TAX COURT OPINION

Case: LR Development Company LLC, Transferee
Docket Number: 8836-06
Judge: Chiechi
Opinion Type: memo
Filed: 09/16/2010
Pages: 110

T.C. Memo. 2010-20-3 UNITED STATES TAX COURT LR DEVELOPMENT COMPANY LLC, TRANSFEREE, Petitioner 1. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 8836-06. Filed September 16, 2010. Jenny L-. Johnson, Ziemowit T. Smulkowski, and Denis J. Conlon, for petitioner. Lawrence C. Letkewicz, David B. Flassing, and Justin D. Scheid, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, Judge:. Respondent determined that petitioner LR Development Co. LLC is liable as a transferee for the de.ficiency of $7,507,972 in, and the accuracy-related penalty under section SERVED SEP 162019 - 2 - 6662(a)1 of $1,501,594.50 on, the Federal income tax (tax) of Bruce C. Abrams, Inc. (BCA),2 for BCA's short taxable year ended December 31, 2000, as well as interest thereon as provided by law. We must decide whether to sustain respondent's determina- tion. We hold that we shall not. FINDINGS OF FACT Some of the - facts have been stipulated and are so found. At the time it filed the petition, petitioner maintained its principal office in Illinois. In 1988, BCA was incorporated under Illinois law in order to (1) develop high- end re s ident ial - condominiums in Chicago, Illi - nois (Chicago) , (2) renovate historic buildings in and around Chicago and, adapt them to different uses, and (3) develop afford- able housing projects in Illinois. At all relevant times prior to August 1, 2000, BCA was an S corporation. At all relevant times until December 12 1999, Bruce C. Abrams (Mr. Abrams) was the president and the sole stockholder of BCA. On December 12, 1999, Mr. Abrams died. As a result, Mr. Abrams' estate (Abrams estate) became the sole stockholder of All section references are to the Internal Revenue Code (Code) to the Tax Court Rules of Practice and Procedure. in seffect at all relevant times. All Rule references are 2From its incorporation, BCA conducted its business under the name "LR Development Co." We shall refer to, that corporation as BCA in order to prevent confusion with petitioner LR Development Co. LLC. BCA. At all relevant times, Mr. Abrams' wife, Nancy Abrams (Ms. Abrams), served as the executrix of the Abrams estate. Sometime between Mr. Abrams' death on December 12, 1999, and December 30, 1999, Ms. Abrams appointed David Kirshenbaum (Mr. Kirshenbaum) as president of BCA.3 On January 5, 2000, Ms. Abrams appointed the following individuals as directors of BCA: Her father Byron Canvasser, her brother Robert Canvasser, and Andrew Hochberg. At all relevant times, the following individuals who consti- tuted the senior management of BCA held the offices in BCA indicated: Name - David Kirshenbaum Steven Shernan Donald Biernacki Title President Chief financial officer Senior vice president-- construction Kerry Dickson Senior vice president-- development Laura Davis Molk Senior vice president-- Thomas Weeks David Dresdner Kenneth Rice marketing Senior vice president-- for-sale properties Senior vice president-- commercial properties Senior vice president-- affordable housing Stephen Galler Senior vice president and Theodore Weldon general counsel Vice president-- acquisitions 3From 1996 until he became president of BCA, Mr. Kirshenbaum had served as its chief operating officer. f 4 - Glen Krandel Vice president-- information technology Ann Thdmpsori Vice president and director of architectural design (We shall'refer collectively to all of BCA's officers'listed above , except Mr . Kirshenbaum, as BCA senior management . ) Wìthin a few days after Mr. Abrams' death, Ms. Abráms, as executrix of the Abrams estate, decided to sell the stock of BCAs that that estate owned. The Abrams estate was unwilling to dause BCA to sell its assets. Sometime before early April 2000, Ms. Abrams, as executrix of the Abrams estate, retained Mayer, Brown & Platt (Mayer Brown) to serve as that estate' s attorneys wi'th respect to the sale of BCA . On February 1, 20 0 0 , Ms . ,Abrams , as executr ix of the Abrams estate, retained Cohen Financial Corp. (Cohen Financial) , an investment~ b'anking firm with its principal' office in Chicago, to assist that estate in valuing and selling BCA.4 CFC Advisory Services L.P. (CFC Advisory) , an entity thats Cohen Financial owned, was to provide that assistance. On February 1, 2000, the Abrams estate and CFC Advisory entered into an agreement (CFC engagement agreement) for CFC Advisory to do so." 4Before Mr. Abrams' death, Cohen Financial ihad provided its real estate development financing to BCA for certain of projects, sAlthough the record establishes that CFC Advisory ¯performed the services under the CFC engagement agreement, the parties (continued. . . ) - 5 - On July 1, 1992, The Related Companies, L.P. (Related), a limited partnership, was organized under New York law to acquire, own, develop, finance, operate, maintain, and manage real estate, primarily residential and retail properties. At all relevant times, Stephen Ross e(Mr. Ross) owned indirectly the majority of the interests in Related.' During those times, Mr. Ross served as chairman of Related. At all relevant- times, Jeff Blau (Mr. Blau) owned a limited partnership interest in Related that ranged from 8 percent to 15 percent, depending on each project that .Related undertook.7 On January 1, 2000, Mr. Blau, who had been serving as a senior vice president of Related, became its presi- dent. At all relevant timesrsince 1996, Michael Brenner (Mr. Brenner) owned a 1-percent.limited partnership interest'-in Related. During those times, Mr. Brenner served-as executive vice president and chief financial officer of that company. In late December 1999,~ shortly after Mr. Abrams' death, Mr. Blau learned from a cousin of Ms. Abrams that the Abrams estate s(...continued) indicated in the stipulation of performed certain services under that agreement. Since the CFC engagement agreement is between the Abrams estate and CFC Advisory, we shall refer to CFC Advisory when discussing services performed under that agreement. facts that Cohen Financial 6The record does not reflect the -nature of Mr. Ross' inter- ests in Related. 7The record does not explain how Mr. Blau's ownership inter- in Related could have varied depending on the project est Related undertook. that - 6 - plannedato sell BCA and certain other, assets that-that-estate owned. At that time, . Related decided- to attempt to purchase certain assets of BCA." To that end, a representative of Related contacted a representative of- the Abrams estate to-express an interest in purchasing certain of BCA's.assetsa" .Related was unwilling to purchase any stocktof BCA. Related wanted-to purchase certain assets, and nót the stock, of BCA because Related; (l) intended to sell icertain of BCA' s assets that it was able to purchase from BCA within a few years after it had pur- chased them and wanted to have a cost basis in each such asset, (2) was unwilling to .hold stock of a corporation -because it wished to conduct its-business through pass-through entities as it had in.the past, tand (3) was concerned about anysunknown a liabilities that BCA might have had as a result of acertain actions -that Mr.'Abrams had taken as :president of BCA. On December 27, 1999, Byron Canvasser, who was a director of BCA and Ms. Abrams' father, sent a memorandum on behalf of the Abrams estate to Mr. Blau of Related. Byron Canvasser included - with that memorandum, inter alia, the following information regaiding the respective book values of~BCA's assets; as well as "Mr. Blau, Mr. Brenner, and Mr. Ross all participated in the decisionmaking process of.Related regarding its interest in, purchasing certain assets of BCA. 'In certain instances, the record does not, establish the identities of entities involved in this case. the individuals who acted on behalf of the various - 7 - the respective real estate activities and joint venture activi- ties of BCA, as of September 30, 1999: Entity/Joint Venture Real estate activities: N.B.A.L. LLC Diversey & Sheffield LLC Dearborn & Elm LLC Ridge Partners LP Walton Associates LLC 3830-32 Lincoln Joint Venture 310 N. Michigan Winners~LP Renaissance Partners LLC St. Benedict's Hotel LLC Total Joint venture activities: LR Fort Sheridan LLC Mayfair Condominium LLC LR Arcade LLC Vision Capital LLC Vision AHC LLC LR Tower LLC Plaines Town Center LLC Total Combined total BCA's Ownership Percentage 9/30/99 Book Value 99 100 100 1 99 50 100 33 -- 1 100 100 100 20 20 100 100 ($1,287,725) (661,674)- (74,247) 862 (442,380) 6,523 21,757 213,815 5,000 (4,699) (2,222,768) 3,708,699 -0- 1,000,000 545 204,046 (690,341) 12,298 4,235,247 2,012,479 In early January 2000, representatives of Related met with respective representatives of the Abrams estate and BCA regarding Related's interest in purchasing certain of BCA's assets. Thereafter through March 2000, respective representatives of BCA, the Abrams estate, and Related conducted initial negotiations and exchanged information in an attempt to reach an agreement regard- - 8 - ing the sale to Related of certain assets of BCA. Those'initial negotiations were unsuccessful. In late March or early April 2000, Ronald Katz (Mr. Katz) , one of Related' s accountants who was with Rubin & Katz, told a representative of Related about Fortrend International LLC (Fortrend) with which Mr . Kat z had orked in the s past . At all relevant times, Fortrend was an investment banking firm in which Jeffrey Furman (Mr. Furman) and Frederick Forster (Mr. Forster) each owned indirectly a 50-percent interest.1° Fortrend indi- cated in certain marketing materials (Fortrend brochure) that it had circulated between 1997 and November 2003 tihat it "[structuredl economic transactions to solve specific corporate tax or accounting problems or to take advantage of related opportunities " One such problem described in the Forti-end brochure was the "sale of appreciated businesses". In this regard, the Fortrend brochure stated: The sale of appreciated, businessés by corporations or individuals that hold the businesses directly, or in one or more subsidiaries, will often produce substan tial tax liabilities due to the gain on the sale. tax liability often results in conflicting desired transaction structures; to minimize current taxes while the buyer wants to buy assets to "obtain 1) a step-up in tax basis in the assets and 2) price (ïncluding goodwill) the ability to recover the full purchase through depreciation or am- the seller wants to sell shares This At all relevant . times, Howard Kramer (Mr. Kramer) was a senior managing director of Fortrend. During 2000, Fortrend employed Randolph Whitney Bae (Mr. Bae) -in ran undisclosed capacity. ortization deductions. Fortrend can often arrange for the sale of increases the seller's after-tax profits. Similarly, when a client wishes to purchase assets held by a corporation, Fortrend can often negotiate a lower price. the business at a price which substantially Fortrend described in the Fortrend brochure one of the methods used to solve certain "problems"- associated with the.sale of appreciated businesses. In this regard, :Fortrend stated in pertinent part in a section of that brochure entitled "BUY STOCK/SELL ASSETS TRANSACTION, EXECUTIVE SUMMARY": We are working with various clients who may be willing to buy the stock from the seller and then cause the target corporation to sell mate buyer. that enabl-e them to absorb the tax gain inherent assets. its net assets to the ultiThese clients have certain tax attributes in the is sufficiently low that a seller "of stock In certain sitùations the economic cost of involvement can increase its after-tax sale proceeds, a buyer of net assets can decrease its after-tax purchase price (on a present value basis), and -the client can still make an arbitrage profit. the client's * * * * * * * As with any transaction, economic substance and proper form are crucial transactions where involvement by such a client may make sense, a transaction is advisable. raising the idea at the earliest stages of to its success. Accordingly, in No one at Related had been familiar with Fortrend or had had any contacts or dealings with it before Mr. Katz talked to a representative of Related about Fortrend. Mr.. Katz explained to that representative that Fortrend had engaged in certain transac- tions in which it had acquired the stock of a company and there- - 10 - after sold that acquired company's assets. At no time did Related review the Fortrend brochure or conduct any due diligence review regarding Fortrend. Around late March or early April 2000, Mr. Katz contacted a representative of Fortrend on behalf of Related and met with that representative.. Thereafter, representatives of Related intro- duced representatives of Fortrend to representatives of the Abrams estate ,for the purpose of discussing whether Fortrend would be able to facilitate the .sale of certain assets of BCA to Related in a manner that would satisfy the objectives of both Related and the -Abrams estate . Around late March or early April 2000, Related agreed to work with Fortrend with respect to Related' s attempt to purchase certain assets of BCA. Pursuant to the CFC engagement agreement, CFC Advisory prepared an offering memorandum dated March 2000 for BCA (BCA offering memorandum) . That offering memorandum stated in perti- nent part: Executive Summary * * * * * * * the Company [BCA] has two compensation Although the [Abrams] Estate owns 100% of * plans which provide for employees to receive a 30% interest in cash available for distributions and increases in the net worth of [BCA] * allow the [Abrams] Estate to liquify their investment * stands prepared to consider inquiries that would the Company [BCA] . the shares of * * [BCA] , * - 11 - and would provide potential operating and capital partners to the senior management team. * * * Company Form and Ownership * * * * * * * * * * * team and the employees do not own The senior management the Corporation [BCA] does have two stock. However, incentive compensation plans that provide for (1) employees to receive approximately 30% of available for distribution and (2) senior managers to participate in the long-term growth of tion's [BCA's] net worth. the annual cash the Corpora- The BCA offering -memorandum included (1) BCA's balance sheet as of December 31, 1999, that showed total assets with a book value of $7,636,225 and (2) BCA's projections of the cashflows from the various real estate investments and real estate develop- ment projects that -it owned. CFC Advisory and BCA considered the development project known as the "Northwestern Project" and BCA's 50-percent ownership interest in Park Tower LLC to be two partic- ularly significant assets of BCA. On March 10, 2000, Mr. Brenner, Related's chief financial officer, sent an email (Mr. Brenner's March 10, 2000 email) to Mr. Blau, Related's president, with a copy to Mr. Ross, Related's majority owner and chairman. Mr. Brenner attached to that email two spreadsheets regarding BCA that he had prepared on the basis of certain available information." One of those spreadsheets "The record does not contain the two spreadsheets that Mr. (continued...) - 12 - was a valuation summary of the operations and the revenues of BCA and the other was a summary of BCA' s payroll . Mr . Brenner indicated in Mr. Brenner's March 10, 2000 email that he believed that Related should submit a bid "in the range of $20-25 million for a 70% interest in the [BCA] business." Mr. Brenner also indicated in that email that he and Mr. Blau would take responsi- bility -for "the negotiation of employment/ownership arrangements with the -12 key employees . " On March 22, 2000, Mr. Blau on behalf of Related sent a letter (Related's March 22, 2000 offer letter) to .a representa- tive of the Abrams estate in which Related offered to purchase certain respective assets of 'the Abrams estate and BCA. That offer letter stated in pertinent part: to transfer to Purchaser, all direct [Related] and Seller It is the intention of Purchaser [the Abrams estate] and indirect interests in all assets and/or entities which provide revenue -to * * * in the Offering Memorandum for * * [CFC Advisory] Purchaser and Seller shall transaction in a tax efficient manner for both Purchaser and Seller. * During the Due Diligence Period, [BCA] or. are described * * * [BCA] prepared by in good faith structure the In Related's March 22, 2000 offer letter, Related offered to purchase from the Abrams estate for $25,500,000 certain of its direct and indirect interests in BCA subject to certain adjust- "(. . . continued) Brenner attached to Mr. Brenner's March 10, 2000 email. Nor does the record establish the period of sheets pertained. time to which -those spread- - 13 - ments to that purchase price based ont certain cashflows accruing to BCA during the period January 1, 2000, sto the date on which the purchase closed. Of'the $25,500,000 purchase price, $24 million was to be distributed to the Abrams estate at the closing and $1,500,000 was to be set aside for the purpose of paying bonuses to those, employees of BCA who continued in-BCA's employ for sixemonths after the closing. On March 28, 2000, Steven-Sherman (Mr. Sherman)s, the chief financial officer of BCA, sent a fax to Mr.'Brenner, the.chief financial officer of Related. 10:. Sherman included with that fax (1) BCA's respective consolidated balance,sheets as of December 31, 1998 and 1999, and (2) a list of the respective entities and the respective assets that the Abrams estatemand-BCA owned as of those two dates. A draft.dated-March 31, 32000 (March 31, 2000 draft- response) ofra letter dated "April , 2000", "was prepared on behalf of the Abrams estate in response to Relate'd's March 22, 2000 offer "Related's March 22, 2000 offer -letter also indicated that Related would arrange for debt and equity financing for the development of certain land that BCA was to acquire on or before May 31, 2000, and that was to be used for the Northwestern project. "The list of the entities-and the assets that BCA'owned as of Dec. 31, 1999, showed BCA's resýective tax bases as of that date in those entities and assets. e 14 - letter In that draftaresponse, the Abrams estate stated: 1. Structure. For tax reasons, iteis essentiàl * [BCA] * * * the closing, rather thantas a sale of assets. [BCA's assets] would consist of that, the transaction be structured as a sale of stock of * * At the assets and related liabilities described in the Offering Memorandum dated March, 2000 that we have provided to you. Assets of * * * that are not described in the Offering Memorandum would be transoferred out of * part of [BCA] before closing and not be a the transaction. [:BCA] the * * * * * 2. Price. We propose that the purchase price be $28 million plus the $1.5 millionethat you have offered to place into a bonus pool for certain * * employees. Net cash flows after January 1, 2000 from assets that are part of the transaction would be deducted~from the $28 amillion, and a-credit that for the portion of 2000 priorato the closings would be added to the $28 million. the Estate would owe'as * [BCA's] shareholder for'taxes * * * [BCA] * * * 3. Employee Matters. any transaction that right to 30% of * * * appropriate vesting schedule. * * * It needs to be clear in they [sic] key employees have a [:BCA's] equity, subject to an a At at time not disclosed by the record during~ the first six months of 2000, certain of BCA's officers submitted to the Abrams estate an offer ,to purchase for $16,500,000 the stock of BCA and certain other business interests that the Abrams estate owned. The Abrams estate rejected that offer because the purchase price was too low. In -response to the BCA offering memorandum, CFC Advisory received on beha-lf of the Abrams estate four different proposals The record does'not-establish whether the Abrams-estate - sent a final version of Related. the March 31, 2000 draft response to - 15 - to purchase that estate's BCA stock from Fortrend, JDL Develop- ment Corp., Lehman Brothers, and Vornado. In those respective proposals, Fortrend, JDL Development Corp., Lehman Brothers, and Vornado proposed to pay $24.5 million," $26.5 million, $26 million, and $22 million, respectively, for the Abrams estate's stock in BCA. On April 18, 2000, CFC Advisory made a presenta- tion with respect to those proposals to Ms. Abrams, Byron Can- vasser, who was a director of BCA and Ms. Abrams' father, and John Schmidt, an attorney with Mayer -Brown, who were the attor- neys for the Abrams estate regarding the sale of BCA. Fortrend's proposal" to purchase the stock of BCA from the Abrams estate included a draft letter dated "April . , 2000". That proposal letter stated in pertinent part: The following is a summary of the basic business terms upon which [FORTREND ENTITY] or an assignee thereof (the "Purchaser"), would be willing to purchase from The Estate of Bruce Abrams (the "Seller") one hundred percent of LR Development Company (a/k/a Bruce C. Abrams, Inc.) ("LR Development"). nal.] (100%) of the capital stock (the "Stock") [Bracketed material in origi- * * * * * * "Fortrend's offer of $24.5 million was net of a $1.5 mil- lion payment that Fortrend proposed to set aside fo_r of paying bonuses to certain BCA employees. the purpose "The draft letter that Fortrend submitted in response to the BCA offering memorandum identified a "FORTREND ENTITY", and not Fortrend, as the purchaser of Fortrend did not purchase the BCA stock, sometimes refer to Fortrend as the purchaser of the BCA stock. Although for convenience we shall the BCA stock. - 16 - It is the intention of Purchaser to -acquire from Seller and Seller to transfer to Purchaser all direct and indirect interests in all assets and/oreentities which are described in the Offering Memorandum ("Offering Memo") for LR Development prepared by Cohen Finan cial, other, than those set forth on Schedule 4 hereto (the "Excluded Assets") . * * * * s . * * . * - * * e *. 3 . Purchase Price . (a) Price") The aggregate purchase price ("Purchase for the Stock shall be an amount equal to: (i) * * Twenty Pou..e & Million Dollars †$24-090-0-0-0†($26,000,000) * * * * * * * * (b) The Purchase Price will be distributed as follows: (i) Twenty--Two Four Million Five Hundred Thousand Dollars - - †$·-2275&0-90-6t($24,500,000) Purchase Price will be distributed to the, Seller at Closing; and * - - * * of the (ii) One Million Five Hundred Thousand Dol- lars ($1,500,000) will be placed into a bonus pool for certain employees, of LR Development, to be distributed six (6). months after the Closing to such employees which continue to be employees at LR Development at such time. * * * Fortrend's proposal to purchase the stock of BCA from the Abrams estate also included a draft letter dated "April 2000" from Mr. Blau, president of Related, to Byron Canvisseí$ a director of BCA. That draft letter stated in pertinent part: - 17 - intent to Fortrend one hundred percent It is our-understanding that you [BCA] have or (the "Fortrend will be executing a letter of Letter of Intent") with a client of Fortrend International or an af-f-i-1-i-ate assignee thereof sell ital stock of * Companies, L.P. trend to purchase from Fortrend certain assets listed on Schedule 1 hereto ("LR/Related Assets") currently owned directly or indirectly by * Related intends to continue to develop, operate and sell to pursue development opportunities through Newco and to have Newco employ current employees.of * []BCA]. As you know, The Related is negotiating with For- the LR/Related Assets, * ("Related") (if- applicable) ("Fortrend") (100%) of [:BCA]. * * * to the cap- * * [BCA]. * * * to continue * * * * . * * * (b) Related shall have the right to approve salaries, bonuses and other compensation or benefits for all senior employees at Newco. Related intends to establish at Closing an incentive compensation plan(s) for certain employees of Newco to be determined by Related, pursuant equity interests in Newco shall be granted to such employees, which interests shall vest over a three-year period and be subject similar plans. quire that certain employees of Newco execute at Closing- employment agreements (including covenants-not-tocompete). In addition, Related may elect to re- to which thirty percent to such other customary terms for (30%) of the Around late April 2000, the Abrams estate agreed to sell to Fortrend for $26 million all of the stock of BCA that the Abrams estate owned. Fortrend retained Manatt, Phelps & Phillips, LLP (Manatt), as its attorneys regarding the purchase from the Abrams estate of that estate's BCA stock and any sale by BCA of certain of its assets. Related retained Katten Muchin Zavis (Katten Muchin) as its attorneys regarding any purchase by Related of certain of BCA's assets. - 18 - OntMay 5, 2000, Mr. Kramer, a senior managing director of Fortrend, esent to Mayer Brown, attorneys for the Abrams estate, two copies of a ,letter of intent dated May 5, 2000 (May 5, 2000 letter .of intent) that a representative of Fortrend had executed. In the May 5, 2000 letter of intent, Fortrend set forth the terms under which 'Fortrend International,a LLC or an-assignee for client thereof" offered to purchase from the Abrams estatë:all of the stock of BCA. In that letter of intent, Fortrend offered to pay $25,128,000 to the Abrams estate for that stock and. to set aside $1, 375, 000 from which Fortrend was to pay bonuses to "certain employees of BCA who remained with BCA for six months after the closing of the sale of the stock of , BCA. ,, On a date not disclosed by the record, lvis. Abrams agreed to and signed the ,May. 5, 2000 letter -of intent on behalf of the Abrams estates. During the period May through July 2000, respective repre- sentatives of the Abrams estate, Fortrend,. and Related and their respective attorneys at Mayer Brown, Manatt, and Katten Muchin negotiated the terms of an agreement for the purchase of the BCA stock that the Abrams estate owned." During the same period, respective representatives of Related a'nd Fortrend "and their respective attorneys at Katten Muchin and Manatt negotiated the terms of an agreement for the purchase of certain of BCA's "During the negotiations, was not Castanet, identified. Inc., was identified as the purchaser of the purchaser of the BCA stock As discussed below, around IJuly 20, 2000 that stock. - 19 - assets.". BCA senior management did not participate in any negotiations regarding the respective terms of the agreement for the purchase of BCA's stock and the "agreement for the purchase of certain of BCA's assets. Before mid-July 2000, during, the respective negotiations with respect to the purchase of BCA's stock and the purchase of certain of BCA's assets, BCA and Related were aware -(1) that BCA would realize a substantial gain on the sale of certain of its assets, (2) what the approximate amount of that gain would be, and (3) that the assets that BCA was to retain after that sale would have a fair market value of approximately $1 million. At no time did Related make any inquiry of Fortrend regarding the gain that BCA was to realize as a result of the sale of certain of its assets. Nor did Related know or ask how BCA and/or Fortrend planned to address any tax attributable to such a sale. At no time did Related know, or inquire as to, what Forttend intended to do with BCA after the sale of certain of BCA's assets. Fortrend and Related each spent three weeks in May 2000 conducting due diligence reviews with respect to BCA and the assets that BCA owned. Part of the due diligence review that Related conducted addressed certain tax issues. Related prepared "During the negotiations, the purchaser of BCA's assets was identified. not petitioner was identified as the purchaser of As discussed below, around July 24, 2000, those assets. 20 - a document dated May 4, 2000 and entitled "Tax Due ,Diligence Issues" that contained a list of 28 «questions and, concerns- that Related wanted to have addressed. Included in that list were the f ollowing questions: * * a 5.- Who will be doing appraisals/valuations/cost allo- the various assets/properties for pur- future income a s ince some leeway may' be cations of poses of doing an IRC Section 1060 allocation? E This is critical to this acquisition and needs to be coordinated with Steven Ross' pro j ec t ions (AMT, e t c . available re: write-offs) and real estate (slow write-offs). Also, we need a breakdown between land (no áriteoffs) and other assets (such as goodwill and other intangibles) . Also, are there any intangibles i that can be wr itten of f over 15 years (e . g . , names, goodwill, going corïcern, workforce in place, covenants not there any self-constructed assets that can be written off over a short period (e.g., plans, workprocesses, blue print library, etc.)? to compete, etc . ) ? Also, are ) inventory-type property (quick trade On June 5, 2000, Mr. Blau Related's president sent to respective representatives of , inter alia, Fortrend, - BCA and the Abrams estate a report. concerning Related' s due diligence review with respect to BCA and its assets that Rubin & Katz had prepared (Rubin & Katz due diligence report) on behalf of Related. In" that due .diligence report, Rubin & Katz set forth (1) its finds ings with respect to the amount of the revenues that it projected Related.would generate from each of the assets that Related proposed to purchase from BCA ind (2) the differences between those projections and the projections that CFC Advisory had made on behalf of BCA and that were set forth in the BCA offering , - 21 - memorandum . On June 6 , 20 0 0 , Mr . A Blau provided to Mr . Kramer additional information regardina the Rubin & Katz due diligence report. In anticipation that the respective negotiations regarding the purchase of BCA's stock from the Abrams estate and the purchase of certain of BCA's assets from BCA would be successful, certain- actionsswere taken Related not only wanted to purchase th ough a new entity to be formed (purchasing new -entity) certain assets of »BCA, it also wanted certain members of BCA's management'to continue to manage, as employees of that new entity, thiaassets purchased. Cónse-- quently, around April 2000 Related offered to BCA senior manage- ment 30 percent of the ~equity interests in that new entity provided that BCA senior management agreed to be employees of the purchasing new entity and to continue managing as such the day- to-day operations tof the assets of BCA that that entity -was to purchase. After negotiations with respect to that offer, BCA senior management agreed to those terms. In order to facilitate that agreement, BCA senior management, except Kenneth Rice (Mr. Rice), formed on July 19, 2000, LRD,Group LLC (LRD Group) under Delaware l,ae. BCA senior management, except Mr. Rice, owried all of the interests in LRD Group. On July 12, 2000, petitioner wås formed under Delaware law to be the purchasing new entity. As of July, 31, 2000, LRD Group - 22 - and Related LR Development LLC (Related LR) " owned 30~ percent and 70 percent, respectively, of the interests in petitioner On July 13, 2000, Castanet, Inc. (Castanet), was incorpo- rated under,Delaware law. Around July -14, 2000, the incorporator elected,Alice Dill (Ms. Dill),.an employee of Fortrend,- as the sole:director of Castanet. On July -14, 2000, Ms. Dill, as the- sole director of Castanet, elected herself president, secretary, and treasurer of that company. On July-14i. 2000, Castanet sold and issued to Cronulla Corp. (Cronulla) and Signal Capital Associates -L.P. (SCALP)? 95 per- cent and 5 percent, respectively, of itsscommon stock. On July 16, 2000, Cronulla sold to SCALP its 95-percent common stock- interest in Castanet. As a result, SCALP owned all of the stock of Castanet. On July 20,, 2000, Mr. Bae, an employee of Fortrend, sent.a memorandum to Fortrend's at.torneys at,Manatt with respect tou Castanet's purchase of the stock of BCA from the -Abrams estate. That memorandum stated in pertinent part: "As of July 31, 2000, Related and Yukon Holdinge LLC owned 90 percent and 10 percent, respectively, of the interests in Related LR. Mr. Blau, Related's president, was a member of Yukon Holdings LLC. Related LR did not own any interest in LRD pup. "During.2000, Mr. Furman, a 50 percent.owner of Fortrend, owned 100 percent of percent ,of the total Forster, a 50-percent owner of Fortrend, owned 9.5 percent of total the general partnership interests and 70.79 interests in SCALP. During 2000, Mrg interests in SCALP. the 2. Transactional Summary & Closing Sequence - 23 - [the owner of 50 percent of the in- As you are aware, it is imperative that we provide Fred Forster terests in Fortrend and 9.5 percent of ests in SCALP] with a copy of summary & closing sequence, so that Fred and Howard Teig [Fortrend's outside accountant] can determine the ownership structure of Castanet, Inc. and appropriate solutions to shelter the gains in the subject transaction [the sale of certain of BCA's assets]. the transactional the inter- On July 21 2000, Mr. Bae sent a fax (July 21, 2000 fax) to Don Fitzgerald (Mr. Fitzgerald), an attorney at Manatt, with respect to Fortrend's intention to contribut-e certain Canadian currency with a high basis and a low value to BCA following Castanet's purchase of BCA's stock and BCA's sale of certain of its assets. In that fax, Mr. Bae stated in pertinent part: illustratUpon our acquisition [BCA] & disposition of certain assets [of BCA] the flow chart, * * we are contemplating contributing certain Canaflow down to Casta- * will * * Annexed hereto is a copy of ing the buying entity structure. of * * dian currencies, which * net, Inc. * Please review the enclosed and advise me whether the contemplated sheltering plan is bona fide. Also, what are the possible tax liabilities/ramifications which may arise from making the contribution after or before the merging of Percussion, LLC into Castanet, Inc.? is Manatt Phelps comfortable in providing a tax Lastly, opinion with regard to this proposed post-closing contribution? Around July 21, 2000, Mr. Fitzgerald made certain handwrit- ten notations on the July 21, 2000 fax. Near Mr. Bae's request --24 - for advice with respect to "whether the contemplated sheltering plan is bona- f ide" , Mr . Fit zgerald wrote "351 + basis only" . In addition; Mr. Fitzgerald wrote the following at the bottom of the July 21, 2000 fax: . "Discussed with Randy [Bae]ssequencing of the downstream merger of Castanet into LR {BCA) to precede contribu- tion of the high basis/low value assets." Castanet borrowed $28 million (UAFC loan) from Utrecht- American Finance Co. (UAFC) , an affiliate of Cooperatieve Centrale Raif feisen-Boerenleenbank, B.A. (Rabobank) . Castanet intended to use most-of that loan to purchase the stock of BCA that the Abrams estate owned. Related LR borrowed $33 million from Bayerische Hypo-und Vereinsbank AG (Hypo Bank) in order, inter alia, to finance petitioner' s purchase of certain of iBCA' s assets . That loan was evidenced by a document dated July 31, 2000, and entitled "CREDIT AGREEMENT" (Hypo Bank.credit agreement) . On July 26, 2000, before executing the Hypo-Bank credit agreement, Hypo Bank- received a memorandum from Richard O'Toole (Mr. O'Toole) an attorney with Paul, Hastings, Janofsky & Walker LLP, the attor- neys representing Related and its affiliates with respect to the purchase of certain of BCA's assets. In that memorandum, Mr. O' Toole stated: In the process of preparing for this acquisition [of certain of BCA' s assets] , tioner] has asked for our advice as to whether, federal income tax purposes, the Purchaser the form of these transac- [peti- for - 25 - to the Purchaser i.e., whether the sale of We have advised the Purchaser [petitioner] , on the transactions tions will be respected - stock in the Company [BCA] from the [Abrams] Estate to Castanet, on the one hand,.and thë sale of assets from the Company [BCA] other hand, will be treated as independent and not recharacterized by the Internal Revenue Service. we believe the correct that each sale should be respected as an independent transaction. the form of the fact that Castanet and its the transactions, owners and the Purchaser [petitioner] and its owners are unrelated parties;- (c) each of the parties to these transactions will report consistent with their form, derive a profit from these transactions and (e) Purchaser sets held by the Company. is not acquiring all of the as- the transactions in a manner tax treatment of these events is (d) Castanet is expected to We based our advice on (a) (b) [petitioner] the [petitioner] that On July 31, 2000, Castanet, Related LR, petitioner, Hypo Bank, Near North Title Insurance Co. (Near North), Rabobank, and UAFC executed a document entitled "ESCROW AGREEMENT" (escrow agreement). BCA was not a party to that agreement. Pursuant to the escrow agreement, Near North was named escrow agent and Rabobank was named subescrow agent in connection with (1) the Abrams estate's sale of its BCA stock to Castanet and (2) BCA's sale of certain of its assets to petitioner. The escrow agreement provided in pertinent part: * C. RECITALS * * * * * * It is contemplated under the Stock Purchase [the agreement for the purchase of BCA's that Castanet will pay or cause to be paid Agreement stock] $25,410,295 net of proceeds and adjustments (the "Stock Purchase Price") hereof. to the [Abrams] Estate on the date D. . It 'is contemplated under the Asset Purchase 26 - [the agreement for the purchase of certain of Agreement BCA' s assets]- that Purchaser cause to be paid $25, 779, 369 net of proceeds and adjustments (the "Asset Purchase Price") the date hereof. [petitioner] will pay or to Castanet on * * * * * * * G. Hypo Bank shall deposit- the Asset Purchase Price into an escrow account held by Sub-Escrow Agent [Rabobank] "Asset Purchase Escrow Amount") . to be referred ¯Eo herein as the (such amount H . The Sub-Escrow Agent in * Asset Purchase Escrow Amount Escrow Account I, Account -No. * "Asset Purchase Escrow Account") . * [Rabobank] will hold the * * Castanet Purchase * 9107 * (the * * I. UFAC [sic] shall deposit the Stock Purchase Price into an escrow account held by Sub-Escrow Agent [Rabobank] "Stock Purchase Escrow Amount" to be referred to herein as the (such amount * * *) . J. The Sub-Escrow Agent Stock Purchase Escrów Amount Escrow Account II, Account No. * "Stock Purchase Escrow Account"). in * [11abobank] will hold the * Castanet Purchase * * * 9116 * * * (the AGREEMENT * * * * * * 2. . Deposits and Establishment of the Escrow Fund. * * * * * * *, * "The escrow agreement required Hypo Bank on behalf of petitioner to deposit with the escrow agent Rabobank the funds representing the price that petitioner agreed (as discussed below)' to pay to purchase certain of BCA' s asset's . ment required Rabobank to credit those funds to Castanet's account No. 9107 maintained at Rabobank. shall discuss Hypo Bank' s and/or petitioner' s deposit of funds representing the price that petitioner agreed to pay- to purchase certain of BCA's assets as being a deposit of funds into that account of Castanet. For convenience, we those the That agree- - 27 - (b) Pursuant to the Credit Agreement [between Hypo Bank and Related LR dated July 31, 2000], Hypo Bank shall deliver to the Sub-Escrow agent the Asset Purchase Escrow Amount on the date hereof. (Rabobank] shall hold the Asset The Sub-Escrow Agent Purchase Escrow Amount and all interest and other amounts earned thereon * * Agreement, in the Asset Purchase Escrow Account. * in escrow pursuant [Rabobank] to this (c) Pursuant to the Stock Purchase Agreement, [Rabobank] UAFC sha-ll deliver, or cause to be delivered, Sub-Escrow Agent Amount on the date hereof. obank] shall hold the Stock Purchase Amount and all interest and other amounts earned thereon * escrow pursuant to this Agreement, chase Escrow Account. the'Stock Purchase Escrow The Sub-Escrow Agent [Rab- in the Stock Pur- * * in to the *- * * * * * Payments from the Stock Purchase Escrow Fund. [Rabobank] shall pay to (a) * * Sub-Escrow Agent 4. * [Abrams] Estate an amount equal transfer * * amount equal * and (b) to $2,207,500 * to Escrow Agent the to $23,202,795 by wire [Near North] an * * by wire -transfer * * * - 5. Payments from the Asset Purchase Escrow Fund. (a) If and only if (i) the Sub-Escrow Agent [Rab- then Sub-Escrow Agent obank] has received the Release Notice and (ii) the Sub-Escrow Agent [Rabobank] has previously made the wire transfers described in the first sentence of Section 4 above, pay (A) Castanet, Amount 'equal and (B) all other amounts in the Asset Purchase Escrow Account, to Castanet or to such other Person as directed by Castanet. to UAFC on behalf of and for the account of the Asset Purchase Escrow to -the amount owed to UAFC by Castanet, [Rabobank] shall that portion of if any, Under the escrow agreement, (1) petitioner was required to pay the funds representing the price that petitioner was to pay to purchase BCA's assets into an escrow account of Castanet at Rabobank that Castanet controlled, (2) petitioner was not re- - 28 - quired to. pay those funds into an account that BCA -controlled, and (3) those funds were required to be used to repay Castanet's debt to UAFC.P BCA had no right under the escrow agreement to receive and/or to control those funds. In late July 2000, the respective negotiations regarding the purchase of BCA's stock and the purchase of BCA's assets, as well as the actions taken -in anticipation of the success of those negotiations, were successfully completed. On July 31, 2000, Castanet and the Abrams estate executed a document entitled "STOCK PURCHASE AGREEMENT" (SPA) under which the Abrams estate; agreed to sell and Castanet agreed to buy all of the stock of BCA that the Abrams estate owned for $25,410,295. The SPA..provided in pertinent part: This Stock Purchase Agreement (this "Agreement") , dated as of July 31, 2000 (the "Closing Date") , , a Delaware corporation -be tween Cas tanet , Inc . is ("Buyer") , and The Estate of Bruce C. Abrams (thea a "Seller") . * * * a * , * * * 1.2 PURCHASE PRICE. The purchase price for the Shares, as designated by Seller. is $25,410,295 payable in cash by wire transfer * * * * * * 22UAFC lent Castanet $28 million, which was more than the price that petitioner was to pay for certain of BCA' s assets . Nonetheless, funds representing that price were used to repay the UAFC loan or the debt to UAFC. for convenience we shall sometimes state that the - 29 - 1.4 PURCHASE PRICE-ADJUSTMENTS (a) An estimate of the income tax benefit the LR Entities (excluding the Ex- for the 2000 Period, has been computed available. to Seller (the "Estimated Tax Benefit") for the period from January 1, 2000 through July 31, 200Ø (the "2000 Period"), based upon the taxable income or taxable losses of cluded Assets) by the Seller and agreed upon by the Buyer, and such Estimated Tax Benefit Benefit"). Seller for the LR Entities for the period beginning January 1, 2000 through and including the Closing Date has been computed by Seller and agreed upon by the Buyer, and such Replacement Tax is $75,000 (the "Estimated Replacement Tax"). the sum of the amounts of mated.Replacement Tax ($5O4,000) to the Escrow Agreement is $429,000 (the "Estimated Tax the Replacement Tax due by the Estimated Tax Benefit and the Esti- (the "Tax Escrow Deposit"). The Seller shall deposit into escrow pursuant An estimate of (b) To the extent the Tax Returns prepared (the "Final Tax income tax losses of for the (i) the amount of income tax benefit the Seller shall pay Buyer an amount to the difference between the amount of by Seller in accordance with Section 5 Returns") show: available to Seller based upon the actual the LR Entities (excluding the Excluded Assets) period from.January 1, 2000 through the Closing Date (the "Short Period") which is greater than the Estimated Tax Benefit, equal tax benefit available to Seller based upon the actual tax losses of the LR Entities (excluding the Excluded Assets) as determined from.the Final the Short-Period and the Estimated Tax Benefit and the parties shall amount of terest or other earnings earned on the Estimated Tax Benefit deposited by Seller pursuant Agreement, benefit available to Seller based upon the actual losses of sets) Tax Benefit, Agent Benefit.'equal such income tax benefit available to Seller based upon the actual Excluded Assets) as determined from the Final Tax Returns for the Short Period and the Estimated Tax tax the LR Entities (excluding the Excluded As- the Estimated Tax to the difference between the amount of to pay to Seller a portion of to-Buyer, (ii) the amount of to the Escrow income tax instruct the Escrow agent the Estimated Tax Benefit, for Short Period which is less than the Estimated tax losses·of the LR Entities (excluding the the parties shall instruct the. Escrow tax Returns for to pay the full including any in- - 30 - to Buyer, for the Short Period, to pay the reif any, Benefit and instruct the Escrow Agent mainder of the Estimated Tax Benefit, (iii) income tax due by Seller based upon the actual taxable income of the LR Entities (excluding the Excluded Assets) instruct the Escrow Agent to pay the full amount of Estimated Tax Benefit, including any interest or other earnings earned on the Estimated Tax Benefit deposited by Seller pursuant to Seller and the Buyer shall pay to .the Seller án amount equal to the income tax due by Seller on the actual taxable the LR Entities (excluding the Excluded Asincome of sets) .Tax Returns . for the Short Period as determined from the Final to the Escrow Agreement, the parties shall the * * * * * * * 2. REPRESENTATIONS AND WARRANTIES OF SELLER. * Seller represents and warrants to Buyer as fol- lows: * * * * * * * 2.10 TAXES. (a) - For the purposes of this "Agreement, impositions and liabilities "Tax" or "Taxes" refers to any and all federal, state, local and foreign taxes, assessments and other governmental charges, duties, relating to taxes, .including, but not based upon or measured by-gross receipts, fits, sales, use and occupation, and value -added, ad valorem, capture, employment, excise and property taxes, er with all interest, penalties and additions imposed with respect any agreements or arrangements with any .other Person - with respect ity for taxes .of a predecessor entity. to such amounts and including any liabil- to such amounts and any obligations under franchise, withholding, payroll, income, pro- limited to, transfer, retogeth- taxes (b) Each of the LR Ent'ities have . timely s taking into account any extensions, all local and foreign returns, estimates, filed, state, tion statements and reports ("Tax Returns") relating to Taxes required to be filed by the LR Entities. All such Tax Returns are true and correct respects. With respect to all Taxes imposed on the LR in all material informa- federal, - 31 the Subsidiaries or sfor which the LR the Subsidiaries is or could be lia- Entities or any of Entities or any of ble, whether to taxing authorities or to other Persons or entities (as, for example, under tax sharing or tax allocation agreements), with respect periods or portions of periods ending on or before the Closing Date, all applicable laws and agreements have been fully complied with, and all material Taxes required to be paid by the LR Entities or any of sidiaries to taxing authorities or.others on or before the date hereof have been paid. All Taxes required to be paid as of the Closing Date will be paid. to all taxable the Sub- * * * * 4.7 TAX INDEMNIFICATION. - - (a) Subject to the terms and conditions :ba the event of a Sale Event which results in a the Seller shall give to the Buyer written hereof, Seller Loss, notice of such loss in accordance with this Agreement, and the Buyer shall be obligated to make a payment to Seller as provided in this Agreement Payment"). Buyer's obligations under Sections 4.7, 4.8 and 4.9 shall survive the Closing until all applicable statutes of-limitation with respect to all Tax Returns have elapsed. (an "Indemnity (b) to. Seller hereunder, If the Buyer shall be obligated to make the Buyer shall satisfy a payment such obligation by making a payment amount equal previously paid, Buyer pursuant to Section 4.8(b). to the Seller Loss plus, to the Seller in an to the extent not the costs and expenses to be borne by (c) Any Indemnity Payment required to .be (i) the Sale Event and (ii) the amount of made in accordance with the terms hereof shall be made no later than 30 days following the receipt by Buyer of a written demand therefor describing in reasonable detail: Seller Loss, which demand shall be made no later than 35 days before the due date for payment by the Seller of to any Seller Loss that is being contested pursuant this Agreement, no Indemnity Payment shall be due until 30 days after a Final Determination with respect such contest. the Seller Loss; provided however, with respect the to to - 32 - 4.8 TAX CONTESTS. (a) Notice i letters, forbear, the Buyer to indemnify the the Seller or any of the LR Entities, if sustained, could result in an ob- In the event any taxing authority -(i) delivers to Seller any written notices, notifications, audit letters.of inquiry or any other written communication thattreasonably-may result in a Seller Loss or (ii) proposes an adjustment to the tax liability of which adjustment, ligation on the part of Seller for a Seller Loss, ethe recipient of Sueh notice (whether it be the Buyer-or the Seller) shall promptly upon receipt of notice of such audit or inquiry notify the Seller (if the Buyer is the recipient), or the Buyer (if the Seller is the recipient), in writing, of such proposed adjustment and of-any'action taken or proposed to be taken by any taxing authority with respect least thirty.(30) days after receivingssuch notice from any.taxing authority, shall ted by law, interest, penalties and additions to Taxes) asserted to be payable as a result of such proposed adjustment. The recipient shall true, corr.ect, and complete copy of any written communication with any taxing authority, and an accurate and complete summary of any oral communication with such taxing authority. from the payment of any Taxes (including include with such notification a if such forbearance is permit- thereto and the Seller, for at (b) Administrative and Judicial Proceedings. the Seller the progress of such contest and Unless otherwise instructed by the Buyer, agrees to diligently contest any proceeding relating to Taxes with any taxing authority relating to any Sale Event; and the Seller shall keep the Buyer promptly and fully informed of shall, if and to the extent requested, permit Buyer to attend any and all conferences with the contesting.authority; and consider in good faith any and all advice to the conduct of rendered by the Buyer with respect such contest. the Buyer made - within thirty (30) days of the.receipt of notice of a proposed adjustment, the Buyer shall have the opportunity to be present at and participate in any -administrative or judicial proceedings (to the extent permitted by law) relating to Taxes with any taxing authority relating to any Sale Event,' but only if (i) the Seller - shall have been provided with a written request by the the adjustment Buyer for the Seller to jointly contest On written request of - 33 - In connection with any its costs and disbursements as- is in excess of $50,000; and (iii) the Buyer reasonable attorney fees and costs) which the in accordance with this Agreement; (ii) the proposed adjustment agrees to bear all of sociated with such contest. contest relating to any Sale Event, the Buyer agrees to pay on demand on an after-tax basis all reasonable outof-pocket costs and expenses (including, without tation, Seller may incur in connection with contesting such claim. tion to be taken to contest such proposed adjustment * view and comment on in advance all material submissions relating to any potential Seller Loss. In the event that Seller does not adhere to Buyer's directions in any material respect -with respect contesting such claim, Buyer shall not be obligated to make.any Indemnity Payment. * *. Buyer shall- be afforded the opportunity to re- The Buyer shall determine the nature of àll ac- to the conduct of limi- * * * * (c) Settlement. If, in the course of contesting any claim referred to in this Agreement, any taxing authority shall advise the Seller or the Buyer that it is willing to agree to a settlement of such claim, such party shall notify the other party of such settlement proposal. If, after receipt of such notice, the Buyer so requests, settlement as proposed by such taxing authority and described to the Buyer. the Seller shall agree to- the (d) Payment. If the Buyer or Seller shall to the the Seller there occurs a Final Deter- to this Agreement with respect the Buyer shall not be required to indemnify the to the-liability of If the Buyer shall direct the have contested any proposed adjustment as above provided, Seller pursuant claim being contested until mination with respect for the Seller Loss. Seller to contest a proposed adjustment that could result in a Seller Loss by paying the tax claimed (including such other amounts payable as -interest, penalties, or additions to tax) and seeking a refund, then the Buyer shall advance to the Seller, on an interestfree basis, interest, penalties and additions to tax applicable to such indemnify the Seller in proposed adjustment (and shall accordance with this Agreement from any adverse consequences of such advance), and the Seller shall not be to this obligated to take any further action pursuant Agreement unless Buyer shall make such advance. * the aggregate amount of such taxes, * * 4.9 MISCELLANEOUS TAK MATTERS. 34 - (a) Adiustment to Purchase Price. The amount of . any Indemnity Payment under this Agreement a shall be treated by the Seller and Buyer as an adjustment to the Purchase 'Price. (b) Assumption of Indemnity Obl'igation. If Buyer sells all or any substantial portion of the ase sets of ,the LR Entities, as a condition to such sale*¡ the purchaser(s) of suc.he assets (or an affiliate thereof) (the "Subsequent Buyer") shall be required to e assume the 'indemnity obligations and the liabilsity for the following li- Taxes provided for in Section 4 7. (subject to Section 4.8) of this Agreement and in Section 5 of this Agreement and- shall be required to meet quidity and other requirementsi (i) provide a $3smillion letter of credit in form and substance reasonably acceptable to Seller which shall allow the Seller to draw down upon the letter of credit during the Reserve Period in the event that an Indemnity Payment accordance with the Agreement and has not been made; * . In the event of a sale whereby the Subsequent Buyer assumes the Buyer' s. indemnity obligations under the Agreement, Buyer shaall no longer be liable for such indemnity-obligations and the Person assuming such in demnity obligations shall be entitled to all provisions of Sections 4.7, 4.8 and 4.9. is due in * * , - (c) Consistent Tax Reporting Position. Seller and .Buyer shall reflect the sale of as a sale of stock or other ownership interests consistent with the terms of this. Agreement for, all Tax and other filing and reporting purposes without any disclo sure pursuant * to Section 6662 or 6111 of the Shares the Code. * * a * * * * * * * 5. LIABILITY FOR TAXES. (a) Except for 'Taxes that have been provided for as accrued in the computation ofe Net Working Capital and except as set forth in Section 4.7, Seller shall be responsible for all Taxes imposed on the LR Entities (the "Seller Taxes"), for all or- portions of taxable periods, ending as of one day prior to the Closing Date (thé "Pre-Closing Period") . taxable periods - - 35 - Buyer shall be responsible for all Taxes imposed on the LR -Entities (the "Buyer Taxes") for all taxable periods or portions of taxable periods beginning on the Closing Date (the "Post-Closing Period"). (b) Seller shall cause its. accountants, * * to prepare the American Express Tax and Business Services Inc. or such other accountants selected by Seller, Tax Returns required to be filed by the LR Entities for all -Pre-Closing Periods. account for the taxable year beginning on January.1, 2000 and ending as of one date prior to the Closingt Date (the "Pre-Closing Short Period") shall be determined using the "closing-the-books",method as described the Code and the regulations in Section 1362(e) (3) of thereunder, and the Buyer- and Seller agree to make an election, Code. if necessary, under Section 1362(e) (3) of Items to be taken into the * (c) Consistent with the "closing-thelbooks" the Code, Seller method under Section 1362(e) (3) of shall be responsible far all Seller Taxes 'attributable to the Pre-Closing Short Period (except such Taxes have been provided for as accrued in the computation of Net Working Capital and except as provided in Section 4.7). Section 4.7, Seller shall harmless from and against all,liability from Seller Taxes attributable for the Pre-Closing Period to the extent such Taxes have not been paid or an accrual therefor has not been included in Net-Working Capital. * * Except as set forth in indemnify and hold Buyer to the extent * * * * * * * * (f) If Buyer or any of the LR Entities re- ceives a refund, credit or reduction of Taxes attributable to the Pre-Closing Period, Buyer shall promptly reimburse the Seller for such refund, credit or reduction of Taxes. ceive a refund or reduction of Taxes attributable to the Post-Closing Period, reimburse the Buyer for such refund, tion of the Seller shall promptly If Seller or any of the LR Entities re- 'credit or reduc- taxes. (g) The Buyer and LR Entities shall cause their accountants to prepare and file all Tax Returns required to [be] filed by LR Entities for the taxable year beginning on the Closing Date (the "Post-Closing -,36 - Such Tax tax years. that to the extent Buyer is entitled to make Short Period") and all subsequent Returns.shall be prepared on a basis donsistent with the items and positions reflected-in the Pre-Closing Period Tax Returns and in this Agreement; provided, however, new tax -elections,, adopt methods-of accounting other than those used by Seller or take reporting positions different from those taken by Seller, long as such items and positions couldenot reasonably lxa expected to cause any material adverse tax consequences to Seller with respect to the Pre-Closing Period. in the Post-Cldsing Short Period Tax Returns shall be determined usina the "closing-the-books" method as described in Section 1362(e) (3) of the Code and the regulations thereunder, and the Buyer and Seller<agree to make an election,« if necessary, under Section 1362 (e) (3) of Items to be taken into account it may do so, so the Code. (h) Consistent with the "closing-the-books" the Code, Buyer limited to, depreciation and amortization deduc method under Section 1362 (e) (3) of shall be responsible for all Buyer Taxes for all taxable periods or portions of taxable periods beginning on the Closing Date (the "PostrClosing Period").- Ex2 emptions, allowances, deductions and any other items that are calculated on an annualsbasis (including, but not tions) shall be allocated between the Pre-Closing Short Period and the Post-Closing Short Period in the proportion which the number of days in each such period bears to the total number of days in the applicable annual period. tities is a partner in a partnership which has a tax year that does not end as of attributable to such partnership's activities shall be allocated among the Pre-Closing Short Period and the Post-Closing Short Period in a manner consistent with Treasury Regulation Section 1.1362-3(c). In addition to any obligation to Seller under Section 4.7, Buyer, shall against all liability from Buyer Taxes attributable to the Post-Closing Period, and for.all, Taxes attributable to the Pre-Closing Period which have been provided.for as accrued in computation of Net Working Capital. indemnify and hold Seller harmless from and the Closing Date,'any of the Closing Date, any item the LR En- If,.as of (i) Any refund of Taxes, credit or reduction of Taxes attributable to the Post-Closing Short.Period and all subsequent periods will be for the benefit,of Buyer. - 37 - * * * * * * * 6. DEFINITIONS. For purposes of this Agreement, the following terms have the meanings specified: * * * * * * * "Excluded Assets" - means all the direct and * * * indirect interest of Corp., 3830-32 Lincoln Joint Venture, Dearborn & Elm LLC, N.B.A.L. LLC, St. Benedicts Hotel, LLC, 310 N. Michigan, LLC, Vision AHC, LLC and Vision Capital, LLC, and each of ings . the foregoing entities respective hold-- in 3169 N; Lincoln [BCA] * * * * * * * "Replacement Tax" - means the Illinois Personal Property Replacement Pre-Closing Period. tax due by the - Company for the * * * * * * * "Sale Event" - shall mean the sale of all or a substantial portion of the Buyer within six months after the Closing that results in any taxing authority assessing or imposing any additional Tax against Seller either as a direct or indirect result of the sale of such assets. the LR Entities by the assets of * * * * * * * - "Seller Loss" - shall mean the amount, if any, of Taxes owed by Seller (including, without Taxes resulting from the receipt of any Indemnity Payment) the amount of Taxes owed to any taxing authority by the Seller with respect amount arises from a Sale- Event to any taxing authority in excess of to the sale of the Shares, which limitation, * * * "On July 31, 2000, before Castanet and the Abrams estate executed the SPA, tions declaring a dividend payable to the Abrams estate consisting of section 6 of the assets that were defined as "Excluded Assets" in the board of directors of BCA adopted resolu- the SPA. - 38 - Pursuant to the SPA, the Abrams estate sold to Castanet all of the stock of BCA that the Abrams estate owned. Under section 5 of the SPA, Castanet expressly agreed to be responsible for, inter alia, all taxes imposed on BCA for taxable years ending- after the closing of the SPA, including any tax attributable to any sale of certain of BCA's assets. Under section 4.9('b) of the SPA, any purchaser of all or a substantial part of BCA's assets was required to assume, inter alia, the taxes.for which Castanet agreed to be responsible under section 5 of that agreement. Effective as of the closing on July 31, 2000, of-the Abrams estate's sale of its BCA stock to Castanet, (1) Byron Canvasser, Robert Canvasser, and Andrew Hochberg resigned as directors of BCA, (2) BCA senior management, Mr. Kirshenbaum,' and certain other executives of BCA resigned their positions with BCA,f4 and (3) Castanet, as the sole stockholder of BCA, elected Ms. Dill as the sole director of BCA. On July 31, 2000, Ms. Dill, as the sole director of BCA, elected herself president, secretary, and treasurer of that company. On July 31, 2000, petitioner, Castanet, and BCA executed a document entitled "ASSET PURCHASE AGREEMENT" (APA) under ,which BCA agreed to sell and petitioner agreed to buy substantially all 440n July 31, 2000, each member of BCA senior managethent, except Mr. Rice, executed an employment agreement with LR Management Co., a company 100 percent of the stock of which petitioner owned. - 39 - of BCA's assets. The APA provided in pertinent part: This Asset Purchase Agreement (this "Agreement") , is between LR Development dated as of July 3¯1, 2000, Company LLC, * ware corporation, Inc., an Illinois cor]boration, * * * * * ("Buyer"), Castanet, Inc., a Dela- (the "Seller") and Bruce C. Abrams, (the "Company"). * * * * * * * * * * 1. SALE AND TRANSFER OF ASSETS; CLOSING 1.1 ASSETS AND A$SUMED LIABILITIES. (a) Subject to the terms and conditions of this the Closing the Seller will, or will transfer, convey, Agreement, at cause the Company to * assign and deliver to Buyer * title, and interest in and to certain assets described in this Section 1.1(a) that are owned by the Seller or the Company (as applicable) as of * the Closing Date the following: including, but not * sell, * limited to, the right, * all of * * * (i) the equity interests described on Ex- hibit 1.1-A attached hereto (collectively, Interests" ) ; the "Equity (ii) all Proprietary Rights of the Company; (iii) the rights of Seller from and after the Closing Date under the Stock Purchase Agreement and rights of Seller under the Escrow Agreement established in accordance with Section 1.4 of Agreement; the Stock Purchase * * * * * * * (b) Notwithstanding the foregoing, the following properties and assets of the Company are retained by the Company and are expressly excluded from the purchase and sale contemplated by this Agreement tively, the "Excluded Assets"): (collec- * * * * * * * (iii) the entities set forth on Exhibit 1.1-B (the "Excluded Entities"); and - 40 - Section 1.1(a) above, .solely -to the Excluded Entities. (iv) those items identified or described in to the extent said items relate (c·) Assumed and Excluded Liabilities Ascof the Closing Date, Buyer will assume and liabili- (A) thereafter pay and fully satisfy when due: ties arising after the Closing Date under the Applicable Contracts to which the Company is a party or by which the Company is bound or Governmental Authorizations held by the Company and assumed by Buyet pursmant to paragraph (a) of this section 1.1, ()B) normal and customary trade accounts payable mand accruals (other than income tax accruals) of in each case arising in the Ordinary Course of Businessaand only to the extent included in the calculation of Net.Working Capital liabilities and obligations of the LR Entities. All such liabilities and obligations to be so assumed by Buyer are referred to, herein as the "Assumed Obligations". Assumed Obligations shall not -items described in subparagraph 1. 1 (c) (A) , which relate to the Excluded Assets, or of Seller or the Company of any ,nature due as a result of the Assets to Buyer, or the sale of by the Company. (the "Accounts Payable"), and (C) (B) , or" (C) (y) any taxes the Shares by Seller, the Excluded Assets the purchase of include (x) any of the the Company, the sale of , 1.2 PURCHASE PRICE. (a) The purchase price (ther "Purchase ,Price") the Assets shall be Twentys Five Million Six Hundred Thirteen Thousand Three Hundred sixty Nine and No/100 Dollars ($25,613,369),"" payable in cash payable [sic] pursuant Agreement between Buyer, Seller and escrow agent. to the terms and provisions of the Escrow for (b)- Exhibit 1.2 of this Agreement sets forth the allocation of (i) the Purchase Price, plus the (ii) al- "Section 1.2(a) of the APA provided that petitioner was to pay $25,613,369 for certain of BCA's assets. Recital D of escrow agreement provided that petitioner was to pay "$25,779,369 net of proceeds and adjustments" The 'record does not establish the amount of adjustments" that was to reduce that $25,779,369. for certain of BCA's assets. the "proceeds and the - 41 - locable liabilities being assumed directly or indirectly by Buyer. all appropriate tax filings on a basis consistent with the agreed allocation, on any return or in any Proceeding that with the terms of the agreed allocation. * and not to take a position is inconsistent The Seller and Buyer agree to make * * 1.3 CLOSING. The closing of the purchase the Assets (the "Closing") will take place the offices of Katten Muchin Zavis, 525 West Monroe and sale of at Street, Suite 1600, Chicago, (local time) on the Closing Date. Illinois, at 10:00 a.m. * * * * * * * 6. DEFINITIONS. For purposes of this Agreement, the following terms have the meanings specified: * * * * * * * "Closing Date" -- the date and time as of which the Closing actually takes place. * * * * * * * * '7.6 ASSIGNMENTS, SUCCESSORS, AND NO THIRD- * Nothing expressed or referred to PARTY RIGHTS. in this Agreement will be construed to give any Person other than the parties to this Agreement any legal or equitable right, to this Agreement or any provision of this Agreement . remedy, or claim under or with respect * * * * * * * * EXHIBIT 1.1-A EQUITY INTERESTS * 100% interest in LR Management Company * * 100% interest in LR Contracting Company * 100% interest in Quality First Contracting Company * 100% interest in LR Builders, 100% interest in Lake Shore, LLC * * * 100% interest in LR Tower LLC * 100% interest in LR Fort Sheridan, LLC * 100% interest in LR Arcade, LLC * 100% interest in Plaines Town Center, LLC * 33.33% interest in Limits LLC * Inc. * * * * * * * * * * * * * ' * * * * 33 . 33% Limited Partnership a interest . in Winners Limited Partnership * * * -' 42 - , -100% interest in Ridge Partners LLC * * * »EXHIBIT 1.1-B EXCLUDED ASSETS 100% interest.in Diversey and Sheffield, L.L.C..* * * 100% interest in Walton Associates, L.L.C. * * * * Pursuant to the APA, BCA sold to petitioner the following assets, some of which were subject to certain liabilities: Assets Fair Market Value Cash Net current assets Prepaid commissions Other assets Furniture and fixtures Leases Equity interests: Park Tower LLC Arcade LLC Lake Shore LLC Limits LLC Plaines Town Center- LLC LR Fort Sheridan LLC Lawrence Partners LP 6133 N. Kenmore LP Amber Manor LP Estes Partners LP Humboldt Ridge LP Jackson Park LP Madison Park Place LP Madison Renaissance LLC Magnolia Partners LP New Southtown LP Ridge Partners LP Sheridan Park Partners LP -0- $8,873,149 50 0 , O OO 260,484 100, 000 50, O00 23 , 223 , 959 85, 206 4 420,232 170,126 1, 44'7, 596 3 , 621, 0 26 100 100 100 100 100 732 100 100 100 100 67,*387 100 - 43 - - Union Square LP Winthrop Partners LP Winners LP Quality First Inc. LR Contracting Co. LR Management Co. Total assets Less liabilities Total assets net of- liabilities 100 100 1,275,945 100 100 100 44,097,342 18,882,973 25, 214, 369 The assets that BCA sold to petitioner and that petitioner purchased from BCA under the APA constituted over 90 percent of. the total value, and substantially all, of BCA's assets. The amount that petitioner paid for the assets that it purchased from BCA was equal to their total fair market value. On July 31, 2000, Castanet, Related, and petitioner executed a document entitled "ASSUMPTION AGREEMENT" (assumption agree- ment). The assumption agreement provided in pertinent part: This Assumption Agreement (this "Agreement") is made as of July 31, 2000 by and among CASTANET, Delaware corporation ("CNI"), THE RELATED -COMPANIES, L.P., a Delaware limited partnership ("Related"), and LR Development Company LLC [petitioner], an Illinois limited liability company ("LDC"). CNI, Related, and LDC are collectively referred to herein as the "Parties". INC., a WITNESSETH: WHEREAS, CNI Purchase Agreement dated July 31, 2000, by and between CNI and the Estate of Bruce C. Abrams (the "Estate") is a party to that certain Stock (the "Stock Purchase Agreement") * * * WHEREAS, CNI, LDC, and the Company [BCA] have entered into that certain Asset Purchase Agreement "Asset Purchase Agreement") dated July 31, 2000, * (the * * -4 44 - * * * * .* * * NOW, THEREFORE, * * * CNI and Related represent, warrant, covenant and agree as follows: * * * * * * * 2. Assignment and Assumption. LDC hereby ac- * * * and Article V of the Stock Purchase the Stock Purchase Agreement, cepts and assumes all of CNI' s obligations under Sections 1.4 (b) Agreement, " and Related hereby accepts and assumes all of CNI's obligations under Sections 4.'7, 4.8 and 4:9 of limitation the obligations required of a Subsequent Buyer suant Agreement to herein as, effective as of Agreement has been delivered to the Estate. (said obligations are collec-tively referred the ,"Obligations"): This assumption is the date hereof and a copy of this (as defined in the Stock Purchase Agreement) purto Section 4.9(b) (i) the Stock Purchase (iv) of - including without * * * * * * * * 4.4: No Reliance. Except for any assignees permitted by Section 4.2 of this Agreement and except for. the Estate who is hereby made a .third party beneficiary to this Agreement: (a) no third party is enti- . tled to rely on any of the agreements of the parties e contained in this Agreement; and (b) the parties assume no liability to any third party because of any reliance , on the agreements of the parties contained in this Agreement.. Under section 2 of the assumption agreement, pet-itioner expressly assumed all of Castanet' s obligations ,under, inter alia, section 5 of the SPA. On July 31, 2000, Castanet, Related, and petitioner'executed a document entitled "ASSIGNMENT OF STOCK PURCHASE AGREEMENT" , ""Article V of the Stock Purchase Agreement" to which section 2 of the SPA. the assumption agreement referred is section 5 of - 45 - which the Abrams estate accepted and to. which Ms. Abrams agreed on behalf of the Abrams estate on July 31, 2000. That agreement provided in pertinent part: Assignment of Representations, Warranties and Covenants. 3. (a) * * [Castanet's] rights after the includ- [Castanet] * limitation all rights with respect * * * by these presents, hereby [petitioner] and its successors * (i) assigns to * and assigns, äll of * Closing Date under the Stock Purchase-Agreement ing without to the representations and warranties contained in Section 2 of the Stock Purchase Agreement and the rights to indemnification contained in Section 4 of chase Agreement, but expressly excluding the rights assigned to Related under subparagraph 3(a) (ii) below, and (ii) assigns to Related and its successors and assigns all of * rights after the Closing Date under Sections 1.4, 4.7, 4.8, and 4.9 of Stock Purchase Agreement, extent any rights under such Sections 2 or 4 relate to Excluded Assets' under the Asset Purchase Agreement or the business related thereto, but including Excluded Liabilities relating thereto. in each case except the Stock Pur- in any event [Castanet's] to the the * * * * (b) Notwithstanding the foregoing, if and to the extent * [Castanet] otherwise or the Company []BCA] directly suffers an indemnifiable Loss under Section 4 of [Castanet] shall be entitled to recover directly against [Abrams] Estate with respect thereto pursuant terms of the Stock Purchase Agreement, the Stock Purchase Agreement. the to the then * * * * * * * * * 6.6 No Reliance. Except for any assignees per- mitted by Section 6.2 of this Agreement and except for the [Abrams] Estate, who is hereby made a third party beneficiary to this Assignment: (a) no third party is the parentitled to rely on any of ties contained in this Agreement; and (b) the parties assume no liability to any third party because of any reliance on the agreements of this Agreement. the parties contained in the agreements of I ->46 - Pursuant to section 1.2 of the SPA and section 2(c) of the escrow agreement, Castanet paid the $25,410,295 purchase price for all of the Abrams estate's BCA stock from a certain account that Castanet maintained at- Rabobank (Castanet's account No. 9081 at Rabobank)" into a certain escrow account established at Rabo- bank for the purpose of holding the funds rëpresenting that purchase.price. Pursuants to section 1.2(a) of the APA and section 2(b) of the escrow agreement, on August 1, 2000, Hypo Bank" deposited on behalf of petitioner the funds representing the purchase price for certain of BCA's assets (asset purchase price) into a certain escrow account maintained at Rabobank on behalf of Castanet (Castanet's escrow account No. 9107 at Rabobank). .However, in contravention of the es crow agreement , . on - the same date Ms . Dill, acting as the sole officer of Castanet, directed Rabobank to transfer the funds representing the asset purchase price from - that escrow account to a certain account that BCA maintained at Rabobank (BCA's account No. 9090 at Rabobank)s. , Rabobank complied with Castanet's direction on August 1, 2000. Also on August 1, 2000, Ms. Dill, acting -as the sole officer"of BCA, directed "Before Castanet's payment of the $25,410,295 purchase price from Castanet's account No. 9081 at Rabobank, U20?C had deposited the $28 million that UAFC had lent to Castanet that account. into "Hypo Bank is the bank that made the loan to Related LR to fund petitioner's purchase of certain of BCA's assets. - 47 - Rabobank to transfer the funds representing the asset purchase price from BCA's account No. 9090 at Rabobank to Castanet's account No. 9081 at Rabobank. Rabobank complied-with BCA's direction on that date. On August 1, 2000, Ms. Dill, acting as the sole officer of Castanet, requested that Rabobank use any fynds in Castanet's account No. 9081 at Rabobank to repay Casta- net's debt to UAFC. Rabobank complied with Castanet's direction on August 2, 2000, and used the funds in Castanet's account No. 9081 at Rabobank, including the funds representing the asset purchase price, to repay that debt." In order to facilitate the contribution of the Canadian currency to BCA that was the subject of the July 21, 2000 fax . that Mr. Bae of Fortrend sent to Mr. Fitzgerald, one of Fortrend's attorneys at Manatt, Castanet merged with and into BCA around September 11, 2000. Thereafter, SCALP owned 100 percent of the stock of BCA. Around September 12, 2000, SCALP made a capital contribution to BCA of $68,000 (Canadian) in which SCALP claimed a tax basis of $17,268,000 (U.S.). (We shall refer to the $68,000 (Canadian) that SCALP contributed to BCA as the Canadian currency.) On October 11, 2000, Mr. Fitzgerald sent a memorandum to certain other attorneys at Manatt. In that memorandum, Mr. "As required by section 5(a) of the escrow agreement, Rabobank had (1) transfers described in the first sentence of section 4 of agreement. received the release notice and (2) made the that Fitzgerald stated in pertinent part: - 48 - Subsequent. to the- stock purchase and the asset the Fortrend entity that purchased the stock of [BCA] [BCA] merged downstream. sale, * * * as the surviving corporation wholly owned by Signal . SCALP then trans Capital Associates; L.P. [BCA] Canadian currency in the amount ferred to * of _$68, 000 (Canadian) but with sa tax basis in SCALP' s hands stated to be $17,268,000. This left * -* -* ("SCALP") . * * We have no knowl- SCALP will have to represent to us We have been asked to render three tax opinions. First, ,Fortrend has asked us. to proviide an opinion as to the dollar amount of pre-contribution tax basis that SCALP had in the Canadian currency. edge of this basis. this basis sfigure. Fortrend entities have-made such representations to us in other transactions. Second, Fortrend has asked us to provide an c opinion that the * transfer of [BCAJ qualified under IRC Section 351. This is the same type of opinion we have rendered in other Fortrend transactions. Third, Fortrend has asked us t·o provide an opinion that * the Canadian currency and the dollar amount of basis * cation of the IRC Section :362 carryover basi-s rules is a consequence of'qualification under IRC Section 351. We would just use the basis dollar amount represented to us by SCALP. [BCA] had in the Canadian currency. Appli- the Canadian currency from SCALP to * took a carryover bas-is in [BCA] the * * * * * Our opinions would be addressed solely to SCALP and * This is an "inside" Fortrend opinion. [BCA] , which are now both Fortrend ,entities . * * ** * * Drafts of the tax opinion letter and the represen- tations letter are enclosed. Fortrend for their simultaneous review. Pursuant policy decisions sour firm has reached concerning Fortrend tax opinions and my review of recommend approval of I am sending copies to to the enclosures . the documents, I On October 11, 2000, Mr. Fitzgerald,sent a letter (Mr. Fitzgerald's October 11, 2000 letter) to Ms. 'Dill, the sole officer and the sole director of BCA and an employee of Fortrend, - 49 - and attached to that letter "a draft tax opinion letter and a draft representations letter supporting the opinions for the LR Development contribution.transaction [the contribution of the Canadian currency to BCA]."" Around October 25; 2000, BCA converted the Canadian currency into U.S. dollars. On November 1, 2000, BCA and SCALP sent-a joint letter (November 1, 2000 representation.letter) to Manatt. In that letter, BCA and SCALP made certain representations to Manatt on which Manatt relied in rendering its opinion regarding certain tax issues involved in SCALP's contribution to BCA of the Cana- dian currency. In the November 1, 2000 representation letter, BCA and SCALP stated in pertinent part: a Signal Capital Associates, L.P., Inc., and Bruce C. Abrams, requested your opinion regarding certain federal tax consequences of a transaction (the -"Contribution") whereby Parent transferred certain Canadian currency in the denomination of $68,000 (Canadian) to Subsidiary. income * * * * ("Parent") ("Subsidiary"), have * * * * * Parent was the sole shareholder of Subsidiary both before and after the Contribution. Accordingly, Parent joins in the representations and statements in this letter. Parent and Subsidiary understand that the conclusions in your opinion letter are dependent letter and that your opinion could be adversely affected if this representations letter is not true; correct and complete. in part on the accuracy of this representations * * * * * * * "The record does not contain the "draft tax opinion letter" or the "draft representations letter" to which Mr. Fitzgerald referred in Mr. Fitzgerald's October 11, 2000 letter. a Parent and Subsidiary -haie asked you to address - 50 - income tax consequences of solely the federal Contribution that are specifically set forth in your draft tax opinion letter referred to above. 4 Parent and Subsidiary are aware that the Contribution may involve many other tax issues and consequences under the Internal Revenue Code of 1986, as amended (the "Code"), and other tax statutes. However, Parent and Subsidiary have- not asked you- to consider or render an opinion regarding such other tax issues . the For purposes of your tax opinion, Parent and Sub- sidiary -represent ,to you, after due investigation, as follows: 1. All factual statements in your draft tax opinion letter concerning the Contribution are true correct and complete. 2. On September 12 2000, Parent and Subsidiary took all proper action ,to transfer from-Parent to Subsidiary beneficial ownership of Canadian currency with a denomination of $68, 000 (Canadian) and a tax basis of $17,268,000 (U.S.) . Parent's tax basis for the Canadian currency that Parent $17, 268, 000 in the aggregate immediately before the Contribution. transferred to Subsidiary was 3. Both Parent -and Subsidiary had substantial non-tax business reasons for engaging in .the Contribution. Both Parent and Subsidiary entered into the Contribution with a view toward making an economic profit apart from tax consequences. 4. Parent and Subsidiary have treated and will is consistent treat the Contribution in a manner that with its form. 5. At the time of the Contribution and thereaf- ter,r Parent owned 100% of -the issued and outstanding shares of.Subsidiary. the Subsidiary stock, shares to Parent would have been meaningless . iary did not Contribution. , Due to its ownership of all of issuance of more Subsidiary For this reason, Subsidthe issue shares to Parent as a result of in connection with the Contribution "See supra note 30. - 51 - 6. No stock or securities were or will be issued No stock or securities were or will be issued by by Subsidiary for services rendered to or for the benefit of Subsidiary in connection with the Contribution. Subsidiary for indebtedness of Subsidiary that evidenced by a security or for interest on indebtedness of Subsidiary which accrued on or after the beginning of the holding period of Parent for the debt. is not 7. Parent neither accumulated receivables nor the Contribution. made any extraordinary payment of payables in anticipation of , Subsidiafy has reported and will report would have resulted in income or deduction to Parent a period subsequent have and will constitute- income or deductions to Subsidiary when received or paid by Subsidiary. items which, but for the Contribution, to the Contribution and such items in 8. The Contribution was not the result of solic- itation by a promoter, broker or investment house. 9. Parent did not retain any beneficial owner- ship in the Canadian currency it transferred to Subsidiary. 10. Subsidiary did not take the Canadian currency subject Parent to any debt and did not assume any debt of in connection with the Contribution. 11. There was no indebtedness between Subsidiary and Parent and there was no indebtedness created in favor of Parent as a result of the Contribution. 12. The Contribution occurred under a plan agreed the upon before the 'Contribution in which the rights of parties were defined. 13. There was no plan or intention on the part of Subsidiary to redeem or otherwise reacquire any Subsidiary stock held by Parent. 14. Taking into account any issuance of addi- tional shares of Subsidiary stock, any issuance of stock for services, the exercise of any Subsidiary stock rights, warrants or subscriptions, any public offering of Subsidiary stock and the sale, exchange, transfer by gift, or other disposition of any of the stock of Subsidïary held by Parent, Parent was in - 52 - the Coder at "control" of Subsidiary within -the meaning of Section - 368 (c) of the Contribution. At the time of binding obligation, and had no plan or intention, dispose of any portion of its stock in Subsidiary following the Contribution. the Contribution, iParent was not under a to the time of 15. Subsidiary-and Parent each paid their own o expenses incurred in connection with the Contribution. 16 . Atethe stime of the Contribution, Subsidiary , was not an "investment company" within the meaning - of Section.351(e) of the Code. 17 ; a You may rely on the accuracy of the representations herein for purposes of your tax opinion letter without further inquiry or independent -investigation 18 . Parent and Subs idiary- hereby iconsent to your reference to this representations letter in your tax opinion letter. 19. The undersigned have undertaken such'investi- gation as the undersigned deemed necessary to ensure the accuracy of the foregoing representations. On November 1, 2000; Manatt sent a tax opinion eletter (Manatt' s November 1, 2000 tax opinion letter) to BCA and SCALP In that tax opinion letter, Manatt stated in pertinent part: In accordance with your request, we provide the income ,tax, consequences' of the transaction (the 5 following analysis 'and opinions relating to certain federal "Contribution") whereby Signal Capital Associates,« L . P . currency to-Bruce C. Abrams, iary") . , contributed certain Canadian ( "Parent" ) ("Subsid- * * * Inc., , * * * At the time of the Contribution, Parent owned all issue -any .shares of the issued- and outstanding shares of Subsidiary. its stock to of Subsidiary did not the Contribution because (accordParent as a result of ing to Parent) issuance of such shares in exchange for the-Canadian currency would have been meaningless ,(due to athe existing,ownership by Parent of .100% of Subsidiary) . - * * * * * * * - 53 - for federal letter are representations We have also relied for purposes of this letter on facts set forth in a representations letter from Parent and Subsidiary to us of even date herewith. :cepresentations in that that, basis for the Canadian currency that Parent contributed to Subsidiary was $17, 268, 000 immediately before the Contribution. investigation, such representations . If such representations at any time are not utrue, correct and complete, our opinions could be .adversely affected. We have assumed, without independent the accuracy and completeness of all income tax purposes, Parent' s tax Among the Any change or inaccuracy in the facts set forth in the documents specified above" or in the above-referenced representations letter could adversely affect our opinions . * . * * * * * * * * * In the case of transactions such as the Contribu- tion, many federal, state and local tax consequences arise. address the issues specifically set forth below. opinion is expressed regarding any other issues. We have been asked only to income and other * * * * * * No * Subject to the foregoing, it is our opinion that, more likely than not: (a) The Contribution satisfied the requirements of Section 351 of the [Internal Revenue] Code. (b) The tax basis for the ¯Canadian currency transferred from Parent tion was a carryover tax basis in accordance with Section 362 of the [Internal Revenue] Code. to Subsidiary in the Contribu- "Manatt' s November 1, 2000 tax opinion letter listed various documents on which Manatt relied in rendei-ing its opinions . described all of they are not material case. the documents on which Manatt relied because the issues in this We have not quoted the entire opinion letter or to our resolution of - 54 - (c) Based on the representations made to us'in the above-referenced representations letter from Parent and Subsidiary, - was $17, 268, 000 for the 'Canadian currency contributed the -carryover tax basis for Subsidiary to Subsidiary. On February 8, 2002, BCA dissolved. On the same date, BCA filed with the secretary of state -of the State of Ill'inois articles of dissolution, which Stephen Galler and Thomas Weeks had signed on behalf of BCA on January 14, 2002. Those articles stated that BCA' s stockholders had authorized the dissolution of BCA on December 13, 2001. On or before September 15, 2001, BCA filed Form 1*1'20S, U.S. Income Tax Return for an S Corporation, for the taxable year that began January 1, 2000, arid ended July 31,: 2000 (7/31/00 BCA return) . BCA indicated in the 7/31/00 BCA return that that return was its final S corporation return BCA included with the 7/31/00 BCA return Schedule L, Balance Sheets per Books (Schedule L) . 4 In that schedule, BCA reported . total assets of $25, 482, 604 as of July 31, 2000, the end of the short taxable year for which that return was filed. BCA also included with the 7/31/00 BCA' return a document that stated in pertinent part: "This is to provide notificatiion under Reg. 1.1362-2(b) (1) that Bruce C. Abrams,. Inc. terminated its S status effective as of July 31, 2000, due to a transfer of stock to a corporation; thereby terminating its S status under-IRC Sec.- * 1361 (b) (1) (B) . " - 55 - On September 17, 2001, BCA timely filed Form 1120, U.S. Corporation Income Tax Return (Form 1120), for the taxable year that began August 1, 2000, and ended December 31, 2000 (12/31/00 BCA return). In the 12/31/00 BCA return, BCA reported total income of $17,972,779, that included a gain of $16,678,066 frod the sale of certain assets that BCA sold to petitioner pursuant to the APA. In the 12/31/00 BCA return, .BCA claimed total deductions of $18,338,661 that included a deduction for a claimed loss of $17,223,844 (Canadian currency loss) for "IRC SEC. 988 loss on foreign currency"= (i.e., the.Canadian currency that SCALP con- tributed to BCA). That claimed loss deduction was calculated as the difference between BCA's claimed $17,268,000 carryover basis under section 362 in the Canadian currency and the claimed $44,156 fair market value of that currency at the time BCA converted it into U.S. dollars. In the 12/31/00 BCA return, BCA reported a net operating loss of $365,882 and total tax of zero. BCA included with the 12/31/00 BCA return Schedule L. In that schedule, BCA reported total assets of $3,277,516 as of • December 31, 2000, the end of the short taxable year for which that return was filed. On September 17, 2002, BCA filed Form 1120 for its taxable year 2001 (12/31/01 BCA return). In that return, BCA stated that its address was¯in Alexandria, Virginia (last known address). In -:56 - the 12/31/01 BCA return, BCA indicated thats that return would be its ,f inal return. In the 12/31/01 BCA retui-n, BCA reported total-income of $220', 721, claimed total deductioris of $48 j319, and carried forward $172,402 of the $365,882 net, operating loss that it had claimed in the 12/31/00 BCA return. . In the 12/31/01 BCA return BCA reported taxable income of zero and total tax of zero. BCA included with the 12/31/01 , BCA. return Schedule" L ? In that schedule, BCA reported total assets of zero as of ethe end of its taxable »year 200]:. Around September 19, 2001, petitioner, filed with"responderit Form 1065 U.S. Return of Partnership Income, for its taxable ye ar that began July 31 / 20 0 0 , and ended December 31, 20 0 0 . Petitioner, included with that form Schedule L. In that schedtile petitioner reported- total -assets "of $78, O91, 661 as of December 31, 2000, the end of, its short taxable year. . On August 13, 2004, respondent issued,to the :Abrams -estate a notice of deficiency (Abrams estate notice) with respect to its , taxable year ended October 31, 2000. In that notice, .respondent determined, inter alia, that, the~ Abrams estate (1) had failed to substantiate the basis that it had claimed "in the stock of BCA that it sold to Castanet under the SPA and (2) had additional ordinary income from BCA. Respondent did not determine in t-he Abrams estate notice to disregard the Abrams estate' s sale of its -«57 - BCA stock to Castanet and to treat BCA's sale of certain of its assets as having occurred while the Abrams estate owned the stock of BCA. As a result of the determinations in the Abrams estate notice, respondent determined a deficiency.of $14,514,038 in the Abrams estate' s tax. The Abrams estate timely filed a petition with the Court in which it disputed the deficiency that respondent determined in the Abrams estate notice. On February 24, 2006, the Court entered a stipulated decision in that case that there was no deficiency in tax due from the Abrams estate for its taxable year ended October 31, 2000. On August 13, 2004, respondent issued to BCA at its last known address a notice of deficiency for its taxable year ended December 31, 2000 (lBCA notice). In that notice, respondent determined a deficiency of $7,507,972 in BCA's tax for that year. Virtually all of that deficiency resulted from respondent's determination to disallow the Canadian currency loss of $17,223,844 that BCA claimed in the 12/31/00 BCA return. Respon- dent disailowed that loss "because you []BCA] have failed to establish the basis in the assets or that a loss was otherwise sustained during taxable year 2000 in the amount claimed." In the BCA notice, respondent also determined an accuracy-related . penalty under section= 6662(a) of $1,501,594.50. - 58 - BCA did not file a petition with the Court with respect to the BCA notice. On February 7, 2005, respondent assessed ,the de- ficiency and the accuracy-related penalty totaling $9,009,566.,50 that respondent had determined in the BCA -notice as well as interest thereon as provided by law through that date. (Wes shall refer to those assessed amounts for BCA's short taxable year ended December 31, 2000, as well as all interest thereon as provided by law after February 7, 2005, as BCA's tax liability.) As of - the time of the trial .in this case, BCA had-not paid any of BCA'es tax liability. On June 18, 2005, respondent opened a collection case; and on June 29, 2005, respondent assigned .a revenue officer (first revenue officer) to conduct collection activities with respect to BCA's, tax liability. On Junes29, 2005,- the first revenue officer reviewed respondent' s Integrated Data tRetrieval System database- with respect to BCA. On July 22, 2005, the first revenue officer went ,to BCA's last known address. On July 26*, 2005, the first revenue officer used certain databaseesystems in order to perform certain re search with respect to BCA*. On the same date, the first revenue officer requested authorization to file a notice of Federal tax lien (notice of tax lien) with respect to BCA' s tax liabilitty. On August 2, 2005, respondent recorded a notice of tax lien with 59 - respect to 'BCA's tax liability with the Virginia State Corpora- tion Commission. On !July 27, 2005, the first revenue officeråreviewed certain data transcripts maintáined by the Internal' Revenué Service and certain State and local government records relating to BCA in order to identify potential :sources of income or assets of BCA on which respondent might levy.MThe first revenue officer did not identify any such sóurces from.that review. On July 27, 2005, respondent- sent to BCA at its last known address Letter 1058, Notice of Intent to Levy and Notice of the Right to a Hearing (notice of levy) . On August 1, 2005, respon- dent received confirmation that delivery, of the notice of levy had been accepted. On Augu'st 31, 2005, the: first tevenue officer requested assistance"from another revenue officer (second revenue officer) in Chicago. The first revenue officer asked the second revenue officer to visit certain offices that petitioner was occupying at the time, which the second revenue officer did on October '4, 2005. On September 16, 2005, the fsirst revenue officer identified Golden Gate Bank as a potential, source on which respondent might levy with re pect to BCA's -tax liability. On the same date, the "The record does not establish who accepted the notice of levy on behalf of'BCA. Nor does the record establish whether BCA appealed the notice of levy to respondent's Appeals Office. - 360 - first revenue" officer inailed to Golden Gate Bank a copy of 'a notice of levy with respect to that liability. On September 29 2005,, the first revenue officer terminated-the levy action involving -Golden Gate Bank .because BCA did not maintain any accounts at that bank. On October 5, a2005, "the second revenue officer reviewed certain records maintained by the secretary of state of the State of Illinois .. That review disclosed that -BCA had dissolved. On October 19, 2005, respondent closed as noncollectible the collection case with .respect to BCA'.s tax liabi-lity because BCA had dissolved. At no stime did the first revenue,officer.or the second revenue officer interview or issue, a summons to Larry Austin who had signed the 12/31/00 BCA return as BCA's president. On April 18, 2006, respondent reopened the ,collection case with respect to BCA' s tax liability and assigned it' to respon- 6 dent's examination division for consideration of possible trans- feree :liability. Respondent issuedato petitioner a notice of liability in I which respondent determined that petitioner is liable as a transferee of BCA for BCA' s tax liability. OPINION Respondent bears the burden of establishing thàt petitioner is liable under section 6901 for BCA' s tax liability as a trans- - -61 - feree-of property of BCA.(BCA',s transferee)-.904See seca 6902(a); see also .Rule 142 (d) . Section 6901 provides in pertinent part: - e 4 - SEC. 69014: TRANSFERRED ASSETS. (a) Method of Collection.--The amountsi of the following liabilities shall, except as hereinafter in this section provided, be assessed, paid, rand ¢ollected-in - the same manner and subject to the same provisions and limitations sas in the . cas~e .of which the liabilities were incurred: the taxes with respect to (1) Inaome, estate, and gift taxes.-- (A) Transferees.--The liability, at law or in equity, of a transferee «of property-- (i) of a taxpayer in the case of a tax imposed by subtitle A (relating to income taxes) , * * * * * * * (h) Definition of Transferee.--As used in this section, distributee * * *. the term "transferee" includes * * * Section 6901 does not create or define a substantive liabil- ity; it merely provides a procedure by which the Government may collect from a transferee of property unpaid taxes owed by the transferor of the property. - See Commissioner v.. Stern 357 U.S. "Petitioner bears the burden of.establishing that BCA is See Rule 142(a), (d) . liable for BCA's tax liability. not PetitiLoner alleged in the petition that respondent.erred in determining that BCA is liable for BCA's tax liability. tioner þresented no evidence at trial and advances no.argument on brief that BCA is not clude that petitioner has abandoned the allegation in the -petition that respondent erred in determining that BCA is iliable for BCA's tax liability. liable for BCA' s tax liability. We con- -Peti- - 62 - 39, 42 (1958) ; Hagaman v. Commissioñer, 100 T.C. 180, '183 (1993) . The existence and the extent of a transferee's liability are - determined under applicable State law. See Commissiorier v. Stern, supra at 42-45; Hagaman v.- Commissioner, supra at 183-185. The parties agree that the applicable State law here is the law of thes State of Illinois. Respondent relies on the following- grounds in support of respondent's position that petitioner is liable under section 6901 as BCA's transferee: (1) Petitioner is liable as BCA's transferee under the assumption agreement; (2) petitioner is liable as BCA's transfereet under 740 Ill. Comp. Stat. Ann. 160/1- 12 (West 2002) (Illinois fraudulent transfer statute); and (3) petitioner is liable as BCA's transferee under what respon- dent labels the "trust fund doctrine" (respondent's trust fund doctrine) .35 asRespondent does not advance any other argument in support of respondent's position that petitioner is liable under sec. 6901 as BCA's transferee. two such other arguments. respondent states: In fact, On brief, respondent expressly abandons the BCA Intermediary Respondent does not seek to recast Transaction .as a stock sale by the [Abrams] Estate «to - petitioner, mas in Enbridge Energy Co. v. United Statest, 553 F.Supp.2d 716 (S.D Tex. 2008) , because petitioners liability as a transferee can be established by following the form of respondent, seek to establish petitioner' s liability as a transferee under the Federal Debt Collection «Procedure Act, 28 U.S.C. the transaction it adopted. Nor does § 3301 _et se_q. Claimed Transferee of Property of BCA Under the Assumption Agreement - 63 - Respondent argues that petitioner is liable for BCA's tax liability as BCA's transferee because petitioner assumed that liability under the assumption agreement. In support of that argument, respondent asserts: (1) Pursuant to section 2 of the assumption agreement petitioner assumed from Castanet all of Castanet's obligations under, inter alia, section 5 of the SPA (i.e., the stock purchase agreement) and (2) pursuant to section 5 of the SPA Castanet obligated itself to be responsible for, inter alia, any tax attributable to the sale of certain of BCA's assets to petitioner (asset sale capital gains tax). Section 2 of the assumption agreement provided in.pertinent part: "LDC [petitioner] hereby accepts and assumes all of CNI's [Castanet's] obligations under * * * Article V of the Stock Purchase Agreement". "Article V of the Stock Purchase Agreement" to which section 2 of the assumption agreement referred is section 5 of the SPA. We have found on the record before us that petitioner expressly assumed in section 2 of the assumption agreement all of Castanet's obligations under, inter alia, section 5 of the SPA. Section 5 of the SPA provided in pertinent part: (a) Except for Taxes that have been provided for as accrued in the computation of Net Working Capital and except as set forth in Section 4.7, Seller shall be responsible for all Taxes imposed on the LR Entities (the "Seller Taxes") taxable periods or por- for all - 64 - taxable periods, ending as of one day prior to tions of the Closing Date (the "Pre-Closing Period") . Buyer shall be responsible for all Taxes imposed on the LR Entities (the "Buyer Taxes") portions of Dater (the "Post-Closing Period") . taxable periods beginning on the Closing taxable periods - or for all * * * * * * * (c) * * * Except as set forth in Section 4.7 indemnify and hold Buyer harmless from and Seller shall against all .liability from Seller Taxes-attributable for- the Pre-Closing Period to the extent such Taxes have not been paid or an accrual therefor has not been included in Net Working Capital. * * * * * * * (f) If Buyer or any of the LR Entities receives a refund, credit or reduction of Taxes attribùtables to the Pre-Closing Period, Buyer shall promptly reimburse the Seller, for such refund, , credit, or reduction of Taxes . If Seller or any of the LR Entities receive a refunds orireduction of Taxes attributable to the,Posta Closing Period, Buyer for ,such refund, credit or reduction of the Seller shall promptly reimburse the taxes. (g)- The Buyer and LR Entities- shall cause their Such Tax Re- accountants to prepare and file all Tax Returns required to be filed by LR Entities for the taxable year beginning on the Closing Date (the "Post-Closing Short Period") and all subsequent tax years. turns shall be prepared on a basis consistent with the items and positions reflected in the Pre-Closing Periòd Tax Returns and in this Agreement; provided, however, that to the extent Buyer is entitled to make new tax elections, adopt methods of accounting other than those used'by» Seller or take reporting positions different from those taken by Seller, it may do so, so long as such items and positions could not reasonably be ext pected to cause any material adverse tax consequences to Sel-ler-with respect Items to be taken into account Short Period Tax Returns shall be determined using the "closing-the-books" method as described in Section to the Pre-Closing Period. in the Post-Closing e - e1362 (e) (3) of the Code* and the regulations thereunder, and the ;Buyer and Seller agree to make an election,. if necessary, iunder Section 1362 (e) (3) of the Code. 4 - 65 - (h) Consistent with the "closing-the-books" limited to, depreciation and amortization deduc- method under Section 1362(e) (3) of the Code, Buyer shall be responsible for all Buyer Taxes for all taxtaxable periods beginning able periods or portions of on the Closing Date (the "Post-Closing Period"). Exemptions, allowances, deductions and any other items that are calculated on an annual basis (including, but not tions) shall be allocated between the Pre-Closing Short Period and the Post-Closing Short Period in the proportion which the number of days in each such period bears to the total number of days in the applicable annual period. tities is a partner in a partnership which has a tax year that does not end as of attributable to such partnership's activities shall be allocated among the Pre-Closing Short Period and the Post-Closing Short Period in a manner consistent with Treasury Regulation Section 1.1362-3(c). In addition to any obligation to Seller under Section 4.7, Buyer shall against all liability from Buyer Taxes attributable to the Post-Closing Period, and for all Taxes attributable to the Pre-Closing Period which have been provided for as accrued in computation of Net Working Capital. indemnify and hold Seller harmless from and If, as of the Closing Date, any of the LR En- the Closing Date, any item (i) Any refund of Taxes, credit or reduction of Taxes attributable to the Post-Closing Short Period and all subsequent periods will be for the benefit of Buyer. . We have found on the record before us that Castanet, as the buyer of BCA's stock, expressly agreed in section 5(a) of the SPA to be responsible for, inter alia, BCA's tax liability, including any asset sale capital gains tax of BCA for the short taxable year of BCA that ended December 31, 2000. Despite the express language of the assumption-agreement and of the SPA, petitioner argues that Castanet did not obligate itself to be responsible for BCA's tax liability. According to petitioner: 66 - the stock seller' is the SPA- simply-means that, as between the Section 5 of stock seller and the stock buyer., responsible for all taxes incurred prior to the closing by .BCA- and the various entities in which it heldi an interest, and the stock buyer is responsible formall taxes incurred by those entities after the closing. standing in Castanet's shoes with respect vision, Petitioner agreed that Estate or Castanet would be responsible for making sure that the entities it owned and controlled as a result of pay their tax liabilities'. Neitiher the SPA nor the AA [assumption agreement] eliminated the separate corporate existence of BCA, made Castanet rather than BCA itself liable for BCA' s' taxes, or madei Petitioner liable for the taxes of an entity it never owned or controlled. the Asset Purchase Agreement itpas opposed÷ to the ("APA") would to this pro- By We reject ,petitioner's argument. - Section 2 -of the assump- tion agreement and section 5 of the SPA mean what they say. We háve found that petitioner expressly assumed in section 2 of the assumption agreement all of Castanet' s obligations under, inter alia, section--5 of the SPA." We have also found that. Castanet expressly obligated itself in section .5 of the SPA to be respon- sible for BCA' s tax liability. On the record before us we find that petitioner expressly assumed in section 2 of the assumption agreement Castanet ' s express obligation in section 5 of the SPA to be responsible for BCA's tax liability." "Petitioner also argues that petitioner. could not have the assets purchase agreement) specifically excluded the assumed BCA's tax liability because (1) section 1.1(c) of (i.e., asset sale capital gains tax from the liabilities that petitioner agreed to, assume from BCA and (2) "[i]n 'them face of contract'ual language that expressly disclaims liability, finds that there was an implied assumption of liability." (bracketed material the APA provided in pertinent part: in original) Section 1.1(c) of [a court] cannot the APA (continued. . . ) - 67 - - Petitioner argues that, even if we were -to find, which we have, that petitioner assumed Castanet's obligation to be respon- sible for BCA's tax liability, section 4.4 of the assumption agreement precludes respondent from enforcing petitioner's assumption of that obligation. Section 4.4 of the assumption agreement provided in pertinent part: except for the [Abrams] Estate who is hereby made a third party beneficiary to this Agreement: third party is entitled to rely on any of ments of (b) because of any reliance on the agreements of ties contained in this Agreement. the parties contained in this Agreement;-and the parties assume no liability to any third party the agree- the par- (a) no According to petitioner: (1) Respondent is a third party with respect to the assumption agreement; (2) section 4.4 of the assumption agreement provided that "the parties assume no liabil- ity tx> any third party" except the Abrams estate; and (3) under Illinois law a third party cannot enforce a contract that specif- ically disclaims liability to any third party except the third party specified in the contract. "(...continued) Assumed Obligations shall not of Seller [Castanet] or the Company [BCA] of any nature due as a result of by Seller [Castanet], [petitioner], or the sale of Company [BCA]. the Shares [of BCA] the Assets to Buyer the Excluded Assets by the the purchase of the sale of * any taxes include * * that under section 2 of We reject petitioner's argument. implying, petitioner assumed a tax of Castanet or a tax of BCA. found that petitioner expressly assumed in section 2 of assumption agreement Castanet's express obligation in section 5 of the SPA to be responsible for BCA's tax liability. We have not the assumption agreement found, and are not We have the - 68 - Respondent agrees wit:hs petitioner that under Illinois law a third party generally may not enforce .a contract that specifi- I cally disclaims liability ,to third parties. However, respondent argue s that, sec tion 4 . 4 of the as sumpt ion - agreement ,a which disclaims liability to third parties except the Abrams yestate, is void because it (1) violates the terms of the SPA and (2-) is contrary to public policy. With respect to respondent's argument that section 4r.4 of the assumption agreement is void because it violates the, terms of the SPA, respondent asserts that "Illinois law does not recognize contract provisions that interfere with a prior contract." According to respondent: Castanet was contractually prohibited from selling BCA's assets without securing an unrestricted assumption of BCA's tax liabilities from the asset buyer. * * tempts to limit petitioner's liability to run only to the [Abrams] Estate, which- violates the terms of SPA, * * The SPA contains no disclaimer for third parties. * -* Section 4.4 [of the assumption agreement] at- the As we understand respondent's argument, the lack of a provision in the SPA precluding third-party beneficiaries means that the SPA sallows third parties to enforce that agreement, and section 4.4 of the assumption sagreement thus violates the SPA. There is a strong presumption under Illinois law that contracting parties bargain and agree for themselves, and only - 69 - incidentally for third parties." See Waterford Condo. Associ- ation v. Dunbar Corp., 432 N.E.2d 1009, 1011 (.Ill. App. Ct. 1982); see also F.W. Hempel & Co. v. Metal World, Inc., 721 F.2d 610, 614 (7th Cir. 1983). A third person is a direct rather than an incidental beneficiary "'only if the contracting parties have manifested in their contract an intention to confer a benefit upon the third party.'" F.W. Hempel & Co. v. Metal World, Inc., supra at 613 (quoting Altevogt v. Brinkoetter, 421 N.E.2d 182, 187 (Ill., 1981)). In order to overcome the strong presumption under Illinois law against third-party contract beneficiaries, "the-implication that the contract applies tx> third parties-must be so strong as to be practically an express declaration." Choi v.- Chase Manhattan Mortg. Co., 63 F. Supp. 2d 874, 881 (N.D. Ill. 1999) - We conclude that the lack of a provision in the SPA preclud- ing third-party beneficiaries, standing alone, is not "so strong as to be practically an express declaration", id., that.the parties to the SPA intended- that the- SPA benefit third parties generally and respondent specifically. We find the lack of a provision in.the SPA precluding third-party beneficiaries, when considered under the strong presumption of Illinois law against "If the benefit to a third person arising from a contract is incidental, the benefit to the third person arising from the contract direct, Pirie Scott & Co. v. Parrett, 178 N.E. 498, 501 (Ill. 1931). the third person may not enforce the contract. is the third person may enforce the contract. See Carson If - 70 - finding third-party beneficiaries to that agreement, to be fully consistent with section 4.4 of the assumption agreement, which expressly disclaims liability to third parties except the Abrams estate. On the record before us, we reject respondent's argument a that section 4.4 of the assumption.agreement is void because it violates the terms of the SPA. With respect to respondent' s argument that section 4, 4. of the assumption agreement is void because it is contrary to.public policy, respondent asserts that if we were to enforce- section 4.4 of the assumption agreement, we would encourage taxpayers to participate :Ui transactions that are contrary to public policy because "an asset buyer in an Intermediary Transaction could - insulate a stock seller from the target company's federal income tax liability while simultaneously leaving respondent, the principal creditor, unprotected." Respondent does not explain, and we decline to speculate, how enforcing the expr.ess language of section 4.4 of the assump- tion agreement in this case could permit petitioner, thg buyer of certain of BCA's assets, 'to "insulate a stock seller [the Abrams estate] from the .target company's [BCA's] federal income stax liability". Respondent did not attempt to hold the Abrams estate liable under section 6901 for BCA's tax liability as a transferee of property of BCA., Nor did respondent determine in the Abrams - 71 - estate notice that respondent issued to the Abrams estate to disregard that estate's sale of its BCA stock to Castanet and to treat BCA's sale of.certain of its assets as h'aving occurred while the Abrams estate owned the stock of BCA. If respondent had made those determinations in the Abrams estate notice, respondent would have determined a deficiency in the Abrams , estate's tax attributable to the gain on the sale.of those - assets.38 Respondent did not do so. Respondent also does not explain, and we also decline to speculate, how enforcing the express language of section 4.4 of the assumption agreement in this case could permit petitioner to "insulate" any other taxpayer involved i.n the Abrams estate's sale of BCA's stock to Castanet" or'BCA's sale of certain of its assets to petitioner, such as Castanet or UAFC," from liability under section 6901 for BCA's tax liability.4° "BCA was an S corporation throughout the period the Abrams estate owned BCA's stock. BCA' s sale of certain of estate owned. the stock of BCA, have flowed through to the Abrams estate as BCA's sole stockholder. if respondent had treated its assets as having occurred while that the gain on any such sale would As a result, "UAFC is the financial institution that made the loan to Castanet to fund its purchase of BCA stock. the assumption agreement 4°Respondent also does not explain how enforcing the express in this case language of section 4.4 of "insulates" petitioner in all events from liability under sec. 6901. agreement, support of respondent's position that petitioner is liable under sec. 6901. Although we find that section 4.4 of In addition to respondent's arguments under the assumption respondent advances in this case other arguments in the assumption (continued...) - 72 - On the recordi before us, we reject respondent's argument that section 4.4 of the assumption agreement is void because t is contrary to public policy. On the record before us,: we find that -section 4:.4 of the assumption agreement prohibits respondent from enforcing as a third-party beneficiary petitioner's assumption under the assump- tion agreement of Castanet's obligation 'under .the SPA to be responsible for BCA's tax liability. Based upon our examination of the "entire record before us, we find that respondent hasafailed to carry respondent's- burden of establishing that petitioner is liable under section 6901 ase BCA!s transferee under the assumption agreement. Claimed Transferee of Property.of BCA Under the Illinois Fraudulent Transfer Statute Respondent argues that petitioner is liable as BCA's trans- feree under section 5 of the Illinois fraudulent transfer stat- ute. That section provides in ,pertinentspart: 160/5. Transfer or obligation fraudulent as to creditor; claim arising before or after transfer § 5. (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred; if the debtor made the transfer or incurred the obligation: *°(...continued) agreement precludes petitioner from liability under sec. 6901 under athe assumption agreement, not relevant under se c . that section of that agreement to our resolution of whether petitioner is liable 6 901 under respondent ' s remaining argument s . is - 73 - (1) with actual intent to hinder, delay, or de- - fraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a busi- ness or a transaction for which the remaining assets of the debtor were unreasonably small business or transaction; or in relation to the (B) intended to incur,. or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. 740 Ill. Comp. Stat. Ann. 160/5. Respondent asserts that BCA's sale of certain of its assets to petitioner pursuant to the APA (:BCA asset sale) was fraudulent under (1) section 5(a) (2) of the Illinois fraudulent transfer statute and (2) section 5(a) (1) of that statute." Section 5(a) (2) of the Illinois Fraudulent Transfer Statute A creditor, such as respondent here, must -prove each of the elements under section 5(a) (2) of the Illinois fraudulent trans- fer statute by a preponderance of the evidence. Wachovia Sec., LLC, v. Neuhauser, 528 F. Supp. 2d 834, 859 (N.D. Ill. 2007); Bay "On brief, respondent advances respondent's arguments under section 5(a) (2) of before advancing respondent's arguments under section 5(a) (1) of that statute. order in which respondent makes them on brief. We shall consider respondent's arguments in the the Illinois fraudulent transfer statute "We shall sometimes refer to a transfer that is fraudulent the Illinois fraudulent transfer statute as under sec. 5(a) (2) of a transfer that is fraudulent in law. - 74 - State Milling Co. v. Martin, .145 Bankr. e 933, 946 2(Bankr. N.D. Ill. 1992) .43 Respondent argues that the BCA asset sale was fraudùlent in law because (1) under section 5(a) (2) of the Illinois fraudulent transfer statute BCA did not receive reasonably equivalent value in exchange for the assets that it sold to petitioner and (2) under section 5 (a) (2) (B) of that statute BCA intended to incur, or believed or reasonably shoulde have believed that it would incur, a debt (i.e., the asset sale capital gains tax) that it wouldebe unable to pay as it became due. We turns first to respondent ' s argument that under section 5 (a) (2) of the 'Illinóis fraudulent transfer statute BCA did not receive reasonably equivalent value in exchange for the assets that it sold to petitioner. The parties stipulated, that the asset purchase price that petitioners paid to purchase certain o BCA?s assets was equal to the: totals fair market value of those assets. Respondent asserts: - - BCA did not retain theafunds it received in exchange for its assets. sale of The proceeds BCA received from the the BCA Assets passed immediately to Castanet inter alia, 43In interpreting the Illinois fraudulent" transfer statute the interpretatjon by a IJ.S. bankthe fraudulent transfer we may rely -on, ruptcy .court or other Federal court of provisions in the-U.S. Bankruptcy Code, 211.U.S..C. sec., 548 (2006) , because those1 provisions are analogous to the provisions of Parkway Bank & Trus t Co . 574, 577 (7th Cir. 1998) ; Voiland v. Gillissie, 215 Bankr,. 370, 374 (Bankr. N.D. Ill. 1997); Martino v. Edison Worldwide Capital (In re Randy) , 189 Bankr. 425, 443 (Bankr. N.D,. Ill. 1995) the Illinois fraudulent transfer statute. See Leibowitz v. ( In re Image Worldwide , L t d . ) , 13 9 F . 3 d - 75 - [BCA' s sole stockholder] and then to Rabobank, of f Castane t ' s UAFC Loan . must be disregarded in determining whether BCA received reasonably equivalent value . to pay Thus , petit ioner ' s payment The APA between BCA and petitioner required petitioner to pay the asset purchase price in accordance with the terms of the escrow agreement." The escrow agreement*S provided in pertinent part: RECITALS * * * * * D. * * * Purchaser [petitioner] will pay.or cause to be paid $25, 779, 369 net of proceeds and adjustments (the "Asset Purchase Price") hereof . to Castanet on the date * * * * * * * "Sec. 1.2 (a) of the APA provided: The purchase price (the "Purchase Price") Assets shall be Twenty Five Million Six Hundred Thirteen Thousand Three Hundred sixty Nine and No/100 for the . Dollars ( $25, 613 , 36 9 ) , payable in cash payable [s ic ] pursuant Agreement to the terms and provisions of the Escrow [dated July 31, 2000] * * *. 4sCastanet, petitioner, Related LR (i.e., the owner of 70 the member , the f inancial institution interests in petitioner) , Hypo Bank (i.e., percent of the bank that made the loan to petitioner to fund its purchase of certain of BCA' s assets) , UAFC (it. e . that made the loan to Castanet to fund its purchase of BCA stock), Near North, and Rabobank were parties to the escrow agreement. BCA was not a party to that agreement. Castanet, petitioner, Related LR, and Hypo 'Bank appointed Near North as escrow agent under the escrow agreement . with Near North appointed Rabobank as sub-escrow agent under that agreement. Since only the actions taken by Rabobank are relevant to our resolution of shall refer to Rabobank as the escrow agent. actions taken by Hypo Bank on behalf of petitioner, nience we shall state that petitioner took those actionsu the issues before us, Those entities along for convenience we In discussing any for conve- G. Hypo Bank shall deposit the Asset Purchase Price into an escrow account held by Sub-Escrow Agent [Rabobank] "Asset Purchase Escrow Amount") . to be referred to herein as the (such amount H . The Sub-Escrow Agent [Rabobank] will hold the Asset Purchase Escrow Amount Escrow Account T, -Account- No. "Asset Purchase Escrow Account") . I"3 in * * * Castanet Purchase * * * 9107 ,* -* * (the * * * 2. * * * * * AGREEMENT * * * * * Deposits and Establishment of the Escrow Fund. * * * * * * * * (b) Pursuant to the Credit Agreement [between Hypo Bank and Related LR dated as of July 31, 2000, under which Hypo Bank lent to Related LR $33, 000, 000, $25,779,369 of which was to be used to finance petitioner' s purchase of certain of BCA' s assetá] , Hypo Bank shall deliver to the Sub-Escrow Agent the Asset Purchase Escrow Amount on the date hereof [July 31, 20 0 0] . [Rabobank] * * * * -; a * * * the Payments from the Stock Purchase Escrow Fund.« [Rabobank] shall pay to (a) * * Sub-Escrow Agent 4. * [Abrams] Estate an amount equal and (b) $2,20?,500 * * * to Escrow Agent * * [Near North] an amount equal to $23, 202, 795 * to 5. Payments from the Asset Purchase Escrow Fund (a) If and only if (i) the Sub-Escrow Agent [Rabobank] has received the Release Notice and (ii) the Sub-Escrow Agent wire transfers described in the first sentence of [Rabobank] has previously made the "See supra note 21. - 77 - then.Sub-Escrow Agent [Rabobank] to UAFC on behalf of and for the account the Asset Purchase Escrow Section 4 above, £43 shall pay (A) of Castanet, Amount equal and (B) all other amounts in- the Asset Purchase Escrow Account, to Castanet or to such other Person as directed by Castanet. that portion of to the amount owed to UAFC by Castanet, if any, As made clear by the above quoted provisions of the escrow agreement, that agreement required petitioner to deposit the funds representing the asset purchase price into Castanet's escrow account No. 9107 at Rabobank over which Castanet, and not BCA, had control. The escrow agreement further required Rabobank, the escrow agent, to use those funds to repay on behalf of Castanet, BCA's sole stockholder, the loan that UAFC had made to Castanet to finance Castanet's purchase of BCA's stock from the Abrams·estate." The escrow agreement required Rabobank, the escrow agent, to pay- the portion of the funds representing the asset purchase price, if any, remaining thereafter pursuant to the instructions of Castanet. The escrow agreement did not place under the control or the direction of BCA the funds representing the asset purchase price that petitioner was required by the APA and that escrow agreement to deposit into Castanet's escrow account No. 9107 at Rabobank. Instead, that escrow agreement "As required by section 5(a) of the escrow agreement, Rabobank (1) fers described in the first sentence of section 4 of ment. received the release notice and (2) made the transthat agree- "See supra note 22. - 78 - placed those funds under the control and the direction of Casta- net, BCA's sole stockholder. Petitioner complied with the APA and the escrow agreement and on August 1, 2000, deposited the funds representing the asset purchase price into Castanet's escrow account No. 9107 at Rabobank. However, in contravention of the escrow agreement, on the same date Ms. Dill, acting as the sole officer of Castanet, directed Rabobank .tò transfer the funds representing that pur- chase price from thatlescrow account to BCA's account No. 9090 at Rabobank. Rabobank complied with Castanet'st direction on August 1, 2000. Also, on August. 1, 2000, Ms. Dill, actingsas the sole officer of EBCA, directed Rabobarik to transfer the funds repre- sentingsthe asset purchase price from BCA's account No. 9090 at Rabobank to Castanet' s account No. 9081 .at Rabobank Rabobank complied with BCA's direction on that date. On August 1, 2000, Ms. Dill acting as the sole officer of Castanet, requested that Rabobank use any funds in Castanet's account No. 9081 at Rabobank to repay Castanet's debt to-UAFC. -Rabobank complied with Casta- net's direction on August 2, 2000, and used the funds in Casta- net's account No. 9081 at Rabobank, including the funds repre- 7 senting the asset purchase price, to repay that debt. We have found on the record before us that petitioner was required to pay the sfunds representing the asset purchase price- into an escrow account of Castanet at Rabobank, which Castanet - 79 - controlled, that petitioner was not required to pay those funds into an account that-BCA controlled, that BCA had no right under the APA, the-escrow agreement, or any other agreement to receive and/or to control those funds, and that those funds were required to be used to repay Castanet's debt to UAFC. On the record before us, we find that under section 5(a) (2) of the. Illinois fraudulent transfer statute BCA did not receive any consideration from petitioner -in exchange for the sale of certain of its assets to petitioner, let alone consideration that was reasonably equivalent value. We turn next to respondent's argument that under section 5(a) (2) (B) of.the Illinois fraudulent transfer statute BCA intended to incur, or bel,ieved or reasonably should have believed that it would incur, a debt (i.e., the asset sale capital gains tax) that it would be unable to pay when it became due. In support of that argument, respondent asserts: Mr. Furman and Mr. Forster, indirectly through SCALP owned BCA at the time the APA was executed, certainly believed or reasonably should have believed that BCA would incur a tax liability beyond BCA's ability to pay when it became due. the Fortrend Owners, who * * * * * * * The Fortrend Owners lacked any objective basis to believe that BCA's large taxable gain from the sale of its assets could be sheltered by use of Dollars [the $68,000 (Canadian) to BCA around September 12, 2000]. in the Canadian Dollars was almost 400 times their fair market value. BCA was part of a large tax avoidance scheme. the Canadian Dollars to The transfer of the Canadian that SCALP contributed The basis claimed - 80 - The Fortrend Owners' lack of belief -in the basis claimed in the Canadian Dollars is revealed by the fact that they made BCA collection-proof well before the statute of limitations period expired for BCA' s tax period ended December 31, 2000 . lack of faith in the Canadian Dollars' basis is further evidenced by the fact that they did not contest the BCA SNOD [the BCA notice] . The Fortrend Owners' As we understand it, respondent is contending that under section 5 (a) (2) (B) of the Illinois fraudulent transfer. statute when BCA sold certain of its assets to petitioner BCA intended to incur, or believed or reasonably should have believed that it would incur, the asset sale capital gains tax" and that it would be unable to pay that tax when it became due on March 15, 2001. That is because, according to respondent, the "Fortrend Owners lacke-d any objective basis to believe that BCA' s large taxable gain from the sale of its assets could be sheltered by use of the Canadian Dollars . " 49We have found that at -the time BCA sold certain of its that assets to petitioner BCA knew (as did petitioner) realize a substantial gain on those assets as a result of sale. that - BCA would soFor purposes of the Illinois fraudulent transfer statute, tax is considered as due and owing on the datie on which the tax return in which the tax must be reported is required to be filed. See Hagaman v. Commissioner, 100 T.C. 180, 188 (1993); United States,v. Brickman, 906 F. Supp. 1164, 1172 (N.D. Ill. 1995) . Sec . 6151 (a) provides that a taxpayer shall pay the tax for the taxable period in, question "at the time * filing the return (determined without regard to any extension of time for filing the return) .", BCA was required to pay on Mar. 15, 2001, See secs - 6151 (a) , 6072 (b) . taxable year ended. Dec. 31, 2000. the tax for its short * * fixed for - 81 - In support of respondent's assertion~ that thes "Fortrend Owners lacked any objective basis to believe that BCA's large taxable gain from the sale. of its assets could be sheltered by use of the Canadian Dollars" respondent asserts that'"The basis claimed in the Canadian Dollars was almost 400 times their fair market value. The transfer of the Canadian Dollars to BCA was part of a large tax avoidance scheme." We have found that on July 21, 2000, Mr. Bae, ans employee of Fortrend, sent a fax to Mr. Fitzgerald, an attorney at Manatt, in which Mr. Bae stated that after the Abrams estate's sale of its BCA stock and BCA's sale of certain of its assets Fortrend intended to contribute to BCA certain Canadian currency with a high basis and a low value in order to shelter the gain resulting from BCA's sale of certain of those assets. We have also found that .on September 12, 2000, SCALP, BCA's sole stockholder,5 made a capital contribution to BCA of the Canadian currency in which SCALP claimed a tax basis of $17,268,000. In addition, we have found that on November 1, 2000, Manatt sent Manatt's November 1, 2000 tax opinion letter to- BCA and SCALP. In that tax opinion letter, Manatt opined in pertinent part (1) that SCALP's contri- bution to BCA of the Canadian currency satisfied the requirements of section 351, (2) that BCA's tax-basis in the Canadian currency was a carryover basis under section 362, and (3) that, based upon "Around Sept. 11, 2000, Castanet merged with and into BCA. As a result, SCALP owned: 100 percent of the stock of BCAa o 82 - the'representation of BCA and SCALP regarding SCALP' s basis in the Canadian currency that SCALP contributed to BCA, BCA' s tax e basis in that currency was $17;268,000. -In the 12/31/00 BCAs return, BCA claimed a deduction -for a loss on the disposition of the Canadian currency that of f sets all of the gain that BCA realized on the sale of certain of . its assets to petitioner. Respondent has failed to establishiany.facts with respect to the $17, 268, 000 basis (Canadian currency basis) that SCALP claimed in the Canadian currency which it contributed; to BCA except that that claimed basis was about 400 times the fair market value of that currency. Respondent did not call any witnesses at the trial .in this case. Respondent chose not to a call as witnesses (1) Ms . Dill, the sole director and the sole officer of BCA and of Castanet, (2) Mr. Furman and Mr. - Forster, the- sole owners of Fortrend andt the owners of over 80 - percent of SCALP, or (3) any person associated with BCA, Castanet, SCALP, or Fortkend in order to examine those persons about their" intent and beliefs and those of BCA and SCALP With. respect to the Canadian currency basis.s2 Nor did.respondent proffer documentary evi- dence at trial regarding those matters. As a result, we dos not s2In the pretrial memorandum that respondent submitted to respondent the Court, indicated that .respondent expected to call, inter alia, as witnesses (1) Mr. Kramer, an employee of Fortrend who was extensively involved in the negotiation of APA, and the other agreements governing the Abrams estate' s sale of its BCA stock and the BCA asset sale and (2) Mr. Teig, one of Fortrend's outside accountants. However, as stated above, respondent did not call any witnesses at trial. the SPA, the - 83 - know when, how, or from whom SCALP obtained the Canadian currency or.whether the circumstances under which SCALP obtained that currency would lead a reasonable person to accept or to question the accuracy of the basis that SCALP claimed. Nor do we know whether or not BCA questioned the Canadian currency basis. We know only that SCALP;claimed a basis in the Canadian currency - that it contributed to BCA which was 400 times the fair market value of that currency and that, in calculating the Canadian currency loss that BCA claimed in the 12/31/00 BCA return, BCA relied on Manatt's November 1,. 2000 tax opinion letter.and claimed the same basis. On the record before us, we rfind that respondent has failed to carry respondent's burden of-showing that BCA's claiming a basis in the Canadian currency that was about 400 times the fair market value of that currency, standing alone, establishes that Mr. Furman and Mr. Forster, the owners of Fortrend, "lacked any' objective basis to believe" that the loss that BCA claimed on the disposition of the Canadian currency would-offset the gain that it realized on the sale of certain of its assets to petitioner. In further support of respondent's assertion that the "Fortrend Owners lacked any objective basis to believe that BCA's large taxable gain from the sale of its assets could be sheltered by use of the Canadian Dollars", respondent contends that Mr. Furman and Mr. Forster took certain actions to make "BCA - 84-- collection-proof well-before the statute of limitations period a expired for BCA's tax period ended. December 31, 2000s" Although it is not altogether clear; it appears -that respondent is con- tending that Mr . Furman - and Mr . Forstera "lacked any [such] objective basis" because ."well before" theeperiod of limitations for iBCA's taxable year ended December 31, 2000 had expired they took certain,actions, including removing BCA's assets ,and dis- solving BCK/ thatsleft BCA without any funds to- pay the tax attributable- to the BCA asset sale. We believe that respondent'as contention would have*merit only if Mr.s Furman and Mr. Forster did not believe, or reasonably should not have believed, that the loss that BCA claimed on the disposition of the Canadian currency would offset the gain that BCA realized on the sale of certain of its assets to petitioner. If,, however, Mr. Furman and Mr. Förster believed or reasonably should have believed that that loss wòuld offset that gain, sany actions of-Mr. Furman and Mr. Forster to remove assets, from BCA and"to dissolve it before the period of limitations expired for BCA' s taxable year ended December 31, 2000, would not support respondent' s assertion that the "Fortrend owners lacked any ,objective basis" for that belief . The" record is devoid of any evidence establishing what Mr . Furman and Mr Forster (or any other person associated with BCA, Casta- - 85 - net, or SCALP) believed or reasonably should have believed regarding the basis that BCA claimed in the Canadian-currency." On the record before us, we find that respondent has failed to carry respondent's burden of-showing that any actions of Mr. Furman and Mr. Forster to remove- BCA's assets and dissolve it before the period of limitations expired for BCA's taxable year ended December 31, 2000, establishes that they "lacked any objective basis to-believe" that the loss that BCA-claimed on the disposition of the Canadian currency would offset the gain that it realized òn the sale of certain of its assets to petitioner. In further support of respondent's assertion that the "Fortrend Owners lacked any objective basis to believe that BCA's large taxable gain from the sale of its assets could be sheltered by use of the Canadian Dollars", respondent contends that Mr. Furman and Mr. Forster' did not contest the BCA notice. We have found that BCA dissolved on February 8, 2002. We have also found that respondent issued the BCA notice to BCA at its last known address on August 13, 2004, over 18 months after BCA had dis- solved. It is not clear whether respondent was aware that BCA had dissolved at the time respondent issued that notice." The "As discussed above, respondent did not call any witnesses at the trial in this case. "We have found that on Oct.35, 2005, the second revenue, officer, while attempting to collect BCA's tax liability from BCA, Illinois maintained. reviewed certain records relating to BCA that the 'State of It was during that review that the second (continued...) - 86 - record does not establishs whog if anyone,s received the BCA notice or whether the U.S.: Postal Service returned that notice as undeliverable.it Nor does the record establish whether any person or, entity was, authorized to act on behalf. of BCA, - which had dissolved, in order to contest the determinations thatirespondent made in that- notice . 1 On the record before us, we find thatærespondent has-failed to carry respondent's burdeniof showing that any failure of Mr. i Furman and Mr. Forster to" contest the- BCA notice establishes that they "lacked any objective basis to believe" that the loss that, BCA claimed on the disposition of the Canadian currency would offset- the gains that it -realized on the sale of certain of its assets to petitioner. . 'On the record before us, we find that respondents has failed to carry respondent' s burden of establishing that when BCA sold certain of its assets to petitioner it believed or reasonably a should have. believed that the loss that BCA claimed, on the disposition of the Canadian currency would not offset the gain thats it realized on that sale.< On that record, we further find that rèspondent has failed to carry respondent's burden of establishing that under section 5 (a) (2) (B) of t he Illihoïá s' ( . . . continued) revenue «officer ascertained that BCA had. filed articles sof dissolution with the Il-linois secretary, of .state on, Feb. 8 The record does not establish whether or not any other represen tative of- respondent' knew before Oct.. 5, 2005,, that BCA had dissolved. 2002. - 87 - fraudulent transfer statute when BCA sold certain of its assets to petitioner BCA intended to incur, or believed or reasonably should have believed that it would incur, a debt that it would be unable sto pay as it became due. Based upon our examination of the entire record before us, we find that respondent has failed to carry respondent's burden of establishing that under section 5(a) (2) of the Illinois fraudulent transfer statute BCA's sale of certain of its assets to petitioner was fraudulent in law. Section 5(a) (1) of the Illinois Fraudulent Transfer Statute Under Illinois law, a court may not presume that a debtor made a transfer with actual intent to hinder, delay, or defraud a creditor under section 5(a) (1) of the Illinois fraudulent trans- fer statute.55 Wachovia Sec., LLC, v Neuhauser, E528 F. Supp. 2d at 858 (citing Hofmann v. Hofmann, 446 N.E.2d 499, 506 (Ill. 1983)). A creditor, such as respondent in this case, must prove by clear and convincing evidence each of the elements in section 5(a) (1) sof the Illinois fraudulent transfer statute. Id. The creditor may establish a debtor's actual fraudulent intent by relying on certain factors in section 5(b) of the Illinois fraudulent transfer statute. That section provides: 55We shall sometimes refer to the actual intent described in the Illinois fraudulent transfer statute as sec. 5(a) (1) of actual that transfer statute as a transfer that is fraudulent under sec. 5(a) (1) of fraudulent intent. We shall sometimes refer to a transfer the Illinois fraudulent is fraudulent in fact. - 88 - 160/5. Transfer or obligations fraudulent as to creditor; claim arising before or after transfer * * * * * * * (b) In determining actual intent under paragraph (1) of subsection (a) be given, among other factors, to whether: {of section 5] , consideration may (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3)- the transfer or obligation was disclosed or concealed; (4) before the transfer was made or obligation was incurred, suit; the idebtor had been sued or threatened with (5) the transfer was of substantially all the debtor's assets; (6) the debtor absconded; (7) the debtor removed or concealed assets; (8) the value of*the consideration received by the debtor was reasonably equivalent asset transferred or the amount of incurred; to the value of the the obligation (9) the debtor was insolvent or became insolvent shortly after the transfer -was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial. debt was incurred; and (11) the debtor transferred the essential assets the business to a lienor who transferred the assets of to an insider of the debtor. 740 Ill. Comp. Stat.' Ann. 160/5 - 89 - No one factor in section 5(b) of the Illinois fraudulent transfer statute is dispositive in determining actual fraudulent intent under section 5(a) (1).of that statute. See Levit v. Spatz, 222 Bankr. 157, 168 (N.D. Ill. 1998). Moreover, as. section 5(b) of the Illinois fraudulent transfer statute itself provides, the list of factors in that section is not exclusive; a court may also consider other factors not,set forth-in section 5(b) of the Illinois fraudulent transfer statute that it deems relevant in determining actual fraudulent intent.under section 5(a) (1) of that statute. See Falcon v. Thomas, 629 N.E.2d 789, 796 (Ill. App. Ct. 1994). "When these 'badges of fraud' are present in sufficient number, they may give rise to an inference or presumption of fraud"." Grochocinski v. Zeigler, 320 Bankr. 362, 373 (Bankr. N.D. Ill. 2005) (citing Steel Co. v. Morgan Marshall Indus., Inc., 662 N.E.2d 595, 602 (Ill. App. Ct. 1996)); see also Berland v. Mussa; 215 Bankr. 158, 168-170 (Bankr. N.D. Ill. 1997); Kaibab Indus., Inc. v. Family Ready Homes, Inc., 372 N.E.2d 139, 142 (Ill. App. Ct. 1978). Respondent asserts that six factors specified in section 5(b) of the Illinois fraudulent transfer statute" and one factor "We shall sometimes refer to a factor from which an infer- ence or a presumption of actual sec. 5(a) (1) of badge of fraud. the Illinois fraudulent transfer statute as a fraudulent intent may arise under "Respondent does not rely on, and we shall not consider, any of the remaining five factors specified in sec. 5(b) of the (continued...) - 90 - not" specified in-that section (respondent's additional faátor) give .rise tocan inference or a.presumption that under-section 5 (a) (1) of the Illinois fraudulent transfer statute BCA sold' certain of its assets to petitioner with actual intent to hinder, delay; or defraud respondent. The six.badges -of fraud specified in section 5(b) of the I-llinois fraudulent transfer statute+on which respondent relies are: (1) The debtor's transfer was to .an insider (insider factor) ; (2) the transfer was of substantially all of the debtor's assets (substantially all assets factor);- (3) the debtor removed or concealed assets (removed assets a factor) ; (4) the value of the consideration that the debtor÷ received- was not reasonably»equivalent to the value of the assets that the debtor transferred (reasonably. equivalent value factor) ; (5) the debtor. was insolvent or became insolvent shortly after the transfer was made (insolvency. factor) ; and (6); the transfer occurred shortly before or shortly after a substantial debt was incurred (substantial debt factor) . Respondent's additional factor on which respondent relies is- certain actions (discussed below) of Mr. Furman and Mr. Forster, the owners of Fortrend. With respect to the insider factor on which respondent * relies, respondent contends that BCA' s sale of certain of its assets to petitioner, was antindirect transfer by BCA of those assets to certain insiders of BCA who owned indirectly 30 percent s? ( . . . continued) Illinois fraudulent transfer statute. - 91 - of petitioner. That is because, according to respondent, certain members of BCA senior management owned all of the membership interests in LRD Group, which in turn owned 30 percent of the membership interests in petitioner. Section 2(g).of the Illinois fraudulent transfer statute defines the term "insider" as pertinent here to include: (2) if the debtor is a corporation, (A) a director of the debtor; (B) an officer of the debtor; - . (C) a person in control of the debtor; (D) a partnership in which the debtor is a general partner; (E) a general partner in a partnership described in clause (D); or (F) a relative of a general partner, director, officer, or person in control of the debtor; 740 Ill. Comp. Stat. Ann. 160/2(g) (2). .We have found that, effective as of the closing on July 31, 2000, of the Abrams estate's sale of its BCA stock to Castanet, (1) the members of BCA senior management resigned their positions with BCA," and (2) Castanet, as the sole stockholder of BCA, elected Ms. Dill as the sole director of BCA. We have also found that on July 31, 2000, Ms. Dill, as the sole director of BCA, "Our use of the defined phrase "BCA senior management" after the members of with BCA is only for convenience and is not suggest with BCA. that-those members continued to hold management positions that management resigned their positions intended to imply or - 92 - elected herself president, secretary, and treasurer of ,that company. As a result, as of the closing on August 1 2000 of BCA's sale of certain of its assets toipetitioner, no member of BCA senior management was a directors or an of ficer of BCA. - See E 740 Ill. Comp. Stat. Ann. 160/2(g) (2)/(A) and (B). Nor was any member of BCA senior management , in control ofs BCA at the time of that sale. See 740 Ill. Comp. Stat. Ann. 160/2(g) (2) (C) . Moreover, BCA did not own any. interestrin petitioner, let alone a general partnership interest." See 740 Ill. -Comp. Stat. Ann. 160/2 (g) (2) (D) and (E) . On the record before us, we find that as of the closing ,on August 1, 2000, of BCA's sale of certain of its assets to petitioner the members of BCA senior management were not insiders of BCA under section 2 (g) (2) of the Illinois fraudu- lent ·transfer statute. On the record before us, we find that respondent has failed to carry respondent's burden of establishing that under section 5 (b) (1) of the "Illinois fraudulent transfer statute BCA' s sÅle of certain of its assets to petitioner was a transfer of those assets to an insider. "We have found that at 1 the BCA asset sale on 2000, Related LR and LRD Group owned 70 percent and 30 the time of Aug. percent, the membership interests in petitioner. On that date, Related and Yukon Holdings LLC owned 90 percent and 10 percent, LR, and Mr. Blau, Holdings LLC. management owned all of On Aug. 1, 2000, certain members of BCA senior the membership interests in LRD Group; the president of Related,- was a member of Yukon the membership interests in Related respectively, of respectively, of - 93 - With respect to the substantially all. assets factor on which respondent relies, we have found on the basis of the parties' stipulation that the assets which BCA sold to petitioner and which petitioner purchased from BCA constituted over 90 percent of the total value, and substantially all, of BCA's assets. On the record before us, we find that respondent has carried respondent's burden of establishing that under section 5(b) (5) of the Illinois fraudulent transfer statute BCA's sale of certain of its assets to petitioner was a transfer of substantially all of its assets. With respect to the removed assets factor on which respon- dent relies, respondent contends that BCA removed virtually all of its assets because the $25,779,369 of funds representing the asset purchase price that petitioner paid to purchase certain of BCA's assets was transferred to BCA's sole stockholder, Castanet, which used those funds to repay the loan that UAFC had made to Castanet to fund Castanet's purchase of the Abrams estate's BCA stock. Petitioner counters only that the transfer to Castanet of the funds representing the asset purchase price was a loan from BCA to Castanet. In support of that contention, petitioner alleges that certain financial statements of BCA refle.cted such a loan. The record does not contain any financial statements of BCA that showed a loan to Castanet as an asset of BCA or as an 94 - item that was receivable by, I or payable to, BCA. Nor does the record contain a loan instrument, any other - document, or other evidence that establishes that BCA made a loan to Castanet . The escrow agreement'° required that the funds representing the asset purchase pricê be used to repay on behalf of Castanet ther loan that UAFC .had made sto Castanet to fund Castanet ' s purchase of the BCA stock from the Abrams estate.' :The esárow agreement required Rabobank, the escrow agent, to pay the portion of the funds representing the asset purchase price, if any, remaining thereafter pursuant to the instructions of Castanet. The escrow agreement establishes that the parties to that agree- ment intended and required that the funds representing the asset purchase price be transferred on behalf of Castanet .to UAFC, and not to e BCA, in repayment of the loan that UAFC had made to Castanet . Pis discussed more fully above, despite the unambiguous provisions of the escrow agreemente on August 1, 2000, Castanet dii-ected Rabobank, 'as escrow agent, to transfer the $25, 779, 369 of funds representing the asset purchase price to a bank account maintained in BCA's name. On the same date, the funds represent- ing the asset purchase price were. transferred to a bank account, maintained in Castanet's name, and on August 2, 2000, Castanet used those funds to repay its debt to UAFC. '°See supra note 45 for a discussion of the parties to the escrow agreement . - 95 - On the record before us, we find that respondent has carried respondent's burden of establishing that under section 5(b) (7) of the Illinois fraudulent transfer statute BCA removed substan- tially all of its assets that it sold to-petitioner in that the record establishes, and we have found in our consideration of whether BCA's sale of those assets to petitioner was fraudulent in law under section 5(a) (2) of the Illinois fraudulent transfer statute, that BCA did not receive any consideration in return for selling those assets to petitioner. With respect to the reasonably equivalent value factor on which respondent relies, we have found in our consideration of whether BCA's sale of certain of its assets tx> petitioner was fraudulent in law under section 5(a) (2) of the Illinois fraudu- lent transfer statute that BCA did not receive any consideration from petitioner in exchange for the sale of certain of its assets to petitioner, let alone consideration that was reasonably equivalent value. The factor in section 5(a) (2) of the Illinois fraudulent transfer statute that is used in determining whether a transfer is fraudulent in law under that section 5(a) (2) has the same meaning as the reasonably equivalent value factor in section 5(b) (8) of the Illinois fraudulent transfer statute that is used in determining whether a transfer is fraudulent in fact under section 5(a) (1) of that statute. See Levit v. Spatz, 222 Bankr. at 167-168. - 96 - On .the record before us, we find that respondentshas carried respondent's burden of establishing that under section 5(b)-(8), of the Illinois fraudulent transfer statute BCA did not- receive .any consideration from petitioner,in exchange for.the sale of certain of its assets to petitioner:,e let alone consideration that was reasonably equivalent value. & With respect to the insolvency factor on which respondent relies, section 3 of the Illinois fraudulent transfer statute provides in pertinent part: 160/3. Insolvency; assets; debts § r3 . debtor' s debts is greater than all of assets at a fair valuation. ,(a) A debtor is insolvent if the sum of the debtor' s the 7 4 0 I-11 . Comp . St at . Ann . 16 0 / 3 . In de t ermining - insolvencyl under section 5(b) (9) of the Illinois fraudulent transfer statute, any contingent - liability of BCA is to be taken into account . 9 See B_ay State Milling Co. vs Martin 145 Bankr. 933, 949 (Bankr. «N.D. Illt 1992) . Respondent contends that any tax att:risbutable to the gain that BCA realized on the sale of certain of its assets to peti- tioner constitutes a contingent liability of BCA at the time of .thedBCA asset sale." , According to respondent, "In the BCA notice, kespondent determined a deficiency in BCA' s tax of $7, 507, 972 . Virtually all of petitioner does not contest asset sale capital gains tax. in this case, that defeiciency, a which is attributable to the - 97 - BCA was insolvent upon the transfer of the BCA Assets to petitioner, because BCA had inadequate assets with which to pay the resulting federal The test under Illinois law for insolvency includes contingent liabilities; thus, BCA was insolvent upon the sale of income tax payment came due. immediately the BCA Assets, not when its federal income taxes. Petitioner counters that from August.1, 2000, the date of the closing of the BCA asset sale, through December 31 of that year (1) BCA held as an asset a $25,779,369 loan receivable from Castanet, and (2) BCA's assets, including-that loan receivable, exceeded its liabilities. We have found in our consideration of the removed assets factor that the record does not contain evidence establishing that the transfer to Castanet of the $25,779,369 asset purchase price constituted a loan from BCA to Castanet. On the record before us, we reject petitioner's contentions that from August 1 through December 31, 2000, (1) BCA held as an asset a $25,779,369 loan receivable from Castahet, and (2) BCA's assets exceeded BCA's liabilities. Petitioner further counters respondent's contentions regard- ing the insolvency factor as follows: "A contingent liability under Illinois law Although the test for insolvency under Illinois law includes contingent liabilities, the tax liability in question here was not a contingent liability and cannot, as a matter of analysis. means a liability that already exists but which will become absolute upon the happening of a certain event." Browning-Ferris Indus. of Illinois, No. 92 C 20259, 1996 WL 67216, 1996) fore, BCA's potential tax liability was not a contingent liability because it did not yet exist in such a Inc. v. Ter Maat, *1 (N.D. Ill. Feb. 16, law, be included in the insolvency (citations omitted). Under Illinois law, there- -¡98 - the end of the calendar year, " Reid Ice Cream way that the c happening of a certain event would make it absolute .- BCA' s tax liability would not exist at all "until Corp. v. Commissioner, 59 F.2d 189,. 191 (2d Cir. _ 1932.) , and no one event, could make that liability absolute because any activities of end of the corporation before the liability. the year would alter the potential Although it is not .altogether clear, it appears that peti- tioner is contending that, because during BCA' s short taxable year ended:December 31) 2000,.BCA might have-engaged in addi- tional transactions or activities. that might have reduced . or eliminated the asset sale capital gains tax,Ithat tax-may not be treated as- a contingent liability for purposes_ of section 5(b) (8) of the Illinois fraudulent: transfer statute. We disagreen Even if during its short taxable .year ended December 31x 2000, BCA might have engaged in additional transactions or activities that might have reduced or eliminated the tax attributable to BCA' s sale of .certain of its assets to petitioner, that tax nonetheless was a contingent liability as of and immediately after that sale. See Climatrol Indus . , Inc . v . Fedders Corp . y 5 01 N . E . 2d . 292 ( Ill . App . Ct . 198 6 ) ; see also Browning- Ferris Indus . of Ill . Inc. v. Ter Maat, No. 92 C 20259 (N.D. Ill. Feb. 16, 1996) - On the record before us, we find (1) that as a result of BCA' s sale of certain of its assets to petitioner on August 1, 2000, BCA had a -contingent liability for the tax attributable to that sale and (2) that as of that sale and immediately thereaf ter - 99 - BCA was insolvent because its liabilities, including that contin- gent liability, exceeded its assets." On the record before us, we find that respondent has carried respondent's burden of establishing that under section 5(b) (9) of the Illinois fraudulent transfer statute BCA was insolvent as of and immediately after it sold certain of its assets to peti- tioner. "We have found that BCA did not receive the funds repre- the escrow agreement, We made that finding even those funds were deposited into a to a bank account of Castanet, which used those.funds on senting the asset purchase price. though on Aug. 1, 2000, at Castanet's direction and in contravention of bank account of BCA and on the same day transferred from that account Aug. 2, 2000, not so found, on the record before us, we find that when the funds representing the asset purchase price were transferred on Aug. 1, 2000, Castanet, BCA's liabilities, for the asset sale capital gains tax, exceeded its assets, and BCA was insolvent. from a bank account of BCA to a bank account of including the contingent liability to repay Castanet's debt Even if we had to UAFC. that tax was a liability at In that taxable year ended Dec. 31, 2000. the end of BCA's We have found that BCA it reported total assets of $3,277,516 on Dec. 31, Assuming arguendo that the asset sale capital gains tax were the BCA asset sale, peti- not a contingent liability of BCA as of tioner agrees that short included Schedule L with the 12/31/00 BCA return. schedule, 2000, which was substantially less than the tax attributable to the BCA asset sale. debtor was insolvent or became insolvent shortly after the transfer". (emphasis added). "shortly after" that 5(b) (9) of arguendo that the asset sale capital gains tax were not a contingent liability at the time of the BCA asset sale on Aug. 1, 2000, but became a liability on Dec. 31, 2000, we would conclude that under sec. 5(b) (9) of BCA became insolvent shortly after that sale. the Illinois fraudulent transfer statute. Assuming We have found no authority defining the term The insolvency factor considers whether "the the Illinois fraudulent transfer statute is used in the insolvency factor in sec. 740 Ill. Comp. Stat.. Ann. 160/5(b) (9) (West 2002) --100 - With respect:to the substantial debt factor on which respon- dent relies, respondent contends that i BCA incurred a: substantial debt (i.e., the asset sale capital gains tax) at the time it sold its assets to petitioner. Although petitioner agrees that BCA incurred a substantial debt consisting of the asset sale capital gains tax, petitioner asserts that that tax "did not become a debt until BCA' s return was required to be filed [on March 15, 2001] ."" The substantial debt factor considers whether "the transfer occurred shorEly before or shortly after a substantial debt- was incurred". 740 Ill Comp-. Stat. Ann. 160/5(b)-(10) (emphasis added) . We have found no authority defining the term "shortly before" that is used in the substantial debt factor in sections5(b) (10) of the Illinois fraudulenti transfer statute." Assuming arguendo that the .asset sale capital gains taxi did not become a debt of BCA until March 15, 2001, the date on which BCA was required to file its return for its taxable year ended December 31, 2000, we would conc lude that under, section 5 (b) (10 ) of the . Illinois f raudulent s "We find petitioner's assert-ion regarding the substantial debt factor to be inconsistent with petitioner's agreement advancing its contentions regarding the insolvency factor that the liability for the assete sale capital gains tax existed at end of BCA's taxable year ended Dec. 31, 2000. 62. See supra note in the "Nor have we. found any authority defining the term "shortly after" that 5(b) (10) of is used in the substantial debt factor in sec. the Illinois fraudulent transfer statute - 101 - . transfer statute BCA's sale of certain of its assets to peti- tioner occurred shortly before that debt was incurred. On the record before us, we find that respondent has carried respondent's burden of establishing that under section 5(b) (10) of the Illinois fraudulent transfer statute BCA's sale of certain of its assets tö petitioner occurred shortly before a substantial debt (i.e., the asset sale capital gains tax) was incurred. With respect tx> respondent's additional factor on which respondent relies, respondent contends: the Fortrend Owners [Mr. Furman and Mr. The The actions of Forster] const.itute an additional badge of Fortrend Owners operated Fortrend, a tax shelter enterprise, and SCALP, whose raison d'etre was facilitating Intermediary Transactions. Non-payment of issue in this case was the Fortrend, Owners' objective in structuring the BCA Intermediary Transaction. fraud. the taxes at In support of the above-quoted contentions, respondent relies primarily on the Fortrend brochure that Fortrend had circulated between 1997 and November 2003 and Notice 2001-16, 2001-1 C.B. 730 (Notice 2001-16), that respondent published on February 26, 2001. We turn first to the Fortrend brochure. That brochure stated in pertinent part in a section entitled "BUY STOCK/SELL ASSETS TRANSACTION, EXECUTIVE SUMMARY": We are working with various clients who may be willing to buy the stock from the seller and then cause the target corporation to sell mate buyer. that enable them to absorb the -tax gain inherent assets. its net assets to the ultiThese clients have certain tax attributes in the - 102 - is sufficiently low that a seller of stock In certain situations the economic cost of involvement can increase its after-tax sale proceeds, a buyer of net assets can decrease its after-tax purchase price (on a present .value basis) , and the client can still . make an arbitrage profit. the client's , * * * * x * * * As with any transaction, economic substance and proper form are crucial transactions where involvement by such a client may make sense, raising the idea at a transaction is advisable. to its success . Accordingly, the earliest stages of a in As we understand respondent's contentions in support of respondent's additional factor, respondent assumes that any transaction described in the section of the Fortrend brochure entitled "BUY STOCK/SELL ASSETS TRANSACTION, EXECUTIVE SUMMARY" that reduces or minimizes tax is improper because it is inconsis- tent with or in violation of the Code. We reject any such assumption. We have found nothing in that section that leads us to conclude that the transaction described therein, standing alone, constitutes a transaction that would improperly reduce or minimize tax. Indeed, that section expressly stated that "eco- nomic substance and proper form are crucial to its [the transac- tion's] success." We turn now to Notice 2001-16. As we understand it, respon- dent is contending that, because respondent in that notice characterized as a tax shelter a- transaction that appears to resemble the transaction described in the section of the Fortrend brochure entitled "BUY STOCK/SELL ASSETS TRANSACTION, EXECUTIVE - 103 - SUMMARY", Fortrend was a "tax shelter enterprise"." On.the record before us, we reject any such contention for reasons that are essentially the same as the reasons that we set forth above in rejecting respondent's assumption about the transaction described in that section of the Fortrend brochure. - On the record before us, we find that respondent has failed to carry respondent's burden of. establishing that under section 5(b) of the Illinois fraudulent transfer statute "The actions of the Fortrend owners [Mr. Furman and Mr;. Forster] constitute" a badge of fraud. On the record before us, we find that respondent has failed to carry respondent's burden of establishing respondent's addi- tional factor under section 5(b) of the Illinois fraudulent transfer statute. We have found that respondent has carried respondent's burden of establishing the following five badges of fraud under section 5(b) of the Illinois fraudulent transfer statute: (1) The substantially all -assets factor, (2) the removed assets factor, (3) the reasonably equivalent value factor, (4) the "We note that respondent indicated in Notice 2001-16, 2001- that respondent might challenge the transactions 1 C.B. 730, identified in that notice by seeking to recharacterize them in a manner that was more consistent with what respondent claimed was their substance. abandons advancing any argument of respondent described in that notice. See supra note 35. In the present case, respondent expressly - 104 - insolvency factor, and (5) the substantial debt factor."'a Based upon our -examination of the -entire record beforecus, we findithat those badges of fraud raise only as suspicion that under -sections 5 (a) (1) of thea Illinois fraudulent transfer statute BCA acted i i with actual intent to hinder, 3 delay, oredefraud ini selling certain of its assets to petitioner. If when BCA sold. certain of its assets to petitioner it had believed or reasonably should have believed that the loss that it. claimed ion the disposition of the Canadian currency would offset the gain that it reailized on that sale, those facts would belie respondent's contention .that under section 5 (a) (1) of the Illinois fraudulent transfer - statute BCA sold those assets with actuali fraudulent intent. If when BCA sold certain of its assets, to petitioner it had believed or reasonably should have believed that that loss would not have offset that gain, those facts would support respondent's conten- tion that under section 5 (a) (1) of the Illinois fraudulento transfer statute BCA sold those assets with' actual fraudulent intent . "We have found no case in which a court has held that the fraudulent the fraud creates an inferencé ör a intent under sec. 5(b) of See Grochocinski v. presence of five badges of presumption of actual Illinois fraudulent transfer statute. Zeigler, 320 Bankr. 362, 373 a(Bankr. N.D. found despite presence of six badges of Gillissie, 215 Bankr. at 373 (fraud found where six badges of fraud present) ; Berland v. Mussa, 215 Bankr.- 158, 170 ,(Bankr N.D. Ill. 1997) ent) . fraud) ; Voiland v. (fraud found where seven badges of fraud pres Ill.-2005) (no fraud - 105 - We have found that respondent, who has the burden of estab- lishing by clear and convincing evidence BCA'.s actual fraudulent intent under section 5(a) (1) of the Illinois fraudulent transfer statute, has failed to carry respondent's burden of establishing that when BCA sold certain of its assets to.petitioner it be- lieved or reasonably should have believed that the loss that it claimed on the disposition of the Canadian currency would not offset the gain that it realized on that sale. Based upon our examination of the entire record before us, we find that respondent has failed to carry respondent's burden of establishing by clear and convincing evidence that under section 5(a) (1) of the Illinois.fraudulent transfer.statute BCA acted with actual intent to hinder, delay, or defraud respondent when it sold certain of its assets to petitioner. Claimed Transferee of Property of BCA Under Respondent's "Trust Fund Doctrine" Respondent argues that petitioner is liable as BCA's trans- feree under respondent's trust fund -doctrine. The three elements of respondent's trust fund doctrine are:" the transferee pays the consideration for the (1) a transferee receives assets from a corporation, (2) assets to someone other than the transferor corporation, and (3) pay its debts * the transferor corporation is unable to * *. "We shall consider only respondent's articulation of a doctrine in equity known as a trust fund doctrine. consider other articulations of so-called trust fund doctrines in equity that arise in contexts not presented in this case. We shall not - 106- - Respondent claims to have "distilled" the above-quoted three elements of, respondent's trust fund doctrine from the following statements of - certain "principles of equity" (principles of equity) by the U.S. Court of Appeals for the Seventh Circliit in Shepard v. Commissioner, 101-F.2d 595, 598-599 (7th Cir. 1939) affg. Hunt v. Commissioner, 36 B.T.A. 268 (1937) : in a case where corporation A transfers all its assets to B for a consideration which B pays to then B, Likewise, of C, any unpaid income tax, which represents the prof its made on such transfer on the theory that B is a trustee, to the extent of which it acquired from A. regardless of any agreement, is liable for the property the value of * * * * * * * i Equally clear and definite must be the holding that one who dispossesses.another company of all of assets,- paying, the consideration therefor to a third party, and leaving the propertyless corporation unable to pay its debts, at trusteeship for taxes and other- debts in an amounts not exceeding the value of debtor taxpayer. This is so * application of principles of equity; the time, becomes a trustee and liable in such including taxes.which were.inchoate the property taken from the * because of the * its * * * In distilling respondent s trust fund doctrine from the above-quoted passages in Shepard, respondent ignores-or fails to acknowledge the underlying rationale that the Court of Appeals gave for the principles of equity that that court set forth in Shepard. According to the Court of Appeals, The theory of these holdings is that courts of equity will protect creditors from fraudulent action ori the part of the the debtors by holding the recipient of - 107 - debtor's property as a.trustee thereof for the benefit of the creditors of said debtor. Id. at 599. This Court's predecessor, the Board of'Tax Appeals, set forth the principles of equity and the rationale for those principles in a manner very similar to that of the Court of Appeals in Shepard. According to that Board, leaving the corporation without is paid to where assets of a corporation are sold for an equivalent consideration, which under an agreement the stockholders, assets to satisfy its creditors, ration is liable to creditors of tion to the extent of ceived, purchaser being a party to such fraud through his knowledge that the result of the transaction must necessarily leave such creditors with no assets from which to satisfy their claims. the sale being in fraud of creditors and the the purchasing corpothe selling corpora- the value of the property re- Hunt v. Commissioner, supra at 277. The courts developed the principles of equity set forth in Shepard and Hunt as an exception to the well-settled general rule in the majority of States in the United States, including the State of Illinois, "that a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the transferor corporation." Vernon v. Schuster, 688 N.E.2d 1172, 1175-1176 (Ill. 1997); see Stewart Title Guar. Co. v. Commissioner, 15 T.C. 566, 573 (1950); Gideon-Anderson Co. v. Commissioner, 20 B.T.A. 106, 108-109 (1930); Cmty. Ins. Servs., Ltd. v. United Life Ins. Co., No. 05-CV-4105-JPG (S.D. Ill. Sept. 13, 2007). That exception to that general rule applies "where - 108 - the transaction is "for the fraudulent purpose of escaping -liabil- ity for the seller's obligations." Vernon v. Schuster, supra at 1175-1176; see Shepard v. Commissioner, supra at 599; Hunt v. Commissioner, supra at 277; Gideon-Anderson Co. v. Commissioner; supra at 109; Cmty. Ins. Servs., Ltd. v. United Life Ins. Co., suora. In determining whether to apply the so-called fraud excep- tion to the wellusettled general, rule in Illinois, that a corpora tion that purchases the assets of another corporation -is not liable for the debts or liabilities of the .transferor corporation and therefore ,whether to a~pply the principles of equity set forth in Shepard, Hunt, and other caselaw, it is necessary to determine whether the transaction in question was for the fraudulent pur- pose of avoiding liability for the transferor's obligations. See Shepard v. Commissioner, supra at 599; Hunt v. Commissioner supra at 277; Gideon-Anderson Co. v. Commissioner, supra at 109; Cmty. Ins. Servs., Ltd. v. United Life Ins. Co., supra; Vernon v. Schuster, supra at 1175-1176. In deterinining under Illinois law whether the transaction was for such a fraudulent purpose, it is appropriate to look to the badges of fraud in section 5(b) of the Illinois fraudulent transfer statute that are used in determining actual fraudulent intent under section 5(a) (1) of that statute. See Davila v. Magna Holdinq· Co., No. 97 C 1909 (N.D. Ill. Feb. 28, 2000). - 109 - We have found that respondent has failed to carry respon- dent's burden of establishing that BCA's sale of certain of its assets to petitioner was a fraudulent transfer under section 5(a) (1) and (b) of the Illinois fraudulent transfer statute." A fortiori, on the record before us, we find that respondent has failed to carry respondent's burden of establishing that that sale comes within the fraud exception to the well-settled general rule in Illinois that a corporation that purchases the assets of another corporation is not liable for the debts or liabilities of the transferor corporation. On that record, we further find that respondent has failed to carry respondent's burden of establish- ing that BCA's sale of certain of its assets to petitioner requires the application to that sale of the principles of -equity set forth in Shepard v. Commissioner, supra. Based upon our examination of the entire record before us, we find that respondent has failed to carry respondent's burden of establishing that petitioner is liable as BCA's transferee under respondent's trust fund doctrine. Conclusion Based upon our examination of the entire record before us, we find that respondent has failed to carry respondent's burden "We have also found that respondent has failed to carry respondent's burden of establishing that BCA's sale of certain- of its assets to petitioner was a fraudulent 5(a) (2) of the Illinois fraudulent transfer statute. transfer under sec. - 110 - of establishing that petitioner: is liable as a transferee of property of BCA under section 6901.'" We have considered all of, the contentions and arguments of the parties that are not discussed herein, and' we find them' to be without merit, irrelevant, and/or moot. To reflect the foregoing Decision will be entered for petitioner. 690ur resolution of the various questions and issues pre sented here depends on the facts that we have found on the record before us and on respondent' s burden of proof . Nothing herein is intended to be, orcshould be read as, finding or conclusion in other cases sthat are not ebefore us. .reaching ora implying any