                         T.C. Memo. 2011-33



                       UNITED STATES TAX COURT



               CHC INDUSTRIES, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19627-06.              Filed February 2, 2011.




     Thomas H. Moreland and Philip R. Weingold, for petitioner.

     John R. Mikalchus, for respondent.



                         MEMORANDUM OPINION


     VASQUEZ, Judge:    Respondent determined that petitioner is

liable for $275,800, plus interest as provided by law, as a

transferee of St. Augustine II, Inc. (St. Augustine), in respect

of a deficiency in St. Augustine’s Federal income tax for 2000.
                                   - 2 -

The issue for decision is whether petitioner is liable as a

transferee of property of St. Augustine under section 6901.1

                                Background

       The parties submitted this case fully stipulated under Rule

122.       The stipulations of facts and the attached exhibits are

incorporated herein by this reference.       Petitioner’s principal

place of business was in New York at the time the petition was

filed.

       Petitioner was incorporated on May 24, 2000.     At all times

relevant hereto, Nancy Caldarola (Ms. Caldarola) was petitioner’s

president and sole shareholder.       In 1997, a few years before

incorporating petitioner, Ms. Caldarola entered into business

discussions with Jeffrey Furman (Mr. Furman), cochairman of

Fortrend International, L.L.C. (Fortrend).2      She then began

working as an independent consultant to Fortrend.3      Her role in

this capacity was to find companies potentially interested in

entering into a transaction with Fortrend.       Pursuant to the

agreement Ms. Caldarola would be paid a finder’s fee if she



       1
        Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
       2
            We discuss Fortrend in more detail below.
       3
        Ms. Caldarola worked as an independent consultant to
Fortrend from 1997 to 2003. She has never been a director,
officer, partner, or employee of Fortrend or any of its
affiliates. Petitioner also has never held an ownership interest
in Fortrend or any of its affiliates.
                              - 3 -

introduced a company to Fortrend that ultimately entered into a

transaction with Fortrend or any of its affiliates.   The finder’s

fee would be equal to approximately 10 percent of the gross fee

or 25 percent of the net fee realized by Fortrend in the

transaction.

     In 1999 Ms. Caldarola introduced Fortrend to MidCoast

Capital Credit Corp. (MidCoast).   This introduction led to the

consummation of a transaction in October 2000 (the Taxi

Transaction)4 involving the acquisition by Fortrend or by an

affiliate of the stock of Checker Taxi, Inc. (Checker), and Town

Taxi, Inc. (Town), from the Frank Sawyer Trust of May 1992.

     After the closing of the Taxi Transaction on October 12,

2000, Fortrend agreed, pursuant to discussions between Ms.

Caldarola and Mr. Furman, to pay petitioner $275,800 as the

finder’s fee for introducing MidCoast to Fortrend.    The parties

have stipulated that this amount represented fair consideration

in exchange for the services petitioner provided.5

     On October 19, 2000, petitioner, at Mr. Furman’s direction,

submitted an invoice to CDGH, Inc. (CDGH), for $275,800 for



     4
        See infra pp. 4-5 for a discussion of the Taxi
Transaction, which was one of the transactions at the focus of
our Opinion in Sawyer Trust v. Commissioner, 133 T.C. 60 (2009).
     5
        Although Ms. Caldarola introduced Fortrend to MidCoast
before incorporating petitioner, we accept the parties’
stipulation that Fortrend agreed to pay the finder’s fee to
petitioner.
                                - 4 -

“consulting services rendered for Checker/Town Taxi deal”.

Petitioner also submitted a second invoice for $275,800 for

“consulting services rendered for St. Augustine, Inc”.    Only the

invoice submitted to CDGH was stamped “approved for payment”.

     The same day Alice Dill, an employee of Fortrend, wired

$275,800 from St. Augustine’s Golden Gate Bank account to

petitioner’s bank account with Smith Barney, Inc.    The wire

transfer did not indicate from what account the payment had been

wired, and petitioner was unaware that the funds had been

transferred from St. Augustine’s account.    Petitioner included

the entire amount as income on its Form 1120, U.S. Corporation

Income Tax Return, for 2000.

Fortrend and the Taxi Transaction

     Fortrend was formed on February 7, 1996, in the State of

Delaware.    Mr. Furman and Frederick Forster (Mr. Forster) were

cochairmen of Fortrend and were responsible for overseeing its

operations.    Avanti, Inc. (Avanti), and Forbach, Inc. (Forbach),

each owned a 50-percent interest in Fortrend.    Mr. Furman and Mr.

Forster were the sole shareholders of Avanti and Forbach,

respectively, and they controlled Fortrend.    Mr. Furman also

owned a 70.79-percent controlling ownership interest in Signal

Capital Associates, L.P. (SCALP), and was SCALP’s general

partner.    Larry Austin was an agent of Fortrend.
                              - 5 -

     On August 7, 2000, Fortrend entered into a stock purchase

agreement with the trustee of the Frank Sawyer Trust of May 1992

to acquire the stock of Town and Checker.   On September 18, 2000,

Fortrend assigned its rights to purchase the stock of Checker to

another Furman-controlled entity, Baritone, Inc. (Baritone), by

executing an assignment and assumption of stock purchase

agreement, which Mr. Furman signed as Fortrend’s authorized

representative.6

     On October 12, 2000, Baritone purchased all of the

outstanding stock of Checker, changed Checker’s name from Checker

Taxi, Inc., to CDGH, Inc. (CDGH f.k.a. Checker), and merged into




     6
        Baritone had been incorporated on July 13, 2000, just a
few months before the Taxi Transaction took place. Three Wood,
L.L.C. (Three Wood), also was formed on or about July 13, 2000.
According to the L.L.C. agreement for Three Wood, SCALP and
Regency Resources each owned a 25-percent interest in Three Wood
and Pylae Ltd. owned the remaining 50-percent interest in Three
Wood. Mr. Furman signed the L.L.C. agreement on behalf of SCALP
and Regency Resources as general partner and director,
respectively.

     According to a Certificate of Action Taken by the Sole
Director of Baritone, Inc. by Written Consent in Lieu of an
Organizational Meeting, with Alice Dill acting as sole director,
Baritone issued one share of common stock to Three Wood on Sept.
14, 2000. The form also purports to indicate the election of
Larry Austin as president and Alice Dill as vice president and
secretary of Baritone.

     A Certificate of Action Taken by the Sole Shareholder of
CDGH by Written Consent in Lieu of a Meeting dated Oct. 11, 2000,
and purporting to indicate the election of Alice Dill as CDGH’s
initial director was signed by Alice Dill as sole shareholder.
                                 - 6 -

CDGH, with CDGH surviving the merger.    Austin signed CDGH’s

Federal income tax return for 2000.

St. Augustine

     St. Augustine is a corporation formed under the laws of

Delaware.   Its original shareholders were Ziyad Abduljawad,

California Land Co., Ocean Land Co., Pacific Land Co., Sunset

Land Co., and Western Land Co.    St. Augustine was formed for the

purpose of holding an interest in St. Augustine II, L.L.C. (St.

Augustine L.L.C.), and has never carried on any other business

activity.   St. Augustine held an 81.67-percent interest in St.

Augustine L.L.C.7

     On September 5, 2000, St. Augustine L.L.C. fully redeemed

St. Augustine’s interest for $5,255,258.   St. Augustine’s only

asset following the redemption of its interest in St. Augustine

L.L.C. was the $5,255,258 in cash it received from the

redemption, which it retained rather than distributing it to its

shareholders.

     Apparently, Fortrend had its eye on acquiring St. Augustine.

On October 12, 2000, i.e., the same day Baritone purchased the

stock of Checker, Matthew G. Brown of the law firm of Gibson,

Dunn & Crutcher L.L.P. faxed a copy of St. Augustine’s unaudited

financial statements for the period ending October 12, 2000, to


     7
        The remaining interests in St. Augustine L.L.C. were held
by PLC Homes, L.L.C. (10 percent), and Christopher Ventures,
L.L.C. (8.33 percent).
                               - 7 -

Randolph Whitney Bae (Bae), an attorney for Fortrend.   These

financial statements confirmed that St. Augustine retained the

$5,255,258 it had received from the redemption of its interest in

St. Augustine L.L.C.   Bae then faxed the financial statements to

certified public accountant Howard Teig.

     The next day Alice Dill, as sole director and vice president

of CDGH, executed a Written Consent of the Sole Director of CDGH,

Inc. dated October 13, 2000, and a stock purchase agreement

between CDGH and the shareholders of St. Augustine, allowing CDGH

to purchase all the shares of St. Augustine from the shareholders

for $4,695,200.8   CDGH used $4,683,965 generated from the Taxi

Transaction and a $13,000 loan from Town to finance the purchase

of the St. Augustine stock.9   In October 2000 Alice Dill and

Larry Austin had signature authority over the bank accounts held

by Three Wood, CDGH, and St. Augustine.    Alice Dill transferred

$920,164.80 from CDGH’s Golden Gate bank account to each of the

shareholders of St. Augustine pursuant to the stock purchase

agreement.


     8
        Larry Austin signed a Certificate of Merger of St.
Augustine II, Inc., and CDGH, Inc., dated Oct. 15, 2000, as
president of both corporations. However, the certificate was not
filed with either the Commonwealth of Massachusetts or the State
of Delaware. And St. Augustine’s 2000 Form 1120 signed by Larry
Austin as president on Sept. 12, 2001, indicates that CDGH was
its 100-percent owner. Thus, we presume no merger took place.
     9
        The $4,683,965 in net cash generated by the Taxi
Transaction for CDGH was wired from a Three Wood bank account to
a CDGH bank account at Golden Gate Bank on Oct. 12, 2000.
                               - 8 -

     Neither petitioner nor Ms. Caldarola has, at any time,

entered into any contractual relationship with nor performed any

services for St. Augustine.

     The parties stipulated that as of the payment date Fortrend,

through Mr. Furman, controlled SCALP, Three Wood, CDGH, and St.

Augustine.   But the parties disagree over who actually owned

CDGH; they have stipulated that either SCALP or Three Wood was

the sole shareholder of CDGH as of the date of payment to

petitioner.10

Other Transfers From St. Augustine’s Account

     A letter from MidCoast to Mr. Furman dated April 27, 2000,

sets forth the agreement between MidCoast and Fortrend regarding

Fortrend’s proposed acquisition of all of the issued and

outstanding stock of Checker and Town.   The letter also provides

details on how MidCoast’s fee would be calculated.

     On October 12, 2000, MidCoast submitted two invoices--one to

CDGH and one to St. Augustine for $3,267,505 for “services

rendered” in connection with the acquisition of the outstanding


     10
        On Oct. 12, 2000, SCALP contributed 5,500 shares of Trex
Communications (basis $13,160,000, FMV $62,000) and 72 shares of
Paclaco Equities, Inc. (basis $3,768,000, FMV $20,000), to CDGH
in a sec. 351 exchange. CDGH did not issue any actual securities
in the exchange because, according to the transferee statement
required by sec. 1.351-3(b), Income Tax Regs., SCALP owned 100
percent of the stock in CDGH. SCALP also executed a Certificate
of Action Taken by the Sole Shareholder of CDGH, Inc. by Written
Consent in Lieu of a Meeting amending the corporation’s bylaws,
which was dated Oct. 13, 2000, and signed by Mr. Furman as
general partner.
                                - 9 -

stock of Checker and Town.    On October 13, 2000, St. Augustine

received a $3,300,000 loan from Town and immediately used the

funds to pay the purported professional fees to MidCoast--even

though the fee agreement was between MidCoast and Fortrend.      On

October 16, 2000, St. Augustine repaid the loan to Town.

     Manatt Phelps Phillips L.L.P. submitted an invoice to

Fortrend, “Attn: Alice Dill”, dated November 21, 2000, for

$31,498.90 for “professional services in connection with stock

purchase and asset sale transactions re St. Augustine II.”       Alice

Dill directed that the invoice be paid from St. Augustine’s

account.

     Alice Dill also directed the following additional wire

transfers from St. Augustine’s Golden Gate bank account:    (1)

$175,000 to Equipment Investment Corp. on October 16, 2000, for

“Investment Banking Services Related to Equipment Leasing”;11 (2)

$23,750 to Maxton Financial Ltd. on October 19, 2000, for

“services rendered”;12 (3) $30,000 to Intercapital Associates for

“consulting services rendered”; and (4) $97,500 to Steve Block

for “consulting services rendered”.     At least two of the invoices

were faxed directly to Fortrend, and Equipment Leasing Corp.’s



     11
        The text at the top of the fax says “From: ACCOUNTING
DEPARTMENT * * * To: Frederick A. Forster.” As stated, supra,
Forster was cochairman of Fortrend.
     12
           The text at the top of the fax says “FORTREND INTL.
LLC”.
                                   - 10 -

invoice was sent to Mr. Forster’s attention.       None of the

creditors performed services directly for St. Augustine.

Petitioner had no involvement with St. Augustine’s other

payments.

St. Augustine’s Tax Liability and Insolvency

     On its Federal income tax return for 2000, which Austin

signed, St. Augustine claimed legal fees and professional

expenses as follows:

                       Payee                      Amount

            MidCoast                            $3,267,505
            Equipment Investment Corp.             175,000
            CHC Industries                         275,800
            Maxton Financial                        23,750
            Intercapital Associates                 30,000
            Steve Block                             97,500
            Manatt Phelps                           31,498
              Total                              3,901,053

On July 13, 2005, respondent in a notice of deficiency disallowed

the deductions and determined a $2,337,499 deficiency in St.

Augustine’s 2000 Federal income tax and a $467,499.80 penalty

under section 6662(a).13       St. Augustine neither paid the

deficiency nor filed a petition with the Court.       On November 14,

2005, respondent assessed the deficiency and the penalty.        At the

time of the assessment, St. Augustine had no assets from which



     13
        In the notice of deficiency respondent explained his
adjustments as follows: “It is determined that St. Augustine II,
Inc. has failed to substantiate that the reported legal and
professional fees were ordinary and necessary business expenses,
incurred and paid by the corporation.”
                                - 11 -

the liability for the deficiency and related penalty could be

satisfied.   To date, this liability remains unpaid.14

     The payments to petitioner, MidCoast, Equipment Investment

Corp., Maxton Financial, Intercaptial Associates, Steve Block,

and Manatt Phelps together with respondent’s disallowance of the

claimed deductions rendered St. Augustine insolvent.

                              Discussion

I.   The Parties’ Arguments

      Respondent argues that petitioner is liable for $275,800 of

St. Augustine’s tax liability as a transferee of property of St.

Augustine because petitioner received assets of St. Augustine in

a transfer that is fraudulent under State law.

      Petitioner argues that Fortrend should be treated as the

transferor for Federal income tax purposes and that petitioner is

not liable as a transferee because petitioner gave adequate

consideration for the transfer.

      In making the argument that Fortrend was the transferor,

petitioner invokes the judicial doctrine of substance over form.

Respondent argues that petitioner was complicit in a plan to

avoid paying Federal income taxes and should be foreclosed from

arguing that the transaction was anything but a transfer from St.

Augustine to petitioner.   Respondent also contends that


      14
        Respondent has not attempted to collect St. Augustine’s
outstanding liability from Mr. Furman, Mr. Forster, SCALP, CDGH,
or Fortrend as transferees of St. Augustine.
                               - 12 -

petitioner has failed to put forth the “strong proof” necessary

to succeed on its substance over form argument.

II.    Transferee Liability in General

       The notice of liability issued to petitioner was based on

section 6901(a)(1)(A)(i), which provides:

            SEC. 6901(a). Method of Collection.--The amounts
       of the following liabilities shall * * * 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) * * *

       Section 6901(a)(1) does not create or define a substantive

liability but merely provides the Commissioner a procedure to

assess and collect from the transferee of property the

transferor’s existing tax liability.     See Commissioner v. Stern,

357 U.S. 39, 42 (1958) (discussing statutory predecessor of

section 6901).    Section 6902 provides that the Commissioner has

the burden of proving the taxpayer’s liability as a transferee

but not that of proving that the transferor was liable for the

tax.

       The substantive question of whether a transferee is liable

for the transferor’s obligation and the extent of his liability
                                   - 13 -

depends on State law.       See Commissioner v. Stern, supra at 45;

Adams v. Commissioner, 70 T.C. 373, 389 (1978), affd.

without published opinion 688 F.2d 815 (2d Cir. 1982).       The

parties stipulated that California law applies.15

III. California Uniform Fraudulent Transfer Act (UFTA)16

        Cal. Civ. Code sec. 3439.04(a) (West Supp. 2011) provides:

             (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 as follows:

             (1) With actual intent to hinder, delay, or
        defraud any creditor of the debtor.

             (2) Without receiving a reasonably equivalent
        value in exchange for the transfer or obligation, and
        the debtor either:

             (A) Was engaged or was about to engage
        in a business or a transaction for which the remaining
        assets of the debtor were unreasonably small in relation to
        the business or transaction.

             (B) Intended to incur, or believed or reasonably
        should have believed that he or she would incur, debts
        beyond his or her ability to pay as they became due.




        15
        The parties in their briefs discuss the general
requirements for establishing transferee liability as set forth
in Gumm v. Commissioner, 93 T.C. 475, 480 (1989), affd. without
published opinion 933 F.2d 1014 (9th Cir. 1991). However, we
need not look beyond California law to determine whether the
transfer was fraudulent. See Commissioner v. Stern, 357 U.S. 39
(1958); Upchurch v. Commissioner, T.C. Memo. 2010-169 n.6.
     16
              The UFTA applies to transfers made on or after Jan. 1,
1987.        Cal. Civ. Code sec. 3439.12 (West 1997).
                               - 14 -

      Cal. Civ. Code sec. 3439.05 (West 1997) provides:

           A transfer made or obligation incurred by a debtor
      is fraudulent as to a creditor whose claim arose before
      the transfer was made or the obligation was incurred if the
      debtor made the transfer or incurred the obligation
      without receiving a reasonably equivalent value in
      exchange for the transfer or obligation and the debtor was
      insolvent at that time or the debtor became insolvent as a
      result of the transfer or obligation.

Cal. Civ. Code sec. 3439.04(a)(1) relates to actual fraud,

whereas Cal. Civ. Code secs. 3439.04(a)(2) and 3439.05 relate to

constructive fraud.17

IV.   Analysis

      Petitioner argues that Fortrend should be treated as the

transferor and that petitioner gave adequate consideration to

Fortrend in exchange for the $275,800 payment it received from

St. Augustine.   In doing so, petitioner asks us to apply

substance over form and recharacterize the payment as a series of

constructive transfers from St. Augustine to Fortrend.

      The Tax Court and the U.S. Court of Appeals for the Second

Circuit, the court to which this case would be appealable,18

apply the “strong proof” rule when a taxpayer attempts to invoke

substance over form.    See Estate of Rogers v. Commissioner, 445



      17
        Respondent does not suggest that Cal. Civ. Code sec.
3439.04(a)(1) (West Supp. 2011) applies.
      18
        Under the Golsen rule, we follow the law of the Court of
Appeals to which the case is appealable. See Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971).
                                - 15 -

F.2d 1020, 1021-1022 (2d Cir. 1971), affg. T.C. Memo. 1970-192.

Under the strong proof rule, a taxpayer must present strong

proof, i.e., more than a preponderance of the evidence, for the

Court to disregard the form in which the taxpayer cast a

transaction.     See O’Malley v. Commissioner, T.C. Memo. 2007-79.

     Petitioner has not presented the strong proof necessary to

prevail on its substance over form argument.19    Regardless, we do

not believe that the present circumstances warrant application of

substance over form.    Petitioner facilitated the Taxi Transaction

by introducing Fortrend to MidCoast.20    And although petitioner

“disclaims” any knowledge of or participation in the Taxi

Transaction, it is unlikely that petitioner could carry out its

duties as an independent consultant without being aware of the

type of transactions Fortrend intended to carry out.    St.

Augustine claimed a deduction to which it was not entitled for

the payment to petitioner.    Petitioner offered no explanation as

to why it submitted the second invoice for services provided to

St. Augustine when it in fact had not provided any services to

St. Augustine.    Without evidence to the contrary we find that the

payment to petitioner had no purpose other than for St. Augustine


     19
        The fact that this case was fully stipulated does not
relieve petitioner of this burden, just as it does not relieve
respondent of his burden of proving the elements of transferee
liability.
     20
        We note that both Fortrend and MidCoast have been the
subject of several tax shelter cases in this and other courts.
                                   - 16 -

to attempt to claim a deduction.        Accordingly, we decline

petitioner’s invitation to apply substance over form under these

circumstances.

     Respondent determined a deficiency against St. Augustine of

$2,337,499 plus a penalty under section 6662(a) of $467,499.80.

St. Augustine neither paid the tax nor filed a petition with the

Tax Court.        Respondent assessed the liability on November 14,

2005.        Thus, St. Augustine owed a debt to the Internal Revenue

Service.        See Cal. Civ. Code sec. 3439.01(d) (West 1997).

     The payment to petitioner along with the other transfers by

St. Augustine rendered St. Augustine insolvent and unable to pay

its debt to respondent.       St. Augustine claimed deductions for

each transfer, all of which were disallowed.        St. Augustine

reasonably should have believed that the deductions it claimed

would be disallowed and it would be unable to pay its debt to

respondent.21

     St. Augustine transferred the $275,800 without receiving any

consideration, let alone reasonably equivalent value, from

petitioner.        Petitioner never provided any services directly to

St. Augustine.        Although the parties stipulated that the $275,800

represented fair consideration for services provided to Fortrend,



        21
        Petitioner does not dispute St. Augustine’s tax
liability or whether St. Augustine should have reasonably
believed it would incur debts beyond its ability to pay as they
became due.
                               - 17 -

we shall not attribute the receipt of this consideration to St.

Augustine.    See LR Dev. Co. LLC v. Commissioner, T.C. Memo. 2010-

203.    Accordingly, respondent has met his burden of proving that

the transfer was fraudulent under Cal. Civ. Code secs.

3439.04(a)(2).22

V.   Conclusion

       Upon our examination of the entire record before us, we find

that petitioner is liable as a transferee under section 6901.

The transfer by St. Augustine (i.e., the debtor) to petitioner

was fraudulent as to respondent (i.e., the creditor) under

California law.

       In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

       To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.




       22
        In the light of this finding we need not provide an
analysis under Cal. Civ. Code sec. 3439.05 (West 1997).
