                          T.C. Memo. 2010-203



                       UNITED STATES TAX COURT



      LR DEVELOPMENT COMPANY LLC, TRANSFEREE, Petitioner v.
           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 deficiency

of $7,507,972 in, and the accuracy-related penalty under section
                                   - 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 residential 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


       1
      All section references are to the Internal Revenue Code
(Code) in effect at all relevant times. All Rule references are
to the Tax Court Rules of Practice and Procedure.
       2
      From 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 Develop-
ment Co. LLC.
                                   - 3 -

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                        Title
             David Kirshenbaum     President
             Steven Sherman        Chief financial officer
             Donald Biernacki      Senior vice president--
                                     construction
             Kerry Dickson         Senior vice president--
                                     development
             Laura Davis Molk      Senior vice president--
                                     marketing
             Thomas Weeks          Senior vice president--
                                     for-sale properties
             David Dresdner        Senior vice president--
                                     commercial properties
             Kenneth Rice          Senior vice president--
                                     affordable housing
             Stephen Galler        Senior vice president and
                                     general counsel
             Theodore Weldon       Vice president--
                                     acquisitions


       3
      From 1996 until he became president of BCA, Mr. Kirshenbaum
had served as its chief operating officer.
                                   - 4 -

             Glen Krandel          Vice president--
                                     information technology
             Ann Thompson          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.)

       Within a few days after Mr. Abrams’ death, Ms. Abrams, as

executrix of the Abrams estate, decided to sell the stock of BCA

that that estate owned.      The Abrams estate was unwilling to cause

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 with respect to the sale of

BCA.       On February 1, 2000, Ms. Abrams, as executrix of the Abrams

estate, retained Cohen Financial Corp. (Cohen Financial), an

investment banking 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 that 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.5

       4
      Before Mr. Abrams’ death, Cohen Financial had provided
financing to BCA for certain of its real estate development
projects.
       5
      Although 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 (Mr. Ross) owned indirectly the majority of

the interests in Related.6      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 times since 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


        5
      (...continued)
indicated in the stipulation of facts that Cohen Financial
performed certain services under that agreement. Since the CFC
engagement agreement is between the Abrams estate and CFC Advi-
sory, we shall refer to CFC Advisory when discussing services
performed under that agreement.
        6
      The record does not reflect the nature of Mr. Ross’ inter-
ests in Related.
        7
      The record does not explain how Mr. Blau’s ownership inter-
est in Related could have varied depending on the project that
Related undertook.
                               - 6 -

planned to sell BCA and certain other assets that that estate

owned.   At that time, Related decided to attempt to purchase

certain assets of BCA.8   To that end, a representative of Related

contacted a representative of the Abrams estate to express an

interest in purchasing certain of BCA’s assets.9   Related was

unwilling to purchase any stock of BCA.   Related wanted to

purchase certain assets, and not the stock, of BCA because

Related (1) intended to sell certain 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, and (3) was concerned about any unknown

liabilities that BCA might have had as a result of certain

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

regarding the respective book values of BCA’s assets, as well as


     8
      Mr. Blau, Mr. Brenner, and Mr. Ross all participated in the
decisionmaking process of Related regarding its interest in
purchasing certain assets of BCA.
     9
      In certain instances, the record does not establish the
identities of the individuals who acted on behalf of the various
entities involved in this case.
                               - 7 -

the respective real estate activities and joint venture activi-

ties of BCA, as of September 30, 1999:

                                            BCA’s
                                          Ownership      9/30/99
          Entity/Joint Venture           Percentage    Book Value
  Real estate activities:
     N.B.A.L. LLC                            99       ($1,287,725)
     Diversey & Sheffield LLC               100          (661,674)
     Dearborn & Elm LLC                     100           (74,247)
     Ridge Partners LP                        1               862
     Walton Associates LLC                   99          (442,380)
     3830-32 Lincoln Joint Venture           50             6,523
     310 N. Michigan                        100            21,757
     Winners LP                              33           213,815
     Renaissance Partners LLC                --             5,000
     St. Benedict’s Hotel LLC                 1            (4,699)
                                Total                  (2,222,768)

  Joint venture activities:
     LR Fort Sheridan LLC                    100       3,708,699
     Mayfair Condominium LLC                 100          -0-
     LR Arcade LLC                           100       1,000,000
     Vision Capital LLC                       20             545
     Vision AHC LLC                           20         204,046
     LR Tower LLC                            100        (690,341)
     Plaines Town Center LLC                 100          12,298
                                Total                  4,235,247
                       Combined total                  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. Katz had worked in the 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.10   Fortrend indi-

cated in certain marketing materials (Fortrend brochure) that it

had circulated between 1997 and November 2003 that it

“[structured] economic transactions to solve specific corporate

tax or accounting problems or to take advantage of related

opportunities.”   One such problem described in the Fortrend

brochure was the “sale of appreciated businesses”.   In this

regard, the Fortrend brochure stated:

     The sale of appreciated businesses 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. This
     tax liability often results in conflicting desired
     transaction structures; the seller wants to sell shares
     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) the ability to recover the full purchase
     price (including goodwill) through depreciation or am-


     10
      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 an undisclosed capac-
ity.
                               - 9 -

     ortization deductions. Fortrend can often arrange for
     the sale of the business at a price which substantially
     increases the seller’s after-tax profits. Similarly,
     when a client wishes to purchase assets held by a cor-
     poration, Fortrend can often negotiate a lower price.

     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 its net assets to the ulti-
     mate buyer. These clients have certain tax attributes
     that enable them to absorb the tax gain inherent in the
     assets.

     In certain situations the economic cost of the client’s
     involvement is sufficiently low that a seller of stock
     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.

        *       *       *        *       *       *       *

     As with any transaction, economic substance and proper
     form are crucial to its success. Accordingly, in
     transactions where involvement by such a client may
     make sense, raising the idea at the earliest stages of
     a transaction is advisable.

     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

        *         *         *       *       *       *       *

     Although the [Abrams] Estate owns 100% of the shares of
     * * * [BCA], the Company [BCA] has two compensation
     plans which provide for employees to receive a 30%
     interest in cash available for distributions and in-
     creases in the net worth of the Company [BCA]. [BCA]
     * * * stands prepared to consider inquiries that would
     allow the [Abrams] Estate to liquify their investment
                                 - 11 -

     and would provide potential operating and capital
     partners to the senior management team.

           *       *       *       *         *       *       *

     Company Form and Ownership

           *       *       *       *         *       *       *

     The senior management team and the employees do not own
     stock. However, the Corporation [BCA] does have two
     incentive compensation plans that provide for (1) em-
     ployees to receive approximately 30% of the annual cash
     available for distribution and (2) senior managers to
     participate in the long-term growth of the Corpora-
     tion’s [BCA’s] net worth.

     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.11       One of those spreadsheets


     11
          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:

     It is the intention of Purchaser [Related] and Seller
     [the Abrams estate] to transfer to Purchaser all direct
     and indirect interests in all assets and/or entities
     which provide revenue to * * * [BCA] or are described
     in the Offering Memorandum for * * * [BCA] prepared by
     [CFC Advisory] * * * During the Due Diligence Period,
     Purchaser and Seller shall in good faith structure the
     transaction in a tax efficient manner for both Pur-
     chaser and Seller.

     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-



     11
      (...continued)
Brenner attached to Mr. Brenner’s March 10, 2000 email. Nor does
the record establish the period of time to which those spread-
sheets pertained.
                                - 13 -

ments to that purchase price based on certain cashflows accruing

to BCA during the period January 1, 2000, to 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 six months after the closing.12

     On March 28, 2000, Steven Sherman (Mr. Sherman), the chief

financial officer of BCA, sent a fax to Mr. Brenner, the chief

financial officer of Related.    Mr. 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 estate and BCA owned as of

those two dates.13

     A draft dated March 31, 2000 (March 31, 2000 draft response)

of a letter dated “April __, 2000”, was prepared on behalf of the

Abrams estate in response to Related’s March 22, 2000 offer




     12
      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.
     13
      The list of the entities and the assets that BCA owned as
of Dec. 31, 1999, showed BCA’s respective tax bases as of that
date in those entities and assets.
                               - 14 -

letter.14   In that draft response, the Abrams estate stated:

          1.   Structure. For tax reasons, it is essential
     that the transaction be structured as a sale of the
     stock of * * * [BCA] rather than as a sale of assets.
     At the closing, * * * [BCA’s assets] would consist of
     the assets and related liabilities described in the
     Offering Memorandum dated March, 2000 that we have
     provided to you. Assets of * * * [BCA] that are not
     described in the Offering Memorandum would be trans-
     ferred out of * * * [BCA] before closing and not be a
     part of the transaction. * * *

          2.   Price. We propose that the purchase price be
     $28 million plus the $1.5 million that you have offered
     to place into a bonus pool for certain * * * [BCA]
     employees. Net cash flows after January 1, 2000 from
     assets that are part of the transaction would be de-
     ducted from the $28 million, and a credit for taxes
     that the Estate would owe as * * * [BCA’s] shareholder
     for the portion of 2000 prior to the closing would be
     added to the $28 million. * * *

          3.   Employee Matters. It needs to be clear in
     any transaction that they [sic] key employees have a
     right to 30% of * * * [BCA’s] equity, subject to an
     appropriate vesting schedule. * * *

     At a 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 behalf of the Abrams estate four different proposals


     14
      The record does not establish whether the Abrams estate
sent a final version of the March 31, 2000 draft response to
Related.
                              - 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,15 $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 proposal16 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 hun-
     dred percent (100%) of the capital stock (the “Stock”)
     of LR Development Company (a/k/a Bruce C. Abrams,
     Inc.)(“LR Development”). [Bracketed material in origi-
     nal.]

          *     *       *        *      *        *       *



     15
      Fortrend’s offer of $24.5 million was net of a $1.5 mil-
lion payment that Fortrend proposed to set aside for the purpose
of paying bonuses to certain BCA employees.
     16
      The draft letter that Fortrend submitted in response to
the BCA offering memorandum identified a “FORTREND ENTITY”, and
not Fortrend, as the purchaser of the BCA stock. Although
Fortrend did not purchase the BCA stock, for convenience we shall
sometimes refer to Fortrend as the purchaser of 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/or entities
     which are described in the Offering Memorandum (“Offer-
     ing Memo”) for LR Development prepared by Cohen Finan-
     cial, other than those set forth on Schedule 4 hereto
     (the “Excluded Assets”). * * *

        *         *        *        *      *       *       *

            3.    Purchase Price.

          (a) The aggregate purchase price (“Purchase
     Price”) for the Stock shall be an amount equal to:

                  (i)   Twenty-Four Six Million Dollars
                        ($24,000,000)($26,000,000) * * *

        *         *        *        *      *       *       *

            (b)   The Purchase Price will be distributed as
                  follows:

                  (i)   Twenty-Two Four Million Five Hundred
                        Thousand Dollars
                        ($22,500,000)($24,500,000) * * * of the
                        Purchase Price will be distributed to
                        the Seller at Closing; and

                  (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 employ-
                       ees 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 Canvasser, a

director of BCA.      That draft letter stated in pertinent part:
                               - 17 -

          It is our understanding that you [BCA] have or
     will be executing a letter of intent (the “Fortrend
     Letter of Intent”) with a client of Fortrend Interna-
     tional or an affiliate assignee thereof (“Fortrend”) to
     sell to Fortrend one hundred percent (100%) of the cap-
     ital stock of * * * [BCA]. As you know, The Related
     Companies, L.P. (“Related”) is negotiating with For-
     trend to purchase from Fortrend certain assets listed
     on Schedule 1 hereto (“LR/Related Assets”) currently
     owned directly or indirectly by * * * [BCA]. * * *
     Related intends to continue to develop, operate and
     sell (if applicable) the LR/Related Assets, to continue
     to pursue development opportunities through Newco and
     to have Newco employ current employees of * * * [BCA].

        *        *       *        *      *       *       *

          (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 Re-
     lated, pursuant to which thirty percent (30%) of the
     equity interests in Newco shall be granted to such em-
     ployees, which interests shall vest over a three-year
     period and be subject to such other customary terms for
     similar plans. In addition, Related may elect to re-
     quire that certain employees of Newco execute at Clos-
     ing employment agreements (including covenants-not-to-
     compete).

     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 -

     On May 5, 2000, Mr. Kramer, a senior managing director of

Fortrend, sent 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, LLC or an assignee or client

thereof” offered to purchase from the Abrams estate all of the

stock of BCA.   In that letter of intent, Fortrend offered to pay

$25,125,000 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, Ms. Abrams agreed to and signed the May 5, 2000

letter of intent on behalf of the Abrams estate.

     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.17   During the same period,

respective representatives of Related and Fortrend and their

respective attorneys at Katten Muchin and Manatt negotiated the

terms of an agreement for the purchase of certain of BCA’s


     17
      During the negotiations, the purchaser of the BCA stock
was not identified. As discussed below, around July 20, 2000,
Castanet, Inc., was identified as the purchaser of that stock.
                               - 19 -

assets.18   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 Fortrend

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


     18
      During the negotiations, the purchaser of BCA’s assets was
not identified. As discussed below, around July 24, 2000,
petitioner was identified as the purchaser of 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

following questions:

     5.   Who will be doing appraisals/valuations/cost allo-
          cations of the various assets/properties for pur-
          poses of doing an IRC Section 1060 allocation?
          This is critical to this acquisition and needs to
          be coordinated with Steven Ross’ future income
          projections (AMT, etc.) since some leeway may be
          available re: inventory-type property (quick
          write-offs) and real estate (slow write-offs).
          Also, we need a breakdown between land (no write-
          offs) and other assets (such as goodwill and other
          intangibles). Also, are there any intangibles
          that can be written off over 15 years (e.g., trade
          names, goodwill, going concern, workforce in
          place, covenants not to compete, etc.)? Also, are
          there any self-constructed assets that can be
          written off over a short period (e.g., plans, work
          processes, blue print library, etc.)?

     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 find-

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 and (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, 2000, Mr. Blau provided to Mr. Kramer

additional information regarding 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 actions were taken.

     Related not only wanted to purchase through 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, the assets purchased.   Conse-

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 of 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 law.   BCA senior management, except Mr. Rice, owned all

of the interests in LRD Group.

     On July 12, 2000, petitioner was 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)19 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 14, 2000, Castanet sold and issued to Cronulla Corp.

(Cronulla) and Signal Capital Associates L.P. (SCALP)20 95 per-

cent and 5 percent, respectively, of its common 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 attorneys at Manatt with respect to

Castanet’s purchase of the stock of BCA from the Abrams estate.

That memorandum stated in pertinent part:



     19
      As of July 31, 2000, Related and Yukon Holdings 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 Group.
     20
      During 2000, Mr. Furman, a 50-percent owner of Fortrend,
owned 100 percent of the general partnership interests and 70.79
percent of the total interests in SCALP. During 2000, Mr.
Forster, a 50-percent owner of Fortrend, owned 9.5 percent of the
total interests in SCALP.
                              - 23 -

     2.   Transactional Summary & Closing Sequence

          As you are aware, it is imperative that we provide
          Fred Forster [the owner of 50 percent of the in-
          terests in Fortrend and 9.5 percent of the inter-
          ests in SCALP] with a copy of the transactional
          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 cer-
          tain of BCA’s assets].

     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 contribute 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:

     Annexed hereto is a copy of the flow chart, illustrat-
     ing the buying entity structure. Upon our acquisition
     of * * * [BCA] & disposition of certain assets [of BCA]
     * * * we are contemplating contributing certain Cana-
     dian currencies, which * * * will flow down to Casta-
     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 Percus-
     sion, LLC into Castanet, Inc.?

     Lastly, is Manatt Phelps comfortable in providing a tax
     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 fide”, Mr. Fitzgerald wrote “351 + basis only”.       In

addition, Mr. Fitzgerald wrote the following at the bottom of the

July 21, 2000 fax:   “Discussed with Randy [Bae] sequencing 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 Raiffeisen-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 BCA’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], the Purchaser [peti-
     tioner] has asked for our advice as to whether, for
     federal income tax purposes, the form of these transac-
                              - 25 -

     tions will be respected - i.e., whether the sale of
     stock in the Company [BCA] from the [Abrams] Estate to
     Castanet, on the one hand, and the sale of assets from
     the Company [BCA] to the Purchaser [petitioner], on the
     other hand, will be treated as independent transactions
     and not recharacterized by the Internal Revenue Ser-
     vice. We have advised the Purchaser [petitioner] that
     we believe the correct tax treatment of these events is
     that each sale should be respected as an independent
     transaction. We based our advice on (a) the form of
     the transactions, (b) the fact that Castanet and its
     owners and the Purchaser [petitioner] and its owners
     are unrelated parties, (c) each of the parties to these
     transactions will report the transactions in a manner
     consistent with their form, (d) Castanet is expected to
     derive a profit from these transactions and (e) the
     Purchaser [petitioner] is not acquiring all of the as-
     sets held by the Company.

     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:

                             RECITALS

        *       *       *        *       *       *      *

          C.   It is contemplated under the Stock Purchase
     Agreement [the agreement for the purchase of BCA’s
     stock] that Castanet will pay or cause to be paid
     $25,410,295 net of proceeds and adjustments (the “Stock
     Purchase Price”) to the [Abrams] Estate on the date
     hereof.
                                - 26 -

         D.   It is contemplated under the Asset Purchase
    Agreement [the agreement for the purchase of certain of
    BCA’s assets] that Purchaser [petitioner] will pay or
    cause to be paid $25,779,369 net of proceeds and ad-
    justments (the “Asset Purchase Price”) to Castanet on
    the date hereof.

         *        *       *       *       *       *       *

         G.   Hypo Bank shall deposit the Asset Purchase
    Price into an escrow account held by Sub-Escrow Agent
    [Rabobank] (such amount to be referred to herein as the
    “Asset Purchase Escrow Amount”).

         H.   The Sub-Escrow Agent [Rabobank] will hold the
    Asset Purchase Escrow Amount in * * * Castanet Purchase
    Escrow Account I, Account No. * * * 9107 * * * (the
    “Asset Purchase Escrow Account”).[21]

         I.   UFAC [sic] shall deposit the Stock Purchase
    Price into an escrow account held by Sub-Escrow Agent
    [Rabobank] (such amount to be referred to herein as the
    “Stock Purchase Escrow Amount” * * *).

         J.   The Sub-Escrow Agent [Rabobank] will hold the
    Stock Purchase Escrow Amount in * * * Castanet Purchase
    Escrow Account II, Account No. * * * 9116 * * * (the
    “Stock Purchase Escrow Account”).

                              AGREEMENT

         *        *       *       *       *       *       *

    2.       Deposits and Establishment of the Escrow Fund.

         *         *      *       *       *       *       *


    21
      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 assets. That agree-
ment required Rabobank to credit those funds to Castanet’s
account No. 9107 maintained at Rabobank. For convenience, we
shall discuss Hypo Bank’s and/or petitioner’s deposit of the
funds representing the price that petitioner agreed to pay to
purchase certain of BCA’s assets as being a deposit of those
funds into that account of Castanet.
                                 - 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 [Rabobank]
     the Asset Purchase Escrow Amount on the date hereof.
     The Sub-Escrow Agent [Rabobank] shall hold the Asset
     Purchase Escrow Amount and all interest and other a-
     mounts earned thereon * * * in escrow pursuant to this
     Agreement, in the Asset Purchase Escrow Account.

          (c) Pursuant to the Stock Purchase Agreement,
     UAFC shall deliver, or cause to be delivered, to the
     Sub-Escrow Agent [Rabobank] the Stock Purchase Escrow
     Amount on the date hereof. The Sub-Escrow Agent [Rab-
     obank] shall hold the Stock Purchase Amount and all
     interest and other amounts earned thereon * * * in
     escrow pursuant to this Agreement, in the Stock Pur-
     chase Escrow Account.

          *        *       *       *       *       *          *

     4.   Payments from the Stock Purchase Escrow Fund.
     * * * Sub-Escrow Agent [Rabobank] shall pay to (a) the
     [Abrams] Estate an amount equal to $23,202,795 by wire
     transfer * * * and (b) to Escrow Agent [Near North] an
     amount equal to $2,207,500 * * * by wire transfer * * *

     5.       Payments from the Asset Purchase Escrow Fund.

          (a) If and only if (i) the Sub-Escrow Agent [Rab-
     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 Sec-
     tion 4 above, then Sub-Escrow Agent [Rabobank] shall
     pay (A) to UAFC on behalf of and for the account of
     Castanet, that portion of the Asset Purchase Escrow
     Amount equal to the amount owed to UAFC by Castanet,
     and (B) all other amounts in the Asset Purchase Escrow
     Account, if any, to Castanet or to such other Person as
     directed by Castanet.

     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.22   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”), is
     between Castanet, Inc., a Delaware corporation
     (“Buyer”), and The Estate of Bruce C. Abrams (the
     “Seller”).

          *       *      *       *       *       *       *

          1.2 PURCHASE PRICE. The purchase price for the
     Shares, is $25,410,295 payable in cash by wire transfer
     as designated by Seller.

          *       *      *       *       *       *       *




     22
      UAFC lent Castanet $28 million, which was more than the
price that petitioner was to pay for certain of BCA’s assets.
Nonetheless, for convenience we shall sometimes state that the
funds representing that price were used to repay the UAFC loan or
the debt to UAFC.
                         - 29 -

     1.4   PURCHASE PRICE ADJUSTMENTS

          (a) An estimate of the income tax benefit
available to Seller (the “Estimated Tax Benefit”) for
the period from January 1, 2000 through July 31, 2000
(the “2000 Period”), based upon the taxable income or
taxable losses of the LR Entities (excluding the Ex-
cluded Assets) for the 2000 Period, has been computed
by the Seller and agreed upon by the Buyer, and such
Estimated Tax Benefit is $429,000 (the “Estimated Tax
Benefit”). An estimate of the Replacement Tax due by
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 Buy-
er, and such Replacement Tax is $75,000 (the “Estimated
Replacement Tax”). The Seller shall deposit the sum of
the amounts of the Estimated Tax Benefit and the Esti-
mated Replacement Tax ($504,000) into escrow pursuant
to the Escrow Agreement (the “Tax Escrow Deposit”).

          (b) To the extent the Tax Returns prepared
by Seller in accordance with Section 5 (the “Final Tax
Returns”) show: (i) the amount of income tax benefit
available to Seller based upon the actual tax losses of
the LR Entities (excluding the Excluded Assets) for the
period from January 1, 2000 through the Closing Date
(the “Short Period”) which is greater than the Esti-
mated Tax Benefit, the Seller shall pay Buyer an amount
equal to the difference between the amount of income
tax benefit available to Seller based upon the actual
tax losses of the LR Entities (excluding the Excluded
Assets) as determined from the Final tax Returns for
the Short Period and the Estimated Tax Benefit and the
parties shall instruct the Escrow agent to pay the full
amount of the Estimated Tax Benefit, including any in-
terest or other earnings earned on the Estimated Tax
Benefit deposited by Seller pursuant to the Escrow
Agreement, to Buyer, (ii) the amount of income tax
benefit available to Seller based upon the actual tax
losses of the LR Entities (excluding the Excluded As-
sets) for Short Period which is less than the Estimated
Tax Benefit, the parties shall instruct the Escrow
Agent to pay to Seller a portion of the Estimated Tax
Benefit equal to the difference between the amount of
such income tax benefit available to Seller based upon
the actual tax losses of the LR Entities (excluding the
Excluded Assets) as determined from the Final Tax
Returns for the Short Period and the Estimated Tax
                           - 30 -

Benefit and instruct the Escrow Agent to pay the re-
mainder of the Estimated Tax Benefit, if any, to Buyer,
(iii) income tax due by Seller based upon the actual
taxable income of the LR Entities (excluding the Ex-
cluded Assets) for the Short Period, the parties shall
instruct the Escrow Agent to pay the full amount of the
Estimated Tax Benefit, including any interest or other
earnings earned on the Estimated Tax Benefit deposited
by Seller pursuant to the Escrow Agreement, to Seller
and the Buyer shall pay to the Seller an amount equal
to the income tax due by Seller on the actual taxable
income of the LR Entities (excluding the Excluded As-
sets) for the Short Period as determined from the Final
Tax Returns.

   *         *        *      *       *       *       *

        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,
“Tax” or “Taxes” refers to any and all federal, state,
local and foreign taxes, assessments and other govern-
mental charges, duties, impositions and liabilities
relating to taxes, including, but not limited to, taxes
based upon or measured by gross receipts, income, pro-
fits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, re-
capture, employment, excise and property taxes, togeth-
er with all interest, penalties and additions imposed
with respect to such amounts and any obligations under
any agreements or arrangements with any other Person
with respect to such amounts and including any liabil-
ity for taxes of a predecessor entity.

          (b) Each of the LR Entities have timely
filed, taking into account any extensions, all federal,
state, local and foreign returns, estimates, informa-
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 in all material
respects. With respect to all Taxes imposed on the LR
                           - 31 -

Entities or any of the Subsidiaries or for which the LR
Entities or any of the Subsidiaries is or could be lia-
ble, whether to taxing authorities or to other Persons
or entities (as, for example, under tax sharing or tax
allocation agreements), with respect to all taxable
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 re-
quired to be paid by the LR Entities or any of the Sub-
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.

   *         *       *       *      *      *       *

       4.7   TAX INDEMNIFICATION.

          (a) Subject to the terms and conditions
hereof, in the event of a Sale Event which results in a
Seller Loss, the Seller shall give to the Buyer written
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 (an “Indemnity
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.

          (b) If the Buyer shall be obligated to make
a payment to Seller hereunder, the Buyer shall satisfy
such obligation by making a payment to the Seller in an
amount equal to the Seller Loss plus, to the extent not
previously paid, the costs and expenses to be borne by
Buyer pursuant to Section 4.8(b).

          (c) Any Indemnity Payment required to be
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 de-
tail: (i) the Sale Event and (ii) the amount of the
Seller Loss, which demand shall be made no later than
35 days before the due date for payment by the Seller
of the Seller Loss; provided however, with respect to
any Seller Loss that is being contested pursuant to
this Agreement, no Indemnity Payment shall be due until
30 days after a Final Determination with respect to
such contest.
                           - 32 -

     4.8   TAX CONTESTS.

          (a) Notice. In the event any taxing author-
ity (i) delivers to Seller any written notices, notifi-
cations, audit letters, letters of inquiry or any other
written communication that reasonably may result in a
Seller Loss or (ii) proposes an adjustment to the tax
liability of the Seller or any of the LR Entities,
which adjustment, if sustained, could result in an ob-
ligation on the part of the Buyer to indemnify the
Seller for a Seller Loss, the recipient of such 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 Buy-
er (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 re-
spect thereto and the Seller, for at least thirty (30)
days after receiving such notice from any taxing au-
thority, shall forbear, if such forbearance is permit-
ted by law, from the payment of any Taxes (including
interest, penalties and additions to Taxes) asserted to
be payable as a result of such proposed adjustment.
The recipient shall include with such notification a
true, correct, and complete copy of any written commu-
nication with any taxing authority, and an accurate and
complete summary of any oral communication with such
taxing authority.

          (b) Administrative and Judicial Proceedings.
Unless otherwise instructed by the Buyer, the Seller
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 the progress of such contest and
shall, if and to the extent requested, permit Buyer to
attend any and all conferences with the contesting au-
thority; and consider in good faith any and all advice
rendered by the Buyer with respect to the conduct of
such contest. On written request of the Buyer made
within thirty (30) days of the receipt of notice of a
proposed adjustment, the Buyer shall have the opportu-
nity to be present at and participate in any adminis-
trative or judicial proceedings (to the extent permit-
ted 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
Buyer for the Seller to jointly contest the adjustment
                        - 33 -

in accordance with this Agreement; (ii) the proposed
adjustment is in excess of $50,000; and (iii) the Buyer
agrees to bear all of its costs and disbursements as-
sociated with such contest. In connection with any
contest relating to any Sale Event, the Buyer agrees to
pay on demand on an after-tax basis all reasonable out-
of-pocket costs and expenses (including, without limi-
tation, reasonable attorney fees and costs) which the
Seller may incur in connection with contesting such
claim. The Buyer shall determine the nature of all ac-
tion to be taken to contest such proposed adjustment
* * *. Buyer shall be afforded the opportunity to re-
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 to the conduct of
contesting such claim, Buyer shall not be obligated to
make any Indemnity Payment. * * *

          (c) Settlement. If, in the course of con-
testing 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, the Seller shall agree to the
settlement as proposed by such taxing authority and
described to the Buyer.

          (d) Payment. If the Buyer or Seller shall
have contested any proposed adjustment as above pro-
vided, the Buyer shall not be required to indemnify the
Seller pursuant to this Agreement with respect to the
claim being contested until there occurs a Final Deter-
mination with respect to the liability of the Seller
for the Seller Loss. If the Buyer shall direct the
Seller to contest a proposed adjustment that could re-
sult in a Seller Loss by paying the tax claimed (in-
cluding such other amounts payable as interest, penal-
ties, or additions to tax) and seeking a refund, then
the Buyer shall advance to the Seller, on an interest-
free basis, the aggregate amount of such taxes, inter-
est, penalties and additions to tax applicable to such
proposed adjustment (and shall indemnify the Seller in
accordance with this Agreement from any adverse conse-
quences of such advance), and the Seller shall not be
obligated to take any further action pursuant to this
Agreement unless Buyer shall make such advance. * * *
                           - 34 -

       4.9   MISCELLANEOUS TAX MATTERS.

          (a) Adjustment to Purchase Price. The
amount of any Indemnity Payment under this Agreement
shall be treated by the Seller and Buyer as an adjust-
ment to the Purchase Price.

          (b) Assumption of Indemnity Obligation. If
Buyer sells all or any substantial portion of the as-
sets of the LR Entities, as a condition to such sale,
the purchaser(s) of such assets (or an affiliate
thereof) (the “Subsequent Buyer”) shall be required to
assume the indemnity obligations and the liability for
Taxes provided for in Section 4.7 (subject to Section
4.8) of this Agreement and in Section 5 of this Agree-
ment and shall be required to meet the following li-
quidity and other requirements: (i) provide a $3 mil-
lion 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 is due in
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 shall 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.

          (c) Consistent Tax Reporting Position.
Seller and Buyer shall reflect the sale of the Shares
as a sale of stock or other ownership interests consis-
tent 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 Code.
* * *

   *         *       *       *       *     *       *

       5.    LIABILITY FOR TAXES.

          (a) Except for Taxes that have been provided
for as accrued in the computation of Net Working Capi-
tal 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 taxable periods
or portions of taxable periods, ending as of one day
prior to the Closing Date (the “Pre-Closing Period”).
                        - 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,
American Express Tax and Business Services Inc. or such
other accountants selected by Seller, to prepare the
Tax Returns required to be filed by the LR Entities for
all Pre-Closing Periods. * * * Items to be taken into
account for the taxable year beginning on January 1,
2000 and ending as of one date prior to the Closing
Date (the “Pre-Closing Short Period”) shall be deter-
mined using 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 the
Code.

          (c) Consistent with the “closing-the-books”
method under Section 1362(e)(3) of the Code, Seller
shall be responsible for all Seller Taxes attributable
to the Pre-Closing Short Period (except to the extent
such Taxes have been provided for as accrued in the
computation of Net Working Capital and except as pro-
vided in Section 4.7). * * * Except as set forth in
Section 4.7, Seller shall indemnify and hold Buyer
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.

   *       *       *       *       *       *       *

          (f) If Buyer or any of the LR Entities re-
ceives a refund, credit or reduction of Taxes attribut-
able to the Pre-Closing Period, Buyer shall promptly
reimburse the Seller for such refund, credit or reduc-
tion of Taxes. If Seller or any of the LR Entities re-
ceive a refund or reduction of Taxes attributable to
the Post-Closing Period, the Seller shall promptly
reimburse the Buyer for such refund, credit or reduc-
tion of 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 -

Short Period”) and all subsequent tax years. Such Tax
Returns shall be prepared on a basis consistent with
the items and positions reflected in the Pre-Closing
Period 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 expected to cause any material adverse tax conse-
quences to Seller with respect to the Pre-Closing Per-
iod. Items to be taken into account in the Post-Clos-
ing Short Period Tax Returns shall be determined using
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 the Code.

          (h) Consistent with the “closing-the-books”
method under Section 1362(e)(3) of the Code, Buyer
shall be responsible for all Buyer Taxes for all tax-
able periods or portions of taxable periods beginning
on the Closing Date (the “Post-Closing Period”). Ex-
emptions, allowances, deductions and any other items
that are calculated on an annual basis (including, but
not limited to, depreciation and amortization deduc-
tions) shall be allocated between the Pre-Closing Short
Period and the Post-Closing Short Period in the propor-
tion which the number of days in each such period bears
to the total number of days in the applicable annual
period. If, as of the Closing Date, any of the LR En-
tities is a partner in a partnership which has a tax
year that does not end as of the Closing Date, any item
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 indemnify and hold Seller harmless from and
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.

     (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 * * * [BCA] in 3169 N. Lincoln
     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 the foregoing entities respective hold-
     ings.[23]

          *     *       *       *       *       *       *

          “Replacement Tax” - means the Illinois Personal
     Property Replacement tax due by the Company for the
     Pre-Closing Period.

          *     *       *       *       *       *       *

          “Sale Event” - shall mean the sale of all or a
     substantial portion of the assets of the LR Entities by
     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.

          *     *       *       *       *       *       *

         “Seller Loss” - shall mean the amount, if any, of
    Taxes owed by Seller (including, without limitation,
    Taxes resulting from the receipt of any Indemnity
    Payment) to any taxing authority in excess of the
    amount of Taxes owed to any taxing authority by the
    Seller with respect to the sale of the Shares, which
    amount arises from a Sale Event * * *



     23
      On July 31, 2000, before Castanet and the Abrams estate
executed the SPA, the board of directors of BCA adopted resolu-
tions declaring a dividend payable to the Abrams estate consist-
ing of the assets that were defined as “Excluded Assets” in
section 6 of 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,24 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



     24
       On July 31, 2000, each member of BCA senior management,
except Mr. Rice, executed an employment agreement with LR Manage-
ment 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”),
     dated as of July 31, 2000, is between LR Development
     Company LLC, * * * (“Buyer”), Castanet, Inc., a Dela-
     ware corporation, (the “Seller”) and Bruce C. Abrams,
     Inc., an Illinois corporation, * * * (the “Company”).
     * * *

        *        *          *       *       *       *        *

            1.   SALE AND TRANSFER OF ASSETS; CLOSING

                 1.1     ASSETS AND ASSUMED LIABILITIES.

          (a) Subject to the terms and conditions of this
     Agreement, at the Closing the Seller will, or will
     cause the Company to * * * sell, transfer, convey,
     assign and deliver to Buyer * * * all of the right,
     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
     * * * including, but not limited to, the following:

               (i) the equity interests described on Ex-
     hibit 1.1-A attached hereto (collectively, the “Equity
     Interests”);

                 (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 the Stock Purchase
     Agreement;

        *        *          *        *       *       *       *

          (b) Notwithstanding the foregoing, the following
     properties and assets of the Company are retained by
     the Company and are expressly excluded from the pur-
     chase and sale contemplated by this Agreement (collec-
     tively, the “Excluded Assets”):

        *          *         *       *       *       *       *

               (iii) the entities set forth on Exhibit 1.1-B
     (the “Excluded Entities”); and
                               - 40 -

               (iv) those items identified or described in
     Section 1.1(a) above, to the extent said items relate
     solely to the Excluded Entities.

          (c)   Assumed and Excluded Liabilities.

               As of the Closing Date, Buyer will assume and
     thereafter pay and fully satisfy when due: (A) liabili-
     ties arising after the Closing Date under the Applica-
     ble Contracts to which the Company is a party or by
     which the Company is bound or Governmental Authoriza-
     tions held by the Company and assumed by Buyer pursuant
     to paragraph (a) of this section 1.1, (B) normal and
     customary trade accounts payable and accruals (other
     than income tax accruals) of the Company, in each case
     arising in the Ordinary Course of Business and only to
     the extent included in the calculation of Net Working
     Capital (the “Accounts Payable”), and (C) liabilities
     and obligations of the LR Entities. All such liabili-
     ties and obligations to be so assumed by Buyer are
     referred to herein as the “Assumed Obligations”. As-
     sumed Obligations shall not include (x) any of the
     items described in subparagraph 1.1(c)(A), (B), or (C)
     which relate to the Excluded Assets, or (y) any taxes
     of Seller or the Company of any nature due as a result
     of the purchase of the Shares by Seller, the sale of
     the Assets to Buyer, or the sale of the Excluded Assets
     by the Company.

                1.2   PURCHASE PRICE.

         (a) The purchase price (the “Purchase Price”) for
    the Assets shall be Twenty Five Million Six Hundred
    Thirteen Thousand Three Hundred sixty Nine and No/100
    Dollars ($25,613,369),[25] payable in cash payable [sic]
    pursuant to the terms and provisions of the Escrow
    Agreement between Buyer, Seller and escrow agent.

          (b) Exhibit 1.2 of this Agreement sets forth the
     allocation of (i) the Purchase Price, plus the (ii) al-


     25
      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 the
escrow agreement provided that petitioner was to pay “$25,779,369
net of proceeds and adjustments” for certain of BCA’s assets.
The record does not establish the amount of the “proceeds and
adjustments” that was to reduce that $25,779,369.
                          - 41 -

locable liabilities being assumed directly or indi-
rectly by Buyer. The Seller and Buyer agree to make
all appropriate tax filings on a basis consistent with
the agreed allocation, * * * and not to take a position
on any return or in any Proceeding that is inconsistent
with the terms of the agreed allocation.

          1.3 CLOSING. The closing of the purchase
and sale of the Assets (the “Closing”) will take place
at the offices of Katten Muchin Zavis, 525 West Monroe
Street, Suite 1600, Chicago, Illinois, at 10:00 a.m.
(local time) on the Closing Date.

   *       *       *        *          *   *       *

     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-
PARTY RIGHTS. * * * Nothing expressed or referred to
in this Agreement will be construed to give any Person
other than the parties to this Agreement any legal or
equitable right, remedy, or claim under or with respect
to this Agreement or any provision of this Agreement.

   *       *       *        *          *   *       *

                       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, Inc. * * *
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 * * *
                               - 42 -

     33.33% Limited Partnership interest in Winners Limited
          Partnership * * *
     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                                         -0-
       Net current assets                       $8,873,149
       Prepaid commissions                         500,000
       Other assets                                260,484
       Furniture and fixtures                      100,000
       Leases                                       50,000
       Equity interests:
         Park Tower LLC                        23,223,959
         Arcade LLC                                85,206
         Lake Shore LLC                         4,420,232
         Limits LLC                               170,126
         Plaines Town Center LLC                1,447,596
         LR Fort Sheridan LLC                   3,621,026
         Lawrence Partners LP                         100
         6133 N. Kenmore LP                           100
         Amber Manor LP                               100
         Estes Partners LP                            100
         Humboldt Ridge LP                            100
         Jackson Park LP                              732
         Madison Park Place LP                        100
         Madison Renaissance LLC                      100
         Magnolia Partners LP                         100
         New Southtown LP                             100
         Ridge Partners LP                         67,387
         Sheridan Park Partners LP                    100
                              - 43 -

          Union Square LP                          100
          Winthrop Partners LP                     100
          Winners LP                         1,275,945
          Quality First Inc.                       100
          LR Contracting Co.                       100
          LR Management Co.                        100
                  Total assets              44,097,342
                  Less liabilities          18,882,973
                  Total assets net of
                    liabilities             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, INC., a
     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 “Par-
     ties”.

                            WITNESSETH:

          WHEREAS, CNI is a party to that certain Stock
     Purchase Agreement (the “Stock Purchase Agreement”)
     dated July 31, 2000, by and between CNI and the Estate
     of Bruce C. Abrams (the “Estate”) * * *

          WHEREAS, CNI, LDC, and the Company [BCA] have
     entered into that certain Asset Purchase Agreement (the
     “Asset Purchase Agreement”) dated July 31, 2000, * * *
                              - 44 -

          *     *       *       *       *       *       *

          NOW, THEREFORE, * * * CNI and Related represent,
     warrant, covenant and agree as follows:

          *     *       *       *       *       *       *

          2.   Assignment and Assumption. LDC hereby ac-
     cepts and assumes all of CNI’s obligations under Sec-
     tions 1.4(b) * * * and Article V of the Stock Purchase
     Agreement,[26] and Related hereby accepts and assumes
     all of CNI’s obligations under Sections 4.7, 4.8 and
     4.9 of the Stock Purchase Agreement, including without
     limitation the obligations required of a Subsequent
     Buyer (as defined in the Stock Purchase Agreement) pur-
     suant to Section 4.9(b)(i) - (iv) of the Stock Purchase
     Agreement (said obligations are collectively referred
     to herein as, the “Obligations”). This assumption is
     effective as of the date hereof and a copy of this
     Agreement has been delivered to the Estate.

          *     *       *       *       *       *       *

                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 benefi-
     ciary to this Agreement: (a) no third party is enti-
     tled to rely on any of the agreements of the parties
     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, petitioner

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”,



     26
      “Article V of the Stock Purchase Agreement” to which
section 2 of the assumption agreement referred is section 5 of
the SPA.
                               - 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:

            3.   Assignment of Representations, Warranties and
                 Covenants.

          (a) [Castanet] * * * by these presents, hereby
     (i) assigns to * * * [petitioner] and its successors
     and assigns, all of * * * [Castanet’s] rights after the
     Closing Date under the Stock Purchase Agreement includ-
     ing without limitation all rights with respect to the
     representations and warranties contained in Section 2
     of the Stock Purchase Agreement and the rights to in-
     demnification contained in Section 4 of the Stock Pur-
     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 as-
     signs all of * * * [Castanet’s] rights after the Clos-
     ing Date under Sections 1.4, 4.7, 4.8, and 4.9 of the
     Stock Purchase Agreement, in each case except to the
     extent any rights under such Sections 2 or 4 relate to
     Excluded Assets under the Asset Purchase Agreement or
     the business related thereto, but in any event includ-
     ing Excluded Liabilities relating thereto.

          (b) Notwithstanding the foregoing, if and to the
     extent * * * [Castanet] otherwise or the Company [BCA]
     directly suffers an indemnifiable Loss under Section 4
     of the Stock Purchase Agreement, then * * * [Castanet]
     shall be entitled to recover directly against the
     [Abrams] Estate with respect thereto pursuant to the
     terms of the Stock Purchase Agreement.

        *        *       *       *       *       *        *

          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
     entitled to rely on any of the agreements of the par-
     ties 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.
                             - 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)27 into a certain escrow account established at Rabo-

bank for the purpose of holding the funds representing that

purchase price.

     Pursuant to section 1.2(a) of the APA and section 2(b) of

the escrow agreement, on August 1, 2000, Hypo Bank28 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 escrow 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).   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


     27
      Before Castanet’s payment of the $25,410,295 purchase
price from Castanet’s account No. 9081 at Rabobank, UAFC had
deposited the $28 million that UAFC had lent to Castanet into
that account.
     28
      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

funds 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.29

     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.


     29
      As required by section 5(a) of the escrow agreement,
Rabobank had (1) received the release notice and (2) made the
transfers described in the first sentence of section 4 of that
agreement.
                             - 48 -

Fitzgerald stated in pertinent part:

          Subsequent to the stock purchase and the asset
     sale, the Fortrend entity that purchased the stock of
     * * * [BCA] merged downstream. This left * * * [BCA]
     as the surviving corporation wholly owned by Signal
     Capital Associates, L.P. (“SCALP”). SCALP then trans-
     ferred to * * * [BCA] Canadian currency in the amount
     of $68,000 (Canadian) but with a tax basis in SCALP’s
     hands stated to be $17,268,000.

          We have been asked to render three tax opinions.
     First, Fortrend has asked us to provide an opinion as
     to the dollar amount of pre-contribution tax basis that
     SCALP had in the Canadian currency. We have no knowl-
     edge of this basis. SCALP will have to represent to us
     this basis figure. Fortrend entities have made such
     representations to us in other transactions. Second,
     Fortrend has asked us to provide an opinion that the
     transfer of the Canadian currency from SCALP to * * *
     [BCA] qualified under IRC Section 351. This is the
     same type of opinion we have rendered in other Fortrend
     transactions. Third, Fortrend has asked us to provide
     an opinion that * * * [BCA] took a carryover basis in
     the Canadian currency and the dollar amount of the
     basis * * * [BCA] had in the Canadian currency. Appli-
     cation of the IRC Section 362 carryover basis rules is
     a consequence of qualification under IRC Section 351.
     We would just use the basis dollar amount represented
     to us by SCALP.

          Our opinions would be addressed solely to SCALP
     and * * * [BCA], which are now both Fortrend entities.
     This is an “inside” Fortrend opinion. * * *

          Drafts of the tax opinion letter and the represen-
     tations letter are enclosed. I am sending copies to
     Fortrend for their simultaneous review. Pursuant to
     policy decisions our firm has reached concerning
     Fortrend tax opinions and my review of the documents, I
     recommend approval of the enclosures.

     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].”30

     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:

          Signal Capital Associates, L.P., * * * (“Parent”)
     and Bruce C. Abrams, Inc., * * * (“Subsidiary”), have
     requested your opinion regarding certain federal income
     tax consequences of a transaction (the “Contribution”)
     whereby Parent transferred certain Canadian currency in
     the denomination of $68,000 (Canadian) to Subsidiary.

          * * * Parent was the sole shareholder of Subsid-
     iary both before and after the Contribution. Accord-
     ingly, Parent joins in the representations and state-
     ments in this letter. Parent and Subsidiary understand
     that the conclusions in your opinion letter are depend-
     ent in part on the accuracy of this representations
     letter and that your opinion could be adversely affect-
     ed if this representations letter is not true, correct
     and complete.

          *      *      *         *       *     *        *


     30
      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.
                          - 50 -

     Parent and Subsidiary have asked you to address
solely the federal income tax consequences of the
Contribution that are specifically set forth in your
draft tax opinion letter referred to above.[31] 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.

     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 Sub-
sidiary 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 Cana-
dian currency that Parent transferred to Subsidiary was
$17,268,000 in the aggregate immediately before the
Contribution.

     3.   Both Parent and Subsidiary had substantial
non-tax business reasons for engaging in the Contribu-
tion. 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
treat the Contribution in a manner that is consistent
with its form.

     5.   At the time of the Contribution and thereaf-
ter, Parent owned 100% of the issued and outstanding
shares of Subsidiary. Due to its ownership of all of
the Subsidiary stock, issuance of more Subsidiary
shares to Parent in connection with the Contribution
would have been meaningless. For this reason, Subsid-
iary did not issue shares to Parent as a result of the
contribution.


31
     See supra note 30.
                        - 51 -

     6.   No stock or securities were or will be issued
by Subsidiary for services rendered to or for the
benefit of Subsidiary in connection with the Contribu-
tion. No stock or securities were or will be issued by
Subsidiary for indebtedness of Subsidiary that is not
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.

     7.   Parent neither accumulated receivables nor
made any extraordinary payment of payables in anticipa-
tion of the Contribution. Subsidiary has reported and
will report items which, but for the Contribution,
would have resulted in income or deduction to Parent in
a period subsequent to the Contribution and such items
have and will constitute income or deductions to Sub-
sidiary when received or paid by Subsidiary.

     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 Subsid-
iary.

     10. Subsidiary did not take the Canadian currency
subject to any debt and did not assume any debt of
Parent 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
upon before the Contribution in which the rights of the
parties were defined.

     13. There was no plan or intention on the part of
Subsidiary to redeem or otherwise reacquire any Subsid-
iary 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 Subsidiary held by Parent, Parent was in
                             - 52 -

     “control” of Subsidiary within the meaning of Section
     368(c) of the Code at the time of the Contribution. At
     the time of the Contribution, Parent was not under a
     binding obligation, and had no plan or intention, to
     dispose of any portion of its stock in Subsidiary
     following the Contribution.

          15. Subsidiary and Parent each paid their own
     expenses incurred in connection with the Contribution.

          16. At the time of the Contribution, Subsidiary
     was not an “investment company” within the meaning of
     Section 351(e) of the Code.

          17. You may rely on the accuracy of the represen-
     tations herein for purposes of your tax opinion letter
     without further inquiry or independent investigation.

          18. Parent and Subsidiary hereby consent 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 letter

(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
     following analysis and opinions relating to certain
     federal income tax consequences of the transaction (the
     “Contribution”) whereby Signal Capital Associates,
     L.P., * * * (“Parent”), contributed certain Canadian
     currency to Bruce C. Abrams, Inc., * * * (“Subsid-
     iary”).

          At the time of the Contribution, Parent owned all
     of the issued and outstanding shares of Subsidiary.
     Subsidiary did not issue any shares of its stock to
     Parent as a result of the Contribution because (accord-
     ing to Parent) issuance of such shares in exchange for
     the Canadian currency would have been meaningless (due
     to the existing ownership by Parent of 100% of Subsid-
     iary).
                             - 53 -

          *     *       *       *       *       *       *

          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. Among the
     representations in that letter are representations
     that, for federal income tax purposes, Parent’s tax
     basis for the Canadian currency that Parent contributed
     to Subsidiary was $17,268,000 immediately before the
     Contribution. We have assumed, without independent
     investigation, the accuracy and completeness of all
     such representations. If such representations at any
     time are not true, correct and complete, our opinions
     could be adversely affected.

         Any change or inaccuracy in the facts set forth in
    the documents specified above[32] or in the above-refer-
    enced representations letter could adversely affect our
    opinions. * * *.

          *    *       *       *       *       *       *

         In the case of transactions such as the Contribu-
    tion, many federal, state and local income and other
    tax consequences arise. We have been asked only to
    address the issues specifically set forth below. No
    opinion is expressed regarding any other issues.

          *    *       *       *       *       *       *

         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 to Subsidiary in the Contribu-
    tion was a carryover tax basis in accordance with
    Section 362 of the [Internal Revenue] Code.


     32
      Manatt’s November 1, 2000 tax opinion letter listed
various documents on which Manatt relied in rendering its
opinions. We have not quoted the entire opinion letter or
described all of the documents on which Manatt relied because
they are not material to our resolution of the issues in this
case.
                              - 54 -

          (c) Based on the representations made to us in
     the above-referenced representations letter from Parent
     and Subsidiary, the carryover tax basis for Subsidiary
     was $17,268,000 for the Canadian currency contributed
     to Subsidiary.

     On February 8, 2002, BCA dissolved.   On the same date, BCA

filed with the secretary of state of the State of Illinois

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 1120S, U.S.

Income Tax Return for an S Corporation, for the taxable year that

began January 1, 2000, and 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).   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 notification 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 from

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 that that return would be

its final return.

     In the 12/31/01 BCA return, BCA reported total income of

$220,721, claimed total deductions of $48,319, 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 the end of

its taxable year 2001.

     Around September 19, 2001, petitioner filed with respondent

Form 1065, U.S. Return of Partnership Income, for its taxable

year that began July 31, 2000, and ended December 31, 2000.

Petitioner included with that form Schedule L.   In that schedule,

petitioner reported total assets of $78,091,661 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 the

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 (BCA 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 disallowed 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.   (We 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’s 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 June 29, 2005, the first revenue officer

reviewed respondent’s Integrated Data Retrieval 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 database systems 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 liability.

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 officer reviewed certain

data transcripts maintained by the Internal Revenue 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.     The first revenue officer did not

identify any such sources 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.33

     On August 31, 2005, the first revenue 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 first revenue officer identified

Golden Gate Bank as a potential source on which respondent might

levy with respect to BCA’s tax liability.    On the same date, the


        33
      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.
                              - 60 -

first revenue officer mailed 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, 2005, 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

liability because BCA had dissolved.

     At no time 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-

dent’s examination division for consideration of possible trans-

feree liability.

     Respondent issued to petitioner a notice of liability in

which respondent determined that petitioner is liable as a

transferee of BCA for BCA’s tax liability.

                              OPINION

     Respondent bears the burden of establishing that petitioner

is liable under section 6901 for BCA’s tax liability as a trans-
                                 - 61 -

feree of property of BCA (BCA’s transferee).34        See sec. 6902(a);

see also Rule 142(d).

     Section 6901 provides in pertinent part:

     SEC. 6901.     TRANSFERRED ASSETS.

          (a) Method of Collection.--The amounts of the fol-
     lowing liabilities shall, except as hereinafter in this
     section provided, be assessed, paid, and collected in
     the same manner and subject to the same provisions and
     limitations as in the case of the taxes with respect to
     which the liabilities were incurred:

              (1) Income, 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, the term “transferee” includes * * *
     distributee * * *.

     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.


     34
      Petitioner bears the burden of establishing that BCA is
not liable for BCA’s tax liability. See Rule 142(a), (d).
Petitioner alleged in the petition that respondent erred in
determining that BCA is liable for BCA’s tax liability. Peti-
tioner presented no evidence at trial and advances no argument on
brief that BCA is not liable for BCA’s tax liability. We con-
clude that petitioner has abandoned the allegation in the peti-
tion that respondent erred in determining that BCA is liable for
BCA’s tax liability.
                              - 62 -

39, 42 (1958); Hagaman v. Commissioner, 100 T.C. 180, 183 (1993).

The existence and the extent of a transferee’s liability are

determined under applicable State law.   See Commissioner 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 the 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 transferee 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




     35
      Respondent does not advance any other argument in support
of respondent’s position that petitioner is liable under sec.
6901 as BCA’s transferee. In fact, respondent expressly abandons
two such other arguments. On brief, respondent states:

     Respondent does not seek to recast the BCA Intermediary
     Transaction as a stock sale by the [Abrams] Estate to
     petitioner, as in Enbridge Energy Co. v. United States,
     553 F.Supp.2d 716 (S.D. Tex. 2008), because petitioners
     liability as a transferee can be established by follow-
     ing the form of the transaction it adopted. Nor does
     respondent seek to establish petitioner’s liability as
     a transferee under the Federal Debt Collection Proce-
     dure Act, 28 U.S.C. § 3301 et seq.
                                - 63 -

Claimed Transferee of Property of
BCA Under the Assumption Agreement

     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”) for all taxable periods or por-
                        - 64 -

tions of taxable periods, ending as of one day prior to
the Closing Date (the “Pre-Closing Period”). 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”).

   *       *       *       *       *       *       *

     (c) * * * Except as set forth in Section 4.7,
Seller shall indemnify and hold Buyer 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.

   *       *       *       *       *       *       *

     (f) If Buyer or any of the LR Entities receives 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. If Seller or any of the LR Entities receive a
refund or reduction of Taxes attributable to the Post-
Closing Period, the Seller shall promptly reimburse the
Buyer for such refund, credit or reduction of taxes.

     (g) The Buyer and LR Entities shall cause their
accountants to prepare and file all Tax Returns re-
quired 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. Such Tax Re-
turns shall be prepared on a basis consistent with the
items and positions reflected in the Pre-Closing Period
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 ex-
pected to cause any material adverse tax consequences
to Seller with respect to the Pre-Closing Period.
Items to be taken into account in the Post-Closing
Short Period Tax Returns shall be determined using 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 the Code.
                             - 65 -

          (h) Consistent with the “closing-the-books”
     method under Section 1362(e)(3) of the Code, Buyer
     shall be responsible for all Buyer Taxes for all tax-
     able periods or portions of taxable periods beginning
     on the Closing Date (the “Post-Closing Period”). Ex-
     emptions, allowances, deductions and any other items
     that are calculated on an annual basis (including, but
     not limited to, depreciation and amortization deduc-
     tions) shall be allocated between the Pre-Closing Short
     Period and the Post-Closing Short Period in the propor-
     tion which the number of days in each such period bears
     to the total number of days in the applicable annual
     period. If, as of the Closing Date, any of the LR En-
     tities is a partner in a partnership which has a tax
     year that does not end as of the Closing Date, any item
     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 indemnify and hold Seller harmless from and
     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.

          (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 -

     Section 5 of the SPA simply means that, as between the
     stock seller and the stock buyer, the stock seller is
     responsible for all taxes incurred prior to the closing
     by BCA and the various entities in which it held an
     interest, and the stock buyer is responsible for all
     taxes incurred by those entities after the closing. By
     standing in Castanet’s shoes with respect to this pro-
     vision, Petitioner agreed that it, as opposed to the
     Estate or Castanet, would be responsible for making
     sure that the entities it owned and controlled as a
     result of the Asset Purchase Agreement (“APA”) would
     pay their tax liabilities. Neither the SPA nor the AA
     [assumption agreement] eliminated the separate corpo-
     rate existence of BCA, made Castanet rather than BCA
     itself liable for BCA’s taxes, or made Petitioner
     liable for the taxes of an entity it never owned or
     controlled.

     We reject petitioner’s argument.   Section 2 of the assump-

tion agreement and section 5 of the SPA mean what they say.    We

have 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.36

     36
      Petitioner also argues that petitioner could not have
assumed BCA’s tax liability because (1) section 1.1(c) of the APA
(i.e., the asset purchase agreement) specifically excluded the
asset sale capital gains tax from the liabilities that petitioner
agreed to assume from BCA and (2) “[i]n the face of contractual
language that expressly disclaims liability, [a court] cannot
find that there was an implied assumption of liability.” (brack-
eted material in original) Section 1.1(c) of the APA provided in
pertinent part:

                                                    (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: (a) no
     third party is entitled to rely on any of the agree-
     ments of the parties contained in this Agreement; and
     (b) the parties assume no liability to any third party
     because of any reliance on the agreements of the par-
     ties contained in this Agreement.

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 to 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.


     36
      (...continued)
     Assumed Obligations shall not include * * * any taxes
     of Seller [Castanet] or the Company [BCA] of any nature
     due as a result of the purchase of the Shares [of BCA]
     by Seller [Castanet], the sale of the Assets to Buyer
     [petitioner], or the sale of the Excluded Assets by the
     Company [BCA].

We reject petitioner’s argument. We have not found, and are not
implying, that under section 2 of the assumption agreement
petitioner assumed a tax of Castanet or a tax of BCA. We have
found 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.
                             - 68 -

     Respondent agrees with petitioner that under Illinois law a

third party generally may not enforce a contract that specifi-

cally disclaims liability to third parties.   However, respondent

argues that section 4.4 of the assumption agreement, which

disclaims liability to third parties except the Abrams estate, 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 4.4 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 assump-
     tion of BCA’s tax liabilities from the asset buyer.
     * * * The SPA contains no disclaimer for third parties.
     * * * Section 4.4 [of the assumption agreement] at-
     tempts to limit petitioner’s liability to run only to
     the [Abrams] Estate, which violates the terms of the
     SPA.

     As we understand respondent’s argument, the lack of a

provision in the SPA precluding third-party beneficiaries means

that the SPA allows third parties to enforce that agreement, and

section 4.4 of the assumption agreement 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.37    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 to 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

     37
      If the benefit to a third person arising from a contract
is incidental, the third person may not enforce the contract. If
the benefit to the third person arising from the contract is
direct, the third person may enforce the contract. See Carson
Pirie Scott & Co. v. Parrett, 178 N.E. 498, 501 (Ill. 1931).
                              - 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

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 in 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 express language of section 4.4 of the assump-

tion agreement in this case could permit petitioner, the buyer of

certain of BCA’s assets, to “insulate a stock seller [the Abrams

estate] from the target company’s [BCA’s] federal income tax

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 having 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 in 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,39 from liability

under section 6901 for BCA’s tax liability.40

     38
      BCA was an S corporation throughout the period the Abrams
estate owned BCA’s stock. As a result, if respondent had treated
BCA’s sale of certain of its assets as having occurred while that
estate owned the stock of BCA, the gain on any such sale would
have flowed through to the Abrams estate as BCA’s sole stock-
holder.
     39
      UAFC is the financial institution that made the loan to
Castanet to fund its purchase of BCA stock.
     40
      Respondent also does not explain how enforcing the express
language of section 4.4 of the assumption agreement in this case
“insulates” petitioner in all events from liability under sec.
6901. In addition to respondent’s arguments under the assumption
agreement, respondent advances in this case other arguments in
support of respondent’s position that petitioner is liable under
sec. 6901. Although we find that section 4.4 of the assumption
                                                   (continued...)
                                - 72 -

       On the record before us, we reject respondent’s argument

that section 4.4 of the assumption agreement is void because it

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 has failed to carry respondent’s burden

of establishing that petitioner is liable under section 6901 as

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 pertinent part:

       160/5.    Transfer or obligation fraudulent as to cred-
                 itor; 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:


       40
      (...continued)
agreement precludes petitioner from liability under sec. 6901
under the assumption agreement, that section of that agreement is
not relevant to our resolution of whether petitioner is liable
under sec. 6901 under respondent’s remaining arguments.
                             - 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 in relation to the
     business or transaction; or

          (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.41

     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.42    Wachovia Sec.,

LLC, v. Neuhauser, 528 F. Supp. 2d 834, 859 (N.D. Ill. 2007); Bay




     41
      On brief, respondent advances respondent’s arguments under
section 5(a)(2) of the Illinois fraudulent transfer statute
before advancing respondent’s arguments under section 5(a)(1) of
that statute. We shall consider respondent’s arguments in the
order in which respondent makes them on brief.
     42
      We shall sometimes refer to a transfer that is fraudulent
under sec. 5(a)(2) of the Illinois fraudulent transfer statute as
a transfer that is fraudulent in law.
                                - 74 -

State Milling Co. v. Martin, 145 Bankr. 933, 946 (Bankr. N.D.

Ill. 1992).43

     Respondent argues that the BCA asset sale was fraudulent 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 should have believed that it

would incur, a debt (i.e., the asset sale capital gains tax) that

it would be unable to pay as it became due.

     We turn first to respondent’s argument that 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.     The parties stipulated that the

asset purchase price that petitioner paid to purchase certain of

BCA’s assets was equal to the total fair market value of those

assets.   Respondent asserts:

     BCA did not retain the funds it received in exchange
     for its assets. The proceeds BCA received from the
     sale of the BCA Assets passed immediately to Castanet


     43
      In interpreting the Illinois fraudulent transfer statute,
we may rely on, inter alia, the interpretation by a U.S. bank-
ruptcy court or other Federal court of the fraudulent transfer
provisions in the U.S. Bankruptcy Code, 11 U.S.C. sec. 548
(2006), because those provisions are analogous to the provisions
of the Illinois fraudulent transfer statute. See Leibowitz v.
Parkway Bank & Trust Co. (In re Image Worldwide, Ltd.), 139 F.3d
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).
                                    - 75 -

        [BCA’s sole stockholder] and then to Rabobank, to pay
        off Castanet’s UAFC Loan. Thus, petitioner’s payment
        must be disregarded in determining whether BCA received
        reasonably equivalent value.

        The APA between BCA and petitioner required petitioner to

pay the asset purchase price in accordance with the terms of the

escrow agreement.44        The escrow agreement45 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”) to Castanet on the date
     hereof.

              *       *       *        *        *      *       *


        44
             Sec. 1.2(a) of the APA provided:

        The purchase price (the “Purchase Price”) for the
        Assets shall be Twenty Five Million Six Hundred Thir-
        teen Thousand Three Hundred sixty Nine and No/100
        Dollars ($25,613,369), payable in cash payable [sic]
        pursuant to the terms and provisions of the Escrow
        Agreement [dated July 31, 2000] * * *.
        45
      Castanet, petitioner, Related LR (i.e., the owner of 70
percent of the member interests in petitioner), Hypo Bank (i.e.,
the bank that made the loan to petitioner to fund its purchase of
certain of BCA’s assets), UAFC (i.e., the financial institution
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. Those entities along
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 the issues before us, for convenience we
shall refer to Rabobank as the escrow agent. In discussing any
actions taken by Hypo Bank on behalf of petitioner, for conve-
nience we shall state that petitioner took those actions.
                               - 76 -

     G. Hypo Bank shall deposit the Asset Purchase
Price into an escrow account held by Sub-Escrow Agent
[Rabobank] (such amount to be referred to herein as the
“Asset Purchase Escrow Amount”).

     H. The Sub-Escrow Agent [Rabobank] will hold the
Asset Purchase Escrow Amount in * * * Castanet Purchase
Escrow Account I, Account No. * * * 9107 * * * (the
“Asset Purchase Escrow Account”).[46]

      *         *         *       *       *     *          *

                              AGREEMENT

      *        *       *         *        *    *         *

2.        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 peti-
tioner’s purchase of certain of BCA’s assets], Hypo
Bank shall deliver to the Sub-Escrow Agent [Rabobank]
the Asset Purchase Escrow Amount on the date hereof
[July 31, 2000].

      *         *       *        *        *     *        *

4.   Payments from the Stock Purchase Escrow Fund.
* * * Sub-Escrow Agent [Rabobank] shall pay to (a) the
[Abrams] Estate an amount equal to $23,202,795 * * *
and (b) to Escrow Agent [Near North] an amount equal to
$2,207,500 * * *

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 [Rabobank] has previously made the
wire transfers described in the first sentence of




46
     See supra note 21.
                                 - 77 -

     Section 4 above,[47] then Sub-Escrow Agent [Rabobank]
     shall pay (A) to UAFC on behalf of and for the account
     of Castanet, that portion of the Asset Purchase Escrow
     Amount equal to the amount owed to UAFC by Castanet,
     and (B) all other amounts in the Asset Purchase Escrow
     Account, if any, to Castanet or to such other Person as
     directed by Castanet.

     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.48     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



     47
      As required by section 5(a) of the escrow agreement,
Rabobank (1) received the release notice and (2) made the trans-
fers described in the first sentence of section 4 of that agree-
ment.
     48
          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 to transfer the funds representing that pur-

chase price from that escrow account to BCA’s account No. 9090 at

Rabobank.    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 Rabobank to transfer the funds repre-

senting 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 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-

senting the asset purchase price, to repay that debt.

     We have found on the record before us that petitioner was

required to pay the funds 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 believed 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, the Fortrend Owners, who
     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 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 [the $68,000 (Canadian) that SCALP contributed
     to BCA around September 12, 2000]. 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.
                             - 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. The Fortrend Owners’
     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].

     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 tax49 and that it would

be unable to pay that tax when it became due on March 15, 2001.50

That is because, according to respondent, 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.”



     49
      We have found that at the time BCA sold certain of its
assets to petitioner BCA knew (as did petitioner) that BCA would
realize a substantial gain on those assets as a result of that
sale.
     50
      For purposes of the Illinois fraudulent transfer statute,
tax is considered as due and owing on the date 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 * * * fixed for
filing the return (determined without regard to any extension of
time for filing the return).” BCA was required to pay on Mar.
15, 2001, the tax for its short taxable year ended Dec. 31, 2000.
See secs. 6151(a), 6072(b).
                              - 81 -

     In 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 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, an 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,51 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


     51
      Around Sept. 11, 2000, Castanet merged with and into BCA.
As a result, SCALP owned 100 percent of the stock of BCA.
                               - 82 -

the representation of BCA and SCALP regarding SCALP’s basis in

the Canadian currency that SCALP contributed to BCA, BCA’s tax

basis in that currency was $17,268,000.    In the 12/31/00 BCA

return, BCA claimed a deduction for a loss on the disposition of

the Canadian currency that offset all of the gain that BCA

realized on the sale of certain of its assets to petitioner.

     Respondent has failed to establish any 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

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 and the owners of over 80 percent of

SCALP, or (3) any person associated with BCA, Castanet, SCALP, or

Fortrend in order to examine those persons about their intent and

beliefs and those of BCA and SCALP with respect to the Canadian

currency basis.52   Nor did respondent proffer documentary evi-

dence at trial regarding those matters.   As a result, we do not


     52
      In the pretrial memorandum that respondent submitted to
the Court, respondent 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 the SPA, the
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.
                             - 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 find 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

expired for BCA’s tax period ended December 31, 2000.”   Although

it is not altogether clear, it appears that respondent is con-

tending that Mr. Furman and Mr. Forster “lacked any [such]

objective basis” because “well before” the period of limitations

for BCA’s taxable year ended December 31, 2000, had expired they

took certain actions, including removing BCA’s assets and dis-

solving BCA, that left BCA without any funds to pay the tax

attributable to the BCA asset sale.    We believe that respondent’s

contention would have merit only if Mr. 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.

Forster believed or reasonably should have believed that that

loss would offset that gain, any 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.53

     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 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 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.54   The


     53
      As discussed above, respondent did not call any witnesses
at the trial in this case.
     54
      We have found that on Oct. 5, 2005, the second revenue
officer, while attempting to collect BCA’s tax liability from
BCA, reviewed certain records relating to BCA that the State of
Illinois maintained. It was during that review that the second
                                                   (continued...)
                              - 86 -

record does not establish who, if anyone, received the BCA notice

or whether the U.S. Postal Service returned that notice as

undeliverable.   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 that respondent

made in that notice.

     On the record before us, we find that respondent has failed

to carry respondent’s burden of showing that any failure of Mr.

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 gain that it realized on the sale of certain of its

assets to petitioner.

     On the record before us, we find that respondent has failed

to carry respondent’s burden of establishing that when BCA sold

certain of its assets to petitioner it believed or reasonably

should have believed that the loss that BCA claimed on the

disposition of the Canadian currency would not offset the gain

that it realized on that sale.   On that record, we further find

that respondent has failed to carry respondent’s burden of

establishing that under section 5(a)(2)(B) of the Illinois


     54
      (...continued)
revenue officer ascertained that BCA had filed articles of
dissolution with the Illinois secretary of state on Feb. 8, 2002.
The record does not establish whether or not any other represen-
tative of respondent knew before Oct. 5, 2005, that BCA had
dissolved.
                               - 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 to 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, 528 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) of 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:



     55
      We shall sometimes refer to the actual intent described in
sec. 5(a)(1) of the Illinois fraudulent transfer statute as
actual fraudulent intent. We shall sometimes refer to a transfer
that is fraudulent under sec. 5(a)(1) of the Illinois fraudulent
transfer statute as a transfer that is fraudulent in fact.
                               - 88 -

     160/5.      Transfer or obligation fraudulent as to cred-
                 itor; claim arising before or after transfer

        *        *       *       *       *       *        *

          (b) In determining actual intent under paragraph
     (1) of subsection (a) [of section 5], consideration may
     be given, among other factors, to whether:

            (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, the debtor had been sued or threatened with
     suit;

          (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 to the value of the
     asset transferred or the amount of the obligation
     incurred;

          (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
     of the business to a lienor who transferred the assets
     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”.56    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 statute57 and one factor


     56
      We shall sometimes refer to a factor from which an infer-
ence or a presumption of actual fraudulent intent may arise under
sec. 5(a)(1) of the Illinois fraudulent transfer statute as a
badge of fraud.
     57
      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 factor)

give rise to an 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 Illinois 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

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 an indirect transfer by BCA of those

assets to certain insiders of BCA who owned indirectly 30 percent


     57
      (...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,58 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,


     58
      Our use of the defined phrase “BCA senior management”
after the members of that management resigned their positions
with BCA is only for convenience and is not intended to imply or
suggest that those members continued to hold management positions
with BCA.
                              - 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 to petitioner, no member of

BCA senior management was a director or an officer of BCA.    See

740 Ill. Comp. Stat. Ann. 160/2(g)(2)(A) and (B).   Nor was any

member of BCA senior management in control of BCA at the time of

that sale.   See 740 Ill. Comp. Stat. Ann. 160/2(g)(2)(C).

Moreover, BCA did not own any interest in petitioner, let alone a

general partnership interest.59   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 sale of

certain of its assets to petitioner was a transfer of those

assets to an insider.




     59
      We have found that at the time of the BCA asset sale on
Aug. 1, 2000, Related LR and LRD Group owned 70 percent and 30
percent, respectively, of the membership interests in petitioner.
On that date, Related and Yukon Holdings LLC owned 90 percent and
10 percent, respectively, of the membership interests in Related
LR, and Mr. Blau, the president of Related, was a member of Yukon
Holdings LLC. On Aug. 1, 2000, certain members of BCA senior
management owned all of the membership interests in LRD Group.
                               - 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 reflected 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, 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 agreement60 required that the funds representing

the asset purchase price be used to repay on behalf of Castanet

the loan that UAFC had made to Castanet to fund Castanet’s

purchase of the BCA 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 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 BCA, in repayment of the loan that UAFC had made to

Castanet.   As discussed more fully above, despite the unambiguous

provisions of the escrow agreement, on August 1, 2000, Castanet

directed 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.



     60
      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 to 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 respondent has 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, 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

          § 3. (a) A debtor is insolvent if the sum of the
     debtor’s debts is greater than all of the debtor’s
     assets at a fair valuation.

740 Ill. Comp. Stat. Ann. 160/3.   In determining insolvency under

section 5(b)(9) of the Illinois fraudulent transfer statute, any

contingent liability of BCA is to be taken into account.   See Bay

State Milling Co. v. Martin, 145 Bankr. 933, 949 (Bankr. N.D.

Ill. 1992).

     Respondent contends that any tax attributable 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

the BCA asset sale.61   According to respondent,



     61
      In the BCA notice, respondent determined a deficiency in
BCA’s tax of $7,507,972. Virtually all of that deficiency, which
petitioner does not contest in this case, is attributable to the
asset sale capital gains tax.
                              - 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 income taxes. The
     test under Illinois law for insolvency includes contin-
     gent liabilities; thus, BCA was insolvent immediately
     upon the sale of the BCA Assets, not when its federal
     income tax payment came due.

     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 Castanet, and

(2) BCA’s assets exceeded BCA’s liabilities.

     Petitioner further counters respondent’s contentions regard-

ing the insolvency factor as follows:

     Although the test for insolvency under Illinois law
     includes contingent liabilities, the tax liability in
     question here was not a contingent liability and can-
     not, as a matter of law, be included in the insolvency
     analysis. “A contingent liability under Illinois law
     means a liability that already exists but which will
     become absolute upon the happening of a certain event.”
     Browning-Ferris Indus. of Illinois, Inc. v. Ter Maat,
     No. 92 C 20259, 1996 WL 67216, *1 (N.D. Ill. Feb. 16,
     1996) (citations omitted). Under Illinois law, there-
     fore, BCA’s potential tax liability was not a contin-
     gent liability because it did not yet exist in such a
                             - 98 -

     way that the happening of a certain event would make it
     absolute. BCA’s tax liability would not exist at all
     “until the end of the calendar year,” Reid Ice Cream
     Corp. v. Commissioner, 59 F.2d 189, 191 (2d Cir. 1932),
     and no one event could make that liability absolute
     because any activities of the corporation before the
     end of the year would alter the potential liability.

     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, that tax may not be

treated as a contingent liability for purposes of section 5(b)(8)

of the Illinois fraudulent transfer statute.   We disagree.   Even

if during its short taxable year ended December 31, 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., 501 N.E. 2d 292

(Ill. App. Ct. 1986); 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 thereafter
                              - 99 -

BCA was insolvent because its liabilities, including that contin-

gent liability, exceeded its assets.62

     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.



     62
      We have found that BCA did not receive the funds repre-
senting the asset purchase price. We made that finding even
though on Aug. 1, 2000, at Castanet’s direction and in contraven-
tion of the escrow agreement, those funds were deposited into a
bank account of BCA and on the same day transferred from that
account to a bank account of Castanet, which used those funds on
Aug. 2, 2000, to repay Castanet’s debt to UAFC. Even if we had
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, from a bank account of BCA to a bank account of
Castanet, BCA’s liabilities, including the contingent liability
for the asset sale capital gains tax, exceeded its assets, and
BCA was insolvent.

     Assuming arguendo that the asset sale capital gains tax were
not a contingent liability of BCA as of the BCA asset sale, peti-
tioner agrees that that tax was a liability at the end of BCA’s
short taxable year ended Dec. 31, 2000. We have found that BCA
included Schedule L with the 12/31/00 BCA return. In that
schedule, it reported total assets of $3,277,516 on Dec. 31,
2000, which was substantially less than the tax attributable to
the BCA asset sale. The insolvency factor considers whether “the
debtor was insolvent or became insolvent shortly after the
transfer”. 740 Ill. Comp. Stat. Ann. 160/5(b)(9) (West 2002)
(emphasis added). We have found no authority defining the term
“shortly after” that is used in the insolvency factor in sec.
5(b)(9) of the Illinois fraudulent transfer statute. Assuming
arguendo that the asset sale capital gains tax were not a contin-
gent 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 the Illinois fraudulent transfer statute
BCA became insolvent shortly after that sale.
                             - 100 -

     With respect to the substantial debt factor on which respon-

dent relies, respondent contends that 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].”63   The substantial

debt factor considers whether “the transfer occurred shortly

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 section 5(b)(10) of the

Illinois fraudulent transfer statute.64   Assuming arguendo that

the asset sale capital gains tax 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

conclude that under section 5(b)(10) of the Illinois fraudulent



     63
      We find petitioner’s assertion regarding the substantial
debt factor to be inconsistent with petitioner’s agreement in
advancing its contentions regarding the insolvency factor that
the liability for the asset sale capital gains tax existed at the
end of BCA’s taxable year ended Dec. 31, 2000. See supra note
62.
     64
      Nor have we found any authority defining the term “shortly
after” that is used in the substantial debt factor in sec.
5(b)(10) of 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 to petitioner occurred shortly before a substantial

debt (i.e., the asset sale capital gains tax) was incurred.

     With respect to respondent’s additional factor on which

respondent relies, respondent contends:

     The actions of the Fortrend Owners [Mr. Furman and Mr.
     Forster] constitute an additional badge of fraud. The
     Fortrend Owners operated Fortrend, a tax shelter enter-
     prise, and SCALP, whose raison d’etre was facilitating
     Intermediary Transactions. Non-payment of the taxes at
     issue in this case was the Fortrend Owners’ objective
     in structuring the BCA Intermediary Transaction.

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 its net assets to the ulti-
     mate buyer. These clients have certain tax attributes
     that enable them to absorb the tax gain inherent in the
     assets.
                              - 102 -

     In certain situations the economic cost of the client’s
     involvement is sufficiently low that a seller of stock
     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.

        *       *       *        *        *       *       *

     As with any transaction, economic substance and proper
     form are crucial to its success. Accordingly, in
     transactions where involvement by such a client may
     make sense, raising the idea at the earliest stages of
     a transaction is advisable.

     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”.65   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



     65
      We note that respondent indicated in Notice 2001-16, 2001-
1 C.B. 730, that respondent might challenge the transactions
identified in that notice by seeking to recharacterize them in a
manner that was more consistent with what respondent claimed was
their substance. In the present case, respondent expressly
abandons advancing any argument of respondent described in that
notice. See supra note 35.
                             - 104 -

insolvency factor, and (5) the substantial debt factor.66    Based

upon our examination of the entire record before us, we find that

those badges of fraud raise only a suspicion that under section

5(a)(1) of the Illinois fraudulent transfer statute BCA acted

with actual intent to hinder, delay, or defraud in 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 on the disposition of

the Canadian currency would offset the gain that it realized 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 actual 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 fraudulent

transfer statute BCA sold those assets with actual fraudulent

intent.



     66
      We have found no case in which a court has held that the
presence of five badges of fraud creates an inference or a
presumption of actual fraudulent intent under sec. 5(b) of the
Illinois fraudulent transfer statute. See Grochocinski v.
Zeigler, 320 Bankr. 362, 373 (Bankr. N.D. Ill. 2005) (no fraud
found despite presence of six badges of fraud); Voiland v.
Gillissie, 215 Bankr. at 379 (fraud found where six badges of
fraud present); Berland v. Mussa, 215 Bankr. 158, 170 (Bankr.
N.D. Ill. 1997) (fraud found where seven badges of fraud pres-
ent).
                             - 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:67

     (1) a transferee receives assets from a corporation,
     (2) the transferee pays the consideration for the
     assets to someone other than the transferor corpora-
     tion, and (3) the transferor corporation is unable to
     pay its debts * * *.


     67
      We shall consider only respondent’s articulation of a
doctrine in equity known as a trust fund doctrine. We shall not
consider other articulations of so-called trust fund doctrines in
equity that arise in contexts not presented in this case.
                              - 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 Circuit in

Shepard v. Commissioner, 101 F.2d 595, 598-599 (7th Cir. 1939),

affg. Hunt v. Commissioner, 36 B.T.A. 268 (1937):

     Likewise, in a case where corporation A transfers all
     of its assets to B for a consideration which B pays to
     C, then B, regardless of any agreement, is liable for
     any unpaid income tax, which represents the profits
     made on such transfer on the theory that B is a
     trustee, to the extent of the value of the property
     which it acquired from A.

       *        *       *       *       *       *      *

          Equally clear and definite must be the holding
     that one who dispossesses another company of all of its
     assets, paying the consideration therefor to a third
     party, and leaving the propertyless corporation unable
     to pay its debts, including taxes which were inchoate
     at the time, becomes a trustee and liable in such
     trusteeship for taxes and other debts in an amount not
     exceeding the value of the property taken from the
     debtor taxpayer. This is so * * * because of the
     application of principles of equity. * * *

     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 on
     the part of the debtors by holding the recipient of the
                               - 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,

     where assets of a corporation are sold for an equiva-
     lent consideration, which under an agreement is paid to
     the stockholders, leaving the corporation without
     assets to satisfy its creditors, the purchasing corpo-
     ration is liable to creditors of the selling corpora-
     tion to the extent of the value of the property re-
     ceived, the sale being in fraud of creditors and the
     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.

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.,

supra.

     In determining whether to apply the so-called fraud excep-

tion to the well-settled 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 apply 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 determining 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 Holding 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.68    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



     68
      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 transfer under sec.
5(a)(2) of the Illinois fraudulent transfer statute.
                             - 110 -

of establishing that petitioner is liable as a transferee of

property of BCA under section 6901.69

     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.




     69
      Our 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, or should be read as, reaching or implying any
finding or conclusion in other cases that are not before us.
