                                T.C. Memo. 2015-51


                          UNITED STATES TAX COURT



 WILLIAM J. KARDASH, SR., TRANSFEREE, Petitioner v. COMMISSIONER
               OF INTERNAL REVENUE, Respondent

      CHARLES K. ROBB, TRANSFEREE, Petitioner v. COMMISSIONER OF
                   INTERNAL REVENUE, Respondent


        Docket Nos. 12681-10, 12703-10.              Filed March 18, 2015.


        Erica G. Pless, for petitioner in docket No. 12681-10.

        Mitchell I. Horowitz and Quian Wang, for petitioner in docket No. 12703-

10.

        Timothy L. Smith, Andrew Michael Tiktin, Sergio Garcia-Pages, and

Michael S. Kramarz, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


        GOEKE, Judge: This case involves the minority shareholders of a concrete

company that earned large profits during the Florida housing boom in the early

2000s. From 2003 to 2007 petitioners received multiple transfers from the
                                         -2-

[*2] company, in which they were minority shareholders. During that period the

company paid no Federal income tax, and its majority shareholders siphoned

substantially all of the cash out of the company. Respondent determined

deficiencies, penalties, and interest with respect to the company for that period

totaling more than $120 million, but the company cannot pay the liability.

Respondent seeks to recoup approximately $5 million that petitioners received

from the company during the period, under section 6901.1 We must determine

whether petitioners are liable as transferees. We hold that they are partially liable.

                               FINDINGS OF FACT

      Some facts have been stipulated and are so found. Petitioners resided in

Florida when they filed their petitions. We have consolidated their cases for trial,

briefing, and decision.

I. Background

      Florida Engineered Construction Products Corp. (FECP) makes precast

concrete products often used in home construction. During the years at issue four

individuals owned all of FECP’s stock: petitioner Kardash owned 8.65%,

petitioner Robb owned 1.13% (not until 2004), and FECP’s president, John

      1
      Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
                                           -3-

[*3] Stanton, and its board chairman, Ralph Hughes, owned equal shares of the

remainder.

      Messrs. Stanton and Hughes were involved in all aspects of FECP’s

business, and as the majority shareholders they controlled the direction and

management of the company. Mr. Kardash is an engineer and was primarily

involved in FECP’s operations. He was responsible for the company’s processes

and production decisions. Mr. Robb managed the company’s sales team; because

of Mr. Robb, FECP was able to retain many of its customers even as it raised the

prices for its products. Neither petitioner was involved in the company’s financial

matters.

II. Tax Liability

      A. Underlying Liability

      Demand for precast concrete construction products corresponds with

demand for new home construction. Consequently, during the Florida housing

boom in the early 2000s FECP experienced a period of growth and profitability.

Its annual revenues peaked in 2006 at more than $100 million. FECP failed to

report any income for the years at issue. Ultimately the Internal Revenue Service

(IRS) audited FECP and determined that it owed over $120 million in tax,

penalties, and interest for the years at issue.
                                         -4-

[*4] Respondent tried to collect FECP’s liability but found that FECP could not

pay. Respondent agreed to let FECP pay its liability in $70,000 monthly

installments. The installment plan agreement did not reduce the total liability.

Under the agreement respondent reviews FECP’s financial condition every two

years and may increase the monthly obligation if he finds FECP can pay more.

      B. Respondent’s Attempts To Collect From Petitioners

      If FECP’s current obligation under the installment agreement remains the

same, FECP will take more than 150 years to pay off its full liability. In the

meantime respondent is seeking to collect as much of the liability as he can from

other parties. Respondent has already reached agreements with Mr. Hughes’

estate and with Mr. Stanton to recoup some of the transfers they received during

the years to which the liability relates. Respondent now seeks to recover many of

the transfers petitioners received. Specifically, respondent seeks to recover from

petitioners the following amounts:

                                               Amounts
                       Year          Mr. Kardash     Mr. Robb
                       2003           $250,000       $250,000
                       2004            300,000        200,000
                       2005           1,549,990       199,890
                                         -5-

                [*5] 2006             1,955,000        255,000
                       2007              57,500           7,500
                        Total         4,112,490        912,390

III. Fraud at FECP

      Until 2001 FECP was subject to a line of credit agreement that required it to

produce an audited financial statement each year. FECP had annual audits and

consistently received unqualified opinions on its financial statements. FECP paid

off the line of credit in 2001 and did not have a financial statement audit

thereafter. About this time Messrs. Hughes and Stanton began to systematically

transfer all of the company’s pretax profits to themselves.

      Mr. Stanton opened a bank account in FECP’s name that did not appear on

its balance sheet. As FECP received payment for services, Mr. Stanton would

transfer cash from the company’s operating account to this secret account. He

would then transfer the money from the secret account to his and Mr. Hughes’

personal accounts or to the accounts of corporations he solely owned. When

accounting personnel asked Mr. Stanton how to characterize the large transfers

from the company’s operating account, he told them to mind their own business.

The accounting staff recorded the amounts as loans receivable and eventually

wrote them off as operating expenses.
                                        -6-

[*6] While Messrs. Hughes and Stanton were transferring money from the

company, they also made sure that FECP did not file accurate income tax returns.

FECP filed returns for 2003 and 2004, but it fraudulently reported losses. FECP

did not file a return for 2005, 2006, or 2007. When the IRS audited FECP, it

determined that FECP owed tax, penalties, and interest for the period of more than

$120 million.

IV. Fictitious Interest Payments

      In addition to the dividends they received, Messrs. Hughes and Stanton

received interest payments from FECP in 2005, 2006, and 2007. Mr. Hughes

received $5,147,250, $12,914,047, and $6,468,750, respectively, through

Denouement Strategies, Inc. (Denouement), a corporation he owned for personal

and business investments. Mr. Stanton received $4,250,001, $12,101,562, and

$9,046,872, respectively. The interest was based on a fictitious loan Mr. Stanton

had recorded on the company’s balance sheet in the names of Mr. Hughes and

Denouement; neither Mr. Hughes nor Mr. Stanton, through Denouement, ever

made the loans to FECP.

      These interest payments were separate from the dividend payments all four

shareholders received. Neither petitioner received any interest payments from

FECP.
                                        -7-

[*7] V. Transfers to Petitioners

      Petitioners received several transfers during the years in which Messrs.

Hughes and Stanton stripped FECP. They received their usual salaries, which

respondent is not seeking to recoup, and they received “advances” and dividends,

which are the subject of this case.

      A. Advances

      Until 2003 FECP had a bonus program, under which petitioners each earned

significant compensation. Their bonuses depended on their performance, and

petitioners routinely received hundreds of thousands of dollars of additional

income under the program. FECP suspended the bonus program for 2003 and

2004. Because Messrs. Hughes and Stanton understood that petitioners had

become accustomed to receiving significant bonuses, they decided to give them

bonus “advances” in 2003 and 2004. The advances would allow petitioners to

continue their standards of living while the bonus program was suspended. When

petitioners asked Mr. Stanton how they should report the advances on their

returns, he told them that they were loans and did not have to be reported. Mr.

Stanton told petitioners that they would eventually have to repay the advances.

Petitioners did not sign a loan agreement or discuss further terms with Mr.
                                         -8-

[*8] Stanton, and they never paid interest on the loans. FECP ultimately forgave

the loans in 2009.

      The IRS audited petitioners’ 2003 and 2004 individual Federal income tax

returns and recharacterized the advances as dividends. Petitioners claimed, in

separate petitions they filed with this Court, that the payments were loans. The

cases eventually settled, and petitioners paid tax on the advances.

      B. Dividends

      In 2005, 2006, and 2007 FECP declared and paid dividends to its

shareholders in total amounts of $17,748,880, $22,610,000, and $665,000,

respectively. Each shareholder’s dividends were based on his percentage of stock

ownership. Mr. Kardash received $1,549,990, $1,955,000, and $57,500,

respectively; Mr. Robb received $199,890, $255,000, and $7,500, respectively.

FECP issued petitioners Forms 1099-DIV, Dividends and Distributions, reflecting

these amounts, and petitioners reported these amounts as dividends on their

individual returns.
                                         -9-

[*9] VI. FECP’s Financial Condition

      FECP’s revenues for the years at issue and the four preceding years are

summarized below:2

                                          Revenue
                                Year    (in millions)

                                1999           $39.9
                                2000            55.2
                                2001            45.6
                                2002            46.7
                                2003            64.2
                                2004            96.6
                                2005           132.2
                                2006           120.4
                                2007            55.4

These numbers reflect the significant growth FECP experienced during Florida’s

housing boom and also the drop in its revenues when the housing market

collapsed. Petitioners believed they were sharing in FECP’s success when they

received large dividends in 2005 and 2006. In 2007 they felt the impact of the

collapse through smaller dividends.

      Until 2007 FECP was, at least ostensibly, a thriving business, but by the end

of 2007 it had become insolvent. Because Messrs. Hughes and Stanton hid a


      2
       The revenues for 1999 to 2002 are based on FECP’s Federal income tax
returns for those years, and the revenues for the years at issue are based on internal
financial statements the company prepared.
                                           -10-

[*10] number of transfers from FECP’s accounting personnel, FECP’s financial

statements do not reliably indicate when FECP became insolvent. Messrs. Hughes

and Stanton left enough cash in the company to allow it to pay its usual creditors

on time. However, FECP did not pay its Federal or State income tax during the

period, and its tax liabilities continued to grow. The following table summarizes

FECP’s liability for Federal and State income tax, penalties, and interest during

the period:3

                                             Liability
                                  Year     (in millions)

                                  2003        $12.6
                                  2004         27.5
                                  2005         56.7
                                  2006        100.9
                                  2007        137.3

      Petitioners and respondent have both presented expert witness testimony

and reports to try to establish when FECP became insolvent.

      A. Respondent’s Expert

      Respondent hired Israel Shaked to evaluate FECP’s solvency during the

years at issue. Dr. Shaked determined that the “asset accumulation approach” was

the most appropriate method for valuing FECP’s assets. Under that approach Dr.


      3
          Tax liability rounded to nearest $0.1 million.
                                         -11-

[*11] Shaked valued FECP at the price at which a willing buyer would purchase

the company’s tangible assets and land. Any buyer, Dr. Shaked contends, would

insist on reviewing FECP’s tax returns and audited financial statements before

purchasing the company. Because FECP could not have produced either, Dr.

Shaked claims that no buyer would have been willing to pay more than the value

of FECP’s tangible assets and land. Dr. Shaked also noted in his report that he did

not believe FECP had any intangible assets of value.

      Dr. Shaked valued FECP’s assets using a 2006 appraisal of the assets the

company then possessed. The appraisal indicated that the fair market value of

FECP’s assets on the date of the appraisal represented 102% of the undepreciated

book value of FECP’s property, plant, and equipment. He used this multiplier to

estimate the fair market value of FECP’s assets on other dates during the years at

issue. He simply applied the multiplier to the book value of FECP’s assets on

each valuation date. Using this method Dr. Shaked determined that FECP was

insolvent at all times during the years at issue.

      Although he determined that the asset accumulation approach was the most

appropriate valuation method, Dr. Shaked also valued FECP’s assets under the
                                        -12-

[*12] “market approach”.4 Under the market approach, the appraiser determines

the value of a company by comparing it to similar companies that have recently

been sold.

      Under the market approach, buyers usually use ratios to estimate the value

of a target company. Dr. Shaked valued FECP using the revenue-to-sale-price

ratio because according to him that is what most buyers use. First, Dr. Shaked

calculated the ratio of sale price to revenue for the comparable companies. Then,

he applied that ratio to FECP’s revenues to estimate its value.

      To perform his analysis, Dr. Shaked chose 13 sales of companies similar to

FECP. He adjusted each comparable company’s sale price to account for FECP’s

financial mismanagement and also applied a 25% key man discount. He then

divided the five-year average of each company’s revenues by its sale price. The

median revenue-to-sale-price ratio for his sample was 0.9. Dr. Shaked applied this

ratio to FECP’s average revenue for the five-year periods ending on each valuation

date. The following table summarizes his conclusions:




      4
       Dr. Shaked noted that the discounted cashflow method is another popular
valuation approach. He did not value the company under this approach because
FECP could not provide reliable historical cashflow information from which to
project future cashflows. Consequently, he claims, no prospective buyer would
use the discounted cashflow method to value FECP.
                                           -13-

 [*13]                          Median                                         Business
                   FECP         adjusted          Operating      Plus: Cash    enterprise
  Valuation       revenue       multiple          asset value     on hand        value
    date
  12/28/2005   $61,887,997        0.9         $56,064,399       $1,247,206    $57,311,606
   1/27/2006    61,887,997        0.9             56,026,851     1,274,387     57,301,237
   2/22/2006    61,887,997        0.9             56,026,851     1,274,387     57,301,237
   3/27/2006    61,887,997        0.9             56,064,399     1,274,387     57,338,786
   4/24/2006    61,887,997        0.9             56,026,851     1,274,387     57,301,237
   5/22/2006    61,887,997        0.9             55,823,008     1,274,387     57,097,395
   6/28/2006    61,887,997        0.9             55,619,166     1,274,387     56,893,553
   9/25/2006    61,887,997        0.9             56,026,851     1,274,387     57,301,237
   12/8/2006    61,887,997        0.9             54,896,395     1,274,387     56,170,782
   3/23/2007    61,887,997        0.9             53,765,940     1,808,061     55,574,001



      Using the market approach, Dr. Shaked found that the fair market value of

FECP’s assets was less than the value of its income tax liabilities, penalties, and

interest as of January 27, 2006, resulting in insolvency. Dr. Shaked concluded

FECP remained insolvent through March 23, 2007.

      B. Petitioners’ Expert

      Petitioners hired Stanley A. Murphy to evaluate FECP’s solvency during the

years at issue. Mr. Murphy calculated the value for each year using three methods

weighted evenly at 33.3%: (1) the discounted cashflow method; (2) the guideline

public company method; and (3) the guideline company transaction method.
                                          -14-

[*14]         1. Discounted Cashflow Method

        The discounted cashflow (DCF) method is a method within the income

approach whereby the present value of future net expected cashflow is calculated

using a discount rate. The DCF method comprises four steps: (1) project future

cashflows for a discrete projection period; (2) discount these cashflows to present

value at a rate of return (e.g., discount rate) that considers the relative risk of

achieving the cashflows and the time value of money; (3) estimate the residual

value of cashflows following the discrete projection period; and (4) combine the

present value of the residual cashflows with the discrete projection period

cashflows. Cash on hand is then added to determine the fair value of the market

value of invested capital (MVIC).

        Mr. Murphy made three key assumptions in applying the DCF method: (1)

estimate of a discount rate; (2) financial projections; and (3) terminal value.

        Mr. Murphy developed the future expected cashflow projections applied in

his DCF method using three sources: (1) year 1 of his projection period uses

management’s forecast; (2) years 2 through 4 of his projection use industry growth

statistics, such as expectations of the growth of the U.S. residential construction

market, expectations of inflation in the United States, and the historical

relationship between growth in Florida residential construction and U.S.
                                         -15-

[*15] residential construction; and (3) year 5 of his projection period uses industry

statistics, such as expectations of inflation in the United States and projected

Florida population growth.

      Mr. Murphy concluded that a willing buyer and a willing seller would have

relied on FECP’s management’s forecasts when available and reverted to an

estimated revenue growth or a long-term growth rate forecast when management’s

forecasts were not available. His estimates did not include any effect for fraud.

The following table shows Mr. Murphy’s forecasts for FECP during 2002-06:

             Year ending 12/31                          EBIT

                    2002                             $7,064,249
                    2003                             15,595,640
                    2004                             31,124,993
                    2005                             52,131,279
                    2006                             59,764,650

      The projected cashflows anticipated to be generated by a business are

discounted to their present value equivalent using a rate of return that reflects the

relative risk of investment as well as the time value of money. The rate of return is

an overall rate based upon the individual rates of return for invested capital. The

rate of return, also known as the weighted average cost of capital (WACC), is

calculated by weighting the required returns on interest-bearing debt and
                                        -16-

[*16] shareholder’s equity in proportion to their estimated percentages assuming

an industry-based capital structure.

      The rate of return on equity capital in Mr. Murphy’s valuation analyses was

estimated using the modified capital asset pricing model (MCAPM). The

MCAPM was used to estimate the return required by equity investors given the

company’s risk profile.

      The terminal value represents the amount an investor would pay today for

the rights to the cashflows of the business for years following the discrete

projection period. Mr. Murphy capitalized the projected cashflows beginning in

the terminal period into perpetuity. Depreciation, capital expenditures, and

working capital requirements were normalized to match long-term expectations of

revenue. Normalized available cashflows were then capitalized using a rate

calculated by subtracting the long-term growth rate from the overall WACC. This

methodology is commonly referred to as the “Gordon Growth Model” and is a

method widely used by business valuation professionals.

             2. The Guideline Public Company Method

      The guideline public company method (GPC) is used to calculate the fair

value of a business on the basis of comparison to publicly traded companies in

similar lines of business. The conditions and prospects of companies in similar
                                        -17-

[*17] lines of business depend on common factors such as overall demand for

their products and services. Mr. Murphy identified six companies to compare to

FECP. The GPC analysis incorporated various multiples of the enterprise value,

calculated by adding (1) the market value of common equity, based on stock prices

for the guideline companies as of the valuation dates; (2) plus total debt, preferred

stock, and minority interests; (3) minus cash and cash equivalents on hand. Mr.

Murphy’s multiples included enterprise value divided by revenue and enterprise

value divided by earnings before interest, taxes, depreciation and amortization

(EBITDA).

      Mr. Murphy used multiples of revenue of 0.6, 1.2, 1.9, 1.6, 1.8, and 1.4 for

the years ended December 31, 2002, 2003, 2004, 2005, 2006, and 2007,

respectively. Mr. Murphy used multiples of earnings of 4.9, 7.0, 8.9, 5.1, 6.7, and

4.0 for the years ended December 31, 2002, 2003, 2004, 2005, 2006, and 2007,

respectively.

                3. The Guideline Company Transactions Method

      The guideline company transactions (GCT) method values a business by

comparing it to similar businesses that have been acquired in private transactions,

including mergers and acquisitions. To value FECP using the GCT method, Mr.

Murphy searched for similar transactions with sufficient financial and
                                            -18-

[*18] transactional data based on business descriptions. Mr. Murphy’s multiples

included enterprise value divided by revenue and enterprise value divided by

EBITDA.

      Mr. Murphy used multiples of revenue of 0.9, 1.2, 1.9, 1.7, 1.8, and 1.1 for

the years ended December 31, 2002, 2003, 2004, 2005, 2006, and 2007,

respectively. Mr. Murphy used multiples of earnings of 6.3, 6.2, 6.9, 7.3, 7.5, and

7.0 for the years ended December 31, 2002, 2003, 2004, 2005, 2006, and 2007,

respectively.

                4. Conclusions

      The following table summarizes Mr. Murphy’s conclusions:5

                                            Weighted                         Equity
  Year         DCF       GPC       GCT       MVIC       Debt    Liability   valuation

  2002        $50.8      $33.2     $45.5      $43.2     $ 2.9       $7        $33.4
  2003          88.3      79.3      75.5           81    1.3      12.6           67
  2004        267.2        229     194.9      230.4       -0-     27.5        202.9
  2005        263.5      213.8     264.6      247.3       -0-     56.7        190.6
  2006        308.0      292.3     318.4      306.2       -0-    100.9        205.3
  2007          52.9      64.7      74.4           64     -0-    137.3       (73.3)




      5
          Amounts listed are in millions.
                                         -19-

[*19] Mr. Murphy opined that FECP was not insolvent on December 31, 2006, or

any date before but was insolvent as of December 31, 2007.

                                      OPINION

I. Transferee Liability

       A. Burden of Proof

       Section 6901(a)(1) is a procedural statute authorizing the assessment of

transferee liability in the same manner and subject to the same provisions and

limitations as in the case of the taxes with respect to which the transferee liability

was incurred. Section 6901(a) does not create or define a substantive liability but

merely provides the Commissioner a remedy for enforcing and collecting from the

transferee of the property the transferor’s existing liability. Coca-Cola Bottling

Co. v. Commissioner, 334 F.2d 875, 877 (9th Cir. 1964), aff’g 37 T.C. 1006

(1962); Mysse v. Commissioner, 57 T.C. 680, 700-701 (1972). Section 6902(a)

and Rule 142(d) provide that the Commissioner has the burden of proving the

taxpayer’s liability as a transferee but not of showing that the transferor was liable

for the tax.

       Under section 6901(a) the Commissioner may establish transferee liability if

a basis exists under applicable State law or State equity principles for holding the

transferee liable for the transferor’s debts. Commissioner v. Stern, 357 U.S. 39,
                                        -20-

[*20] 42-47 (1958); Bresson v. Commissioner, 111 T.C. 172, 179-180 (1998),

aff’d, 213 F.3d 1173 (9th Cir. 2000); Starnes v. Commissioner, T.C. Memo. 2011-

63. “[T]he existence and extent of liability should be determined by state law.”

Commissioner v. Stern, 357 U.S. at 45. Thus, State law determines the elements

of liability, and section 6901 provides the remedy or procedure to be employed by

the Commissioner as the means of enforcing that liability. Ginsberg v.

Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), aff’g 35 T.C. 1148 (1961).

      We must determine whether respondent has shown that petitioners were

liable as transferees.

      B. Preliminary Issues

      Petitioners argue that they are not liable as transferees because respondent

failed to exhaust collection efforts against more culpable parties. First, they argue

that respondent’s installment plan agreement with FECP cuts off their transferee

liability. Second, they argue that respondent’s failure to exhaust his collection

options against FECP precludes him from seeking to recover from them as

transferees. Finally, petitioners contend that respondent’s failure to exhaust

collection efforts against more culpable transferees precludes him from collecting

from them. We will address each of these arguments in turn.
                                         -21-

[*21]         1. Effect of FECP’s Installment Plan Agreement

        Respondent agreed to allow FECP to pay its outstanding tax liability in

monthly installments of $70,000. Under the installment plan agreement

respondent will review FECP’s ability to pay every two years and may adjust the

monthly payment accordingly. Petitioners argue that this agreement should

prevent respondent from collecting from transferees. Their argument is as

follows: Petitioners’ liability is derivative of FECP’s liability; in agreeing to the

installment plan respondent has reduced the amount of that liability to the amount

collectible under the installment plan; because respondent will collect that full

amount from FECP, petitioners have no further liability as transferees.

        The acceptance of an installment plan agreement by the Commissioner does

not reduce the amount of tax, interest, or penalties owed by the delinquent

taxpayer. Sec. 301.6159-1(c)(1)(ii), Proced. & Admin. Regs. However, payments

by the transferor may eliminate or reduce the amount that may be collected from

the transferee. See, e.g., Estate of Stein v. Commissioner, 40 T.C. 275, 278

(1963); Leach v. Commissioner, 21 T.C. 70 , 79 (1953); Quirk v. Commissioner,

15 T.C. 709 (1950), aff’d, 196 F.2d 1022 (5th Cir. 1952). Respondent’s recovery

from the installment plan agreement with FECP to date is a small piece of the

overall tax liability owed. Respondent may take collection action, other than levy,
                                         -22-

[*22] to protect the interests of the Government with regard to the liability defined

in the installment plan agreement. Sec. 301.6159-1(f)(3), Proced. & Admin. Regs.

Respondent may take action to collect from any person who is not named in the

installment plan agreement but is liable for the tax which relates to it. Sec.

301.6159-1(f)(3)(i)(C), Proced. & Admin. Regs. The installment plan agreement

between FECP and respondent does not preclude petitioners from facing transferee

liability. Further, as a practical matter a decision against petitioners does not

relieve the principal, FECP, of its liability under the installment plan agreement

with respondent because of the large outstanding tax liability of FECP.

             2. Respondent’s Failure To Exhaust Collection Efforts Against FECP

      Petitioners cite a number of steps respondent could have taken that might

have resulted in greater collections from FECP. Respondent could have seized

FECP’s assets and sold them for about $3 million, but instead he agreed to the

installment plan to allow FECP to continue operating.

      We must look to Florida law to determine whether respondent has an

obligation to pursue all reasonable collection efforts against a transferor before

proceeding against a transferee. See Hagaman v. Commissioner, 100 T.C. 180,

183-184 (1993); Jefferies v. Commissioner, T.C. Memo. 2010-172; Upchurch v.
                                         -23-

[*23] Commissioner, T.C. Memo. 2010-169.6 The Florida Uniform Fraudulent

      6
       In Gumm v. Commissioner, 93 T.C. 475, 480 (1989), aff’d without
published opinion, 933 F.2d 1014 (9th Cir. 1991), the Tax Court listed the
following general requirements for transferee liability:

      (1) That the alleged transferee received property of the transferor; (2)
      that the transfer was made without consideration or for less than
      adequate consideration; (3) that the transfer was made during or after
      the period for which the tax liability of the transferor accrued; (4) that
      the transferor was insolvent prior to or because of the transfer of
      property or that the transfer of property was one of a series of
      distributions of property that resulted in the insolvency of the
      transferor; (5) that all reasonable efforts to collect from the transferor
      were made and that further collection efforts would be futile; and (6)
      the value of the transferred property (which determines the limit of
      the transferee’s liability) * * * . [Citations omitted.]

Id. Petitioners state that respondent must exhaust all reasonable efforts to collect
from the transferor unless further collection procedures would be futile. However,
in Hagaman v. Commissioner, 100 T.C. 180, 183-184 (1993), the Tax Court
explained:

              Professors Bittker and Lokken have stated that “This
      distillation of what is sometimes called the trust fund theory is a
      useful guide, but, to the extent it implies there is a common body of
      national law protecting the rights of creditors, it must yield to the
      Supreme Court’s admonition in Stern that ‘the existence and extent of
      [transferee] liability should be determined by state law.’” 4 Bittker &
      Lokken, Federal Taxation of Income, Estates and Gifts, par. 111.6.7,
      at 111-188 (2d ed.1992) (quoting Commissioner v. Stern, supra at 45)
      (fn. ref. omitted). We agree with Professors Bittker and Lokken. We
      would therefore emphasize that Gumm’s distillation of the trust fund
      theory is viable only as a generalization of typical State law; section
      6901 does not itself impose those requirements. We would further
      caution that Gumm’s distillation of the trust fund theory, which
                                                                         (continued...)
                                         -24-

[*24] Transfer Act (FUFTA) does not require a creditor to pursue all reasonable

collection efforts against the transferor. See Fla. Stat. Ann. secs. 726.101-726.112

(West 2012). Therefore, respondent was not required to exhaust collection efforts

against FECP, and petitioners may be held liable.

               3. Respondent’s Failure To Exhaust Collection Efforts Against
                  Messrs. Stanton and Hughes

      Petitioners argue that respondent may not collect from them because he did

not exhaust collection efforts against Messrs. Stanton and Hughes. Petitioners cite

no authority for their argument that respondent must pursue all potential

transferees.

      We have held that the Commissioner may proceed against any or all

transferees in no particular order. Cullifer v. Commissioner, T.C. Memo. 2014-

208, at *73-*74. Further, transferee liability is several under section 6901.

Alexander v. Commissioner, 61 T.C. 278, 295 (1973). Therefore, respondent may


      6
       (...continued)
      theory pertains to transferee liability in equity, is not a useful guide
      regarding transferee liability at law (e.g., under a corporate merger
      statute or bulk sales law), whose elements typically are quite
      different. * * *

Thus, we do not view Gumm’s requirements as controlling here to the extent they
do not reflect Florida law, as indicated by Commissioner v. Stern, 357 U.S. 39
(1958).
                                        -25-

[*25] pursue petitioners without first exhausting collection efforts against Messrs.

Stanton and Hughes.

      C. Fraudulent Transfer

      Respondent contends that petitioners are liable as transferees because the

transfers they received were both actually and constructively fraudulent. Before

we address respondent’s arguments, we must determine how to evaluate each

transfer. Respondent urges us to group together both the transfers petitioners

received and the transfers Messrs. Hughes and Stanton received because,

respondent contends, FECP made all of the transfers as part of a comprehensive

scheme to defraud the IRS. Petitioners argue that we should evaluate each transfer

individually.

      Respondent cites several cases in which courts have aggregated transfers

when each was part of a fraudulent scheme. Respondent argues that the transfers

to petitioners were part of Messrs. Hughes and Stanton’s scheme to defraud the

IRS. Respondent describes how FECP systematically eliminated all of the

controls that would have detected their fraud and intentionally misled the IRS by

failing to report its income. Respondent also demonstrates that Messrs. Hughes

and Stanton used various corporations to confuse the IRS about FECP’s activities.

The facts establish that Messrs. Hughes and Stanton organized a scheme to
                                        -26-

[*26] defraud the IRS, but they do not establish that the payments petitioners

received were part of this scheme.

      Messrs. Hughes and Stanton hoped to take as much money from FECP as

possible. To that end they decided not to have FECP pay tax on its income. They

distributed pretax profits to themselves in the form of dividends and interest

payments. They also distributed pretax profits to petitioners in the form of

dividends and “advances”. We think it is clear that the distributions to Messrs.

Hughes and Stanton were made with the intent to defraud respondent; the question

is whether we should impute that intent to the distributions to petitioners. We do

not think we should.

      During the years at issue FECP was experiencing unprecedented growth.

Petitioners’ hard work was instrumental in FECP’s success, and they likely would

have become suspicious if they had not been compensated fairly. Messrs. Hughes

and Stanton wanted to take money for themselves; they devised a scheme from

which petitioners incidentally benefited, but the payments they received were not

made with the same intent as those Messrs. Hughes and Stanton received.

Accordingly, we decline to group the transfers to petitioners with the transfers to

Messrs. Hughes and Stanton for the purpose of determining whether the transfers

to petitioners were fraudulent.
                                          -27-

[*27]         1. Constructive Fraud

        FUFTA provides three scenarios under which transfers may be

constructively fraudulent. Each scenario requires the debtor to have received less

than “reasonably equivalent value” for the transfer. If the debtor did not receive

reasonably equivalent value, the transfer is fraudulent if: (1) the debtor was

engaged or was about to engage in a business or a transaction for which the

remaining assets of the debtor were unreasonably small in relation to the business

or transaction; (2) the debtor intended to incur, or believed or reasonably should

have believed that he or she would incur, debts beyond his or her ability to pay as

they became due; and (3) the debtor was insolvent at the time of the transfer or

became insolvent as a result of the transfer. Fla. Stat. Ann. secs. 726.105(1)(b),

726.106(1).

                    a. Reasonably Equivalent Value

        First we will address whether FECP received reasonably equivalent value

for the transfers at issue. If it did, the transfers cannot be constructively

fraudulent. To resolve this issue we must determine what FECP received in return

for the transfers at issue. FUFTA provides that “[v]alue is given for a transfer or

an obligation if, in exchange for the transfer or obligation, property is transferred

or an antecedent debt is secured or satisfied, but value does not include an
                                       -28-

[*28] underperformed promise made otherwise than in the ordinary course of the

promisor’s business to furnish to the debtor or another person.” Fla. Stat. Ann. sec

726.101(1).

      The totality of the circumstances is examined in assessing whether value

was given, including “the fair market value of the item or service received

compared to the price paid, the arms-length nature of the transaction, and the good

faith of the transferee.” Official Comm. of Unsecured Creditors v. Florida (In re

Tower Envtl., Inc.), 260 B.R. 213, 225 (Bankr. M.D. Fla. 1998) (citing Mellon

Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L., Inc., (In re

R.M.L., Inc.), 92 F.3d 139, 150 (3d Cir.1996)).

      By their nature, the transfers fall within two groups: (1) the 2003 and 2004

transfers and (2) the 2005, 2006, and 2007 transfers, and we analyze the two

groups separately.

                             2003 and 2004 Transfers

      FECP suspended its bonus program after 2002. Petitioners had become

accustomed to receiving $25,000 bonuses every month under the program. To

offset the financial hardship resulting from the suspension of the bonus program,

Messrs. Hughes and Stanton decided to make advances to petitioners. Those

advances are the 2003 and 2004 transfers at issue.
                                        -29-

[*29] When petitioners asked Mr. Stanton how they should report the transfers on

their returns, he told them that they were loans that did not have to be reported.

Consequently, neither petitioner reported them as compensation on his return. The

IRS later audited each petitioner’s individual returns and determined the payments

were dividends. Petitioners settled their respective cases and paid tax on the

transfers. Respondent urges us to bind petitioners to statements they made in their

petitions for their individual deficiency cases. We decline to do so; we will no

more bind them to their statements in their petitions than we will bind respondent

to his statements in his answers to those petitions. See Pert v. Commissioner, 105

T.C. 370, 380 (1995) (“[W]e decline to reconsider the well-established principle

that a Tax Court decision entered pursuant to the stipulation of the parties is

considered to be judgment on the merits for purposes of res judicata.”). We will

independently evaluate the nature of the payments.

      Petitioners argue that each transfer was compensation and that the work

they performed for FECP constitutes reasonably equivalent value. Respondent

concedes that the transfers were not fraudulent if they were compensation for

services petitioners performed, but he contends that they were not compensation.

Respondent believes that the 2003 and 2004 transfers were loans that were never

repaid and that the 2005, 2006, and 2007 transfers were dividends.
                                       -30-

[*30] Because the loans were never repaid, respondent argues, FECP did not

receive reasonably equivalent value for the 2003 and 2004 transfers. He argues

that FECP did not receive reasonably equivalent value for the other transfers,

because, by definition, dividends cannot be issued in exchange for reasonably

equivalent value. To determine whether FECP received reasonably equivalent

value for the transfers it made to petitioners, we must determine why it made the

transfers.

      Before 2003 FECP had a bonus program through which petitioners received

significant compensation. In 2003 FECP decided to temporarily suspend the

bonus program. Mr. Hughes knew that petitioners would struggle to maintain

their standards of living without the bonuses. Consequently, he decided to pay

them “advances” on future bonuses and told them they would have to repay them

when FECP reinstituted the bonus program. Mr. Kardash received $250,000 and

$300,000 of “advances” in 2003 and 2004 respectively; Mr. Robb received

$250,000 and $200,000.

      We think the “advances” were compensation. Petitioners received them in

lieu of bonuses, and FECP never expected repayment. Petitioners did not have to

sign loan agreements or make interest payments, and the amounts are roughly

what they would have received under the suspended bonus program. Because
                                         -31-

[*31] petitioners gave reasonably equivalent value for the 2003 and 2004

transfers, they were not constructively fraudulent.

                           2005, 2006, and 2007 Transfers

        Petitioners argue that the transfers they received in 2005, 2006, and 2007

were compensation for services performed and that thus they gave reasonably

equivalent value for them. Respondent argues that the transfers were dividends

and that consequently petitioners did not give reasonably equivalent value for

them.

        If the 2005, 2006, and 2007 transfers were dividends, FECP likely did not

receive reasonably equivalent value for them. Under the Uniform Fraudulent

Transfer Act, a distribution of dividends that is not compensation or salary for

services rendered is not a transfer in exchange for reasonably equivalent value.

See Fisher v. Hamilton (In re Teknek, LLC), 343 B.R. 850, 861 (Bankr. N.D. Ill.

2006) (citing Sherman v. FSC (In re Brentwood Lexford Partners, LLC), 292 B.R.

255, 267-268 (Bankr. N.D. Tex 2003)).

        In a limited number of cases, other courts have found that certain dividends

were made in exchange for reasonably equivalent value. See Crumpton v.

Stephens (In re Northlake Foods, Inc.), 715 F.3d 1251 (11th Cir. 2013); Pryor v.

Tiffen (In re TC Liquidations, LLC), 463 B.R. 257 (Bankr. E.D.N.Y. 2011). In
                                         -32-

[*32] those cases, however, the debtors received something of value that was

specifically related to the dividends.

      In Northlake Foods the debtor, which had recently elected S corporation

status, made a distribution to one of its shareholders to pay his tax liability

associated with his share of the corporation’s income. The debtor made the

distribution pursuant to an agreement it had made with the shareholder long before

the debtor became insolvent. Under the agreement, the corporation had to pay the

shareholder’s tax liability if the corporation ever elected S corporation status. The

court held that the tax flexibility granted to the corporation by the agreement and

cashflow benefits represented reasonably equivalent value for the later dividend.

      In TC Liquidations the debtor paid its shareholders dividends, but the

shareholders used the dividend proceeds to repay loans that they had taken out to

expand the debtor’s business. On these facts the court determined that the debtor

had received fair consideration for those dividends.

      FECP did not benefit from the dividends it paid to petitioners. Petitioners

argue that the dividends were compensation for their work, but neither FECP nor

petitioners treated the payments as compensation. FECP issued Forms 1099-DIV

for the payments, and petitioners reported the payments as dividends on their

individual tax returns. Accordingly, we hold that FECP did not receive reasonably
                                         -33-

[*33] equivalent value for the 2005, 2006, and 2007 transfers at issue.

Consequently, we will find any of the transfers during these years constructively

fraudulent if FECP (1) was insolvent at the time of the transfer or became

insolvent as a result of the transfer, (2) was engaged or was about to engage in a

business or a transaction for which its remaining assets were unreasonably small in

relation to the business or transaction, or (3) intended to incur, or believed or

reasonably should have believed that it would incur, debts beyond its ability to pay

as they became due.

                    b. Insolvency

      For a company to be solvent, the fair value of its assets must equal or

exceed the sum of its debts. Fla. Stat. Ann. sec. 726.103. If a debtor is not paying

its debts as they become due, we presume the debtor is insolvent. Id.

      Petitioners argue that, should we find that FECP was insolvent during the

years at issue, they should not be liable if FECP made transfers to them while it

was insolvent, because any insolvency resulted from Messrs. Hughes’ and

Stanton’s stripping the company. Petitioners essentially ask us to include in

FECP’s assets, for purposes of our solvency analysis, the amounts Messrs. Hughes

and Stanton took from the company. However, FUFTA’s definition of insolvency

explicitly instructs us not to consider as assets “property that has been transferred,
                                        -34-

[*34] concealed, or removed with intent to hinder, delay, or defraud creditors.” Id.

sec. 726.103(4). Accordingly, we do not think it is appropriate to include in our

solvency analysis the assets Messrs. Hughes and Stanton fraudulently removed

from FECP.

      Both parties have presented expert witness testimony concerning FECP’s

solvency during the years at issue. The parties agree that the company was solvent

in 2002 but insolvent by 2007. They also agree that the transfers to Messrs.

Stanton and Hughes contributed in large part to the insolvency. They disagree

about when exactly the company became insolvent. Respondent argues that the

company was insolvent when each payment was made. Petitioners argue that the

company did not become insolvent until 2007, after they had received the last of

the transfers at issue. The experts substantially agree on the value of FECP’s

debts; they disagree about the value of the assets.

      An analysis of the experts’ reports shows that FECP was insolvent for all

transfers starting in 2005. It is clear FECP was insolvent once the dividends were

transferred to the shareholders beginning in 2005, essentially stripping the

company of its assets. Other than the tax liability of FECP, there is no evidence

that FECP was not paying its debts as they became due. Further, even with the

advance payments in 2003 and 2004, FECP’s assets exceeded the fair value of its
                                        -35-

[*35] debts. However, with the large distributions of money to the shareholders

starting in 2005 and the accumulation of the tax liability, FECP’s assets did not

exceed the fair value of its debts. We find that FECP was solvent for the years

2003 and 2004 and insolvent for the years 2005, 2006, and 2007.

      We need not address whether when it made the transfers at issue FECP had

unreasonably small assets to continue its business or intended to incur debts

beyond its ability to pay. The transfers petitioners received in 2003 and 2004 are

not fraudulent under any of FUFTA’s constructive fraud provisions because

petitioners gave reasonably equivalent value for them. Petitioners did not give

reasonably equivalent value for the transfers they received in 2005, 2006, and

2007, and FECP was insolvent when it made those transfers. Accordingly, those

transfers are constructively fraudulent under Fla. Stat. Ann. sec. 726.106(1). We

need not address whether they are also fraudulent under FUFTA’s other

constructive fraud provisions.

                          2. Actual Fraud

      FUFTA sec. 726.105(1)(a) also provides that 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 with actual intent to hinder,
                                         -36-

[*36] delay, or defraud any creditor of the debtor. Respondent was a creditor of

FECP by virtue of FECP’s unpaid tax liability. Respondent argues that FECP

made the transfers at issue with actual intent to hinder, delay, or defraud the IRS.

Respondent’s argument that the transfers at issue were actually fraudulent depends

on our grouping them together with the transfers to Messrs. Hughes and Stanton.

We decline to do so.

      In determining actual intent, consideration may be given among other

factors, to whether:

      (a) [t]he transfer or obligation was to an insider[;]

      (b) the debtor retained possession or control of the property
      transferred after the transfer[;]

      (c) the transfer or obligation was disclosed or concealed[;]

      (d) before the transfer was made or obligation was incurred, the
      debtor had been sued or threatened with suit[;]

      (e) the transfer was of substantially all of the debtor’s assets[;]

      (f) the debtor absconded[;]

      (g) the debtor removed or concealed assets[;]

      (h) the value of the consideration received by the debtor was
      reasonably equivalent to the value of the assets transferred or the
      amount of the obligation incurred[;]
                                         -37-

      [*37] (i) the debtor was insolvent or became insolvent shortly after
      the transfer was made or the obligation was incurred[;]

      (j) the transfer occurred shortly before or shortly after a substantial
      debt was incurred[;]

      (k) the debtor transferred the essential assets of the business to a
      lienor who transferred the assets to an insider of the debtor.

Fla Stat. Ann. sec. 726.105(2)(a)-(k).

      To prevail under this section of FUFTA, respondent must show that the

transfer was made “with actual intent to hinder, delay, or defraud” creditors.

Although one badge of fraud “may only create a suspicious circumstance and may

not constitute the requisite fraud to set aside a conveyance, * * * several of them

when considered together may afford the basis to infer fraud.” Johnson v. Dowell,

592 So. 2d 1194, 1197 (Fla. Dist. Ct. App. 1992). Respondent contends that

factors (a), (c), (d), (e), (g), (h), (i), and (j) of FUFTA sec. 105(2) are present. We

do not need to determine whether the 2005, 2006, and 2007 transfers were actually

fraudulent because they were constructively fraudulent. Thus, we address only

whether the 2003 and 2004 transfers were actually fraudulent.

      Factor (a). Whether the Transfer or Obligation Was to an Insider

      In the case of a corporation, an “insider” includes a director or an officer of

the corporation. Fla. Stat. Ann. sec. 726.102(7)(b). Mr. Kardash was an officer of
                                         -38-

[*38] the corporation in his capacity as secretary for all relevant years. See id. sec.

726.102; id. sec. 607.01401(23) (West 2007).

      The FECP bylaws state that an officer “may include one or more vice

presidents * * * . The officers will be elected initially by the board of directors at

the organization meeting of directors and, after that, at the first meeting of the

board of directors following the annual meeting of the shareholders each year.”

Mr. Robb was a vice president, but there is no evidence that he was elected as an

officer by the board of directors. Therefore, respondent has not shown that Mr.

Robb was an insider for all relevant years.

      Factor (c). Whether the Transfer or Obligation Was Disclosed or Concealed

      The transfers were not originally properly reported as compensation on any

Forms W-2 or Forms 1099. Mr. Stanton told petitioners that the transfers for 2003

and 2004 were loans to be repaid at a later date, but the loans were not evidenced

by written promissory notes. The 2003 and 2004 transfers were not properly

disclosed at the time by loan documents or wage forms.

      Factor (d). Whether Before the Transfer Was Made or Obligation Was
                  Incurred, the Debtor Had Been Sued or Threatened With Suit

      Respondent argues that FECP was threatened with suit because FECP made

the transfers at issue knowing it faced potential adjustments and tax deficiencies,
                                         -39-

[*39] together with the imposition of penalties, additions to tax, and interest due to

the filing of fraudulent income tax returns. Respondent cites a string of cases

where courts have found transfers to be fraudulent when the debtor was under an

IRS audit.7 Further, we have found that a debtor had been threatened with suit

when an IRS revenue agent gave a taxpayer a copy of recommended adjustments

the taxpayer disagreed with. Pert v. Commissioner, T.C. Memo. 1997-150. FECP

was not under an IRS audit until 2005. We therefore will not find that FECP was

threatened with suit when the 2003 and 2004 transfers occurred.

      Factor (e). Whether the Transfer Was of Substantially All of the Debtor’s
                  Assets

      Mr. Kardash received $250,000 and $300,000 and Mr. Robb received

$250,000 and $200,000 in 2003 and 2004, respectively. These amounts did not

constitute substantially all of the debtor’s assets as both petitioners’ expert and

respondent’s expert valued FECP’s assets at well above the amounts of the

transfers.




      7
       United States v. Coppola, 85 F.3d 1015, 1016 (2d Cir. 1996); Veigle v.
United States, 873 F. Supp. 623, 627 (M.D. Fla. 1994); Harper v. United States,
769 F. Supp. 362, 367 (M.D. Fla. 1991).
                                        -40-

[*40] Factor (g). Whether the Debtor Removed or Concealed Assets

      Respondent argues that the transfers to Mr. Stanton and Mr. Hughes were

part of FECP’s general plan or scheme to remove and conceal assets to hinder,

delay, or defraud respondent’s collection efforts and by making the transfers at

issue, FECP removed assets that it should have used instead to pay respondent and

the State of Florida. Further, respondent argues that the transfers to petitioners

during 2003 and 2004 were concealed. Those transfers were not a removal of

assets, nor were they concealed. While the transfers to petitioners were not

properly disclosed, they were not concealed but evidenced by bank transactions.

Further, there was a pattern of paying petitioners large bonuses, and the 2003 and

2004 transfers were a continuation of the bonus plan.

      Factor (h). Whether the Value of the Consideration Received by the Debtor
                  Was Reasonably Equivalent to the Value of the Asset
                  Transferred or the Amount of the Obligation Incurred

      As discussed above, the transfers made to petitioners in 2003 and 2004 were

reasonably equivalent to the value of the assets transferred.
                                         -41-

[*41] Factor (i). The Debtor Was Insolvent Shortly After Transfer Was Made or
                  Obligation Incurred

      As discussed above, FECP did not became insolvent shortly after the

transfers were made to the shareholders in 2003 and 2004 but instead became

insolvent because of the transfers starting in 2005.

      Factor (j). Whether the Transfer Occurred Shortly Before or After a
                  Substantial Debt Incurred

      The transfers to petitioners did occur shortly after FECP incurred tax

liabilities. See Hagaman v. Commissioner, 100 T.C. at 188 (noting that Federal

taxes are due and owing, and constitute a liability, at the close of the taxable year);

Yagoda v. Commissioner, 39 T.C. 170, 185 (1962) (noting that a transferee is

liable for all existing debts of the transferor, “whether or not such debts had been

determined, or were even known at that time”), aff’d, 331 F.2d 485 (2d Cir.1964).

      After weighing the factors, and recognizing that no one factor is dispositive,

we conclude that respondent has not shown that a transfer was made with intent to

hinder, delay, or defraud respondent.

II. Conclusion

      We conclude that respondent has not established that the transfers for 2003

and 2004 are fraudulent under Florida law. We conclude that respondent has

established that the transfers for 2005, 2006, and 2007 are fraudulent under
                                        -42-

[*42] Florida law. Accordingly, we hold that petitioners are liable as transferees

under section 6901(a) for the years 2005, 2006, and 2007. In reaching our

holdings herein, we have considered all arguments made by the parties, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,

                                                     Decisions will be entered for

                                               petitioners as to the taxable years

                                               2003 and 2004 and for respondent

                                               as to the taxable years 2005, 2006,

                                               and 2007 in docket Nos. 12681-10

                                               and 12703-10.
