Fed eral Tax Li ab il ity Inth e n ot ic e o f de fic ie nc y to W es t Si de , th e IRS di sa ll owe d ade du ct io n o f $1 ,65 1,7 52 forleg al an d p ro fes si on al fees an d ade du ct io n o f $4 2,4 80 ,62 2 fo r ba d

Whe th er the bu rd enha s s hi fte d m at te rs on ly in the cas e o f anev id en ti ary 8 ti e. See Po la ckv. Co m

m is si on er, 3 66 F.3d60 8, 6 13 (8t h C ir. 2 00 4) , aff’g T.C. Mem o. 2 00 2- 14 5. Inth is cas e, we di sc ern edno ev id en ti ary ti e o n any m at eri al is su e o f fac t. See Payne v. Co m m is si on er, T.C. Mem o. 2 00 3- 90 , 85 T.C.M. (CCH) 10 73 , 10 77 (20 03 ).- 33 -

[* 33 ] de bt s. Th e n ot ic e al so de te rm in edanaccu racy-rela te d p en al ty of $6 1,8 51
an d ape na lty

of $ 5,9 50 ,92 6 fo r a “ gr os s v al ua ti on mis st at em en t” un de r se ct io n 66 62 (h ). The d educ ti on for

leg al an d p ro fes si on al fees was d is al lo wedonth e gr ou ndth atth es e fee s wer e in cu rredinco nn ect io n wi th a ta x- av oi da nc e tr an sact io n. We con cl ud e b el ow tha t the tra ns act io n b y whi chNob Hil l ac qu ire d pe ti ti on er’s WestSid e st oc k was in de eden te redin to for th e so le pu rp os e o f ta x av oi da nc e. Pet it io ne r pr ov id edno ev id en ce t o e st ab li sh th atan y of the di sa ll owe d pr of es si on al fees were i nc urredinco nn ect io n wi th so m e o th er, l eg it im at e, tr an sact io n. Pe ti ti on er h as th us fai le d t o c arry his bu rd enof p ro vi ng th atan y po rti on of th es e fee s co ns ti tu te d d educ ti bl e b us in es s ex pe ns es of WestSid e und er s ect io n 16 2. Se e Agr o S ci . Co. v . Comm is si on er, 9 34 F.2d57 3, 5 76 (5t h C ir. 1 99 1) , aff’g T.C. Mem o. 1 98 9- 68 7; Sim on v. Co m m is si on er, 8 30 F.2d49 9, 5 00 -5 01 (3dCir
. 19 87 ), aff’g T.C. Me m o. 1 98 6- 15 6; Cu ll ife r v. C ommis si on er, T.C. Mem o. 2 01 4- 20 8, at*4 5. W es t Si de ’s cla im ed$4 2,4 80 ,62 2 b adde btlo ss was b as edon th e as se rti on th atth e two Aoyam a lo an s h ada ta x b as is of $ 43 ,32 3,0 69 . Thatass ert io n i s p repo st ero us be cau se th os e lo an s wer e a s ub se t o f a l arg er p ortfo li o o f lo an s tha t h ad- 34 -

[* 34 ] a ta x b as is of app ro xi m at el y $1 37 ,00 0. Pe ti ti on er i nt ro du cedno cred ib le
ev id en ce t o s ub st an ti at e th e b as is cla im ed
. 9 Pet it io ne r do es no t s eri ou sl y di sp ut e West S id e’s li ab il ity for th e $ 61 ,85 1
accu racy-rela te d p en al ty. Forreturns fil edon or b efo re Au gu st17 , 20 06 , a 1 0

“ gr os s v al ua ti on m is st at em en t” ex is ts wher e th e b as is cla im edequa ls or e xc eed s 40 0% o f th e co rrec t am ou nt . Sec. 6 66 2( h) (2 ); s ec. 1 .66 62 -5 (e)( 2) , Inc om e Tax Reg s. Cl ai m in g atax ba si s o f $4 3,3 23 ,06 9 fo r th e Aoyam a lo an s, wh ic h h adan actua l b as is of s ub st an ti al ly less th an$1 37 ,00 0, i s u nque st io nabl y a “ gr os s va lu at io n m is st at em en t.” Ap artfro m ch al le ng in g the de fic ie nc y on whi chth e pe na lty is ba se d, p et it io ne r in tro du cedno ev id en ce t o s ho w th atres po nd en t’s

Pet it io ne r arg ue s tha t a m em or an du m so li ci te d b y

Mi ll en ni um

fro m th e 9 Seyfarth Sh aw la w firm

was s uf fic ie ntto subs tant ia te th e b ad -d eb t d educ ti on . W e gi ve no weig htto th atm em or an du m . It was ba se d o n a ss um edfact s p ro vi de d b y Mr. Mc Nab ol a; th os e as su m edfact s ar e co nt rad ic te d b y th e rec or d e vi de nc e in th is cas e; an d the m em or an du m ex pl ic it ly stat es th atno on e b utMi ll en ni um canrel y up on it . Sey fart h S haw gai ne d n ot or ie ty for i ss ui ng bo gu s t ax -s he lt er o pi ni on s, an d thi s d oc um en t s eem s p ar fo r th e co ur se . See, e.g ., Kenn a Trad in g, LLC v
. Co m m is si on er, 1 43 T.C. 32 2 (2 01 4) ; Supe rio r Trad in g, LLC v . Comm is si on er, 13 7 T.C. 7 0 (2 01 1) , aff’d, 7 28 F.3d67 6 (7 th Cir . 20 13 ); R og ers v. Co m m is si on er, T.C. Mem o. 2 01 4- 14 1; Ro ge rs v. Co m m is si on er, T.C. Mem o. 2 01 1- 27 7, af f’d, 72 8 F .3d67 3 (7 thCir . 20 13 ); S te rli ng Trad in g, LLC v . Uni te d S tate s, 5 53 F. Supp . 2d11 52 (C.D. Cal . 20 08 ). Pet it io ne r di sp ut es hi s l iabi li ty for the pe na lt ie s p rin ci pa ll y on th e g ro un d 1 0 th atth e p en al ti es forwhi chW es t Si de is li ab le can no t b e co ll ect edfro m hi m as i ts tra ns fere e. W e ad dr es s thi s ar gu m en t i nf ra p p. 6 1- 63
.- 35 -

[* 35 ] cal cu la ti onof asec ti on 66 62 (h ) pe na lty of $ 5,9 50 ,92 6 was in co rrec t. Pet it io ne r ha s thu s fa il edto pro ve th atres po nd en t erredinde te rm in in g a ga in st W es t Si de for20 03 a ta x d efi ci en cy of $ 15 ,18 6,5 70 an d p en al ti es of $ 61 ,85 1 a nd $5 ,95 0,9 26 un de r se ct io n 6 66 2( a) an d (h ), res pe ct iv el y . III. Pet it io ne r’s Liab il ity as Tra ns fere e o f W es t Si de Sect io n 6 90 1 p erm it s the Co m m is si on er t o a ss es s t ax li ab il ity ag ai ns t a p erso n wh o i s “ th e tr an sf

eree of a ss et s o f a t ax pay er wh o o wes in co m e ta x.” Sal us Mu nd i Fo un d. v . Comm is si on er, 7 76 F.3d10 10 , 10 17 (9t h C ir. 2 01 4) , rev ’g an d
rem an di ng T.C. Mem o. 2 01 2- 61 . To im po se th atli ab il ity

ona tr an sf

eree , a co urt
m us t fi rs t d et erm in e whe th er “ th e p arty [is ] subs tant iv el y

li ab le for th e tr an sf

ero r’s
unpa idtax es un de r st at e la w,” an d n ex t d et erm in e whe th er tha t p arty is a “ tra ns fere e” wi th in th e m ean in g o f se ct io n 6 90 1. Sl on e v . Comm is si on er, _ _ F .3d__ , 20 15 W L 50 61 31 5, at*2 (9th C ir. Au g. 2 8, 2 01 5) va cat in g a ndrem an di ng T.C. Mem o. 2 01 2- 57 ; s ee Co m m is si on er v . Ste rn , 35 7 U.S. at44 -4 5. Th e two pro ng s of th is in qu iry are in de pe nd en t o f on e an ot he r. See Fe ld m anv. Co m mis si on er, 77 9 F .3d44 8, 4 58 (7t h C ir. 2 01 5) , aff’g T.C. Mem o. 2 01 1- 29 7; Sal us Mu nd i Fo un d., 7 76 F.3dat 1 01 2; Dieb ol d F ou nd ., Inc ., 73 6 F .3dat 1 85 ; Fr an k S awy er Trus t o f May 19 92 v. Co m m is si on er, 7 12 F.3d59 7, 6 05 (1s t Ci r. 20 13 ), aff’g T.C. Mem o. 2 01 1- 29 8; Sta rn es , 68 0 F .3dat 4 29
.- 36 -

[* 36 ] A. Pet it io ne r’s Subs tant iv e Liabi li ty Und er Oh io Law Inde ci di ng m at te rs of S ta te law, we ar e g en eral ly gui de d b y th e d eci si on s o f th e St at e’s hi gh es t co urt. If the re i s n o re le va ntpre ced en t fr om th e St at e’s hi gh es t co urt, b utth ere i s re le va ntpre ced en t fr om anin te rm ed ia te ap pe ll at e co urt, “ th e fed eral co urt m

us t fo ll ow the st at e in te rm ed ia te ap pe ll at e co urt d eci si on un le ss th e fed eral co urt fi nd s co nv in ci ng ev id en ce tha t the st at e’s supr em e co urt l ik el y wou ld
no t fo ll ow i t.” Rym anv. Se ars , Roe bu ck& Co ., 50 5 F .3d99 3, 9 94 (9t h C ir. 20 07 ); s ee Co m

m is si on er v . Est at e o f Bo sc h, 3 87 U.S. 45 6, 4 65 (19 67 ) (Fed eral
co urt s ho ul d app ly wha t i t “ fin d[ s] to be th e st at e la w aft er g iv in g ‘pro pe r reg ard ’ to rel ev an t ru li ng s o f ot he r co urts of t he Sta te ”); Swor ds Trus t, 1 42 T.C. at 3 42 ; Est at e o f You ng v. Co m

m is si on er, 1 10 T.C. 29 7, 3 00 , 30 2 (1 99 8) . “ Onl y wher e no st at e co urt h as de ci de d the po in t i n i ss ue m ay a fed eral co urt m ak e aneduc at ed gu es s as to ho w th atst at e’s supr em e co urt wo ul d ru le .” Fli ntko te Co . v. Drav o Co rp ., 67 8 F .2d94 2, 9 45 (11 th Cir . 19 82 ) (quo ti ng Ben an te v. Al ls tate Ins . Co., 47 7 F .2d55 3, 5 54 (5t h C ir. 1 97 3) ). In19 90 Ohi o e na ct edth e Uni fo rm Frau du le ntTran sf

er Actof 1 98 4 (UF TA)
as ch ap te r 13 36 of i ts Co m m erci al Tran sa ct io ns Co de . See Oh io Rev . Cod e se cs . 13 36 .01 to 13 36 .12 (he reaf te r OUFTA; al l re fere nc es to th e OUFTA are t o t he
ve rs io n i n e ffec t dur in g 2 00 3) . Fort y -th ree S ta te s an d t he Dis tri ctof C ol um bi a- 37 -

[* 37 ] ha ve ad op te d the UFTA inwho le or i n p art . The v ers io n o f th e UFTA th at Ohi o a do pt edco rres po nd s al m os t v erb at im to th e uni fo rm

law. Whe n i nt erp ret in g Oh io st atut es de riv edfro m un ifo rm or m od el laws , th e Ohi o S up rem e Co urt h as reg ul arl y co ns ul te d o pi ni on s fr om si st er St at e co urts in te rp ret in g p aral le l p ro vi si on s o f th ei r own st atut es . See St ei n v . Bro wn, 4 80 N.E.2d11 21 (Ohi o 1 98 5) (di sc us si ng ot he r St at es ’ tre atm en t o f th e Uni fo rm Frau du le ntCo nv ey an ce Act(UFCA), the UFTA’ s p red eces so r); Ohi o In s. Gu ar. Ass ’n v. Si m

ps on , 43 9 N.E.2d12 57 (Ohi o C t. Ap p. 1 98 1) (no ti ng rel ev an ce o f op in io ns fro m

co urts of o th er St at es when in te rp ret in g m od el or u ni fo rm laws ). 1 1 Fed eral Co urts of Ap pe al s fo r fi ve di ffer en t Ci rcu it s, ex am in in g M id co trans act io ns si m il ar t o tha t h ere, h av e rec en tl y is su edop in io ns in te rp ret in g s ta te laws th atsubs tant ia ll y

in co rp or at e th e UFTA or i ts pre de ces so r. See s up ra p . 2 an d
no te 1. We bel ie ve th atth e Ohi o S up rem e Co urt wo ul d g iv e p ro pe r reg ardto th es e d eci si on s, an d t o the Sta te co urt p rece de nt s o n wh ic h t he y are b as ed , when in te rp ret in g p aral le l p ro vi si on s o f th e OUFTA. Ohi o S up rem e Co urt o pi ni on s co ns id eri ng th e tr eat m en t o f un ifo rm act s b y 1 1 co urts of o th er St at es in cl ud e Al M in or& Ass oc ., Inc . v. Marti n, 8 81 N.E.2d 8 50 (Oh io 20 08 ) (Un ifo rm

Trad e Sec ret s Act ); C ru z v . Cum ba -Ort iz , 87 8 N.E.2d62 0 (Oh io 20 07 ) (Un ifo rm

Int ers ta te Supp ort Actan d Un ifo rm Reci pr oc al Enfo rcem en t o f Supp ort Act ); Eri e In s. Grp . v. Fi sh er, 4 74 N.E.2d 3 20 (Ohi o 1 98 4) (Uni
fo rm Decl arat ory

Ju dg m en ts Act) ; Lev i v . Levi , 16 6 N.E.2d74 4 (Oh io 19 60 ) (Un ifo rm Reci pr oc al Enfo rcem en t o f Supp ort Act ).- 38 -

[* 38 ] The Ohi o S up rem e Co urt h as em ph as iz edth atth e OUFTA is a rem ed ia l st atut e th atsh ou ldbe li be ral ly con st ru edto pro te ctcred it or s. See W ag ne r v. Gali po , 55 3 N.E.2d61 0, 6 13 (Ohi o 1 99 0) ; Lo cafr an ce Un it edSta te s C or p. v . In te rs ta te Dis tri b. Se rv s., In c., 45 1 N.E.2d12 22 , 12 25 (Ohi o 1 98 3) (in te rp ret in g th e OUFTA’ s p red eces so r). The OUFTA defi ne s “ trans fer” ve ry bro ad ly to i ncl ud e “ ev ery di rector i nd ire ct , abs ol ut e o r co nd it io na l, an d v ol un tary or i nv ol un tary m etho d o f di sp os in g o f orpa rti ng with an a ss etor a n i nt eres t i n an a ss et .” OUFTA sec. 1 33 6.0 1( L). Res po nd en t ar gu es th atpe ti ti on er i s a l iabl e as a “ tra ns fere e” o f W es t Si de ’s cas h u nd er fo urdi st in ctsec ti on s o f th e Ohi o s tatu te . See i d.
se cs . 13 36 .04 (A)(1 ) an d (2 ), 13 36 .05 (A) an d (B ). The fi rs t o f th es e is anactua l frau d p ro vi si on ; the lat te r th ree a re co ns tru ct iv e fraudpro vi si on s. OUFTA sect io n 1 33 6.0 4( A)(1 ), th e actua l fr au d p ro vi si on , app li es inth e cas e o f an y

cred it orreg ard le ss of wh ethe r hi s “ cl ai m * * * ar os e b efo re o r aft er the tra ns fer was m ad e.” A tra ns fer i s fr au du le ntun de r th is pro vi si on if the de bt or m ad e th e tr an sf

er “ [w]ith actua l i nt en t t o h in de r, de lay , or d efraudan y cred it orof th e d eb to r.” The st atut e se ts forth 11 no ne xc lu si ve “ba dg es of f rau d” th atm ay gi ve ris e to anin fere nc e o f actua l fr au du le ntin te nt . See i d. s ec. 1 33 6.0 4( B). Two o f th e co ns tru ct iv e fraudpro vi si on s ap pl y inth e cas e o f a cre di to r

“ who se cla im

aro se be fo re the tra ns fer was m ad e.” Id . sec s. 1 33 6.0 5( A) an d (B ).- 39 -

[* 39 ] Sect io n 1 33 6.0 5( A), th e p ro vi si on m os t re le va nthe re, p ro vi de s tha t “ [a] tra ns fer m ad e * * * by a deb to r is frau du le ntas t o [s uc h] a cred it or ” if th e d eb to r m ad e th e tr an sf

er wi th ou t re cei vi ng a reas on ab ly equ iv al en t v al ue inex ch an ge an d th e d eb to r “ was in so lv en t atth atti m e o r * * * b ecame ins ol ve ntas ares ul t o f th e tra ns fer.” Thi s p ro vi si on ap pl ie s re ga rd le ss of atra ns fero r’s or tra ns fere e’s actua l in te nt . See Sea se v. J oh n S m ith Gra in Co ., 47 9 N.E.2d28 4, 2 87 (Ohi o C t. Ap p. 19 84 ) (h ol di ng th atwith re sp ectto th e OUFTA’ s p red eces so r, “ [n ]eith er the in te nt of th e d eb to r no r th e kno wled ge of t he trans fere e n eedbe pro ve n” ); Ne ls on v. W al nu t In v. Pa rtn ers , L.P., 201 1 U.S. Di st . LEXIS 75 53 4 (S .D. Ohio 20 11 ) (s am e). The th irdco ns tru ct iv e fraudpro vi si on ap pl ie s wh ethe r th e cre di to r’s cl ai m aro se “be fo re o r aft er the trans fer was m ad e.” OUFTA sec . 13 36 .04 (A). “ A trans fer m ad e * * * by a deb to r is frau du le ntas t o [s uc h] a cred it or ” if th e d eb to r m ad e th e tr an sf er “ witho utrece iv in g areas on ab ly equ iv al en t v al ue inex ch an ge ” an d e ith er: (1) “ [t]he de bt orwas e ng ag ed* * * [i n a ] tra ns act io n fo r whi chth e rem ai ni ng as se ts of t he de bt orwere u nr eas on ab ly sm al l i n re la ti on to th e b us in es s o r tra ns act io n,” or ( 2) “ [t]he de bt orin te nd edto in cu r, orbe li ev edor r eas on ab ly sh ou ldha ve be li ev edth athe wou ldin cu r, de bt s b ey on d h is ab il ity to pa y as the y be cam e due .” Ib id . This pro vi si on li ke wis e ap pl ie s re ga rd le ss of t he de bt or ’s- 40 -

[* 40 ] in te ntor t ran sf

eree ’s actua l kno wled ge . If th e st at edco nd it io ns of a ny co ns tru ct iv e fraudpro vi si on are m et , “ th e tr an sf er i s fr au du le ntas am at te r of law.” See S eas e, 47 9 N.E.2dat 2 88
.

1. Pet it io ne r’s Sta tu s Un de r Ohi o Law as a “ Tran sf eree ” Und er al l fo urOUFTA pro vi si on s, a “ trans fer” of s om e k in d m us t h av e b een m ad e fro m

W es t Si de as t ax de bt orto pe ti ti on er as tra ns fere e. Thi s i ss ue is th e fo cu s o f th e p art ie s’ di sp ut e an d i ts res ol ut io n a ffec ts an al y si s o f th e o th er OUFTA te st s. We m ay

th us co nv en ie nt ly dis cu ss itfir st . Pet it io ne r in si st s tha t h e was no t l it eral ly a tran sf eree of WestSid e’s cas h. Acco rd in g t o p et it io ne r, th e cas h h e g otcam e fro m Nob Hil l, an d t he so ur ces of th atcas h wer e th e “ lo an s” fro m Rab ob an k a ndMo ffat . Nob Hil l s up po se dl y di d
no t g etW es t Si de ’s cas h, wh ic h i t u se d t o re pay th os e “ lo an s,” u nt il lat er tha t s am e da y . For t hi s re as on , pet it io ne r co nt en ds th athe rece iv edno W es t Si de ass et s tha t co ul d s ub ject h im to li ab il ity

as afrau du le nttra ns fere e und er Oh io law. Res po nd en t co nt en ds th atOhi o l aw wou ldtre atpe ti ti on er i n s ub st an ce as th e tra ns fere e o f W es t Si de ’s cas h. We agre e wit h re sp on de ntforat l eas t two re as on s, each of wh ic h c on st itut es analt ern at iv e g ro un d fo r su st ai ni ng hi s p os it io n. Fi rs t, th e “ lo an s” fro m

Rab ob an k a ndMo ffatwere s ha m s, an d WestSid e was th e true so ur ce o f th e cas h p et it io ne r rec ei ve d. Se co nd , th e st oc k s al e tr an sa ct io n wo ul d b e- 41 -

[* 41 ] rech arac te riz edun de r Ohi o l aw as a de fact o l iqui da ti on of WestSid e, with pe ti ti on er re cei vi ng inex ch an ge forhi s s to cka $3 5.2 m il li on li qu id at in g di st rib ut io n. 1 2
a. Sh am Loan s Inord er t o “ fin an ce” t he pu rch as e o f W es t Si de ’s st oc k fr om pe ti ti on er, No b Hil l “bo rro wed ” $ 29 .9 m il li on fro m Rab ob an k a nd$5 m il li on fro m Mo ffat t, a Fo rtre ndaffi li at e. Ohi o c ou rts ha ve co ns is te nt ly allo wedfin de rs of f act , inap pr op ria te ci rcu m st an ces , to di sr eg ardtra ns act io ns as s ha m s. See , e.g., Ro we v. St an dard Res po nd en t ad va nc es th e “ eco no m ic subs tanc e” an d “ subs tanc e o ve r 1 2 fo rm ” d oc tri ne s as ad di ti on al th eo rie s t o s up po rt h is po si ti on , con te nd in g t ha t the Ohi o c ou rts wou lddi sr eg ardth e fo rm of t he Mi dc o t ran sa ct io n b ecau se itwas n ot a true m ul ti pa rty tran sa ct io n, h adno bu si ne ss purp os e, an d was en gi ne eredforth e so le pu rp os e o f av oi di ng W es t Si de ’s Fed eral an d Oh io tax li ab il it ie s. Th e Ohi o co urts ha ve reco gn iz edan d e m pl oyed b ot h d oc tri ne s. See , e.g., Fi rs t Ba nc Grp., In c. v. Li nd le y , 42 8 N.E.2d42 7, 4 28 (Ohi o 1 98 1) (affi rm in g d eci si on of Oh io Bo ardof Tax App eal s an d a gr eei ng th at“ [t]o h ol d o th erwi se wou ldall ow fo rm to co nt ro l o ve r subs tanc e”); Blo om in gd al e v . Ste in , 42 Ohi o S t. 1 68 (Ohi o 1 88 4) (co nc lu di ng infrau du le nttra ns fer c as e th atequi ty “ lo ok [s ] th ro ug h t he form to th e subs tanc e o f th e tr an sa ct io n” ); M aci orv. Limbach , 62 0 N.E.2d22 7, 2 29 (Ohi o C t. App . 19 93 ) (ci ti ng Hum an a, In c. v. Co m mis si on er, 8 81 F.2d24 7, 2 55 (6th C ir. 19 89 ), aff’g i n p art , rev ’g inpa rt 8 8 T.C. 1 97 (19 87 )) (em pl oyin g F ed eral “ eco no m ic subs tanc e” d oc tri ne ). The “ bu si ne ss pu rp os e” p et it io ne r no w all eg es forth e Mi dc o tran sa ct io n- -to ge ne rat e g reat er aft er-t ax pro fitforW es t Si de ’s so le sh areho ld er-- is no t co gn iz ab le un de r th es e two do ctrin es be cau se itis si m pl y a co ro ll ary of th e ta x- av oi da nc e sc he m e. Andth e fac ts we fin d t o s up po rt r es po nd en t’s p os iti onon th e “ sh am

lo an ” an d “ de fact o l iqui da ti on ” th eo rie s al so sh ow tha t the Mi dc o tran sa ct io n l ack edeco no m ic subs tanc e. Invi ew of our di sp os it io n, h owev er, we n eedno t ad dr es s the se alt ern at iv e th eo rie s as anin de pe nd en t ju st ifi cat io n fo r res po nd en t’s s ub m is si on th atpe ti ti on er i s l iabl e as a tr an sf eree un de r Ohi o l aw.- 42 -

[* 42 ] Drug Co ., 9 N.E.2d60 9, 6 13 (Ohi o 1 93 7) (“ Of co ur se a le as e, va li d o n i ts face , m ay be a m ere s ha m

or d ev ic e to co ve r up th e rea l tran sa ct io n; bu t s uc h a
subt erfu ge wil l n otbe pe rm itte d t o b eco m e a cl oak fo r il le ga l p ract ic es . The co urts wil l al way s p ie rce the ve il to di sc ov er the real rel at io ns hi p.” ); S el an de rs v. Sel an de rs , 20 09 W L 13 65 22 6, at*1 1 (Oh io Ct. Ap p. 2 00 9) (affi rm in g t he tri al
co urt’s d eci si on an d a gr eei ng th at“ th e en ti re tran sa ct io n was qu it e p os si bl y no th in g m or e th ana sh am ”); Gall ey v. Gal le y , 19 94 W L 19 14 31 , at * 5 (Oh io Ct. Ap p. 19 94 ) (“ Whe n tha t re as onforth e tr an sf er o f pr op erty

* * * i s d is reg ard edas a sh am , th e * * * [fi nd er o f fac t] cou ldwell co nc lu de th atth e tr an sf er was a frau dul en t tran sf

er[.]”); Ph il li ps v. Ph il li ps , 19 94 W L 17 99 50 (Ohi o C t. Ap p. 1 99 4) . W e be li ev e th atanOhi o c ou rt wo ul d d is reg ardas s ha m s the “ lo an s” pu rp orte dl y ex te nd edby Rabo bankan d M of fat
. The Rab ob an k “ lo an ” sh ou ldbe di sr eg ard edas ash am forat l eas t thr ee re aso ns . Firs t, thi s “ lo an ” was ex te nd edan d re pa idth e sa m e b us in es s d ay , li te ral ly
m om en ts aft er No b Hi ll rece iv edth e al le ge d l oa n p ro ceed s. Th e es se nc e o f a l oa n is anex te ns io n o f cre di t. Itis ob vi ou s tha t the pa rti es to th is tra ns act io n d idno t de si re t o re cei ve fro m

Rab ob an k, an d t ha t No b Hi ll di d n otinfactrece iv e, a true ex te ns io n o f cre di t.- 43 -

[* 43 ] Seco nd , th e “ lo an ” b y it s t erm s d idno t b ear i nt eres t. In st ead , Rab ob an k
rece iv eda “ fee” of $ 15 0,0 00 . This fee ca nn otrep res en t i nt eres t: Sin ce the “ lo an ”
was ou ts tand in g fo r le ss th ana da y , th is fee wo ul d t ran sl at e to annu al in te res t o f $5 4,7 50 ,00 0, al m os t twice th e m ag ni tu de of t he “ lo an .” Wha t Rabo bankrece iv ed
was no t i nt eres t o n alo anbu t a f ee fo r faci li tati ng a ta x s he lt er tran sa ct io n. Rabo
ba nkwas p res um ab ly abl e to ch arg e su chanou tl an di sh fee b ecau se (1) fro m it s va nt ag e p oi nt , itwas i nc urrin g re pu ta ti on al or b us in es s ri sk s b y acco m m od at in g a qu es ti on ab le tra ns act io n a nd(2) fro m pe ti ti on er’s v an ta ge po in t, the fee was be in g pa idby the U.S. Treas ury an d n otby him
. Thi rd , th e Rab ob an k “ lo an ” was ful ly col la te ral iz edby the cas h i n West Si de ’s Rab ob an k a cco un t. No b Hi ll ’s cred itap pl ic at io n d es cri be d t he ris k ra ti ng on th is lo anas “N/A, o r ba se d o n c ol la te ral .” (“N/A” p res um ab ly m ean s “ no t ap pl ic ab le .”) Rab ob an k g av e th e lo ananR-1 ris k ra ti ng , whi chde no te s a l oa n tha t i s fu ll y cas h c ol la te ral iz ed . The d oc um en ts ex ecu te d a t the clo si ng ga ve Rab ob an k
co ntro l o ve r W es t Si de ’s Rab ob an k a cco un t an d a“ sp rin gi ng li en ” o n WestSid e’s
cas h the m om en t i t fu nd edth e lo an . Cas h i s fu ng ib le , andth e co ns id erat io n u se d t o pa y pe ti ti on er fo r hi s s to ckcam e in subs tanc e fro m W es t Si de
. Fo r es se nt ia ll y

th e sa m e rea so ns , th e $ 5 m il li on “ lo an ” ex te nd edby Moff at
m us t al so be di sr eg ard edas ash am . Like th e Rab ob an k l oa n, i t b or e n o i nt eres t;- 44 -

[* 44 ] in st ead , Fortre ndrece iv eda $5 m il li on fee fo r as se m bl in g t he en ti re t ax sh el te r pa ck ag e. Thi s “ lo an ” d idno t re pr es en t a t ru e ex te ns io n o f cre di t. Itwas si m pl y anov ern ig htsh uf

fli ng of f un ds be twee n t wo Fo rtr en d e nt it ie s d es ig ne d t o faci li ta te a ta x- av oi da nc e tr an sa ct io n. W e co nc lu de th atanOhi o c ourt wo ul d app ly the sh am trans act io n d oc tri ne to th es e lo an s, an d we f

in d tha t b ot h l oa ns were i n fa ctsh am s. Th e to ta li ty of th e ci rcu m st an ces sh ows th atth e n om in al len de rs pro vi de d t he se fun ds , no t as bo na fid e ex te nd ers of c red it , bu t s im pl y as a cco m m od at io n p art ie s re cru it edby Fortren d to co nc eal th e true na tu re o f wha t was happ en in g. Whatactua ll y happ en edis th at Rab ob an k e le ctro ni cal ly tran sf erre d c as h fr om

W es t Si de ’s Rab ob an k a cco un t th ro ug h No b Hi ll ’s Rab ob an k a cco un t i nt o p et it io ne r’s Rab ob an k a cco un t; th e

“ lo an s” were u tt erl y

un ne ces sa ry

an d h adno pu rp os e ex cep t o bf us cat io n. Si nc e bo th lo an s wer e sh am s, Rabo ba nk ’s trans fer o f fu nd s fr om W es t Si de ’s acco un t in to pe ti ti on er’s acc ountco ns ti tu te d a“ di rector i nd ire ct* * * m etho d o f di sp os in g of or p art in g wi th anass et .” See OUFTA se c. 13 36 .01 (L). Pet it io ne r was th us was a “ tra ns fere e” o f W es t Si de un de r Ohi o l aw.

b. De Fact o Li qu id at io n o f W es t Si de Res po nd en t al te rn at iv el y co nt en ds th atth e tr an sf

ers am on g WestSid e, Nob Hil l, an d p et it io ne r sh ou ldbe co ll ap se d a ndrech arac te riz edun de r Ohi o l aw as a- 45 -

[* 45 ] parti al or c om

pl et e li qu id at io n o f W es t Si de , with p et it io ne r rec ei vi ng in
ex ch an ge forhi s s hares a $3 5.2 m il li on li qu id at in g d is tri bu ti on ($3 4.6 m il li on of
cas h p lu s a c he ckfor$5 77 ,77 8) . Alth ou gh th e Ohi o c ou rts have no t ad dr es se d thi s pr eci se sce na rio , jud ic ia l i nt erp ret at io ns of f rau du le nttrans fer p ro vi si on s s im il ar t o Ohi o’s es tabl is h tha t s uc h tran sa ct io ns m ay be “ co ll ap se d” if the ul ti m at e tr an sf eree ha d c on st ru ct iv e kno wled ge th atth e d eb to r’s de bt s wo ul d n otbe pa id
. The Co urt o f App eal s fo r th e Nin th Cir cu itrece nt ly addres se d the ap pl ic at io n of New York ’s frau du le nttra ns fer p ro vi si on s t o aMi dc o t ran sa ct io n re se m bl in g th athe re. Itco nc lu de d tha t m ul ti pl e tr an sf

ers co ul d b e co ll ap se d u nd er St at e la w if th e co nduc t o f th e u lt im at e tr an sf eree s “ sh ow[ ed ] th atth ey ha d c on st ru ct iv e kn owl ed ge of t he frau du le ntsch em e.” Sal us Mund i Fo un d., 7 76 F.3dat 1 02 0. Addres si ng th e ap pl ic at io n o f New York l aw to th atsame Mid co tra ns act io n i n Dieb ol d F ou nd ., Inc ., th e Co urt o f App eal s fo r th e Sec on d C irc ui t h el d t ha t m ul ti
pa rty tran sa ct io ns canbe co ll ap se d wh ere t he de bt or ’s pro pe rty is “ reco nv ey ed * * * fo r le ss th anfai r co ns id erat io n” an d t he ul ti m at e tr an sf eree ha d “ co ns tru ct iv e kn owl ed ge of t he en ti re s ch em e.” 7 36 F.3dat 1 86
. The Co urt o f App eal s fo r th e Fo urth Cir cu it , add res si ng th e ap pl ic at io n o f North Caro li na ’s UFTA pro vi si on s t o a no th er Mi dc o tran sa ct io n, s im il arl y rul ed th atm ul ti pl e tr an sf

ers canbe co ll ap se d i f th e u lt im at e tr an sf eree ha s co ns tru ct iv e- 46 -

[* 46 ] kn owl ed ge th atth e d eb to r’s ta x l iabi li ti es wil l n otbe pa id . If th e u lt im at e tra ns fere es are o n “ in qu iry no ti ce” andfai l t o c on du cta su ffi ci en tl y di li ge nt in ve st ig at io n, “ th ey

are ch arg edwith t he kn owl ed ge th ey wou ldha ve acqui redha d th ey un de rta ke n the reas on ab ly dil ig en t i nqui ry requi redby the kn own cir cu m st an ces .” Sta rn es , 68 0 F .3dat 4 34
. The Ohi o c ou rts ha ve reg ul arl y co ns ul te d a ndfol lo wedth e d eci si on s o f si ste r co urts when in te rp ret in g the pro vi si on s o f m od el laws , in cl ud in g t he OUFTA’ s pr ed eces so r. See s up ra p p. 3 6- 37 an d n ot e 1 1. Th e North Caro li naUFTA pro
vi si on s g ov ern in g c on st ru ct iv e fraudare s ub st an ti al ly ide nt ic al to Ohi o’s, an d New York’s fr au du le nttra ns fer p ro vi si on s ar e si mil ar i n m at eri al res pe ct s. We con cl ud e th atth e Ohi o S up rem e Co urt, i f co nf ro nt edwith t hi s que st io n, wo ul d fi nd pe rs ua si ve an d wo ul d fo ll ow the se th ree F ed eral de ci si on s an d t he st at e co urt pr eced en ts on whi chth ey are b as ed . The tran sf

ers at i ss ue he re m ay

th us be
co ll ap se d u nd er the OUFTA if p et it io ne r ha d c on st ru ct iv e kno wled ge th atW es t Si de ’s Fed eral an d Oh io tax li ab il it ie s wo ul d n otbe pa id
. 1 3 Pet it io ne r arg ue s tha t Oh io law d oe s n otpe rm ittra ns act io ns to be co l- 1 3 laps ed , cit in g Off

ic ia l Co m m . of Un se cu redCred it or s o f Gran d Eag le Co s. v . Asea Bro wn Bo ve ri, In c., 31 3 B .R. 21 9, 2 30 (N.D. Ohio 20 04 ) (d ecl in in g t o c ol laps e a le ve rag edbu y ou t wh ere t he re was “ no ev id en ce o f kn owl ed ge on th e p artof t he Len de rs th atth e acqui si ti on wou ldha rm futur e cre di to rs ”). Thi s ca se is in ap po si te be cau se pe ti ti on er h adat l eas t co ns tru ct iv e kno wled ge th atFo rtr en d’s t ax - (co nt in ue d...)- 47 -

[* 47 ] Pet it io ne r arg ue s tha t h e was no t awa re o f Fo rtr en d’s “pl anas awho le ” to
av oi d WestSid e’s in co m e ta xe s. If thi s i s tru e, itis irr el ev an t. Fi nd in g t ha t a p erso n h adco ns tru ct iv e kno wled ge do es no t re qu ire th athe ha ve actua l kno wled ge of th e p lan’s m inut e d et ai ls . It i s s uf fic ie ntif, u nd er the to ta li ty of th e su rro un di ng ci rcu m st an ces , he “ sh ou ldha ve kn own ” ab ou t the tax -av oi da nc e sc he m e. HBE Leas in g C or

p. v . Fran k, 4 8 F .3d62 3, 6 36 (2dCir . 19 95 ). Co ns tru ct iv e kno wled ge als o i nc lu de s “ in qu iry kn owl ed ge .” “ In qu iry kn owl ed ge ” ex is ts wher e th e tr an sf eree was “ aware of c irc um st an ces th atsh ou ld ha ve led* * * [h im ] to in qu ire furth er i nt o t he cir cu m st an ces of t he tra ns act io n, bu t * * * [he ] fai le d t o m ak e su chin qu iry.” HBE L eas in g C or p., 4 8 F .3dat 6 36
. So m e cas es de fin e co ns tru ct iv e kno wled ge as t he kn owl ed ge th atord in ary di li
ge nc e wou ldha ve eli ci te d, wh il e o th er ca se s re qu ire m or e act iv e av oi da nc e o f th e tru th . Dieb ol d F ou nd ., Inc ., 73 6 F .3dat 1 87 . W e n eedno t d eci de whi chof t he se fo rm ul at io ns is ap pr op ria te be cau se pe ti ti on er h ad“ co ns tru ct iv e kno wled ge ”
un de r ei th er s tand ard
. Pet it io ne r’s “ du e d il ig en ce” e xp ert , Mr. Pu rcel l, t es ti fie d t ha t a s el le r who
rece iv es anall -cas h o fferfor hi s s to ckis m ai nl y

co nc ern edwith e ns ur in g t ha t h e (...co nt in ue d) 1 3 av oi da nc e sc he m e wou ldha rm two cred it or s, the Uni te d S ta te s an d Oh io
.- 48 -

[* 48 ] ge ts pa id . Buthe ag reedth ata se ll er i n p et it io ne r’s po si ti on m us t ne ve rth el es s ex erci se a cert ai n l ev el of due di li ge nc e. Sp eci fic al ly, ech oi ng th e co nt em po ran eo us advi ce o f Hah n Lo es er’s b an kr up tc y lawyers, Mr . Pur cel l te st ifi edth at“ du e d il ig en ce d idrequi re [p et it io ne r] andhi s advi so rs to in ve st ig at e Fo rtr en d’s p lans ” fo r el im in at in g WestSid e’s 20 03 tax li ab il it ie s. Neit he r pe ti ti on er n orhi s advi se rs pe rfo rm edan y du e d il ig en ce i nt o F or tre ndor i ts tra ckreco rd . Neithe r pe ti ti on er n orhi s advi se rs pe rfo rm edan y m ean in gf ul in ve st ig at io n i nt o the “ hi gh ba si s/ lo w val ue ” sc he m e th atFo rtr en d s ug ge st edforeli m in at in g WestSid e’s acc ru ed20 03 tax li ab il it ie s. Pet it io ne r an d h is advi se rs were cl earl y

su sp ic io us ab ou t Fo rtr en d’s s ch em e. Bu t i ns te adof d ig gi ng de ep er, the y

en ga ge d i n wi ll fu l b li nd ne ss an d a ct iv el y av oi de d l earn in g t he tru th
. Pet it io ne r an d h is advi se rs kn ew th atth e tr an sa ct io n F ortre ndwas p ro po si ng was li ke ly a “rep ortabl e” o r “ li st edtra ns act io n.” Befo re m eet in g wi th Fo rtr en d, Hah n Lo es er l awy ers sp en t s ev eral da y s re se arch in g No ti ce 2 00 1- 16 , “ rep ortabl e tra ns act io ns ,” “ sh am

trans act io ns ,” an d t ran sa ct io ns in vo lv in g “ anin te rm ed iary co rp or at io n.” PwC in si st edon in cl ud in g i n i ts en ga ge m en t l et te r a requi rem en t th atpe ti ti on er ad vi se itif h e d et erm in ed“ th atan y m at te r co ve redby thi s Ag reem en t i s a r ep ortabl e tr an sa ct io n.” Pet it io ne r at te m pt edto strik e th is sen te nc e fro m th e en ga ge m en t l et te r, ev id en ci ng hi s ac ti ve av oi da nc e o f le arn in g t he tru th
.- 49 -

[* 49 ] PwC ad vi se d p et it io ne r or al ly tha t “ a p os it io n c anbe tak en ” th atth e p ro po se d s to cksal e wou ldno t b e a rep ortabl e tr an sa ct io n. Intax -s pe ak , th is tra ns la te s t o alo w lev el of c on fid en ce o n P wC’s pa rt. Pet it io ne r’s lawy ers att em pt ed 1 4 to in cl ud e in th e st oc k p ur ch as e ag reem en t a p ro vi si on pro hi bi ti ng W es t Si de fro m en ga gi ng ina “ li st edtrans act io n” aft er Fo rtr en d a cqui redW es t Si de . Fort ren d re
fu se d t o a gr ee t o thi s p ro vi si on . Any reas on ab ly dil ig en t p ers on wou ldin fer fr om th is refu sa l tha t a “ li st edtra ns act io n” was v ery li ke ly wha t Fo rtr en d, a t ax sh el te r pr om ot er, h adinm in d. Tho ug h a le rte d b y

th es e warn in g s ig ns , pet it io ne r an d h is advi se rs fai le d t o co nduc t a d il ig en t i nqui ry in to th e “ hi gh ba si s/ lo w val ue ” d eb t s tra te gy tha t Fo rtre ndpro po se d fo r el im in at in g WestSid e’s ta x l iabi li ti es . PwC ha d a dv is edth at th is ap pe aredto be “ a v ery ag gr es si ve tax -m ot iv at edstrat eg y ” th atwas “ subjec t t o IRS c ha ll en ge .” PwC s pe ci fic al ly decl in edto gi ve “ m or e li ke ly than n ot ” as su ran ce o n thi s p oi nt . Peti ti on er turne d h is ba ckon th is redfla g. He t es ti fie d tha t

Und er re gu lati on s i n e ffec t dur in g 2 00 3, “ [a] po si ti on * * * [wa s] con
1 4 si de redto ha ve a real is ti c p os si bi li ty of be in g s us ta in edon it s m eri ts ” if a well
in fo rm edtax pro fes si on al wou ldco nc lu de th atitha d “ ap pr ox im at el y a on e in th ree, o r gr eat er, l ik el ih oo d o f be in g s us ta in edon it s m eri ts .” Sec. 1 .66 94 -2 (b )(1 ), In co m e Tax Reg s. St at in g tha t “ a p os it io n c anbe tak en ” su gg es ts a lo wer l ev el of co nf id en ce than thi s. Virtu al ly any po si ti on “ canbe tak en .”- 50 -

[* 50 ] Fo rtr en d’s t ax -el im in at io n s tra te gy was o f no co nc ernto hi m be cau se “ th at was th ei r bu si ne ss .” Mr. Pu rcel l t es ti fie d tha t p et it io ne r co ul d n otha ve so ug htanop in io n fr om PwC co nc ern in g F ortre nd ’s badde btstrat eg y be cau se , as o f th e cl os in g d at e, Fo rtre ndha d p utno sp eci fic hi gh -b as is /l ow- va lu e p lan o n t he tab le . The Co urt d id
no t fi ndth is tes ti m on y

pe rs ua si ve . If or di na ry

di li ge nc e requi redpe ti ti on er an d hi s ad vi se rs to in ve st ig at e Fo rtr en d’s p lan, as Mr. Pu rcel l ad m it te d, o rd in ary di li
ge nc e requi redth em

to di g m or e d eep ly int o wh atFo rtr en d’s b ad -d eb t s tra te gy was . Fortren d o bv io us ly hadto kn ow, as of S ep te m be r 9, 2 00 3, h ow i t en vi si on ed el im in at in g a$1 6.9 m il li on co rp or at e ta x l iabi li ty in fe wer tha n 1 2 wee ks . Reaso nabl e d il ig en ce re qu ire d p et it io ne r an d h is advi se rs to in si stth atFo rtr en d e xpl ai n i ts de btreduc ti on strat eg y insu ffi ci en t d et ai l t o e nabl e PwC t o e va lu at e it
. Num ero us othe r fea tu res of F ortre nd ’s pro po sa l ra is edredfla gs th atde
m an de d fu rth er i nqui ry . Fort ren d o ffer edto pay pe ti ti on er $ 11 .2 m il li on m or e th anth e n etbo okva lu e o f W es t Si de --re pr es en ti ng a pr em iu m of 4 7%- -wh il e in si st in g tha t WestSid e’s as se ts be reduc edto cas h. Pe ti ti on er was a so ph is ti cat ed
en tre pr en eu r who ha d b ui lta co m pany andkn ew ho w to va lu e a b us in es s. It sh ou ldha ve pro vo ke d trem en do us sk ep ti ci sm to di sc ov er tha t Fo rtr en d was- 51 -

[* 51 ] wil li ng to pay

a 47 % pre miu m

to acqui re ca sh , whi chby defi ni ti on can no t be wort h m or e th anit s fa ce v al ue . The bu si ne ss pu rp os e al le ge d fo r th e tr an sa ct io n, m or eo ve r, m ad e ab so lu te ly
no sen se . Peti ti on er an d h is advi se rs were t ol d t ha t Fo rtr en d i nt en de d t o p utW es t Si de in to th e “ di st res se d d eb t” bu si ne ss . “ [T]he b us in es s p ur po se forth e acqui
si ti on ,” acc or di ng to PwC’s m em o, was “ba se d o n t he ne w bu si ne ss ’ ne edforcas h to pu rch as e th e ch arg ed -o ff cre di t ca rdde btas c omm erci al fin an ci ng forsu chpu rpo se s i s ap pa ren tl y

di ffi cu lt .” Thi s ex pl an at io n d em an de d fu rth er i nqui ry fro m an y reas on ab ly dil ig en t pe rs on . In o rd er t o p ur ch as e West S id e’s st oc k, Fo rtr en d n eed edto ha ve cas h o r be ab le to bo rro w cas h. If F ortre ndha d c as h o r co ul d e as il y bo rro w cas h, wh y wou lditwantto acqui re WestSid e in ord er t o g etcas h? Mo reo ve r, as PwC n ot ed in a pa ren th et ic al , “ m os t o f th e $ 40 ,00 0,0 00 cas h i n West si de wil l b e d is tri bu te d
ou t o f W es ts id e an d u se d b y * * * [F ortre nd ] to pa y

ba ckth e cas h b orro wedto pu rch as e * * * [pe ti ti on er’s] W es ts id e st oc k.” Sin ce the re was go in g t o b e p reci ou s l it tl e cas h l eftinW es t Si de aft er the de al clo se d, the “bu si ne ss pu rp os e” al le ge d fo r th e tr an sa ct io n d idno t p as s the strai gh t-f ace t es t. The ici ng on th e cak e was th e m an ne r in whi chth e p ur ch as e p ric e was de te rm in ed . Num ero us sp read sh eet s p rep aredby pet it io ne r’s br othe r ex pl ic it ly- 52 -

[* 52 ] st at e th atth e p ur ch as e p ric e wou ldequa l WestSid e’s cl os in g c as h b al an ce pl us 68 .12 5% o f it s ac cru edtax li ab il it ie s. A so ph is ti cat edbu si ne ss m anli ke pe ti ti on er s ho ul d h av e b eencurio us as t o wh y th e p ur ch as e p ric e fo r hi s co m pa ny was be in g c om

pu te d a s a p erce nt ag e o f it s t ax li ab il it ie s, an d wh y th is was the on ly
nu m be r th atFo rtr en d s eem edto care ab ou t. Ineffe ct , Fortre ndwas o ffer in g t o as su m e a $ 16 .9 m il li ontax li ab il ity inex ch an ge fora $5 m il li onfee. Bec au se th e eco no m ic s o f th e d eal m ad e itob vi ou s tha t Fo rtr en d was no t g oi ng to pay W es t Si de ’s tax li ab il it ie s, thi s fa ctalo ne pu t p et it io ne r on “ in qu iry kn owl ed ge .” 1 5 Pet it io ne r te st ifi edth athe ha d n o c on te m po ran eo us un de rs tand in g t ha t the

“ Fo rtr en d p rem iu m ” was co rrel at edto W es t Si de ’s accru edtax li ab il it ie s. Th e Co urt d idno t fi ndth is tes ti m on y cred ib le . Peti ti on er ac ti ve ly part ic ip at edinne go Inth e st oc k p ur ch as e ag reem en t, No b Hi ll rep res en te d tha t i t wo ul d “ cau se 1 5 * * * [WestSid e] to s at is fy ful ly all Un it edSta te s * * * tax es , pen al ti es an d i nt eres t re qu ire d t o b e p ai d b y * * * [WestSid e].” This rep res en ta ti onwas n otwort h th e p ap er i t was pri nt edon . Peti ti on er an d h is advi se rs kn ew th atNob Hil l was a sh el l co rp or at io n, tha t WestSid e wou ldha ve vi rtu al ly no a ss et s l eftaft er the clo
si ng , andth atne ithe r wou ldha ve th e whe rewi th al to pa y a $1 6.9 m il li on tax li abi li ty. Andbe cau se Nob Hil l an d M il le nn iu m (it s p aren t) we re o ffs ho re co m pa ni es with n o U.S. as se ts , th is rep res en ta ti on was c om pl et el y un en fo rceabl e. The lang ua ge inth e st oc k p ur ch as e ag reem en t al lo cat in g WestSid e’s 20 03 tax ob li
ga ti on to Nob Hil l d idno t re li ev e p et it io ne r of hi s dut y to in qu ire . See Die bo ld Fo un d., In c., 73 6 F .3dat 1 89 (“ [T]he kno wled ge requi rem en t fo r co ll ap si ng a tra ns act io n was de si gn edto ‘ pr ot ect [] inn oc en t cr ed it or s o r pu rch as ers forva lu e.’ * * * Itwas n otde si gn edto all ow p art ie s t o s hi el d t he m se lv es , when ha vi ng kn owl ed ge of t he sch em e, by sim pl y us in g ast oc k a gr eem en t t o d is cl ai m an y res po ns ib il ity .” (quo ti ng HBE Leasi ng Co rp ., 48 F.3dat 6 36 )).- 53 -

[* 53 ] ti at in g F ortre nd ’s fee. Whe n c on fro nt edwith h is bro th er’s s pr ead sh eet s tha t in va riabl y

co m pu te Fo rtr en d’s fe e as 31 .87 5% o f W es t Si de ’s tax li ab il it ie s, pe ti ti on er b ecame vis ib ly unc om fo rtabl e. Pet it io ne r’s ev as iv e te st im on y is furth er ev id en ce tha t h e h adat l eas t co ns tru ct iv e kno wled ge th atFo rtr en d p lann edto us e a ta x- av oi da nc e sc he m e to eli m in at e West S id e’s ta x l iabi li ty. To co nc lu de th atth e to ta li ty of th es e ci rcu m st an ces di d n otgi ve ris e to co nst ru ct iv e kno wled ge on pe ti ti on er’s p art“ wou lddo away with t he di st in ct io n b etwee n a ctua l an d c on st ru ct iv e kno wled ge .” Dieb ol d F ou nd ., Inc ., 73 6 F .3dat 1 89
. Andto rel ie ve pe ti ti on er an d h is advi se rs of t he du ty to i nqui re, wh enth e su rro un di ng cir cu m st an ces cri edou t fo r su chin qu iry, “wou ldbe to bl es s the wil lfu l bl in dn es s the co ns tru ct iv e kno wled ge tes t was de si gn edto roo t o ut .” Ib id . W e fin d a s a f actth atpe ti ti on er h adco ns tru ct iv e kno wled ge th atFo rtr en d i nt en de d t o im pl em en t an il le gi ti m at e sc he m e to ev ad e West S id e’s acc ru edtax li ab il it ie s an d le av e itwitho utass et s t o s at is fy th os e li ab il it ie s. Th e v ari ou s s te ps of t he Mi dc o tra ns act io n m ay

thus be “ co ll ap se d” inde te rm in in g wh ethe r pe ti ti on er was a

“ tra ns fere e” o f W es t Si de un de r Ohi o l aw. 1 6 As the Seco ndCir cu itex pl ai ne d i n Di eb ol d F ound ., Inc ., “ co ll ap si ng ” th e 1 6 tra ns act io ns inth is way

requi res , no t o nl y

th atth e u lt im at e tr an sf

eree ha ve “ co nst ru ct iv e kno wled ge of t he en ti re s ch em e,” b utals o t ha t the de bt or ’s pro pe rty “be reco nv ey ed* * * fo r le ss th anfai r co ns id erat io n.” 73 6 F .3dat 1 86 . W e ad dr es s (co nt in ue d...)- 54 -

[* 54 ] The rem ai ni ng qu es ti on is whet he r th es e st ep s, o nc e co ll ap se d, yielda de fact o “ li qu id at io n” of WestSid e fro m whi chpe ti ti on er re cei ve d a$3 5.2 m il li on li qu id at in g d is tri bu ti on . Peti ti on er ap pe ars to be li ev e th at , forth is to oc cu r, th ere m us t h av e b eena co m

pl et e li qu id at io n o f W es t Si de . W e d o n otsee th e lo gi c o f th is po si ti on : u nd er s ta te co rp or at e la w, as wel l as un de r Fed eral tax law, a co rp or at io n c anbe th e subjec t o f ei th er a p art ia l o r a co m pl et e li qu id at io n. In e ithe r 1 7
ev en t, p et it io ne r rec ei ve d a$3 5.2 m il li on li qu id at in g d is tri bu ti on up on su rren de rin g h is st oc k. We fail to see ho w itm at te rs whi chki ndof l iqui da ti on itwas. Inan y ev en t, we fi ndas afactth atW es t Si de was i n s ub st an ce co m pl et el y li qu id at ed . There is no ev id en ce tha t WestSid e co nduc te d a ny bo nafid e b us in es s op erat io ns aft er Se pt em

be r 10 , 20 03 . It h adno em pl oyees a fte r th atda te . It repo rte d n o g ro ss rece ip ts , in co m e, orbu si ne ss ex pe ns es rel at in g t o i ts supp os ed (...co nt in ue d) 1 6 th e ab se nc e o f “ fai r co ns id erat io n” be lo w indi sc us si ng th e requi rem en ts of OUFTA sect io n 1 33 6.0 5. Se e in fra p p. 5 8- 59
. See, e.g ., sec . 30 2( b) (4 )(B) , (e) (d efi ni ng “pa rti al li qu id at io n” ); Arm st ro ng 1 7 v. M arat ho n Oi l Co ., 51 3 N.E.2d77 6 (Oh io 19 87 ) (n ot in g t ha t co rp or at io n was co ns id eri ng co m

pl et e o r pa rti al li qu id at io n t o p rev en t h os ti le tak eo ve r); Cle ve land Tr. Co. v . Hick ox , 16 7 N.E. 59 2, 5 95 -5 96 (Ohi o C t. Ap p. 1 92 9) (“ If the re i s li qu id at io n o f a co rp or at io n, p art ia l o r co m pl et e, th e d et erm in in g e le m en t o f th e tra ns act io n i s wh ethe r th e st oc kh ol de rs surren de r an d c an cel th e st oc k wh ic h i s gi ve n i n e xc ha ng e[.]”); 1 8B Am . Ju r. 2dCo rp or at io ns sec . 10 64 (no ti ng th atsh areho ld ers ’ rig htto rece iv e acc um ul at eddi vi de nd s o n l iqui da ti onap pl ie s i de nt ic al ly in pa rti al an d c om

pl et e li qu id at io ns ).- 55 -

[* 55 ] “ de btco ll ect io n” bu si ne ss . There is no ev id en ce tha t i t m ad e an y effo rt t o co ll ectth e Aoyam a lo an s o r co nt ract edwith a ny thi rdpa rty to d o s o. Th os e lo an s were n otop erat io na l as se ts of abu si ne ss ; the y were s im pl y to ol s fo r im

pl em en ti ng a sh am tax -av oi da nc e sc he m e. Inreal ity , W es t Si de was n othi ng bu t a s he ll co m pa ny im m ed iate ly after t he Mi dc o d eal clo se d. At the in si st en ce o f pe ti ti on er’s l awy ers , W es t Si de was k ep t i n fo rm al ex is ten ce fo r se ve ral y ears . It fi le d t ax returns ; i t cu t ch eck s t o F ortre ndaffi li at es ; an d itm ai nt ai ne d ano m in al cas h b al an ce. Bu t k eep in g WestSid e in no ti on al ex is ten ce was si m

pl y a ch arad e d es ig ne d t o c reat e a d efen se to th e p reci se arg um en t the IRS i s ad va nc in g h ere, an arg um en t tha t p et it io ne r an d h is att orne y s kne w th e IRS
wou ldadva nc e if

th is Mi dc o tran sa ct io n c am e to it s at te nt io n. Su chlawyerly st rat ag em s ca nn othi de th e fac t tha t WestSid e h adbe enli qu id at edinsubs tanc e. It
co nt in ue d a s a P ot emki n v il la ge in te nd edto de cei ve th e IRS , justas t he ori gi na l
was de si gn edto foo l Ca th eri ne th e Great
. Insu m , we fin d tha t p et it io ne r ha d c on st ru ct iv e kno wled ge of F ortre nd ’s ta x- av oi da nc e sc he m e; th atth e m ul ti pl e st ep s o f th e Mi dc o t ran sa ct io n m us t b e co ll ap se d; an d tha t co ll ap si ng th es e st ep s yield s a p art ia l o r co m pl et e li qu id at io n of W es t Si de fro m

whi chpe ti ti on er re cei ve d i n e xc ha ng e fo r hi s s to cka $3 5.2
m il li on li qu id at in g d is tri bu ti on . See Sal us Mu nd i Fo un d., 7 76 F.3dat 1 01 9- 10 20- 56 -

[* 56 ] (fo ll owi ng th e Sec on d C irc ui t’s an al y si s t o the same effectinDieb ol d Fo un d., In c.). Und er the OUFTA, pet it io ne r is th us a di recttra ns fere e o f W es t Si de ’s ass et s u nd er re sp on de nt ’s “ de fact o l iqui da ti on ” th eo ry as we ll as u nd er the

“ sh am lo an ” th eo ry

di sc us se d p rev io us ly. 1 8 2. Pet it io ne r’s Liab il ity Und er Oh io Law as a“ Tran sf eree ” OUFTA sect io n 1 33 6.0 5( A) pr ov id es th ata tr an sf er i s fr au du le ntwith
res pe ctto a cred it orwher e: (1) th e cre di to r’s cl ai m aro se be fo re the tra ns fer; (2) th e tr an sf ero r di d n otrece iv e “ a rea so nabl y equi va le ntva lu e in ex ch an ge forth e tra ns fer” ; an d (3 ) th e tr an sf ero r be cam e in so lv en t as a res ul t o f th e tr an sf er. W e fin d tha t al l thr ee o f th es e el em en ts are s at is fie d h ere. Pe ti ti on er i s thu s l iabl e as a tra ns fere e o f W es t Si de un de r Ohi o l aw.

a. Whe n t he IRS Cl ai m Aros e Dur in g Ap ril an d M ay

20 03 , W es t Si de rece iv edpro ceed s o f $6 5 m il li on fro m th e PUCO s ettl em en t. Thi s yield eda la rg e g ai n t ha t g en erat eda ta x l iabi li ty of ap pr ox im at el y

$1 6.9 m il li on . W es t Si de thus ha d a n a ccru edtax li ab il ity of
Res po nd en t ad va nc es th e al te rn at iv e co nt en ti on th atNob Hil l was a di rect 1 8 tra ns fere e o f W es t Si de an d tha t p et it io ne r ha s tran sf eree -o f-tran sf

eree li ab il ity

as a subs eque nttra ns fere e o f Nob Hil l. See sec . 69 01 (c)( 2) ; Fr an k S awy er Tru stof May 199 2 v . Comm is si on er, T.C. Mem o. 2 01 4- 59 (fi nd in g tran sf eree -o f-tran sf

eree li ab il ity ). Becaus e we fi ndth atpe ti ti on er i s l iabl e as a di recttra ns fere e o f W es t Si de , we nee d n otco ns id er re sp on de nt ’s alt ern at iv e p os it io n.- 57 -

[* 57 ] ap pr ox im at el y

$1 6.9 m il li on be fo re Se pt em be r 9, 2 00 3, the da y

th e Mi dc o de al clo se d. The OUFTA defi ne s the term “ cl ai m ” ex pa ns iv el y

to m ean“ a ri gh t t o p ay m en t.” Id . sec . 13 36 .01 (C). A ri gh t t o p aym en t co ns ti tu te s a c la im reg ard le ss of whe th er i t i s “ reduc edto jud gm en t, l iqui da te d, u nl iqui da te d, fi xe d, co nt in ge nt , m atur ed , un m atur ed , di sp ut ed , un di sp ut ed , leg al , equ it ab le , sec ur ed , or u ns ecu red .” Ib id . A “ cred it or ” is an y pe rs on who ha s a “ cl ai m .” Id . sec . 13 36 .01 (D). Giv enth is bro adde fin it io n, tran sf ers are fr au du le ntas t o c red it or s wh os e cl ai m s ha ve no t b eenfin al ly det erm in ed , andev enas t o c red it or s wh os e cl ai m s ar e n oty et du e. See Zah ra Sp iri tu al Tr. v. Uni te d S tate s, 9 10 F.2d24 0, 2 48 (5t h C ir. 1 99 0)
. Bec au se “un m atur edtax li ab il it ie s ar e ta ke n i nt o a cco un t i n d et erm in in g ade bt or ’s
so lv en cy , th ey

are ‘cla im s’ andsh ou ldbe tre at edas s uc h und er the ex pa ns iv e de fin it io n o f th e te rm

‘ cl ai m ’” in the UFTA. Stu artv. Co m m is si on er, 1 44 T.C. __ ,

__(sl ip op . at 1 5) (Apr . 1, 2 01 5)
. Pet it io ne r do es no t s eri ou sl y di sp ut e th atth e IRS ha d a“ cl ai m ” ag ai ns t West Si de be fo re the st oc k s al e. Rathe r, he arg ue s tha t the IRS h adno cla im ag ai ns t Nob Hil l wh enhi s s to ckwas p ur ch as edbe cau se W es t Si de ha d n oty ettra ns ferr ed it s ca shin to Nob Hil l’s Rabo ba nkacco un t. The pre ci se ti m in g o f th e b ack -to -b ack
cas h tran sf

ers is im m at eri al un de r ou r an al y si s. We hav e fo un d t ha t the va rio us- 58 -

[* 58 ] tra ns act io ns m

us t b e co ll ap se d fo r pu rp os es of d et erm in in g t he OUFTA’ s pr op er ap pl ic at io n. Be cau se co ll ap si ng th e tr an sa ct io ns y ie ld s a tran sf er o f cas h fro m W es t Si de to pe ti ti on er, i t i s i rrel ev an t i n wh atord er the subs id iary tra ns fers are t ho ug htto ha ve oc cu rred
. W es t Si de ’s Fed eral tax li ab il ity ha d a ccru edby late May 200 3. Th e IRS ha d acla im

ag ai ns t WestSid e atth atti m e. The tran sf er o f W es t Si de ’s ass et s t o pe ti ti on er o ccu rredon Sep te m be r 9, 2 00 3. Re sp on de nt ’s cla im th us “ aro se be fo re th e tr an sf er was m ad e.” OUFTA sec . 13 36 .05 (A). b. “ Rea so nabl y

Equ iv al en t Val ue ” OUFTA sect io n 1 33 6.0 5( A) im po se s, as a se co ndco nd it io n o f li ab il ity , th at th e d eb to r no t h av e rec ei ve d “ a rea so nabl y equi va le ntva lu e in ex ch an ge forth e tra ns fer.” Whe th er the de bt orrece iv ed“ reas on ab ly equ iv al en t v al ue ” is a qu es ti on of fact . See Sh oc kl ey

v. Co m m is si on er, T.C. Mem o. 2 01 5- 11 3, at*5 0. On Se pt em

be r 9, 2 00 3, WestSid e co ns is te d o f no th in g b utcas h a ndtax li abi li ti es . The v al ue of p et it io ne r’s st oc k t hu s equa le d WestSid e’s ne t as se t v al ue , whi chwas abo ut$2 3.7 m il li on (cas h e qu iv al en ts of $ 40 .6 m il li on m in us accrue d ta x l iabi li ti es of $ 16 .9 m il li on ). W es t Si de tra ns ferr ed$3 5.2 mil li on to pe ti ti on er in ex ch an ge for

hi s s ha res . Sin ce h is sh ares were wo rth on ly $23 .7 m il li on , W es t- 59 -

[* 59 ] Sid e d idno t re cei ve “ a rea so nabl y equi va le ntva lu e inex ch an ge forth e tra ns fer.” OUFTA sec. 1 33 6.0 5( A). The on ly oth er thi ng W es t Si de go t atth e cl os in g was a rep res en ta ti on fro m Nob Hil l tha t i t wo ul d “ cau se ” West S id e to pa y it s 2 00 3 t ax li ab il it ie s i n fu ll . As we ha ve fou ndpre vi ou sl y , th is rep res en ta ti on was n otwort h t he pape r itwas p rin tedon . Nob Hil l was a sh el l co m pa ny, inc or

po rat edoff

sh or e, with n o a ss et s i n the Uni te d S tate s (o r an ywhe re el se ). Nob Hil l’s p aren t, Mi ll en ni um , was al so a Caym anIsl an ds co m

pa ny withno ass et s i n t he Uni te d S ta te s. Bo th were af fil ia te s o f a ta x s he lt er p ro m ot er. The va lu e o f Nob Hil l’s p ro m is e was zero .

c. W es t Si de ’s Ins ol ve nc y OUFTA sect io n 1 33 6.0 5( A) im po se s, as a th irdco nd it io n o f li ab il ity , th at th e d eb to r m ak in g the trans fer “ was in so lv en t atth atti m e o r * * * b ecame ins ol
ve ntas ares ul t o f th e tr an sf er.” Pe ti ti on er as se rts th atW es t Si de was s ol ve nt whe n h e rec ei ve d No b Hi ll ’s cas h b ecau se , at tha t m om en t, WestSid e h adno t yet tra ns ferr edit s ca sh to Nob Hil l. Thu s, WestSid e supp os ed ly hadass et s i n e xc es s of it s t ax li ab il it ie s wh enth e tr an sf er t o p et it io ne r oc curred
. As wi th pe ti ti on er’s arg um en t ab ou t wh enth e IRS cla im aro se , th e p reci se ti min g o f th e b ack -to -b ackcas h tran sf ers is imm at eri al un de r ou r an al y si s. We ha ve fou ndth atth e v ari ou s tran sa ct io ns m us t b e co ll ap se d fo r pu rp os es of d et er-- 60 -

[* 60 ] m in in g the OUFTA’ s p ro pe r ap pl ic at io n. Be cau se co ll ap si ng th e tra ns act io ns y ie ld s a tran sf er o f cas h fr om

W es t Si de to pe ti ti on er, West S id e’s
so lv en cy m us t b e jud ge d o n tha t b as is
. Und er OUFTA se ct io ns 13 36 .02 an d .0 5, s ol ve nc y is m eas ur edat t he ti m e of th e tr an sf

er. A de bt oris in so lv en t i f th e su m of t he de bt or ’s deb ts is gre at er th anall of t he de bt or ’s ass et s ata fai r va lu at io n. Id . sec . 13 36 .02 (A)(1 ). Fol lo win g the tra ns fer o f $3 5.2 mil li on to pe ti ti on er, West S id e was lef t wi th tax li ab ili ti es of $ 16 .9 m il li onan d a ss et s o f $5 .1 m il li on (co ns is ti ng of aRab ob an k a cco un t s oo n t o b e em

pt ie d b y pa ym en ts to tax sh el te r pr om ot ers ). W es t Si de th us

“be cam e in so lv en t as a res ul t o f th e tr an sf er.” Id . sec . 13 36 .05 (A). Insu m , we fin d tha t the IRS cl ai m aro se be fo re WestSid e’s as se ts were tra ns ferr edto pe ti ti on er; th atW es t Si de m ad e th is tra ns fer wi th ou t h av in g re cei ve d

“ a rea so nabl y

equi va le ntva lu e in ex ch an ge ”; an d t ha t thi s tran sf er caus edW es t Si de to be co m e in so lv en t. Pet it io ne r is th us li ab le for W es t Si de ’s tax de bt s u nd er OUFTA sect io n 1 33 6.0 5( A). 1 9 The res ul t wo ul d b e th e sa m e if th e IRS ’ cl ai m

were tho ug htto ha ve ari se n 1 9 aft er WestSid e’s as se ts were tran sf erre d t o p et it io ne r. OUFTA sect io n 13 36 .04 (A)(2 ) pr ov id es th ata tr an sf er i s fr au du le ntwith re sp ectto a pr es en t o r fu tu re cr ed it or

if the tra ns fer was m ad e wit ho utth e d eb to r’s rece iv in g “ a reas on ab ly equ iv al en t v al ue inex ch an ge ” an d i f (am on g o th er thi ng s) th e d eb to r “ in te nd edto in cu r, or

be li ev edor r eas on ab ly sho ul d h av e b el ie ve d t ha t h e wou ld (co nt in ue d...)- 61 -

[* 61 ] 3. Pet it io ne r’s Liab il ity Und er Oh io Law ForPen al ti es Eve n i f he canbe he ldli ab le forW es t Si de ’s unpa idtax , pet it io ne r co nt en ds th atth e p en al ti es ass es se d a ga in stW es t Si de can no t b e co ll ect edfro m hi m as i ts

“ tra ns fere e” u nd er Oh io law. Acco rd in g t o p et it io ne r, “ th e d is tre ss edde bttra ns act io n g iv in g ri se to th os e p en al ti es was n oten te redin to un ti l af te r pe ti ti on er s ol d hi s s to ckan d p et it io ne r ha d n ot hi ng what so ev er t o d o wi th th attra ns act io n.” In
supp ort o f th is pro po si ti on he rel ie s o n S tank o v . Comm is si on er, 2 09 F.3d10 82 (8 th Cir . 20 00 ), rev ’g T.C. Mem o. 1 99 6- 53 0. InSta nk o, the Eig ht h C irc ui t i nt erp ret edNebr as kalaw i n e ffec t b efo re 19 89 , when Nebr as kaad op te d the UFTA. See id . at 1 08 4 n .1. The Co urt re aso ne d tha t “pe na lt ie s fo r ne gl ig en t o r in te nt io na l m is co nduc t b y th e tr an sf

ero r th at oc cu rredm an y

m on th s af

te r th e tr an sf

er * * * are n ot* * * ex is ti ng at t he ti m e o f th e tr an sf er.” Id . at 1 08 8. Th e Eig ht h C irc ui t co nc lu de d t ha t “ [a] cred it orwho se de btdi d n otex is t atth e d at e o f th e * * * [tr an sf er] can no t h av e th e co nv ey an ce (...co nt in ue d) 1 9 in cu r, de bt s b ey on d h is ab il ity to pa y as t he y be cam e due .” As d is cu ss edinth e te xt , W es t Si de di d n otrece iv e “ a rea so nabl y equi va le ntva lu e in ex ch an ge ” fo r it s tra ns fer t o p et it io ne r. Andif the IRS cl ai m were re ga rd edas a ris in g a fte r, rathe r th anbe fo re, thi s tran sf

er, West S id e kne w th atitwou ldin cu r ta x d eb ts “be y on d * * * [i ts ] ab il ity

to pay as t he y be cam e due .” Ib id . In v ie w of o urdi sp os it io n, ho wev er, we n eedno t d is cu ss inan y de ta il pe ti ti on er’s l iabi li ty und er thi s al te rn at iv e p ro vi si on . W e li ke wis e n eedno t d eci de whet he r pe ti ti on er wo ul d b e li ab le un de r th e OUFTA’ s “ actua l fr au d” pro vi si on .- 62 -

[* 62 ] de cl aredfrau du le ntun le ss he pl ead s an d p ro ve s tha t the co nv ey an ce was m ad e to de frau d s ub se qu en t cr ed it or s wh os e d eb ts were i n c on te m pl at io n at the ti m e.” Id . at 1 08 7 (quo ti ng U.S. Nat’l Ban k o f Om ah a v . Rup e, 29 6 N.W.2d 4 74 , 47 6 (Ne b. 1 98 0) ). W e fi ndth e St an ko cas e to ha ve no ap pl ic at io n h ere. Th e in st an t ca se is go ve rn edby O hi o l aw, an d the go ve rn in g Oh io law d iff ers fro m th e p re-UFTA Neb ras kast atut e th atth e Eig hth C irc ui t was co ns tru in g. Th e OUFTA def in es

“ cl ai m ” ex pa ns iv el y

to in cl ud e an y

“ rig htto paym en t” ev enif i t i s “ un li qu id at ed ”
an d “ un m atur ed .” OUFTA sec. 1 33 6.0 1( C). The IRS m ay th us ha ve a “ cl ai m ” fo r th e p en al ti es whet he r orno t the y are tho ug htto ha ve be en“ ex is ti ng at t he ti m e o f th e tr an sf er.” St an ko , 20 9 F .3dat 1 08 8. Th e OUFTA, m or eo ve r, do es no t re qu ire pr oo f th atth e tr an sf

er was m ad e to de frau d s pe ci fic cred it or s; no r do es itrequi re pr oo f th atth e d eb ts inqu es ti on“ were i n c on te m pl at io n a t the ti m e” the ass et s wer e co nv ey ed . Id. at10 87
. Fi na ll y , th e OUFTA pro vi de s tha t a t ran sf er m ay be he ldfrau du le ntas t o fu tu re as well as p res en t cr ed it or s. Liabi li ty as to futur e cre di to rs ex is ts if the tra ns fer was m ad e wit ho utth e d eb to r’s rece iv in g “ a rea so nabl y equi va le ntva lu e in
ex ch an ge ” an d the de bt or“ in te nd edto in cu r, orbe li ev edor r eas on ab ly sho ul d ha ve be li ev edth athe wou ldin cur, de bt s b ey on d h is ab il ity to pa y as t he y be cam e- 63 -

[* 63 ] du e.” OUFTA sec . 13 36 .04 (A)(2 )(b ). Thu s, ev enif re sp on de nt ’s cla im for th e p en al ti es were re ga rd edas n otbe in g “ in ex is te nc e” o n the da te of t he tra ns fer, pe ti ti on er wo ul d h av e tr an sf eree li ab il ity

to th e IRS un de r OUFTA sec ti on 13 36 .04 (A)(2 ) in it s capa ci ty as a “ fu tu re cr ed it or ” wit h re sp ectto th os e p en al ti es . See s up ra p p. 6 0- 61 an d n ot e 1 9. Fo r th es e rea so ns , we con cl ud e th atpe ti ti on er i s l iabl e und er Oh io law as a tra ns fere e b ot h wi th res pe ctto W es t Si de ’s unpa idtax de fic ie nc y an d wi th res pe ct to th e p en al ti es pro pe rly ass es se d a ga in stit . W e h av e rea ch edth e sam e co nc lu si on co nc ern in g tran sf

eree li ab il ity

forpe na lt ie s u nd er the frau du le nttra ns fer l aws of ot he r St at es . See, e.g ., Kreps v. Co m m is si on er, 4 2 T.C. 6 60 , 67 0 (1 96 4) (New York l aw), aff’d, 3 51 F.2d1 (2 d C ir. 1 96 5) ; Cu ll ife r, T.C. Mem o. 2 01 4- 20 8, at *3 0, * 74 (Tex as law) ; Fe ld m anv. Co m m is si on er, T.C. Mem o. 2 01 1- 29 7, 1 02 T.C.M. (CC H) 61 3, 6 23 (W is co ns in law)
. 2 0

InFran k S awy er Tru stof M ay 19 92 v. Co m

m is si on er, T.C. Mem o. 2 01 4- 2 0 12 8, at*1 0- *1 1, thi s C ou rt c it edSta nk o, 2 09 F.3d . at 1 08 8, i n h ol di ng th ata tra ns fere e was no t l iabl e fo r acc ur acy-rela te d p en al ti es ass es se d a ga in stth e tra ns fero rs . The fac ts of t he in st an t ca se , whi chm us t b e ev al ua te d u nd er Oh io law, di ffersubs tant ia ll y

fro m th os e o f Fran k S awy er Tru st , whi chin vo lv ed Mas sa ch us et ts law. Th e Fi rs t Ci rcu itacce pt edou r “ factua l fi nd in g t ha t the Trus t la ck edkn owl ed ge --ac tu al or c on st ru ct iv e--o f th e n ew sh areh ol de rs ’ ta x avo id an ce in te nt io ns .” Fran k S awy er Tru stof M ay 19 92 , 71 2 F .3dat 5 99 . Here, we have fo un d tha t p et it io ne r ha d at l eas t co ns tru ct iv e kno wled ge th atW es t Si de ’s tax li ab il it ie s wo ul d n otbe sat is fie d.- 64 -

[* 64 ] B. Pet it io ne r’s Sta tu s as a “ Tran sf eree ” Und er Fe de ral Law Whe th er a p ers on is a “ tra ns fere e” wi th in th e m ean in g o f se ct io n 6 90 1 i s

“un di sp ut ed ly [a qu es ti on ] of fed eral law.” St arn es , 68 0 F .3dat 4 27 ; s ee Sl on e,

__F.3d__ , 20 15 W L 50 61 31 5; Fel dm an , 77 9 F .3dat 4 58 . “ Tran sf eree ” is an ex pa ns iv e te rm

th atin cl ud es a “ do ne e, he ir, l eg at ee, d ev is ee, an d d is tri bu te e.” Sec. 6 90 1( h) . The t erm

als o i nc lu de s “ th e sh areh ol de r of a di ss ol ve d c or

po rat io n,”

“ th e su cces so r of

a co rp or at io n,” an d “ th e as si gn ee * * * of a n i ns ol ve ntpe rs on .” Sec. 3 01 .69 01 -1 (b ), Pro ced . & Adm in . Reg s. Inde te rm in in g “ tra ns fere e” s ta tu s fo r Fed eral law p ur po se s, the Nin th Cir
cu itha s re cen tl y

he ldth ata co urt m

us t co ns id er wh ethe r to di sr eg ardth e fo rm of th e tr an sa ct io n b y

whi chth e tr an sf

er o ccu rred . See Sl on e, __F.3dat _ _, 2 01 5 WL 50 61 31 5, at*5 . “ [F]or p ur po se s o f tr an sf

eree li ab il ity

un de r § 6 90 1,” th e Nin th Ci rcu itrul ed , rel ev an t p rece de ntrequi res th atth e co urt “ lo okth ro ug h t he form of a tra ns act io n t o c on si de r it s s ub st an ce.” Id . at _ _, 2 01 5 WL 50 61 31 5, at*4 . Analyzin g atra ns act io n s im il ar t o tha t h ere, the Nin th Cir cu itex pl ai ne d i n S lo ne : [W] he n the Co m

m is si on er cl ai m s a t axpa y er was “ th e sh areh ol de r of a d is so lv edco rp or at io n” forpu rp os es of 2 6 C .F.R. § 3 01 .69 01 -1 (b ), bu t the tax pa y er d idno t re cei ve a li qu id at in g d is tri bu ti on if the form of th e tr an sa ct io n i s re sp ect ed , a co urt m us t co ns id er the rel ev an t subjec ti ve an d o bjec ti ve fact or s t o d et erm in e whe th er the form al tra ns act io n “ ha d a ny prac ti cal eco no m ic effe ct s o th er than t he crea ti on of i nc om e ta x l os se s.”- 65 -

[* 65 ] Id. a t _

_, 2 01 5 WL 50 61 31 5, at*5 (qu ot in g R ed da m v. Co m m is si on er, 7 55 F.3 d 1 05 1, 1 06 0 (9 th Cir . 20 14 ), aff’g T.C. Me m o. 2 01 2- 10 6)
. 2 1 Inpe rfo rm in g thi s “ subs tanc e o ve r fo rm ” in qu iry, the Nin th Cir cu itdo es no t en ga ge ina ri gi d two- st ep an al y si s. Ra th er, i t fo cu se s “ ho li st ic al ly on wh ethe r th e tra ns act io n h adan y

pra ct ic al eco no m ic effe ct s o th er tha n the crea ti on of i nc om e ta x l os se s.” Id . (qu ot in g R ed da m , 75 5 F .3dat 1 06 0) . Fol lo win g aco m m on se ns e rev ie w of the tra ns act io n, i f th e co urt co nc lu de s tha t the tra ns act io n l ack s a n on ta x bu si ne ss pu rp os e, ha s n o e co no m ic subs tanc e, an d was en te redin to so le ly to g en erat e il le gi ti m at e ta x b en efi ts , th e Co m m is si on er m ay

di sr eg ardth e fo rm

th e p art ie s ha ve sel ect edan d t ax th e tr an sa ct io n o n t he ba si s o f it s und erl y in g e co no m ic subst an ce. Id . at _

_, 2 01 5 WL 50 61 31 5, at*5 -* 6. Fo r th e rea so ns di sc us se d p rev io us ly, we fi ndth atth e tr an sa ct io n b y whi ch Nob Hil l “pu rch as ed ” p et it io ne r’s W es t Si de st oc k re li edon sh am trans act io ns , ha d n o e co no m ic subs tanc e, ha d n o b on a fi de bu si ne ss pu rp os e, an d was en te red in to so le ly to ev ad e West S id e’s Fed eral an d Oh io tax li ab il it ie s. See supr a p . 40 At l eas t two o th er Ci rcu it s h av e p rev io us ly rule d s im il arl y . See Fel dm an , 2 1 77 9 F .3dat 4 54 -4 57 (7t h C ir. 2 01 5) ; Owen s v . Comm is si on er, 5 68 F.2d12 33 (6t h Ci r. 19 77 ) (“ [T]he law do es no t p erm ita ta xp ay er * * * to cas t tran sa ct io ns in fo rm s wh enth ere i s n o e co no m ic real ity be hi ndth e u se of t he form s. ‘The in ci de nc e o f ta xa ti on de pe nd s o n t he subs tanc e o f a tran sa ct io n.’” (quo ti ng Co m m is si on er v . Cou rt Ho ld in g C o., 3 24 U.S. 33 1, 3 34 (19 45 ))), af f’g in pa rt, rev ’g inpa rt, 6 4 T.C. 1 (19 75 ).- 66 -

[* 66 ] an d n ot e 1 1 a ndpp . 41 -5 5. We th eref or e d is reg ardth e fo rm

of t he tra ns act io n andfin d tha t p et it io ne r in subs tanc e was a di rectreci pi en t o f W es t Si de ’s
cas h, i .e., as a“ di st rib ut ee,” “ th e sh areh ol de r of a di ss ol ve d c or

po rat io n,” or “ th e as si gn ee * * * of a n i ns ol ve ntpe rs on .” Sec. 6 90 1( h) ; s ec. 3 01 .69 01 -1 (b ), Pro ced
. & Admin . Reg s. Inan y

of tho se cap aci ti es , he was a “ tra ns fere e” o f W es t Si de withi n the m ean in g o f se ct io n 6 90 1. IV. Res po nd en t’s Co ll ect io n Eff orts In c ert ai n c irc um st an ces th e IRS m ay be requi redto sh ow tha t i t ex haus te d al l re as on ab le effo rts to co ll ectth e ta x l iabi li ty from th e tr an sf

ero r be fo re p ro ceed
in g a ga in stth e tr an sf

eree . See Sh arp v. Co m

m is si on er, 3 5 T.C. 1 16 8, 1 17 5 (1 96 1) ; Sh oc kl ey

v. Co m mis si on er, T.C. Mem o. 2 01 5- 11 3, at*5 4; Kard as h v
. Co m m is si on er, T.C. Mem o. 2 01 5- 51 , at * 22 -* 24 ; Zad orki n v . Comm is si on er, T.C. Mem o. 1 98 5- 13 7, 4 9 T.C.M . (CCH) 1 02 2, 1 02 8 (1 98 5) . The rea so nabl en es s o f th e IRS ’ co ll ect io n e ffo rts ag ai ns t the tax de bt orm us t b e as se ss edinth e li gh t o f th e fac ts of the pa rti cu lar cas e. Whe re “ th e tr an sf ero r is ho pe le ss ly ins ol ve nt , th e cred it oris no t re qu ire d t o t ak e u se le ss st ep s t o c ol le ctfro m th e tr an sf

ero r.” Zad orki n, 4 9 T.C.M . (CCH) at10 28
. In20 08 , du rin g the co ur se of i ts ex am in at io n o f W es t Si de , th e IRS
se arch edforany

ex is ti ng W es t Si de ass et s upo n wh ic h t o l ev y . Uns ur pr is in gl y , it- 67 -

[* 67 ] fou ndno ne . In 2 00 8, as inlat e Sep te m be r 20 03 , W es t Si de ha d n o m ean in gf ul ass et s. Whatli tt le cas h i t h adpo stclo si ng was qui ck ly dis si pa te d b y pa y m en ts to Fo rtr en d, M id Co as t, an d t he ir t ax sh el te r pr om ot er af fil ia te s. Mi ll en ni um , W es t Si de ’s po st cl os in g p aren t, was li ke wis e imm un e fro m IRS co ll ect io n effo rts be cau se itwas aCaym anIsl an ds co m pa ny withno ass et s i n the Uni te d St at es . W e fi ndth atth e IRS act edco m pl et el y reas on ab ly in d ecl in in g t o t ak e furth er, u se le ss , st ep s t o c ol le ctth is li ab il ity fro m W es t Si de
. Pet it io ne r al so arg ue s tha t the IRS fa il edto m ak e co ll ect io n e ffo rts ag ai ns t Mo ffat t, wh os e $ 5 m il li on“ lo an ” was all eg ed ly repai d wi thso m e o f W es t Si de ’s
cas h. We hav e al read y

de te rm in edth atth e Mo ffat t l oa n was a sh am . In s ub
st an ce, WestSid e’s cas h wen t d ire ct ly to p et it io ne r, an d t he Mo ffat t “ lo an ” was si m pl y anov ern ig htsh uf

fli ng of f un ds be twee n t wo Fo rtr en d a ffi li at es . Und er th es e ci rcu m st an ces , itis no t ce rta inth atMo ffat t was a tr an sf eree of WestSid e. Eve n i f Mo ffat t wer e th ou gh t t o b e a tran sf eree of WestSid e, co ll ect io n e ffo rts ag ai ns t i t wo ul d a lm os t ce rta in ly hav e b eenfut il e. As far as t he tri al reve al ed , Mo ffat t was a sh ad owy ent ity th atap pe aredan d qui ck ly dis ap pe ared
. The re i s n o e vi de nc e in th e rec or d abo utwhatass et s M of fat t h ador wh ere t he y were. Itis a fai r as su m

pt io n tha t Fo rtr en d e st ab li sh edth is affi li at e, li ke Nob Hil l,- 68 -

[* 68 ] Mi ll en ni um , andit s o th er af fil ia te s, i n am an ne r th ateffe ct iv el y imm un iz ed th em fro m th e rea chof U.S. t ax au th or it ie s. Inan y ev en t, the IRS i s n otrequi redto pu rs ue co ll ect io n e ffo rts ag ai ns t Tran sf eree A bef

or e se ek in g t o c ol le ctfro m Tran sf eree B. “ Tran sf

eree li ab il ity

is
se ve ral ” und er s ect io n 6 90 1. Al ex an de r v. C omm is si on er, 6 1 T.C. 2 78 , 29 5 (1 97 3) ; Cu ll ife r v. C ommis si on er, T.C. Mem o. 2 01 4- 20 8, at*7 4 (s am e). “ It i s well set tl edth ata tr an sf

eree is sev eral ly liab le forth e unp ai d t ax of t he tra ns fero r to th e ex te ntof t he ass et s re cei ve d a ndot he r st oc kh ol de rs or t ran sf eree s n eedno t be joi ne d.” Est at e o f Harri so n v . Comm is si on er, 1 6 T.C. 7 27 , 73 1 (1 95 1) (ci ti ng Ph il li ps v. Co m

m is si on er, 2 83 U.S. 58 9 (1 93 1) (co ns tru in g p red eces so r st atut e)).

“ Inth e ev en t tha t o ne tra ns fere e is cal le d upo n t o p ay m or e th anhi s p ro rat a sh are of th e ta x, h e is lef

t t o h is rig ht s o f co nt rib ut io n fr om th e o th er tran sf

eree s.” Id
. Pet it io ne r is free to pu rs ue ag ai ns t M of fatan y rig htof c on tri bu ti on he m ay ha ve . W e acc or di ng ly con cl ud e (1 ) th atpe ti ti on er i s l iabl e und er Oh io law fo r th e fu ll am ou ntof WestSid e’s 20 03 tax de fic ie nc y an d t he pe na lt ie s an d i nt eres t i n co nn ect io n the rewi th an d (2 ) th atth e IRS m ay co ll ectth is ag gr eg at e li ab il ity fro m pe ti ti on er as a “ trans fere e” u nd er s ect io n 6 90 1. Se e OUFTA sec . 13 36 .08 (B); Shus se l v . W erfe l, 7 58 F.3d82 (1s t Ci r. 20 14 ) (d is cu ss in g t he cal cu la ti on of- 69 -

[* 69 ] pre jud gm en t i nt eres t o n tran sf eree li ab il ity ), aff’g i n p art , rev ’g inpa rt a nd
rem an di ng T.C. Mem o. 2 01 3- 32
. To re fle ctth e fo reg oi ng , Deci si on wil l b e en te redun de r Ru le 15 5.