                        T.C. Memo. 2011-298



                      UNITED STATES TAX COURT



   FRANK SAWYER TRUST OF MAY 1992, TRANSFEREE, CAROL S. PARKS,
                      TRUSTEE, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 5526-07.               Filed December 27, 2011.



     David R. Andelman and Juliette Galicia Pico, for petitioner.

     Kevin G. Croke and Yvonne M. Walker, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     GOEKE, Judge:   In four statutory notices of liability,

respondent determined that the Frank Sawyer Trust of 1992 is

liable as a transferee for the assessed Federal income tax

liabilities, penalties, and interest of four C corporations:   (1)

TDGH, Inc. (Town Taxi); (2) CDGH, Inc. (Checker Taxi); (3) St.
                                 - 2 -

Botolph Holding Co. (St. Botolph); and (4) Sixty-Five Bedford

Street, Inc. (Sixty-Five Bedford) (collectively, the

corporations).   The issue for decision is whether petitioner is

liable as a transferee under section 69011 for the corporations’

unpaid Federal income tax liabilities, penalties, and interest.

For the reasons stated herein, we find that petitioner is not

liable.

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the stipulated

facts are incorporated by this reference.    Petitioner is the

Frank Sawyer Trust of May 1992 (the trust).    At the time the

petition was filed, the trust’s legal residence was

Massachusetts.

     On March 20, 2000, Mildred Sawyer, wife of Frank Sawyer,

passed away.   Her taxable estate, which includes the trust, was

reported as $138,480,721 on her estate’s estate tax return filed

December 13, 2000.   This generated Federal and State transfer

taxes of $76,600,416.   Ms. Sawyer’s daughter, Carol S. Parks (Ms.

Parks), was the sole trustee of the Trust.    The Trust held, among

other things, 100 percent of the stock of the corporations.      In

order to pay the estate tax liability, Ms. Parks decided to sell

the stock of the corporations.


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

      Respondent’s assertion of transferee liability arises from

the series of transactions that took place in selling the stock

of the corporations during the 2000 and 2001 tax years.    The

stock was sold in the following manner.   First, the corporations

sold substantially all of their assets to unrelated third

parties.   Next, the trust sold all of its stock in the

corporations to another unrelated third party.2   The trust owned

all of the stock of the corporations before the asset sales and

at all times leading up to the stock sales.

1.   The Taxi Corporations

      Town Taxi and Checker Taxi (collectively, Taxi corporations)

provided taxicab services in Massachusetts.   Their primary assets

were taxicab medallions issued by the City of Boston that gave

the holder the right to provide taxicab services in Boston.      In

March 2000 Ms. Parks decided to begin selling the taxicab

medallions.   Walter McLaughlin, an attorney for the Trust, and

James Milone, the CFO of the corporations (collectively, trust

representatives), realized that the sales of the taxicab

medallions would generate large capital gains for the Taxi

corporations because of the low basis and high value of the

taxicab medallions.




      2
      Notice 2001-16, 2000-1 C.B. 826, regarding intermediary
transactions was issued Jan. 18, 2001.
                                  - 4 -

     A.   Midcoast Credit Corp.

     Mr. McLaughlin received a promotional letter in October of

1999 from Midcoast Credit Corp. (Midcoast).      Midcoast was

primarily involved in the debt recovery business, which involved

purchasing portfolios of delinquent credit card debt from banks

and then trying to collect the debt.      They financed their debt

recovery business in part through corporate acquisitions.

Midcoast had a nationwide marketing strategy that included

sending promotional letters to legal and accounting firms.      The

promotional letter Mr. McLaughlin received included a brief

history of Midcoast and described the type of target company

Midcoast was interested in acquiring.      It stated that Midcoast

sought to purchase the stock of C corporations that had taxable

gains from asset sales and that Midcoast would pay a significant

premium in excess of the amount a shareholder of the corporation

would otherwise receive from an asset sale followed by a

liquidation, thus enabling the shareholder to maximize the after-

tax proceeds from the sale of a business.      The material described

the following benefits from a sale to Midcoast:

     •     Significant increase in after-tax proceeds.

     •     Elimination of exposure to unknown future claims,
           losses, and litigation.

     •     Midcoast replaces seller as shareholder of company,
           receiving standard corporate representations and
           warranties.
                                 - 5 -

     •      Midcoast relieves selling shareholder from unknown
            corporate liabilities.

     •      Company is solvent when sold to Midcoast.

     •      Midcoast represents that it will not liquidate company,
            but will operate it on a go-forward basis.

     •      Midcoast will cause the company to satisfy its tax and
            other liabilities.

The letter was representative of the type of promotion sent by

Midcoast to other attorneys and accountants.

     B.   The Initial Meeting

     Mr. McLaughlin contacted Louis Bernstein, a representative

of Midcoast, and scheduled a meeting for April 7, 2000, to

discuss the potential stock sale of the Taxi corporations.

Because Midcoast did not have the financial resources to purchase

the Taxi corporations alone, they brought in Fortrend

International, LLC (Fortrend).    Fortrend represented itself as an

investment banking firm that specialized in structuring economic

transactions to solve specific corporate and estate or accounting

problems.    It represented that it had offices in New York,

Atlanta, San Francisco, Delray Beach, and Melbourne.    Fortrend’s

relationship with Rabobank Nederland (Rabobank), a major

international bank, gave Fortrend access to financing that

Midcoast did not have.

     At the meeting, Fortrend explained that it was looking to

purchase the stock of corporations with capital gains and would

reduce the stock purchase price by a percentage of the contingent
                                 - 6 -

tax liability related to the capital gains.    The reduction

percentage of the stock purchase price was generally negotiated

according to the size of the transaction and associated

administrative costs.     Fortrend offered to buy the stock of the

Taxi corporations, but it wanted all existing and potential

liabilities eliminated, except for the contingent Federal and

State tax liabilities from the medallion sales, which Fortrend

would assume.   It is unclear exactly what was discussed at the

initial meeting in regard to the propriety of the stock sale and

of Fortrend’s method of offsetting the capital gains within the

purchased corporations.    Jeffrey Furman, cochairman of Fortrend,

negotiated the terms of the stock sales including the purchase

price with the trust representatives.

     C.   Due Diligence

     Fortrend sent a letter to Ms. Parks representing that

Fortrend had the financial resources to consummate the stock

purchase.   The letter included a list of references of several

law firms, a “big four” accounting firm, and Rabobank.    Rabobank

also stated in a letter to Ms. Parks that Fortrend was a valued

customer and Rabobank had financed a number of transactions for

Fortrend.   Ms. Parks decided to go through with the stock sale

subject to the performance of due diligence by the trust

representatives.
                                 - 7 -

     The trust representatives believed Fortrend’s attorneys to

be from prestigious and reputable law firms.   They assumed that

Fortrend must have had some method of offsetting the taxable

gains within the corporations.    They performed due diligence with

respect to Fortrend to ensure that Fortrend was not a scam

operation and that Fortrend had the financial capacity to

purchase the stock.   The trust representatives believed Fortrend

assumed the risk of overpaying for the Taxi corporations if they

did not have a legal way for offsetting or reducing the tax

liabilities.   After due diligence was conducted, Ms. Parks

decided to sell the stock on the advice of the trust

representatives.

     Fortrend was represented by independent counsel, Manatt,

Phelps; Phillips, LLC; and Chamberlain, Hrdlicka, White, Williams

& Martin (collectively, Fortrend’s attorneys). Fortrend’s

attorneys also conducted due diligence of the Taxi corporations

mainly to determine that the Taxi corporations had no unknown

liabilities.

     D.   The Letter of Intent, Asset Purchase Agreement, and
          Stock Purchase Agreement

     The trust representatives sent a letter dated April 18,

2000, to Fortrend requesting a letter of intent to purchase the

stock of the Taxi corporations.    On April 27, 2000, Ms. Parks and

Fortrend entered into letters of intent for the sale of 100

percent of the stock of the Taxi corporations.   The letters of
                                - 8 -

intent were conditioned upon the conversion of all of the assets

of the Taxi corporations into cash or cash equivalents before the

stock sale, as well as the satisfaction of all liabilities except

the contingent income tax liabilities.    The Taxi corporations

were allowed to keep the rights to their respective names.

Moreover, the letters of intent stated that the computation of

the share purchase prices would be based on the values of the

cash and other assets held by the Taxi corporations minus a

percentage of the outstanding contingent income tax liabilities.

In the event all of the assets were not converted to cash or

liabilities paid by the stock closing, the share purchase prices

would be adjusted by lowering the percentage of the income tax

liabilities assumed by Fortrend.

     In July of 2000, the Taxi corporations entered into an asset

purchase agreement with a local taxi competitor, Mr. Tutunjian,

for most of the taxi medallions.    The asset purchase agreement

closed in September.    The remaining assets were all sold or in

agreements for sale with various other individuals and companies

by the end of August.    Town Taxi and Checker Taxi received total

proceeds from their asset sales of $18,468,900 and $17,578,000,

respectively, which were reinvested in Treasury bills.

     On August 7, 2000, the Trust and Fortrend entered into stock

purchase agreements for the stock of each of the Taxi

corporations.   The stock purchase agreements provided a formula
                                - 9 -

for the calculation of the stock purchase price:    the purchase

price would be equal to the value of the Taxi corporations’

assets less 50 percent of the “Specified Remaining Tax Liability”

of each.    The specified remaining tax liabilities were the

Federal and State tax liabilities arising from the sale of each

corporation’s assets.

     E.    Fortrend Financing

     To facilitate the stock sales, Fortrend formed and

controlled Three Wood, LLC (Three Wood), Baritone, Inc.

(Baritone), and Tremolo, Inc. (Tremolo).    Baritone and Tremolo

were both wholly owned subsidiaries of Three Wood used to receive

the stock of Checker Taxi and Town Taxi, respectively.    On

September 18, 2000, Fortrend assigned its rights and obligations

in the Checker Taxi and Town Taxi stock purchase agreements to

Baritone and Tremolo, respectively.     However, the assignments did

not relieve Fortrend of its obligations under the stock purchase

agreements.

     In order to pay the stock purchase price, a Fortrend-

controlled entity contributed $2.7 million to Three Wood’s bank

account, and Fortrend financed an additional $30 million with a

loan from Rabobank--borrowed via Three Wood and its wholly owned

subsidiaries.    Both amounts were contributed to Three Wood the

day of the closing.    In exchange for Rabobank’s loan, Three Wood

executed and delivered a promissory note, irrevocable payment
                              - 10 -

instructions, a security and assignment agreement, and a control

agreement.   The irrevocable payment instructions required the

Taxi corporations to transfer all of their cash to Three Wood

after the stock sale was complete.     Neither the trust nor the

trust representatives were privy to the details, including the

amount of Fortrend’s financing arrangement with Rabobank.     The

Trust and the trust representatives never saw the irrevocable

payment instructions or any other loan documents, nor did they

know what collateral was pledged by Three Wood as security for

the loan.

     F.   The Stock Closing

     A letter dated September 21, 2000, was sent from Fortrend’s

attorneys to the Trust’s law firm setting forth the agreed steps

to be taken at the closing of the stock purchase agreement.     The

letter explained that the Taxi corporations would open bank

accounts at Rabobank and then transfer all of the proceeds from

the sale of the Treasury bills in their respective accounts.

After full payment was made to the Trust for the sale of the Taxi

corporations’ stock, the Trust would transfer their signature

cards out of escrow to the buyers’ representatives.     The letter

concluded that “at this point the closing shall be completed”.

     At the request of Fortrend, on October 3, 2000, the Trust

opened accounts for the Taxi corporations at Rabobank.     Before

the stock sales were consummated, Ms. Parks and Mr. Milone were
                              - 11 -

the only authorized signatories for the accounts.    Ms. Parks and

Mr. Milone did not grant any security interest to Rabobank in the

accounts of the Taxi corporations, nor did the accounts serve as

collateral for Three Wood’s loan at any time the Taxi

corporations were controlled by the Trust.

     Three days later, on October 6, 2000, the names of Town Taxi

and Checker Taxi were changed to TDGH and CDGH, respectively.3

At the request of Fortrend, on October 10, 2000, the Trust sold

all of the Treasury bills held by the Taxi corporations and

transferred $18,601,779 and $21,012,306 to the Rabobank accounts

of Town Taxi and Checker Taxi, respectively.   Town Taxi and

Checker Taxi’s Rabobank accounts remained unencumbered and in the

exclusive control of the Trust at all times leading up to the

stock sale.   Also on October 10, 2000, Fortrend and the trust

representatives held a preclosing meeting where the final stock

purchase price for the Taxi corporations was calculated under the

formula provided in the stock purchase agreements.   The final

stock purchase price was calculated to be $32,474,243.4


     3
      The names were changed so the Trust could retain the Taxi
corporations’ names after the sale of their stock to Fortrend, as
Fortrend did not intend to participate in the taxi business. In
order to stay consistent and avoid confusion, the Taxi
corporations will continue to be referred to as Town Taxi and
Checker Taxi when discussed individually.
     4
      The final stock purchase price was calculated by
subtracting 50 percent of the “Specified Remaining Tax Liability”
(as defined in the stock purchase agreements) from the total cash
                                                   (continued...)
                              - 12 -

     The closing took place the following day at the office of

the Trust’s attorneys.   Present at the closing were the trust

representatives, Mr. Bernstein, a representative from Fortrend,

and one of Fortrend’s attorneys.   At this time, all employment

contracts, union contracts, employee arrangements, employment

benefit plans, and any other type of employee compensation

arrangements or programs at the Taxi corporations had been

terminated or were in the process of being terminated.    All

taxicab operations of the Taxi corporations had ceased.    The only

remaining assets of the Taxi corporations were $39,619,286 in

cash and prepaid estimated State tax payments of $5,200. Their

only known liabilities were unresolved tort and employee benefit

plan liabilities and the contingent Federal and State tax

liabilities arising from the asset sales.   The Trust assumed all

liabilities except the tax liabilities.

     All of the documents necessary to consummate the stock sale

and transfer the stock of the Taxi corporations were executed by

the Trust before the closing and held in escrow by the Trust’s

attorneys.   The closing took place in the following manner:    (1)

Three Wood wired $32,481,395, the agreed final stock purchase

price plus interest, to the Trust’s bank account; and (2) upon


     4
      (...continued)
of $39,619,286 held by the Taxi corporations. The “Specified
Remaining Tax Liability” was calculated to be $14,290,090.
Therefore, the final stock purchase price was $32,474,243
[$39,619,286 - (50% x $14,290,090)].
                              - 13 -

confirmation of the Trust’s receipt of the final purchase price,

the closing documents were delivered out of escrow, resulting in

the transfer of the Town Taxi stock to Tremolo, the Checker Taxi

stock to Baritone, and the resignation of the officers and

directors of the Taxi corporations.    Three Wood then appointed

its own officers and directors of the Taxi corporations and had

Tremolo and Baritone merge into Town Taxi and Checker Taxi,

respectively.   Town Taxi and Checker Taxi became wholly owned

subsidiaries of Three Wood as a result of the merger.    Therefore,

Three Wood was in control of the Taxi corporations’ Rabobank bank

accounts.   At the time of the sale of the trust’s stock to the

Fortrend-controlled entities, the Taxi corporations were

solvent--they possessed total cash in excess of $39 million and

contingent Federal and State income tax liabilities of

approximately $14 million.

     G.   Fortrend’s Postclosing Transactions

     On the same day the stock sales were completed, pursuant to

the loan agreements between Rabobank and Three Wood, the cash of

the Taxi corporations became security for Three Wood’s Rabobank

loan, and the cash balances of the Taxi corporations were

transferred to Three Wood.   The following day, October 12, 2001,

Three Wood paid $30,007,808 to Rabobank to repay its loan and

transferred $4,683,964 and $5,055,176 back to bank accounts of

Checker Taxi and Town Taxi, respectively.    Accordingly, on the
                               - 14 -

day following the completion of the stock sales, the Taxi

corporations had cash of $9,739,140 and contingent Federal and

State income tax liabilities of approximately $14 million.

      From October 13 through December 29, 2000, Fortrend caused

Checker Taxi to make numerous transfers, resulting in a yearend

account balance of $308,639.   Similarly, Fortrend caused Town

Taxi to make various transfers resulting in a yearend account

balance of $93,602.   None of these transfers were made to the

Trust.   Moreover, before the closing of the Taxi corporations’

2000 tax year, a Fortrend-controlled entity transferred Trex

Communications stock to Town Taxi and Checker Taxi and also

transferred Paclaco Equities stock to Checker Taxi.    At the time

of the stock sales, neither Ms. Parks nor the trust

representatives knew about the postclosing merger or the

contributions of the Trex Communications or Paclaco Equities

stock contemplated by Fortrend.     After the Taxi corporations were

acquired and controlled by Fortrend, Ms. Parks and the trust

representatives were not involved in any of Fortrend’s activities

with respect to the Taxi corporations.

2.   The Real Estate Corporations

      St. Botolph and Sixty-Five Bedford (collectively, Real

Estate corporations) were Massachusetts corporations that owned

real estate in Boston that was either leased or operated as

garages and parking lots.   Some of these properties were rented
                                - 15 -

to the Taxi corporations and used in their operations.     In 2001

the Real Estate corporations sold their respective parcels of

real estate to two different section 501(c)(3) educational

institutions.    Like the Taxi corporations, the Real Estate

corporations realized gain on the sales and were left holding

large amounts of cash.

     A.   St. Botolph

     St. Botolph owned three properties (St. Botolph properties)

located amid properties owned by Northeastern University

(Northeastern) in Boston.     Because of that proximity,

Northeastern offered St. Botolph $22 million for the St. Botolph

properties.     Northeastern was not interested in acquiring the

stock of St. Botolph.     Ms. Parks, on behalf of St. Botolph,

agreed to sell the St. Botolph properties to Northeastern.

     On February 1, 2001, the sale of the St. Botolph properties

to Northeastern was consummated, and St. Botolph received net

proceeds of $21,775,341, which were deposited into St. Botolph’s

account at Sovereign Bank.     Following the sale, St. Botolph’s

only asset was the proceeds from the sale of the St. Botolph

properties and its only remaining liabilities were the contingent

Federal and State corporate income tax liabilities arising from

the sale.   Realizing that St. Botolph faced a tax situation

similar to that of the Taxi corporations, the trust

representatives contacted Midcoast and Fortrend about purchasing
                               - 16 -

the stock of St. Botolph.    Fortrend offered to purchase the

stock.

     The series of events leading up to the stock closing were

substantially similar to those that took place with the Taxi

corporations.

           i.   Fortrend Financing

     Fortrend financed the stock purchase with another loan from

Rabobank for $19 million using a controlled subsidiary, Monte

Mar, Inc. (Monte Mar), as the borrower.     Monte Mar executed and

delivered various documents to Rabobank, including a promissory

note, irrevocable payment instructions, and a security and

assignment agreement.    Moreover, a Fortrend representative, as

the purported president of St. Botolph, guaranteed payment of the

Rabobank loan on behalf of St. Botolph, even though the

representative did not have the authority to do so until after

the stock sale was complete.    The irrevocable payment

instructions required St. Botolph to transfer all of its cash to

Monte Mar following the stock sale.     Again, the Trust was not

privy to any of the financing details, nor was it a party to the

loan.    The Trust never saw the irrevocable payment instructions

or any of the Rabobank loan documents, nor did it know what

collateral Monte Mar pledged to secure its loan.     On February 20,

2001, at the request of Fortrend, the Trust had St. Botolph open

a bank account at Rabobank.    Ms. Parks and Mr. Milone were the
                              - 17 -

only authorized signatories on the account.    They did not grant a

security interest to Rabobank in this account, nor did the

account serve as collateral for Monte Mar’s loan while St.

Botolph was controlled by the Trust.

          ii.   The Stock Purchase Agreement

     On February 26, 2001, the day before the stock closing, St.

Botolph transferred all of its funds, $21,651,135, to its newly

created Rabobank account.   That same day, a Fortrend

representative signed and delivered instructions to Rabobank to

place all of St. Botolph’s funds in an overnight time deposit.

Even though the Fortrend representative had no signatory

authority over the account, Rabobank complied with the

instructions.

     On February 27, 2001, the Trust and Monte Mar entered into a

stock purchase agreement for the stock of St. Botolph.   The

formula to determine the purchase price of the St. Botolph stock

was essentially the same as the formula used previously for the

Taxi corporations’ stock.   However, for this deal the parties

agreed that the stock purchase price would be reduced by only

37.5 percent of the specified remaining tax liability, rather

than the 50 percent used in the Taxi corporations’ deals.    The

final stock purchase price was $18,453,421.5   Under the stock


     5
      The final stock purchase price was calculated by
subtracting 37.5 percent of the specified remaining tax liability
                                                   (continued...)
                               - 18 -

purchase agreement, Monte Mar would acquire St. Botolph subject

to its contingent Federal and State income tax liabilities.

Monte Mar was obligated to file corporate tax returns reporting

the gains from the St. Botolph’s asset sales.

          iii.   The Stock Closing

     The stock closing also took place on February 27, 2001, at

the office of the Trust’s attorneys.    The trust representatives,

a representative of Fortrend, and one of Fortrend’s attorneys

were present at the closing.   At this time, St. Botolph had

ceased all operations and had no employees.   Its only asset was

cash and only liabilities were contingent Federal and State

income tax liabilities.   The Trust had executed all of the

documents necessary to consummate the stock sale before the

closing and placed them in escrow with their attorneys.   The

documents were not released from escrow until after the full

stock purchase price was transferred to the Trust’s bank account.

     As for the Taxi corporations’ stock sale, on the day of

closing Rabobank wired $19 million to Monte Mar.   Thereafter,

Monte Mar wired $18,456,186, the agreed-upon purchase price plus

interest, to the Trust’s bank account.   The stock closing

documents were then delivered out of escrow, resulting in the


     5
      (...continued)
from the total cash of $21,651,135 held by St. Botolph. The
specified remaining tax liability was calculated to be
$8,527,237. Therefore, the final stock purchase price was
$18,453,421 [$21,651,135 - (37.5% x $8,527,237)].
                                - 19 -

delivery of the St. Botolph stock to Monte Mar and the

resignation of the officers and directors of St. Botolph.

Thereafter, Monte Mar appointed new officers and directors of St.

Botolph.    Monte Mar then merged into St. Botolph, giving Fortrend

legal control of St. Botolph and its bank account.      Upon the

consummation of the stock sale, St. Botolph’s cash in the

Rabobank accounts became security for Monte Mar’s Rabobank loan.

At the time of the sale of its stock to Monte Mar, St. Botolph

was solvent and had a sufficient cash balance to fully satisfy

its contingent Federal and State income tax liabilities.

            iv.   Fortrend’s Postclosing Transactions

     Pursuant to the irrevocable payment instructions, after the

stock sale was consummated St. Botolph transferred $19 million to

Monte Mar, leaving $2,749,820 in St. Botolph’s account.      The

following day, Monte Mar repaid its Rabobank loan in full.

Thereafter, from March 1, 2001, through December 31, 2001, St.

Botolph made various transfers resulting in a yearend balance of

approximately $365,000.     None of these transfers were made to the

Trust.     Before the closing of St. Botolph’s 2001 tax year, a

Fortrend-controlled entity transferred TelCel Equities (TelCel)

stock and Theodor Tower, Inc. (Theodor) stock to St. Botolph.      At

the time of the stock sale Ms. Parks and the trust

representatives did not know about the postclosing merger or the

contribution of the TelCel and Theodor stock contemplated by
                               - 20 -

Fortrend.   After St. Botolph was acquired by Monte Mar, St.

Botolph was controlled by Fortrend, and Ms. Parks and the trust

representatives were not involved in any of Fortrend’s activities

with respect to St. Botolph.

     B.   Sixty-Five Bedford

     Sixty-Five Bedford owned three properties:   156 Ipswich

Street, 38 Isabella Street, and 8-12 Somerset Street.   Sixty-Five

Bedford’s 8-12 Somerset Street property (Somerset Street

property) was on Beacon Hill near Suffolk University (Suffolk).

Suffolk was interested in acquiring the Somerset Street property

in order to build a dormitory.   Suffolk offered to pay Sixty-Five

Bedford $5.5 million for the property.

Suffolk wanted to acquire only the property.   It did not want to

acquire the stock of Sixty-Five Bedford.   Ms. Parks, on behalf of

Sixty-Five Bedford, agreed to sell the Somerset Street property

to Suffolk.

     On September 30, 2001, Sixty-Five Bedford transferred

the 156 Ipswich Street and 38 Isabella Street properties to other

entities owned by the Trust.   On October 1, 2001, the sale of the

Somerset Street property to Suffolk was consummated, and Sixty-

Five Bedford received net proceeds of $5,474,920.   Following

these transactions, Sixty-Five Bedford’s only asset was cash and

its only liabilities were the contingent Federal and State income

tax liabilities resulting from the asset sales.   Once again the
                               - 21 -

trust representatives contacted Midcoast and Fortrend about

purchasing the stock of Sixty-Five Bedford.    By letter dated

March 5, 2001, Midcoast notified the Trust that Fortrend was

interested in purchasing 100 percent of the stock.

          i.   Fortrend Financing and the Stock Closing

     Because of the smaller size of the transaction, Fortrend did

not use Rabobank to finance the stock purchase.    Fortrend used

another controlled entity, SWRR, Inc. (SWRR), to acquire the

stock of Sixty-Five Bedford.   On October 3 and 4, 2001, a

Fortrend-controlled entity (SEAP) contributed $4,500,000 and

$417,000, respectively, to SWRR.

     On October 4, 2001, the parties executed the stock purchase

agreement and completed the stock closing.    The stock purchase

price of $4,916,834 was calculated similarly to that of the three

previous agreements, but the percentage split of the specified

remaining tax liability was adjusted back to 50 percent because

of the smaller size of the transaction.6   Once again, by the

closing date Sixty-Five Bedford had no employees and all of its

operations had ceased.   Its only asset was cash, and its only

liabilities were the contingent Federal and State income tax


     6
      The final stock purchase price was calculated by
subtracting 50 percent of the specified remaining tax liability
(as defined in the stock purchase agreements) from the total cash
of $5,937,336 held by Sixty-Five Bedford. The specified
remaining tax liability was calculated to be $2,041,002.
Therefore, the final stock purchase price was $4,916,834
[$5,937,336 - (50% x $2,041,002)].
                               - 22 -

liabilities from the asset sales.   The stock purchase agreement

specified that SWRR would acquire Sixty-Five Bedford subject to

its contingent Federal and State corporate income tax liabilities

and that SWRR was obligated to file corporate tax returns and

report the gains from the asset sales.

     At the time of closing, the Trust had executed all documents

necessary to transfer the stock and placed them in escrow with

its attorneys.   On the day of closing, SWRR transferred

$4,916,834 to the Trust’s bank account as consideration for the

Sixty-Five Bedford stock.   Upon confirmation of receiving the

funds, the Trust delivered Sixty-Five Bedford’s closing documents

out of escrow, resulting in essentially the same process as the

other transactions.   Thereafter, SWRR merged into Sixty-Five

Bedford, giving Fortrend control of Sixty-Five Bedford’s bank

account.   At the time of the sale of stock, Sixty-Five Bedford

was solvent and had a sufficient cash balance to fully satisfy

the contingent Federal and State corporate income tax

liabilities.

           ii.   Fortrend’s Postclosing Transactions

     On October 5, 2001, the day following the stock sale,

Fortrend caused Sixty-Five Bedford to transfer $4,942,000 to

SWRR, leaving Sixty-Five Bedford with a $995,336 account balance.

Immediately thereafter, Fortrend caused SWRR to transfer the

$4,942,000 to SEAP in repayment of the SEAP loans.     From October
                                   - 23 -

5 through December 31, 2001, Fortrend caused Sixty-Five Bedford

to make various transfers.      None of these transfers were made to

the Trust.    As of December 31, 2001, Sixty-Five Bedford had a

bank account balance of $336,833.       The Trust did not receive any

funds from Sixty-Five Bedford after the stock sale, nor did it

own any interest in any entity that received funds from Sixty-

Five Bedford.     Before the closing of Sixty-Five Bedford’s 2001

tax year, a Fortrend-controlled entity transferred Treasury bills

to Sixty-Five Bedford.     At the time of the stock sale, neither

Ms. Parks nor the trust representatives knew about the

postclosing merger or the contribution of Treasury bills

contemplated by Fortrend.      After the stock sale, Sixty-Five

Bedford was controlled by Fortrend, and Ms. Parks and the trust

representatives were not involved in Fortrend’s activities with

respect to Sixty-Five Bedford.

3.   The Trust’s Tax Returns

      The Trust reported the sales of the corporations’ stock on

its fiduciary income tax returns for tax years 2000 and 2001.

The Trust reported the following on its 2000 income tax return:

         Entity      Date of Sale      Sale Price      Basis      Gain

      Town Taxi        10/9/2000     $14,850,702    $14,850,702    -0-

      Checker Taxi     10/9/2000      17,880,694     17,880,694    -0-

      The Trust reported the following on its amended 2001 income

tax return:
                                   - 24 -

          Entity    Date of Sale    Sale Price    Basis         Gain

      St. Botolph    2/26/2001     $18,480,194   $6,985,296   $11,494,898

      Sixty-Five
         Bedford     10/4/2001       6,096,834    3,725,341     2,371,493

      Respondent examined the Trust’s 2000 and 2001 tax returns

and issued notices of deficiency for both tax years in regard to

the sales of the corporations’ stock.7       The Trust filed petitions

in this Court, and on February 14, 2006, pursuant to compromises

between the parties, we entered decisions holding that there were

no deficiencies in the Trust’s Federal income tax liability for

either tax year.8

4.   The Corporations’ Tax Returns

      As discussed above, Fortrend-controlled entities purchased

the stock of the corporations subject to their contingent Federal

and State income tax liabilities and were obligated to file the

corporations’ tax returns and report the corporations’ gains on

their asset sales.



      7
      The notices essentially explained that the Internal Revenue
Service’s position was that the corporations in effect sold all
of their assets, paid all of their liabilities, and liquidated.
Because the Trust was the sole shareholder of the corporations,
the Trust received the liquidation proceeds and was required to
report the gain pursuant to sec. 331(a).
      8
      The decision documents reflected a compromise by the
parties and were not the result of a trial on the merits.
Neither this Court nor the decision documents addressed any of
respondent’s theories for determining a deficiency, nor were
there any pertinent stipulations between the parties other than
that the Trust did not have a deficiency in tax or owe any
penalties.
                              - 25 -

     Fortrend caused the Taxi corporations to each file Form

1120, U.S. Corporation Income Tax Return, for the taxable year

ended December 31, 2000.   With respect to the sale of its taxi

medallions, Town Taxi reported on Schedule D, Capital Gains and

Losses, proceeds of $18,468,900 and a cost basis of $2,740,000,

resulting in a recognized long-term capital gain of $15,728,900.

Additionally, Town Taxi reported a long-term capital loss of

$18,495,188 from the disposition of Trex Communications stock.

This resulted in Town Taxi’s reporting a net long-term capital

loss of $2,766,288.

     Checker Taxi’s Schedule D reported proceeds of $17,578,000

and a cost basis of zero with respect to the sale of its taxicab

medallions, resulting in a recognized long-term capital gain of

$17,578,000.   Moreover, Checker Taxi’s reported long-term capital

losses of $13,097,812 and $3,766,154 from the disposition of Trex

Communications stock and Paclaco Equities stock, respectively.

This resulted in Checker Taxi’s reporting a net long-term capital

loss of $714,034.

     Fortrend caused St. Botolph to file a Form 1120 for the

taxable year ended December 31, 2001.   St. Botolph’s Schedule D

reported $22 million in proceeds and a cost basis of $1,102,509

with respect to its sale of real estate, resulting in a

recognized long-term capital gain of $20,897,491.   St. Botolph

also reported long-term capital losses of $8,400,000 and
                              - 26 -

$15,820,000 from the disposition of Telcel and Theodor stock,

respectively.   This resulted in a net long-term capital loss of

$3,322,509.

     Fortrend also caused Sixty-Five Bedford to file a Form 1120

for the taxable year ended December 31, 2001.   Sixty-Five

Bedford’s Schedule D reported aggregate long-term capital gains

from the sale of its assets of $5,195,474, and a long-term

capital loss of $5,170,475 from the sale of Treasury bills,

resulting in a net long-term capital gain of $24,999.    Neither

Ms. Parks nor the trust representatives reviewed any of the

corporations’ returns.

     Respondent examined the income tax returns of the Taxi

corporations for the tax year ended December 31, 2000.    Following

the examination, respondent disallowed the losses claimed with

respect to Trex Communications and Paclaco Equities stock and

asserted penalties against the Taxi corporations.   The Taxi

corporations and respondent entered into closing agreements

signed on July 11, 2005, whereby the Taxi corporations agreed to

the disallowance of the claimed losses and the imposition of the

accuracy-related penalty under section 6662.

     Respondent also examined the income tax returns of the Real

Estate corporations for the tax year ended December 31, 2001.

After the examination, respondent disallowed St. Botolph’s

claimed losses on the disposition of Theodor and Telcel stock and
                              - 27 -

Sixty-Five Bedford’s claimed losses on the disposition of

Treasury bills.   Respondent asserted accuracy-related penalties

under section 6662 in both instances.   St. Botolph entered into a

closing agreement with respondent signed on July 11, 2005, where

St. Botolph agreed to the disallowance of the claimed losses and

the imposition of the accuracy-related penalty.   Furthermore,

Sixty-Five Bedford entered into a closing agreement with

respondent signed on January 10, 2006, where Sixty-Five Bedford

agreed to the disallowance of the claimed losses and the

imposition of the accuracy-related penalty.

     The Trust was not a party to any of the closing agreements.

Moreover, neither Ms. Parks nor the trust representatives

participated in any of the examinations of the corporations.

The closing agreements set forth the following liabilities:

                                               Penalty
       Entity        Year         Tax         Sec. 6662

     Town Taxi       2000      $6,100,159     $1,145,027
     Checker Taxi    2000       5,722,441      1,142,019
     St. Botolph     2001       6,839,682      1,367,936
     Sixty-Five      2001       1,644,315        328,863
       Bedford

     Respondent was unable to collect against the corporations

because they were insolvent at the time the closing agreements

were entered into and the taxes and penalties were assessed.     On

December 8, 2006, respondent issued four statutory notices of

liability to the Trust (notices of transferee liability),

determining that the Trust is liable as transferee for the unpaid
                              - 28 -

Federal income tax liabilities and penalties of the corporations

as set out in the table above.

     The Trust timely filed a petition contesting respondent’s

determination that it was liable as a transferee.   Thereafter,

the Trust filed a motion for summary judgment, which we denied.9

A trial was held in Boston, Massachusetts, on October 18, 2010.

                              OPINION

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

assessment of transferee liability in the same manner and subject

to the same provisions and limitations as in the case of the

taxes with respect to which the transferee liability was

incurred.   Section 6901(a) does not create or define a

substantive liability but merely provides the Commissioner a

remedy for enforcing and collecting from the transferee of the

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

Co. v. Commissioner, 334 F.2d 875, 877 (9th Cir. 1964), affg. 37



     9
      As discussed above, before this transferee action
respondent issued notices of deficiency against the trust for the
fiduciary Federal income taxes arising from the stock sales of
the corporations. Respondent contended that the stock sales
should be recast as asset sales followed by liquidating
distributions. However, the parties ended up entering a
stipulated decision finding that the trust was not liable for the
income taxes associated with the stock sales. Thereafter, when
respondent issued the trust the notice of transferee liability
for the stock sales, the trust filed a motion for summary
judgment based on res judicata and collateral estoppel. We
denied the trust’s motion for summary judgment on the grounds
that “the Trust’s liability as transferee is not the same as the
Trust’s fiduciary tax liability.”
                               - 29 -

T.C. 1006 (1962); Mysse v. Commissioner, 57 T.C. 680, 700-701

(1972).   Section 6902(a) and Rule 142(d) provide that the

Commissioner has the burden of proving the taxpayer’s liability

as a transferee but not of showing that the transferor was liable

for the tax.

      Under section 6901(a) the Commissioner may establish

transferee liability if a basis exists under applicable State law

or State equity principles for holding the transferee liable for

the transferor’s debts.    Commissioner v. Stern, 357 U.S. 39, 42-

47 (1958); Bresson v. Commissioner, 111 T.C. 172, 179-180 (1998),

affd. 213 F.3d 1173 (9th Cir. 2000); Starnes v. Commissioner,

T.C. Memo. 2011-63; Diebold v. Commissioner, T.C. Memo. 2010-238.

“[T]he existence and extent of liability should be determined by

state law.”    Commissioner v. Stern, supra at 45 (emphasis added).

Thus, State law determines the elements of liability, and section

6901 provides the remedy or procedure to be employed by the

Commissioner as the means of enforcing that liability.    Ginsberg

v. Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), affg. 35 T.C.

1148 (1961).

      We must determine whether respondent has shown that the

trust was liable as a transferee.

I.   Massachusetts Uniform Fraudulent Transfer Act (MUFTA)

      The law of the State where the transfer occurred (in this

case, Massachusetts) controls the characterization of the
                               - 30 -

transaction.    See Commissioner v. Stern, supra at 45.   Respondent

argues that under Massachusetts law, the substance of the

transaction controls, not the form.

     Massachusetts has adopted the Uniform Fraudulent Transfer

Act (MUFTA).    Mass. Ann. Laws ch. 109A, secs. 1-12 (LexisNexis

2005) (hereinafter MUFTA).    MUFTA includes provisions imposing

transferee liability on the transferee of a debtor’s property on

grounds of both actual and constructive fraud.     See id. sec.

5(a)(1) (actual fraud); id. secs. 5(a)(2), 6 (constructive

fraud).   A “transfer” is defined as every mode, direct or

indirect, absolute or conditional, voluntary or involuntary, of

disposing of or parting with an asset or an interest in an asset

and includes payment of money, release, lease, and creation of a

lien or other encumbrance.    Id. sec. 2.   Respondent bears the

burden of proving that the trust is liable under Massachusetts

law as a transferee.    See sec. 6902(a).   Furthermore, because

fraud is never presumed, creditors attacking a conveyance as

fraudulent have the burden of establishing fraud.     Mullins v.

Riopel, 76 N.E.2d 633 (Mass. 1948); Rioux v. Cronin, 109 N.E. 898

(Mass. 1915).    Therefore, respondent must prove that there was a

fraudulent disposition of property from the corporations to the

trust.

      MUFTA does not set forth specific standards of proof to

establish transferee liability under MUFTA sections 5(a)(1) and
                              - 31 -

(2) and 6.   However, the U.S. Bankruptcy Court for the District

of Massachusetts (the bankruptcy court), in applying MUFTA, has

found that actual fraud must be proven by clear and convincing

evidence, Murphy v. Meritor Bank (In re O’Day Corp.), 126 Bankr.

370, 410 (Bankr. D. Mass. 1991), and constructive fraud must be

proven by a preponderance of the evidence, Ferrari v. Barclays

Bus. Credit, Inc. (In re Morse Tool, Inc.), 148 Bankr. 97, 131

(Bankr. D. Mass 1992).   Respondent claims to have met the

relevant standards of proof for MUFTA sections 5(a)(1) and (2)

and 6 in showing fraudulent transfers to the trust.

II.   Constructive Fraudulent Transfer Under MUFTA Section 5(a)(2)

      Under MUFTA section 5(a)(2), 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 without receiving a reasonably equivalent

value in exchange for the transfer or obligation and the debtor:

(1) 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; or

(2) intended to incur, or believed or reasonably should have

believed that he would incur, debts beyond his ability to pay as

they became due.
                               - 32 -

       The Uniform Fraudulent Transfer Act is a uniform act that

derived the phrase “reasonably equivalent value” from 11 U.S.C.

section 548.    See Leibowitz v. Parkway Bank & Trust Co. (In re

Image Worldwide, Ltd.), 139 F.3d 574, 577 (7th Cir. 1998).

Reasonably equivalent value has been construed to include both

direct and indirect benefits to the transferor, even if the

benefit does not increase the transferor’s net worth.     See id. at

578.    “There need not be a dollar-for-dollar exchange to satisfy

the reasonable equivalence test”; rather, the court should simply

compare “‘the value of what went out [of the debtor’s estate]

with the value of what came in’.”    Southmark Corp. v. Riddle, 138

Bankr. 820, 829 (Bankr. N.D. Tex. 1992) (quoting Heritage Bank

Tinley Park v. Steinberg (In re Grabill Corp.), 121 Bankr. 983,

994 (Bankr. N.D. Ill. 1990).

       In CHC Indus., Inc. v. Commissioner, T.C. Memo. 2011-33, we

held the taxpayer liable as a transferee when the taxpayer

directly received a fraudulent “consulting” payment from a

recently acquired Fortrend entity.      The taxpayer knew the payment

was fraudulent and received the payment directly from the

insolvent entity.

       Respondent’s arguments under MUFTA are predicated on the

assumption that the series of transactions among the asset

purchaser, the Trust, Midcoast, and Fortrend should be collapsed

and treated as if the corporations had sold their assets and then
                                - 33 -

made liquidating distributions to the trust.    If the transactions

are collapsed accordingly, then the corporations will have

transferred substantially all of their assets to the trust and

received virtually nothing in exchange, let alone reasonably

equivalent value.   If the preceding is found, it follows that the

trust will be liable as a transferee of the corporations’ assets

under MUFTA section 5(a)(2).

     We were recently confronted with the same issue in Starnes

v. Commissioner, T.C. Memo. 2011-63.     In Starnes, the taxpayers

each owned 25 percent of the stock of Tarcon, a freight

consolidation corporation.     The Tarcon shareholders had sold all

of the assets of Tarcon to an unrelated third party, so that

Tarcon had only cash and contingent Federal and State corporate

income tax liabilities.   Midcoast and the Tarcon shareholders

entered into a contract to sell the Tarcon stock, where Midcoast

was obligated to file corporate tax returns and report the

capital gains arising from Tarcon’s asset sales.    After Midcoast

failed to pay Tarcon’s income tax liabilities, the Commissioner

asserted a transferee liability action against the Tarcon

shareholders.

     We applied State fraudulent conveyance law to determine

whether the Tarcon shareholders should be liable for the income

tax liabilities of Tarcon.   Specifically, we focused on whether

all the parties involved knew of the multiple transactions,
                                - 34 -

including Midcoast’s fraudulent scheme to offset Tarcon’s tax

liabilities.    We held that because the Commissioner failed to

show the taxpayers’ knew of Midcoast’s fraudulent scheme, the

transactions should not be collapsed to determine whether Tarcon

received reasonably equivalent value as required under the North

Carolina Uniform Fraudulent Transfer Act (NCUFTA).    We then

applied NCUFTA without collapsing the transactions and found that

because there was no fraudulent conveyance to the taxpayers, they

were not liable as transferees of Tarcon’s assets.    We believe

the approach in Starnes to be the correct approach for a

transferee liability action.

     Whether the transactions should be “collapsed” is a

difficult issue of State law on which there is fairly limited

precedent.     Brandt v. Wand Partners, 242 F.3d 6, 12 (1st Cir.

2001).   While the Massachusetts courts do not provide much

guidance for collapsing transactions among multiple parties in

the context of transferee liability, the bankruptcy court offers

some assistance.

     The bankruptcy court will overlook the form of a transaction

and collapse multiple steps taken by parties according to the

knowledge and intent of the parties involved.     Murphy v. Meritor

Bank (In re O’Day Corp.), supra at 394 (citing Wieboldt Stores,

Inc. v. Schottenstein, 94 Bankr. 488, 502 (N.D. Ill. 1988)).

Murphy involved a leveraged buyout (LBO), where the court found
                              - 35 -

that all parties were aware of the structure of the transaction

and participated in implementing it.   Therefore, the court

focused on the substance of the LBO as one transaction, not on

its form.   Furthermore, in Consove v. Cohen (In re Roco Corp.),

21 Bankr. 429, 436 (B.A.P. 1st Cir. 1982), the court looked to

whether a series of transactions was made at arm’s length to

determine whether the substance or the form of the transactions

should control.   Finally, when the parties meant for the various

transactions to occur together, the court found it should

collapse the various transactions and treat them as one

integrated transaction.   See Ferrari v. Barclays Bus. Credit,

Inc. (In re Morse Tool, Inc.), 148 Bankr. at 134.

     Other courts have similarly found that in determinations of

whether to collapse multiple transactions, the party arguing that

the transaction should be avoided must prove that the multiple

transactions were linked and that the purported transferee had

either actual or constructive knowledge of the entire scheme.

HBE Leasing Corp. v. Frank, 48 F.3d 623, 636 n.9 (2d Cir. 1995);

Official Comm. of Unsecured Creditors of Sunbeam Corp. v. Morgan

Stanley & Co., 284 Bankr. 355, 370-371 (Bankr. S.D.N.Y. 2002).

“Where a transfer is actually ‘only a step in a general plan,’ an

evaluation is made of the entire plan and its overall

implications.’”   Official Comm. of Unsecured Creditors of Sunbeam

Corp. v. Morgan Stanley & Co., supra at 370 (quoting Orr v.
                               - 36 -

Kinderhill Corp., 991 F.2d 31, 35 (2d Cir. 1993)).    On the basis

of the authorities discussed, respondent must establish the trust

had actual or constructive knowledge.

     We must first determine whether the trust had actual

knowledge.   Respondent stipulated for all of the stock sales that

at the time of the stock sales neither Ms. Parks nor the trust

representatives knew about the postclosing merger or the

contribution of inflated-basis stock contemplated by Fortrend.

Reviewing this stipulation and the record as a whole, we do not

find that the trust had actual knowledge.

     We must next determine whether the trust had constructive

knowledge.   Constructive knowledge may be found where the initial

transferee became aware of circumstances that should have led to

further inquiry into the circumstances of the transaction, but no

inquiry was made.   See HBE Leasing Corp. v. Frank, supra at 636.

Further inquiry was likely warranted considering Fortrend agreed

to pay the trust more than the net book value of the company when

the only assets were cash and the only liabilities were income

tax liabilities.    It is unclear what level of inquiry the trust

made in regard to what Fortrend planned to do to offset the

capital gains, including whether Fortrend’s actions would be

proper.   The trust representatives argue that they did not

inquire as to what Fortrend intended to do about the tax

liability, and also that they were inquisitive at the initial
                                - 37 -

meeting with Fortrend and conducted due diligence of the

transaction but could not find anything wrong.      Respondent argues

that the trust representatives should have known that Fortrend

intended to fraudulently offset the capital gains of the

corporations, but also concedes that the representatives did not

have enough information to draw a conclusion regarding the

propriety of the transaction.

     While there is uncertainty as to the trust’s level of

inquiry regarding Fortrend’s postclosing activities, respondent

bears the burden of proof.   There are legitimate transactions

that Fortrend could have contemplated, yet respondent fails to

explain why the trust was obligated to determine the propriety of

Fortrend’s postclosing activities.       Respondent’s contention that

the trust should have known that Fortrend intended to

fraudulently offset the capital gains of the corporations is

insufficient to support a finding by a preponderance of the

evidence that the trust had constructive knowledge of the entire

scheme, including the subsequent purchase and sale of inflated-

basis stock to purportedly generate losses for the corporations.

     Respondent stipulated for all of the stock sales that the

trust did not know of the postclosing mergers or contributions of

inflated-basis stock contemplated by Fortrend.      Reviewing this

stipulation and the record as a whole, we do not find that the

trust had constructive knowledge.
                               - 38 -

       Because we hold that respondent has not met his burden of

proving that the transactions should be collapsed, we will

respect the form of the transactions in our application of MUFTA

to the stock sales.    Thus, we will not collapse the transactions

to determine whether the corporations received reasonably

equivalent value.    With respect to the corporate stock sales, the

trust received in aggregate approximately $56 million from

Fortrend in exchange for the stock of the corporations.      None of

the cash held in the corporations’ bank accounts was used to

purchase the stock from the trust.      The funds used to purchase

the stock were borrowed from Rabobank--none of the money held by

the corporations was used in the stock purchases.     All of the

corporations had sufficient cash assets to pay their respective

contingent income tax liabilities both before and after the stock

sales.    The corporations transferred their cash to Fortrend-

related entities after ownership was transferred to Fortrend.

Nothing from the corporations was transferred to the trust.

Thus, we conclude that the requirements of MUFTA section 5(a)(2)

have not been satisfied.

III.    Constructive Fraudulent Transfer Under MUFTA Section 6

       Additionally, MUFTA section 6(a) provides that a transfer

made or obligation incurred by a debtor is fraudulent as to the

creditor whose claim arose before the transfer was made or the

obligation was incurred if the debtor made the transfer or
                               - 39 -

incurred the obligation without receiving 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.   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.    Id. sec. 3(a).

      Respondent is required to show that the corporations made

transfers without receiving reasonably equivalent value in

exchange for the transfers and that the corporations were

insolvent at the time or became insolvent as a result of the

transfers.   See id.   As discussed above with respect to the

requirement of MUFTA section 5(a)(2), respondent has not shown

that the corporations made transfers to the trust; therefore the

trust was not required to provide reasonably equivalent value to

the corporations.   Thus, we conclude that the requirements of

MUFTA section 6 have not been satisfied.

IV.   Actual Fraudulent Transfer Under MUFTA Section 5(a)(1)

      MUFTA section 5(a)(1) provides that a transfer made or

obligation incurred by a debtor is fraudulent as to a creditor,

whether the creditor’s claim arose before or after the transfer

was made or the obligation was incurred, if the debtor made the

transfer or incurred the obligation with actual intent to hinder,

delay, or defraud any creditor of the debtor.   In determining
                              - 40 -

actual intent, 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.

Id. sec. 5(b).

     To prevail under this section of MUFTA, respondent must show

that the transfer was made “with intent to hinder, delay, or

defraud” creditors.   “While the ‘presence of a single badge of

fraud may spur mere suspicion, the confluence of several can
                              - 41 -

constitute conclusive evidence of an actual intent to defraud.’”

Hasbro, Inc. v. Serafino, 37 F. Supp. 2d 94, 98 (D. Mass. 1999)

(quoting Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926

F.2d 1248, 1254-1255 (1st Cir. 1991)).   Respondent contends that

factors 1, 3, 5, 8, 9, and 10 of MUFTA section 5(b) are present.

     Factor 1.   Whether the Transfer or Obligation Was to an
                 Insider

     The trust was an insider as a person in control of the

corporations before the sale of the stock to Fortrend.   See MUFTA

sec. 2.   However, because the transactions were not collapsed,

respondent has not shown that the transfers to the trust were

from the corporations.

     Factor 3.   Whether the Transfer or Obligation Was Disclosed
                 or Concealed

     Respondent argues that the distributions from the

corporations were concealed as proceeds from stock sales.

However, the transactions in dispute were all reported on the

appropriate tax returns.   The Trust reported the sales of the

stock of all of the corporations, and the corporations reported

the asset sales on their respective returns.

     Factor 5.   Whether the Transfer Was of Substantially All the
                 Debtor’s Assets

     Respondent argues that the corporations transferred

substantially all of their assets to the trust.   While the

corporations did transfer substantially all of their assets after

the stock sales, as the transactions are not collapsed, the
                               - 42 -

transfers made by the corporations were to Fortrend-related

entities, not the trust.

     Factor 8.    Whether the Value of the Consideration Received
                  by the Debtor Was Reasonably Equivalent to the
                  Value of the Asset Transferred or the Amount of
                  the Obligation Incurred

     The corporations did not receive reasonably equivalent value

in exchange for their transfers of assets, but as the

transactions are not collapsed, the transfers by the corporations

were to Fortrend-related entities, not the trust.

     Factor 9.    Whether the Debtor Was Insolvent or Became
                  Insolvent Shortly After the Transfer Was Made or
                  the Obligation Was Incurred

     As discussed, 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.   MUFTA sec. 3(a).   Additionally, a debtor who is

generally not paying his debts as they come due is presumed to be

insolvent.   Id. sec. 3(b).   After the asset sales and at all

times leading up to the stock sales the corporations’ cash

balances far exceeded their contingent income tax liabilities.

Moreover, while the corporations became insolvent after

transferring substantially all of their assets to Fortrend-

related entities, as the transactions are not collapsed the trust

did not receive anything from the corporations either before or

after the stock sales.
                              - 43 -

     Factor 10.   Whether the Transfer Occurred Shortly Before or
                  Shortly After a Substantial Debt Was Incurred

      The transfer of the corporations’ assets to Fortrend-related

entities did occur shortly after the corporations incurred

contingent Federal and State corporate income tax liabilities

from the sales of their assets.   However, respondent has not

shown that any transfer of the corporations’ assets was made to

the trust, resulting in the corporations’ inability to pay the

liabilities at the time of their respective stock sales.

      After weighing the factors and recognizing that no one

factor is dispositive, we conclude that respondent has not shown

that a transfer was made with intent to hinder, delay, or defraud

respondent.

V.   Federal Tax Doctrines

      While we affirm that the existence and extent of transferee

liability should be determined by State law if substance over

form and its related doctrines are applicable, we find that the

form of the stock sales should be respected in this case.

      Respondent asks us to apply the substance over form doctrine

to recast the stock sales as “asset sales followed by liquidating

distributions”.   Courts use substance over form and its related

judicial doctrines to determine the true meaning of a transaction

disguised by formalisms that exist solely to alter tax

liabilities.   See United States v. R.F. Ball Constr. Co., 355

U.S. 587 (1958); Commissioner v. Court Holding Co., 324 U.S. 331
                                - 44 -

(1945); Volvo Cars of N. Am., LLC v. United States, 571 F.3d 373

(4th Cir. 2009); Rose v. Commissioner, T.C. Memo. 1973-207.      In

such instances, the substance of a transaction, rather than its

form, will be given effect.   We generally respect the form of a

transaction, however, and will apply the substance over form

principles only when warranted.    See Gregory v. Helvering, 293

U.S. 465 (1935); Blueberry Land Co. v. Commissioner, 361 F.2d 93,

100-101 (5th Cir. 1966), affg. 42 T.C. 1137 (1964).

     Furthermore, “The legal right of a taxpayer to decrease the

amount of what otherwise would be his taxes, or altogether avoid

them, by means which the law permits, cannot be doubted.”

Gregory v. Helvering, supra at 469.      Nonetheless, a transaction

“having no business or corporate purpose * * * the sole object

and accomplishment of which was the consummation of a

preconceived plan” to avoid taxation cannot be respected.      Id.

     Here, we find that substance over form and its related

doctrines are not applicable.    There was no “preconceived plan to

avoid taxation”; rather, there were arm’s-length stock sales

between the trust and Fortrend where the parties agreed that

Fortrend would be responsible for reporting and paying the

Federal income taxes of the corporations.     In the absence of a

nefarious scheme, when faced with the choice of liquidating the

corporations or selling their stock the trust was not required to

choose the result that would produce the highest tax liability.
                              - 45 -

Faced with a substantial estate tax liability, the trust chose to

maximize the cash proceeds from the sales by selling the stock of

the corporations rather than liquidating them.    Had the trust

known of Fortrend’s illegitimate scheme to fraudulently offset

the tax liabilities of the corporations, then we would be

inclined to disregard the form of the stock sales in favor of

respondent’s contention.   However, there are legitimate tax

planning strategies to defer or avoid paying taxes, so it was not

unreasonable for the trust to believe that Fortrend had a

legitimate method of doing so.   Respondent’s contention that the

trust should have known Fortrend intended to fraudulently offset

the corporations’ capital gains is insufficient to support a

finding that the trust knew of Fortrend’s nefarious plans,

especially when coupled with the fact that respondent expressly

stipulated that the trust did not know of the postclosing merger

or contribution of inflated-basis stock by Fortrend.

     Moreover, similar to the facts of Starnes v. Commissioner,

T.C. Memo. 2011-63, there was an infusion of cash into the

transaction, rather than a circular flow of cash.    Fortrend

obtained independent financing from Rabobank.    While the details

were unknown to the trust, the trust was aware that the stock

purchases were financed by loans from Rabobank.    Rabobank was an

independent third party that lent funds to Fortrend at arm’s

length, conditioned upon several written agreements.    Because the
                              - 46 -

trust would not release control over the corporations’ bank

accounts until it received the stock purchase price, Fortrend

could not have paid for the stock without a loan from Rabobank.

Therefore, the funds used to purchase the stock were genuine

infusions of cash into the transaction, further leading us to

conclude that the form of the stock sales should be respected.

     An opinion in another transferee case with similar facts has

recently been filed--Feldman v. Commissioner, T.C. Memo. 2011-

297, holding the taxpayer liable as a transferee.    However, in

holding the taxpayer liable as a transferee, the Court in Feldman

found that:   (1) It was “absolutely clear” that the taxpayer was

aware the stock purchaser had no intention of ever paying the tax

liabilities; (2) the taxpayer did not conduct thorough due

diligence of the stock purchaser; and (3) the “loan” used to

purchase the stock was a sham because it was made by a

shareholder of the purchaser and was not evidenced by a

promissory note or other writing and the lending shareholder did

not receive any security or collateral in exchange for the

“loan”.   In our case, respondent failed to show that the trust

had actual or constructive knowledge of Fortrend’s fraudulent

plans to offset the corporations’ tax liabilities.    Moreover, the

loans to purchase the stock were made by a third party, evidenced

by multiple written agreements, and supported by security

interests.
                              - 47 -

      Therefore, we reject any application of substance over form

or its related doctrines to recast the stock sales as “asset

sales followed by liquidating distributions” and instead find

that the form of the stock sales should be respected.

VI.   Conclusion

      We conclude that respondent has not established that a

fraudulent transfer occurred under Massachusetts law.   In

reaching our holdings herein, we have considered all arguments

made by the parties, and, to the extent not mentioned above, we

conclude they are moot, irrelevant, or without merit.

      To reflect the foregoing,


                                         Decision will be entered

                                    for petitioner.
