                             T.C. Memo. 2015-231



                       UNITED STATES TAX COURT



  JOHN M. ALTERMAN TRUST U/A/D MAY 9, 2000, RONALD GORDON
 AND DONALD GAVID, TRUSTEES, TRANSFEREE, ET AL.,1 Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 6936-10, 6940-10,              Filed December 1, 2015.
                 7071-10, 20636-11.



      Michael Todd Welty, Kristina L. Novak, and Denise M. Mudigere, for

petitioners in docket Nos. 6936-10, 7071-10, and 20636-11.

      Jenny L. Johnson and Guinevere M. Moore, for petitioner in docket No.

6940-10.



      1
       Cases of the following petitioners are consolidated herewith: Bryan S.
Alterman Trust U/A/D May 9, 2000, Bryan S. Alterman, Trustee, Transferee,
docket No. 6940-10; Richard C. Alterman Trust U/A/D May 9, 2000, Richard C.
Alterman, Trustee, Transferee, docket No. 7071-10; and Estate of John Marks
Alterman, Deceased, Melvin S. Black, Personal Representative, Transferee, docket
No. 20636-11.
                                         -2-

[*2] David B. Flassing, Angela B. Reynolds, Catherine Marie Thayer, and

Steven Rex Guest, for respondent.



            MEMORANDUM FINDINGS OF FACT AND OPINION


      BUCH, Judge: Courts, including this court, have been plagued by Midco

cases. Rarely do these cases present themselves for a determination of the

underlying liabilities. Instead, these cases are postured so that the courts are asked

to determine whether someone other than the taxpayer should be on the hook for

the taxpayer’s liability. They are transferee liability cases, and so are these cases.

      The fact patterns of these cases are similar. Someone sells an interest in a

corporation for a good price; the corporation doesn’t pay its taxes; and the Internal

Revenue Service (IRS) goes after the former shareholder for the taxes.

      The outcomes of these cases vary. Many taxpayers have prevailed at the

trial court, but many of those taxpayers have seen their victories turned to defeat

on appeal.2 The IRS has likewise prevailed at the trial court, and its victories have

      2
       Slone v. Commissioner, ___ F.3d ___, 2015 WL 5061315 (9th Cir. Aug.
28, 2015), vacating and remanding T.C. Memo. 2012-57; Salus Mundi Found. v.
Commissioner, 776 F.3d 1010 (9th Cir. 2014), rev’g and remanding T.C. Memo.
2012-61; Diebold Found., Inc. v. Commissioner, 736 F.3d 172 (2d Cir. 2013),
vacating and remanding Salus Mundi Found. v. Commissioner, T.C. Memo. 2012-
                                                                  (continued...)
                                         -3-

[*3] uniformly survived appeal.3 Rarest of all is the taxpayer victory that survives

appeal.4

      But each case stands on its own. Outcomes are determined by the facts of

each specific case and what is established by the record.5

      These consolidated cases present unique facts and evidentiary holes that

distinguish them from those cases where the IRS ultimately prevailed. First, the

record is clear that petitioners took steps to ensure that the IRS was paid what it

was due, even if those steps were ultimately unsuccessful. Second, because

petitioners did not receive a transfer from the company they sold, direct transferee

liability cannot be established. Third, to prevail under a “transferee of a



      2
       (...continued)
61; Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 597 (1st Cir.
2013), rev’g and remanding T.C. Memo. 2011-298.
      3
       For a recent example, see Feldman v. Commissioner, 779 F.3d 448 (7th
Cir. 2015), aff’g T.C. Memo. 2011-297.
      4
      Starnes v. Commissioner, 680 F.3d 417 (4th Cir. 2012), aff’g T.C. Memo.
2011-63.
      5
       See, e.g., Holden v. Commissioner, T.C. Memo. 2015-83, at *2 n.2; Holden
v. Commissioner, T.C. Memo. 2015-131, at *2 n.1 (noting that separate cases
involving the same taxpayer and issues each turn on the facts established by the
record in each separate case); see also Feldman v. Commissioner, T.C. Memo.
2011-297, 2011 WL 6781006, at *17 (noting different outcomes in Midco cases
because of the distinct facts and circumstances of each case).
                                        -4-

[*4] transferee” theory, the Commissioner must prove that there was a fraudulent

transfer at each step along the way, and the Commissioner failed to prove that the

purchasers of the company were insolvent or approaching insolvency at any

relevant time. Indeed, the Commissioner failed to prove that the taxpayer

company was insolvent. It is these evidentiary holes that require that we hold for

petitioners.

                               FINDINGS OF FACT

I.    Alterman Corp. Background

      In 1938 Sidney Alterman (Mr. Alterman, Sr.) founded the businesses that

would later become part of an affiliated group controlled by Alterman Corp. (AC).

Mr. Alterman, Sr. started this business with a single truck and grew it into a

national freight hauling company that transported perishable foods across the

United States. AC’s primary assets were trucks, tractors, trailers, and real estate

that served as terminals. Mr. Alterman, Sr. incorporated AC in 1986 under Florida

law, and AC based its business in Miami, Florida. AC became the parent of

Transport Realty Co. and Alterman Transport Lines, which in turn held the wholly

owned subsidiary Reefer Division. AC and its subsidiaries were treated as C

corporations under the Internal Revenue Code.
                                         -5-

[*5] Mr. Alterman, Sr. had three sons: John, Bryan, and Richard. John was an

attorney and acted as general counsel for AC, but he developed Parkinson’s

disease and had to quit working in 1997. Bryan was educated as a social worker.

He served on the board of directors for AC and was vice president of operations

for Alterman Transport Lines until approximately 1988, when he had to quit after

suffering multiple bouts of cancer. Middle son Richard had a Ph.D. in the history

and philosophy of American education, and he worked in the academic world until

taking a position at Alterman Transport Lines as vice president in 1984.

      In May 2000 Mr. Alterman, Sr. created the Sidney Alterman Irrevocable

Trust for the benefit of his three sons. Mr. Alterman, Sr. funded this trust with a

significant portion of AC stock. The trust instrument provided that a trust would

be created for each of the beneficiaries upon Mr. Alterman, Sr.’s death.

      In addition, Mr. Alterman, Sr.’s will provided that a trust would be created

for each of his sons upon his death, and each of these trusts would receive one-

third of 50% of his residuary estate.6

      Mr. Alterman, Sr. died in 2001. Immediately before his death, AC was

owned as follows:

      6
        The probate court accepted a revised will that Mr. Alterman, Sr. had never
signed as his final will, which provided for these three separate trusts as well, with
slightly different terms.
                                          -6-

 [*6]                                                    Ownership of shares
                       Shareholder                       outstanding (percent)
            Sidney Alterman Irrevocable Trust                    78.17
            Sidney Alterman                                      10.22
            John Alterman                                         3.83
            Richard Alterman Revocable Trust                      3.86
            Bryan Alterman Revocable Trust                        3.88
            John Alterman Trust U/A/D 12/27/95                    0.05

        The Alterman brothers each had two trusts for their benefit following the

death of Mr. Alterman, Sr.: their preexisting interest in the Sidney Alterman

Irrevocable Trust and the trusts that were created under the terms of Mr. Alterman,

Sr.’s will. They agreed to consolidate their interests into one trust apiece instead

of two. The Sidney Alterman Irrevocable Trust remained in existence for

administrative convenience well after Mr. Alterman, Sr.’s death. The Alterman

brothers chose to separate it into three separate trusts for filing purposes in

November 2003. These three separate trusts are the petitioner trusts in these cases,

the John M. Alterman Trust U/A/D May 9, 2000, the Bryan S. Alterman Trust

U/A/D May 9, 2000, and the Richard C. Alterman Trust U/A/D May 9, 2000.7


        7
       The share purchase agreement executed December 5, 2003, lists the sellers
as: the Sidney Alterman Irrevocable Trust, Mr. Alterman, Sr.’s Estate, John
Alterman individually, the Richard Alterman Revocable Trust, the Bryan Alterman
                                                                     (continued...)
                                         -7-

[*7] When Mr. Alterman, Sr. died, his family was faced with an estate tax bill of

$12,502,994. Considering the estate’s significant tax liability and the fact that

most of the estate’s assets were tied up in AC stock, the estate borrowed

$12,502,994 from AC to pay the tax bill. AC reflected this transaction as a note

receivable on its balance sheet.

II.   Decision To Sell AC

      Richard Alterman became president and chairman of the board of AC after

his father’s death in 2001, and he remained in that position until AC’s stock was

sold to MidCoast Investments, Inc. (MidCoast), on December 5, 2003. Like his

older brother John, Richard was stricken with Parkinson’s disease, and the

youngest brother, Bryan, had long been sidelined battling multiple bouts of cancer.

Faced with the loss of their father, their own failing health, the loss of working

capital in the business due to the necessity of borrowing corporate funds to satisfy




      7
       (...continued)
Revocable Trust, and the John Alterman Trust U/A/D 12/27/95. This fact is
relevant because the Commissioner argues that the three petitioner trusts, the John
M. Alterman Trust U/A/D May 9, 2000, the Bryan S. Alterman Trust U/A/D May
9, 2000, and the Richard C. Alterman Trust U/A/D May 9, 2000, are transferees of
transferees (Sidney Alterman Irrevocable Trust and the Estate of Sidney Alterman
from AC), whereas the Commissioner argues that the Estate of John Marks
Alterman is an initial transferee (from AC).
                                         -8-

[*8] the estate tax liability, and the declining profitability in the operations of AC,

the Alterman brothers decided to sell AC.

      Richard hired Carter Morse & Co. to help find a buyer and publicly

announced that AC would be sold and cease operations on December 4, 2002.

The Altermans’ primary contact at Carter Morse was Frank Morse, a managing

director who had a background in finance and banking and who specialized in

financial advisory services for mergers, acquisitions, and divestitures. Although

Carter Morse presented the Altermans with two or three potential buyers, the

Altermans did not reach a deal with any of them.

      After the decision to sell had been made and the process was under way, the

Alterman brothers decided that it would be best to sell the assets of AC; the

Altermans had run sale scenarios that showed they could get a better price this

way than if they sold AC outright. These scenarios always included payment of

all of AC’s tax liabilities. Over the course of 2003, AC sold all of its trucks and

terminals, resulting in capital gains.

      The Altermans also retained the Berger Singerman law firm to represent and

advise them during the sale process and to ensure that AC complied with its

obligations under the Worker Adjustment and Retraining Notification Act (WARN
                                        -9-

[*9] Act).8 The main attorneys that worked for the Altermans on the sale of AC

were Robert Barron, Nick Jovanovich, and Sheldon Polish. Mr. Barron was a

veteran in the corporate law field with experience in both buy- and sell-side

transactions, and he also served as chair of the Business Law Section of the

Florida Bar Association’s Legal Opinion Standards Committee. Both Mr.

Jovanovich and Mr. Polish were tax attorneys. Mr. Jovanovich, in addition to

being a tax lawyer, was a licensed certified public accountant (C.P.A.), had an

LL.M. in taxation, was certified by the Florida Bar Association as a tax attorney,

and had approximately 30 years’ experience in corporate tax and tax controversy.

Mr. Polish had approximately 40 years’ experience and also was a C.P.A. He

specialized in income tax law and had previously worked for the IRS, Ernst &

Young, and Greenberg Traurig, and he helped dozens of clients sell their business

interests.

       Finally, AC’s longtime accountants, Lefcourt, Billig, Tiktin & Yesner, P.A.,

assisted the Altermans in the sale process. Jeffrey Lefcourt had known the


       8
       The Worker Adjustment and Retraining Notification Act (WARN Act),
Pub. L. No. 100-379, secs. 1-10, 102 Stat. at 890-894 (1988), requires that a
covered employer send employees notice of its intention to cease operations and
terminate their employment at least 60 days before doing so. The WARN Act sec.
3 was amended by the Workforce Innovation and Opportunity Act, Pub. L. No.
113-128, sec. 512(kk), 128 Stat. at 1722 (2014).
                                       - 10 -

[*10] Alterman family since he was a child, and his firm became AC’s accountants

in the early 1990s.

       Ultimately, these advisers presented the shareholders with two bids to

purchase their shares from two potential purchasers: MidCoast Investments, Inc.

(MidCoast), and the Diversified Group, Inc. (Diversified).

III.   Negotiations With MidCoast and Diversified

       MidCoast learned that AC was planning to sell, and it initially approached

Mr. Lefcourt to make a bid.

       Mr. Polish had previously dealt with Graham Paul Wellington, a MidCoast

representative, and Mr. Polish had a favorable impression of Midcoast. After the

initial overtures, MidCoast and AC’s attorneys began negotiating a deal for

MidCoast to buy AC’s stock and reengineer AC into an asset recovery business.

       After several meetings over a period of six months that included Richard

Alterman, members of the AC team of attorneys and advisers, and Donald

Stevenson and Mr. Wellington of MidCoast, Mr. Stevenson presented the

Alterman team with a letter of intent from MidCoast to purchase the AC shares.

       MidCoast described its plan for a viable business and provided significant

representations, warranties, and covenants to the shareholders. MidCoast

represented that it had been in the financial services business for many years and
                                       - 11 -

[*11] that it was “among the top 25 largest purchasers of delinquent consumer

receivables in the United States.” MidCoast explained that it wanted to purchase

the shares of AC because it wanted to enter into a joint venture agreement to

purchase distressed credit card receivables and that MidCoast needed to quickly

purchase this debt. At trial Mr. Jovanovich testified:

      My understanding is that MidCoast, because they had a history of
      acquiring businesses that were in the debt recovery service business,
      that they intended in the initial phase to avail themselves of write-
      offs, legitimate write-offs. And to the extent that there was any tax
      liability that was required to be reported on the 2003 tax return, that
      that tax liability would be fully paid by the company.

MidCoast described its business plan as a deferral of tax and not an elimination of

AC’s putative tax.

      The Altermans’ advisers spent time performing due diligence on MidCoast

and what it planned to do. Mr. Morse contacted MidCoast references to get their

impressions of MidCoast. Mr. Barron was reassured by the fact that MidCoast

was represented by what he considered to be a reputable law firm, Akerman

Senterfitt, and that the escrow agent being used was another reputable firm,

Morris, Manning & Martin, LLP. Mr. Barron also testified that when he met Mr.

Stevenson, he was “a sharp, impressive person.” Mr. Barron generally understood

MidCoast’s business plan, and the Altermans’ tax attorneys, Mr. Jovanovich and
                                         - 12 -

[*12] Mr. Polish, understood that there were legitimate ways that MidCoast could

achieve its business plan.

        Mr. Barron generally understood that “MidCoast was an experienced

collector of delinquent credit card receivables” and would defer AC’s taxable gain

through this business model. He understood that “MidCoast had arrangements

with the banking organizations that they did either a joint venture of [sic] some

type of transaction with the banking organization where they would put credit card

receivables into Alterman Corporation.” MidCoast would use the cash in the

target companies to buy the receivables or interests in the joint venture that owned

the receivables. “And that there would be a write down of those credit card

receivables based upon collectability * * * [which] would cause a deferral of the

tax.”

        Mr. Jovanovich testified that the tax “deferral sounded plausible, absolutely,

particularly in pre-2004.” He further explained that the tax deferral was “plausible

because there were certainly avenues to defer the tax, and one of the avenues

which existed back then was the ability to do partnerships, contribute built in

losses, and keep the inside basis at a high amount”.

        Mr. Polish understood MidCoast’s plan to include “startup phase” writeoffs.

MidCoast’s representatives explained that “over the years, that they have been
                                         - 13 -

[*13] doing this business, that at the time of the acquisition of this, that there were

certain things that could be written off in the startup phase of the business that

wouldn’t be actually worth anything in the future.” Then after the initial writeoff,

the business would begin generating income in the subsequent years and then

“they’d have to pay the tax.” Mr. Polish, a seasoned and experienced tax lawyer

and C.P.A., thought that MidCoast’s tax deferral plan “sounded reasonable”.

      Mr. Lefcourt, the accountant for AC and the Altermans’ longtime family

friend, understood MidCoast’s business model to be buying delinquent credit card

receivables and “that there were early write-offs, which would defer * * * much of

that tax, if not all of that tax, to a later period. And therefore, they could use all

the money that they got in the purchase, towards their * * * activities.”

      The MidCoast representatives’ assurances that MidCoast had a history of

success in this business bolstered the confidence of the Altermans’ attorneys and

advisers. Mr. Polish believed that MidCoast would operate AC and that it was a

“g[o]ing concern that was solvent that could pay the taxes.” Mr. Jovanovich

testified that he did not believe Notice 2001-169 applied to this transaction because

      9
       Notice 2001-16, 2001-1 C.B. 730, Intermediary Transactions Tax Shelter,
indicated that the IRS may challenge certain intermediary transactions and their
reported tax results and that the IRS designates these transactions as “listed
transactions” for purposes of section 1.6011-4T(b)(2), Temporary Income Tax
                                                                        (continued...)
                                       - 14 -

[*14] there was no intermediary, no plan to use an intermediary, and no plan to

avoid paying the tax liability.

      The final purchase price for the AC shares was $4,989,331. MidCoast used

the following purchase price formula: cash plus estimated tax prepayments minus

44.5% of AC’s 2003 projected income tax liability.

      While these negotiations were ongoing, Mr. Morse presented the Altermans

with a rival bid from Diversified to purchase their shares. Diversified’s bid would

give the Alterman shareholders approximately $1 million more than MidCoast’s

bid.10 Diversified sent the Altermans’ advisers a copy of a memo it had prepared

to show that its proposal was distinguishable from the transaction in Owens v.




      9
       (...continued)
Regs., 65 Fed. Reg. 11207 (Mar. 2, 2000), and section 301.6111-2T, Temporary
Income Tax Regs., 65 Fed. Reg. 11218 (Mar. 2, 2000).
      10
        This differential was based on a comparison of Diversified’s bid and
MidCoast’s initial bid. MidCoast later increased its purchase price. MidCoast
claimed in its September 30, 2003, letter to Mr. Barron that it was “being
presented with opportunities to purchase charged-off receivables at attractive
prices due to a soft market and the need for certain banks to report increased
earnings in the third and fourth quarters. MidCoast is prepared to pass onto the
Shareholders such savings”.
                                        - 15 -

[*15] Commissioner.11 Mr. Jovanovich, however, “vehemently disagreed with

* * * [Diversified’s] analysis.”

      The Altermans’ advisers told MidCoast about Diversified’s bid. In

response, MidCoast in a letter dated September 30, 2003, told the Altermans that

MidCoast “has no competitors” and that other transactions were tax shelters. In

this letter MidCoast also promised it would provide the Alterman shareholders

with a postclosing cash pro forma showing how the new asset recovery business

would operate, which it did. MidCoast wrote in this letter that the pro forma

financial statement was “based on actual historical experience, as well as industry-

wide data.” At this point, the Altermans’ attorneys did further research into

transferee liability and determined that Diversified’s offer lacked economic

substance and business purpose.

      The Altermans’ attorneys met again with Diversified and asked Diversified

to further describe its business and to provide them with guaranties: (a) that AC

would not be dissolved for at least three years; (b) that AC would reinvest net

cashflows for at least three years; (c) that no actions would be taken to cause

      11
        568 F.2d 1233, 1237 (6th Cir. 1977) (finding that “[a] taxpayer, working
within the law, may legitimately seek to avoid taxes”, however “[w]hat the law
does not permit a taxpayer to do * * * is to cast transactions in forms when there is
no economic reality behind the use of the forms”), aff’g in part, rev’g in part 64
T.C. 1 (1975).
                                        - 16 -

[*16] transferee liability; and (d) that AC would retain a specified amount of cash

to pay its tax liabilities after the sale. Diversified refused, and consequently the

Altermans declined to move forward with Diversified despite its higher offer.

Indeed, Mr. Lefcourt recalled that Diversified “didn’t want to talk about what their

business was. Almost like it was none of our business. And they [the Berger

Singerman attorneys] got terribly concerned about it.”

      MidCoast, by contrast, provided the Altermans with significant

representations, covenants, and warranties, some of which MidCoast offered

initially and others for which the Altermans’ advisers negotiated. MidCoast met

with the Altermans’ advisers again on October 7, 2003. Not only in person at that

meeting but also in further correspondence, MidCoast promised that AC would not

be dissolved after the sale but would continue in accordance with the

representations made to the selling shareholders.

      Indeed, this promise was memorialized. The Altermans’ attorneys fought

for an ongoing corporate net worth requirement of $1.5 million continuing at least

four years after the sale to ensure that “the purchaser was going to cause the

corporation to pay the deferred tax liability as it went due.” The advisers wanted

to ensure “that the purchasers had the wherewithal in order to effectuate that

payment”, and it was “critically important” to both the advisers and the Altermans.
                                         - 17 -

[*17] The minimum net worth requirement was there to make sure funds were

“available to pay * * * any of that tax liability that was due at the end of the year”.

Mr. Barron drew additional confidence in the viability of the transaction from a

direct representation in the share purchase agreement that the MidCoast entities

that would be purchasing AC had a net worth of $10 million, a provision for

which the Altermans had to negotiate.

      There was a lot of back and forth between the AC shareholders’ attorneys

and MidCoast’s counsel. One of the areas that MidCoast was investigating was

AC’s potential environmental liabilities. After the AC shareholders signed a final

letter of intent dated October 14, 2003, MidCoast through its counsel at Akerman

Senterfitt did extensive due diligence on AC. Mr. Barron coordinated with AC to

provide the information that MidCoast requested. Mr. Barron testified that the AC

shareholder’s attorneys were constantly communicating with MidCoast’s lawyers

to provide MidCoast with additional information that it had requested.

MidCoast’s due diligence period was extended twice.

      The final share purchase agreement included the following promises by

MidCoast:

      -      MidCoast would not allow AC to be dissolved or liquidated for
             at least four years and had no intention of allowing that after
             four years either.
                                         - 18 -

[*18] -        MidCoast would reengineer AC into an asset recovery
               business.

         -     MidCoast would ensure that AC invested at least $1,450,000
               into delinquent receivables and would reinvest the proceeds
               into more delinquent receivables for the next 10 years.

         -     MidCoast would ensure that AC maintained a net worth of at
               least $1.5 million for at least four years.

         -     MidCoast would “cause * * * [AC] to pay the Deferred Tax
               Liability to the extent that the Deferred Tax Liability is due
               given the Company’s post-closing business activities and shall
               file all federal and state income tax returns on a timely basis
               related thereto.”

         -     MidCoast would indemnify the former shareholders against any
               and all claims, including any damages, losses, deficiencies,
               liabilities, costs, and expenses resulting from and relating to
               any “misrepresentation, breach of warranty or nonfulfillment of
               any agreement or covenant on the part of any Purchaser under
               this Agreement”.

         -     MidCoast would represent that the “combined net worth of
               Purchasers exceeds $10,000,000 as of the date hereof and as of
               the Closing Date.”

The share purchase agreement also incorporated by reference an escrow agreement

that controlled the flow of funds and gave specific instructions to the escrow

agent.

         The Altermans’ advisers were not asked to write a formal tax opinion, but

their tax attorney, Mr. Jovanovich, said that “we didn’t feel that [a] tax opinion
                                         - 19 -

[*19] would have been of value * * * [b]ecause the opinion would have had reps,

representations, factual assumptions, and again we would have been relying on the

same assumptions that we put into the purchase agreement.” Indeed, the

Commissioner’s own expert agreed that an “opinion writer in this circumstance

would have to assume all of those representations contained in the Share Purchase

Agreement were true”.

      Richard Alterman testified that he relied on his attorneys to evaluate the

MidCoast deal and requested that they advise him on the transaction’s validity.

He explained that he understood “due diligence” to mean that “you look at the

details of the transaction and * * * determine whether you want to go forward.”

He relied on his attorneys to do this.

IV.   Redemption Transaction

      Before the AC shareholders signed the share purchase agreement with

MidCoast, MidCoast required that AC spin off all the assets and liabilities that

MidCoast did not want for purposes of its new asset recovery business. AC

formed and was the 100% owner of Alterman Enterprises, LLC, which filed its

articles of organization on October 23, 2003. Alterman Enterprises then formed

six wholly owned subsidiary LLCs. Between October 27 and November 5, 2003,
                                       - 20 -

[*20] AC transferred its trucking terminals and associated liabilities to Alterman

Enterprises.

      As part of the partial redemption AC transferred the $12,502,994 note

receivable, which represented the money borrowed to pay Mr. Alterman, Sr.’s

estate tax, to Alterman Enterprises. After the redemption Alterman Enterprises

had $27,463,444 of equity, which included the $12,502,994 note receivable, and

AC had sufficient funds remaining to cover its liabilities (including the putative

tax liabilities) with net equity of $1,501,336. The redemption did not render AC

insolvent, a fact acknowledged by the Commissioner’s expert.

      On November 12, 2003, AC then distributed the Alterman Enterprises stock

to its shareholders in exchange for part of their AC stock. This represented a

partial redemption of the AC shares. Specifically, AC redeemed 454,644 shares of

AC stock, leaving 24,854 remaining AC shares outstanding. The value per share

was approximately $60.41. After the redemption the AC shareholders held

interests in Alterman Enterprises in the same proportion as their interests in AC.12

      12
        Specifically, the ownership percentages of both AC and Alterman
Enterprises were:
                                                       Ownership of shares
                    Shareholder                        outstanding (percent)
       Sidney Alterman Irrevocable Trust                     78.1692
                                                                       (continued...)
                                      - 21 -

[*21] In late 2002 AC entered into an agreement to sell its name “Alterman”, its

logo, and its Florida customer list to Colorado Boxed Beef Co.

V.    Sale of AC Stock to MidCoast

      MidCoast through its two domestic subsidiaries, MidCoast Acquisitions

Corp. (MAC) and MidCoast Credit Corp. (MCC) (collectively MidCoast

acquisition vehicles), purchased 100% of the outstanding shares of AC stock.

MAC purchased 25% and MCC purchased 75% of the AC stock. The

consummation of the purchase was controlled by the share purchase agreement,

described previously. The parties used Morris, Manning & Martin as the escrow

agent for the sale, which Mr. Barron considered to be reputable because he had

previously closed a transaction where Morris, Manning & Martin had served as

escrow agent. The MidCoast acquisition vehicles borrowed $5,080,000 from

Sequoia Capital, LLC, to fund the $5,059,331 purchase price.13 Under the terms

      12
       (...continued)
       Sidney Alterman                                     10.2207
       John Alterman                                        3.8303
       Richard Alterman Revocable Trust                     3.8578
       Bryan Alterman Revocable Trust                       3.8757
       John Alterman Trust U/A/D 12/27/95                   0.0463

      13
        MAC borrowed $1,270,000 and MCC borrowed $3,810,000. MAC agreed
to repay $1,276,350 and MCC agreed to repay $3,829,050 to Sequoia. We find
                                                                 (continued...)
                                       - 22 -

[*22] of the loan agreements, MAC and MCC had to repay $5,105,400

collectively on demand, with the difference representing implied interest on the

loan.14

      The escrow agreement required the separation of funds. First, Sequoia, as

lender to the MidCoast acquisition vehicles, had to deposit the purchase price into

Morris, Manning & Martin’s Interest on Lawyers Trust Account (IOLTA). Next,

AC had to deposit its cash into the IOLTA. The escrow agreement provided that

at all times the AC funds would remain AC’s exclusive property. After those

deposits, Morris, Manning & Martin would pay out the purchase price to the AC

shareholders. Finally, Morris, Manning & Martin would credit the AC funds back

to a new AC bank account in the exact amount that AC had deposited into the

IOLTA. All these steps were contingent on the buyer’s and seller’s following

through with the agreement, and Morris, Manning & Martin was instructed to stop

the execution of the escrow agreement if one or both parties failed to abide by the

terms of the agreement.


      13
         (...continued)
that the difference between the amounts advanced and the amounts that MAC and
MCC agreed to repay represents implied interest.
      14
         These loans from Sequoia to the MidCoast acquisition vehicles were
satisfied the same day that they were entered into by the proceeds of the sale of the
AC shares to Sequoia.
                                        - 23 -

[*23] The sale of AC by the Alterman shareholders to the MidCoast acquisition

vehicles on December 5, 2003, had the following steps:

      1.     Sequoia, as lender, deposited $5,080,000 into the escrow
             account of Morris, Manning & Martin at Wachovia Bank,
             which was an IOLTA.

      2.     AC deposited its $6,455,772.50 cash into the escrow account.

      3.     Morris, Manning & Martin sent $5,059,331 total to the
             Alterman shareholders, representing the purchase price paid by
             MidCoast, plus reimbursement for professional fees, and less a
             $20,000 holdback pending the outcome of a Florida State
             intangible property tax exam.

      4.     Morris, Manning & Martin sent $5,167.25 to MAC.

      5.     Morris, Manning & Martin sent $15,501.75 to MCC.

      6.     Morris, Manning & Martin sent $6,455,772.50 to AC at its
             Deutsche Bank account.

      The escrow agreement had wire instructions for specific accounts for the

former Alterman shareholders but not specific account information for AC’s

funds; however, the escrow agreement specified that AC would instruct Morris,

Manning & Martin where to send the funds.15 AC instructed the funds to be sent

      15
        The escrow agreement directed the “Escrow Agent to make the following
disbursements: * * * (ii) after, but not before, the occurrence of the Purchase
Price Delivery Time, to deliver the Alterman Escrow Funds to Alterman and to
disburse Alterman Escrow Funds as Alterman shall direct (the parties
acknowledging that, at such time, Alterman shall be owned and controlled by the
                                                                        (continued...)
                                       - 24 -

[*24] to its new bank account at Deutsche Bank, and the funds were sent that day,

December 5, 2003.

      At the time of the sale of the AC stock to MidCoast, AC had assets of

$6,455,772.50 in cash and $1,330,321 in prepaid taxes and an expected tax

liability for 2003 of $6,284,675, resulting in net equity of $1,501,418.50.16 During

the sale on December 5, 2003, AC’s cash was held in Morris, Manning & Martin’s

IOLTA as required under the escrow agreement. After the sale, that cash was

transferred to AC’s account at Deutsche Bank. Accordingly, AC again had assets

of $6,455,772.50 in cash and $1,330,321 in prepaid taxes and an expected tax

liability for 2003 of $6,284,675, resulting in the same net equity of $1,501,418.50

after the transaction on December 5, 2003.




      15
       (...continued)
Buyers).”
      16
        $6,455,772.50 + $1,330,321 - $6,284,675 = $1,501,418.50. This net
equity reflects an additional $82.50 of equity over the amount existing on
November 12, 2003.
                                         - 25 -

[*25] VI.    Sequoia’s Immediate Purchase of AC Stock Without Former
             Shareholders’ Knowledge

      Unbeknownst to the Altermans or their advisers, MidCoast and Sequoia had

an agreement for Sequoia to immediately purchase the AC shares from the

MidCoast acquisition vehicles. MidCoast and its representatives had always

maintained that MidCoast planned to reengineer AC into an asset recovery

business, and it made significant promises to this effect in the share purchase

agreement. Indeed, MidCoast’s own representative that the Commissioner called

as a witness at trial, Mr. Wellington, testified:

            QUESTION: In any of the meetings that you attended with Mr.
      Alterman and/or any of his representatives, any of them, was it
      communicated to anyone on the Alterman side of the table, that
      MidCoast intended to immediately resell the Alterman Corporation as
      soon as it closed on the acquisition of that corporation?

             MR. WELLINGTON: To the contrary.

            QUESTION: To the contrary? What do you mean by to the
      contrary?

             MR. WELLINGTON: It was expressed that it was being
      acquired to be reengineered into the credit card deduction business,
      that asset recovery business.

      MidCoast represented to the Altermans and their advisers that the tax

liability “was to be offset through the use of certain high basis, low market value

assets, including the purchase and collection of credit card receivables.” As Mr.
                                          - 26 -

[*26] Wellington candidly testified, MidCoast misled the Altermans, their

attorneys at Berger Singerman, and their C.P.A. Mr. Lefcourt.

          Further, the Commissioner’s own expert testified that neither the Altermans

nor their attorneys had any way of knowing that MidCoast would sell the stock to

Sequoia or that MidCoast had lied to them. That this scheme was not reasonably

discoverable by the Altermans was further confirmed by IRS Revenue Agent Anne

Tinkell, who later investigated MidCoast for promoter penalties. She testified that

she tried to uncover fraud by MidCoast and kept asking questions of MidCoast

during her four-year investigation. Ultimately, after being repeatedly told that

MidCoast was in the business of reengineering target corporations into asset

recovery businesses and after doing research on MidCoast that indicated it was

one of the 25 largest debt collection agencies in the country, she concluded: “I

was unable to uncover any evidence of false and fraudulent statements [by

MidCoast]. It doesn’t mean that it wasn’t there; I just was unable to get my hands

on it.”

          Neither the Alterman brothers nor their advisers knew about MidCoast’s

immediate sale of the AC stock to Sequoia until the IRS subpoenaed them years

later in 2006. When Mr. Barron finally discovered that MidCoast had not caused

AC to pay its 2003 tax liability, he was “shocked and stunned”.
                                        - 27 -

[*27] Mr. Jovanovich nearly “fell off * * * [his] chair” when he heard the news.

Mr. Jovanovich testified that the immediate purchase by Sequoia was something

with which he “would never associate myself or allow clients to associate

themselves with.” As noted by Mr. Barron, Sequoia’s immediate purchase of AC

was “completely opposite of what we were told.” MidCoast concealed its

intended sale of the AC shares to Sequoia from the Altermans and their advisers,

and MidCoast’s intent was not reasonably discoverable by the Altermans or their

advisers.

      After Sequoia took over AC it contributed $10.5 million to AC’s Deutsche

Bank account on December 8, 2003. After this transfer, AC had assets of

$16,955,772.50 in cash and $1,330,321 in prepaid taxes, and it had $6,284,675 in

deferred tax liabilities, resulting in a net balance of $12,001,418.50.

      AC then sent $16,780,000 to an account in the name of Delta Trading

Partners, LLC, in the Cook Islands on December 9, 2003. Neither party offered

evidence about who owns this account or who holds an interest in Delta Trading

Partners or where the money went after this point. AC further sent $169,679 to

MCC on December 10, 2003.

      On February 3, 2004, MCC and MAC paid Alterman Enterprises the

$20,000 held back under the share purchase agreement after they were informed
                                        - 28 -

[*28] by Mr. Barron that AC’s State intangible property tax exam had resulted in a

ruling that AC had overpaid its tax.

         In March 2004 AC filed a Form 4466, Corporation Application for Quick

Refund of Overpayment of Estimated Tax, requesting a refund of $1,329,848. The

IRS issued a refund check to AC for this amount, and AC deposited $1,329,848

into its Deutsche Bank account in April 2004. On May 17, 2004, AC transferred

$1,329,848 from its Deutsche Bank account to MCC’s Suntrust Bank account.

The transfer indicated that it was for the benefit of AC.

         AC also filed a Form 7004, Application for Automatic Extension of Time

To File Corporation Income Tax Return, in March 2004. On July 20, 2004, AC

filed its Form 1120, U.S. Corporation Income Tax Return, for the tax year ending

December 31, 2003, stating that it owed no tax. AC claimed a deduction for losses

from interest rate swap option sales, which offset the deferred gain that MidCoast

had promised to pay under the share purchase agreement of $6,284,675 in deferred

taxes.

         AC filed returns for 2004 and 2005. The IRS received AC’s Form 1120 for

the 2004 tax year on March 27, 2005. This form showed interest income of $391.

The Deutsche Bank statement for the account in AC’s name for June 2004 shows
                                       - 29 -

[*29] year-to-date “Dividends/Interest” of $391.33. On March 6, 2006, the IRS

received AC’s Form 1120 for the 2005 tax year.

      AC changed its name to Enterprises of Miami and administratively

dissolved in September 2005 because it did not file its annual report.

VII. Audit

      The IRS audited AC’s 2003 Form 1120 return and disallowed the loss

deduction. The examination began in 2005. The IRS issued a notice of deficiency

to AC on July 18, 2007, determining a deficiency of tax of $5,230,234 and an

accuracy-related penalty under section 6662(h)17 of $2,092,094. AC did not file a

petition to challenge the notice.

      The IRS took minimal steps to try to collect the 2003 tax liability from AC

or to pursue related entities after it assessed the tax in December 2007. Revenue

Officer Ted Hanson was assigned to the case originally in May 2006. Officer

Hanson first made transferee liability recommendations before further

investigating AC. He said: “The purpose of this investigation is to determine if

there is collection potential from Alterman Corporation should a transferee

assessment under IRC 6901 be recommended against it.” It is unclear what

      17
        Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
                                       - 30 -

[*30] Officer Hanson investigated, but he said he could not determine whether

there were any assets remaining in AC. Remarkably, according to the record

before us, nothing was done for over a year.

      The next revenue officer to do substantive research on the case was Ann

Taylor, who began to work the case on May 12, 2008; but she did not vigorously

pursue leads to find AC assets. Officer Taylor determined early in her

investigation that AC had changed its name to Enterprises of Miami. Officer

Taylor testified that she did not pursue any leads that were given to her about

people she had identified that were connected with Enterprises of Miami but

focused exclusively on AC. Officer Taylor did not use the bank account

information that she received to attempt to trace funds that appeared to have been

wired offshore. Officer Taylor then declared in her final report dated March 16,

2009, that AC’s 2003 tax liability was uncollectible.

      On December 22, 2009, the IRS asserted AC’s putative tax liability against

the three petitioner trusts as transferees of transferees under section 6901. The

notices of liability were sent to the Bryan S. Alterman Trust U/A/D May 9, 2000,

the Richard C. Alterman Trust U/A/D May 9, 2000, and the John M. Alterman

Trust U/A/D May 9, 2000, and in those notices the IRS determined that each of the

recipients was liable as a transferee of Mr. Alterman, Sr.’s estate and the Sidney
                                       - 31 -

[*31] Alterman Irrevocable Trust, who were initially transferees of AC for the

entire amount of its deficiency of $5,230,234 and accuracy-related penalty of

$2,092,094 for 2003, plus statutory interest.

      The IRS further issued a related notice of liability on June 16, 2011, to

petitioner John Alterman determining he was liable as an initial transferee of AC

for $1,243,024 of the deficiency and accuracy-related penalty, plus interest.

VIII. Former AC Shareholders Prevail Against MidCoast for Breach of Contract
      and Fraud

      Neither the Altermans nor their advisers learned of MidCoast’s fraud until

after the IRS began auditing AC’s 2003 Form 1120. As part of that examination,

the Altermans received information document requests from the IRS in May 2006.

Mr. Barron wrote to MidCoast on behalf of the former shareholders in late May

2006 requesting that it honor the share purchase agreement and pay costs

associated with the IRS’ requests for information.

      The Altermans later filed suit in February 2010 against MidCoast, Michael

Bernstein, and Donald Stevenson for breach of contract, fraud in the inducement,

and conspiracy to commit fraud.18

      18
        Alterman v. MDC Credit Corp., No. 10-09439 CA 04 (Fla. Cir. Ct. final
judgment entered Apr. 19, 2012). Mr. Stevenson gave a deposition in this case
and reached a settlement with the Altermans. The Commissioner filed a motion in
                                                                   (continued...)
                                        - 32 -

[*32] A Florida State court found in favor of the Altermans and awarded them a

judgment on April 19, 2012, against MidCoast for approximately $683,000 for the

amounts that the Altermans had already spent in responding to the IRS inquiries

and claims. Further, the court held that MidCoast had to indemnify the former

shareholders against further IRS liability as a result of AC’s 2003 tax liability.

      In 2011 Mr. Stevenson testified in Griffin v. Commissioner,19 a case

involving another stock sale to MidCoast. In part of his testimony Mr. Stevenson

described MidCoast’s routine practice and profiles of typical target corporations it

sought to acquire, MidCoast’s practice of purchasing and reengineering the targets

into asset recovery businesses that purchased receivables, and how this method

was used to defer tax. He further explained MidCoast’s general practice of using a

formula for the purchase price of the target’s assets less a percentage of its tax

liability. Mr. Stevenson also testified that his role for MidCoast was to identify

potential target corporations and to relay information about MidCoast to those



      18
        (...continued)
limine to exclude Mr. Stevenson’s deposition testimony; however, petitioners seek
to have his deposition admitted as evidence in these proceedings. We declined to
rule on this motion at trial.
      19
        T.C. Memo. 2011-61. Petitioners seek to have this testimony admitted as
well, but the Commissioner filed a motion in limine to exclude it. We declined to
rule on this motion at trial.
                                          - 33 -

[*33] potential targets; however, he typically did not have any further contact with

the former shareholders of the target corporations MidCoast purchased after he

sent them a letter of intent.

IX.   MidCoast Principals Indicted

      In 2012 the U.S. Government indicted many of the MidCoast principals in

United States v. Veera.20 The Government brought charges against Mr. Stevenson,

among others, and alleged in its indictment that MidCoast’s acquisition staff “was

misleading the target corporations’ shareholders and their representatives about

how MidCoast Financial would use the corporations after they were purchased.”21

Indeed, the Government further alleged that MidCoast

      concealed MidCoast Financial’s actual business model, in particular,
      of buying and immediately re-selling target corporations from its
      acquisition staff so that the target corporations’ income taxes could be
      evaded. This concealment necessarily caused the MidCoast Financial
      acquisition staff to describe MidCoast Financial’s business model




      20
       United States v. Veera, No. 12-444 (E.D. Pa. Oct. 1, 2013) (superseding
indictment). In addition, there were criminal informations filed in United States v.
Ahn, No. 12-319 (E.D. Pa. filed June 26, 2012), and United States v. Del Bove,
No. 13-422 (E.D. Pa. filed Aug. 22, 2013). Both Mr. Ahn and Ms. Del Bove were
involved with MidCoast at the time that the Altermans sold their stock in AC to
MidCoast.
      21
           Veera, No. 12-444, slip op. at 8.
                                           - 34 -

       [*34] falsely to potential selling shareholders of target corporations and
       their representatives.[22]

X.     Trial

       Petitioners timely petitioned the Court in response to their respective notices

of liability.

       The three petitioner trusts were created from the Sidney Alterman

Irrevocable Trust that was governed by Florida law as well as from Mr. Alterman,

Sr.’s will that was probated in Florida. The mailing address of the John M.

Alterman Trust U/A/D May 9, 2000 was in South Carolina when it petitioned.

The mailing address of the Bryan S. Alterman Trust U/A/D May 9, 2000 was in

Colorado when it petitioned. The mailing address of the Richard C. Alterman

Trust U/A/D May 9, 2000 was in Florida when it petitioned.

       John Alterman resided in Florida when he petitioned. Before trial John

Alterman passed away after a long battle with Parkinson’s disease, and a

representative of his estate took over his proceeding.

       The Court consolidated the cases at docket nos. 6936-10, 6940-10, 7071-10,

and 20636-11 for trial, briefing, and opinion. Trial was held in Chicago, Illinois.




       22
            Veera, No. 12-444, slip op. at 14.
                                           - 35 -

[*35]                                   OPINION

        We must decide whether petitioners are liable for AC’s unpaid 2003 tax and

penalties under Florida’s Uniform Fraudulent Transfer Act (FUFTA)23 and

whether the procedural requirements of section 6901 are met. Specifically, we

must determine whether the Estate of John Marks Alterman is liable as a transferee

of AC and whether petitioners John M. Alterman Trust U/A/D May 9, 2000, Bryan

Alterman Trust U/A/D May 9, 2000, and Richard Alterman Trust U/A/D May 9,

2000 are liable as transferees of the Sidney Alterman Irrevocable Trust and Mr.

Alterman, Sr.’s estate, which were alleged transferees of AC.

        The Commissioner determined that the redemption and stock sale should

not be respected and should instead be treated as AC’s liquidating and making a

distribution to its shareholders. The Commissioner asserts that the Court should

treat these transactions as “a sale of the assets of Alterman Corporation followed

by a distribution by Alterman Corporation of its proceeds to its shareholders.”

Thus, overall the Commissioner determined that “[i]n substance, for all

transactions (stock sale and redemption transaction), the shareholders received a

distribution in liquidation from Alterman Corporation.” Petitioners argue that the

Commissioner’s determinations were in error because the Commissioner cannot

        23
             Fla. Stat. Ann. secs. 726.101-726.112 (West 2012).
                                        - 36 -

[*36] prove that petitioners received fraudulent transfers under FUFTA and

because the Commissioner has not satisfied the procedural requirements under

section 6901 to pursue petitioners as transferees.

      Before deciding the multifaceted transferee liability issues, however, there

are outstanding evidentiary issues we must address.

I.    Admissibility of Mr. Stevenson’s Deposition and Testimony

      The parties presented several evidentiary issues at trial, and we reserved

ruling on the admissibility of Mr. Stevenson’s testimony in Griffin and his

deposition in Alterman v. MDC Credit Corp. Petitioners argue that both should be

admissible under rules 804(b)(1) and (3) and 807 of the Federal Rules of

Evidence. The Commissioner disagrees and argues that neither Mr. Stevenson’s

testimony nor his deposition is admissible because neither satisfies the

requirements set forth in the Federal Rules of Evidence.

      A.     Mr. Stevenson’s Testimony in Griffin Is Partially Admissible Under
             Rule 804(b)(1) of the Federal Rules of Evidence.

      Rule 804(b)(1) of the Federal Rules of Evidence allows statements of an

unavailable declarant to be admitted if the declarant gave former testimony “as a

witness at a trial, hearing, or lawful deposition, whether given during the current

proceeding or a different one; and * * * is now offered against a party who had--
                                        - 37 -

[*37] or, in a civil case, whose predecessor in interest had--an opportunity and

similar motive to develop it by direct, cross-, or redirect examination.”

      Mr. Stevenson’s prior testimony in Griffin meets the test under rule

804(b)(1) of the Federal Rules of Evidence. Mr. Stevenson is currently a criminal

defendant in Veera, and the parties stipulated that if required to take the stand as a

witness, Mr. Stevenson would assert his Fifth Amendment privilege and refuse to

testify. Thus, he is unavailable.24 Mr. Stevenson testified as a witness at the

Griffin trial where the Commissioner had an opportunity and similar motive to

develop his testimony. Therefore, we admit Mr. Stevenson’s testimony in Griffin

with certain caveats. Specifically, we admit those portions of Mr. Stevenson’s

testimony in Griffin that relate to his habit and to MidCoast’s routine practices.25

      B.       Mr. Stevenson’s Deposition in MDC Credit Corp. Is Not Admissible
               Under Rule 804(b)(1) or (3), or 807 of the Federal Rules of Evidence.

      We decline to admit Mr. Stevenson’s deposition in MDC Credit Corp. under

rule 804(b)(1) of the Federal Rules of Evidence. The Commissioner was not a



      24
           See Fed. R. Evid. 804(a).
      25
        See Fed. R. Evid. 406 (“Evidence of a person’s habit or an organization’s
routine practice may be admitted to prove that on a particular occasion the person
or organization acted in accordance with the habit or routine practice. The court
may admit this evidence regardless of whether it is corroborated or whether there
was an eyewitness.”).
                                         - 38 -

[*38] party in that case, and no predecessor to his interest with a similar motive to

develop Mr. Stevenson’s deposition was a party to it, either. Accordingly, Mr.

Stevenson’s deposition is not admissible under rule 804(b)(1) of the Federal Rules

of Evidence.

      Rule 804(b)(3) of the Federal Rules of Evidence allows a statement against

interest to be admitted if the declarant is unavailable as a witness. As already

discussed, Mr. Stevenson is unavailable. To be a statement against interest, the

statement must be one that “a reasonable person in the declarant’s position would

have made only if the person believed it to be true because, when made, it was so

contrary to the declarant’s proprietary or pecuniary interest or had so great a

tendency to invalidate the declarant’s claim against someone else or to expose the

declarant to civil or criminal liability”.26 The Supreme Court has explained that

rule 804(b)(3) of the Federal Rules of Evidence allows only “self-inculpatory”

statements to be admitted, but other statements that are collateral to the self-

inculpatory statements and are not themselves self-inculpatory are not admissible

under this rule.27 Indeed, rule 804(b)(3) of the Federal Rules of Evidence “does

not allow admission of non-self-inculpatory statements, even if they are made


      26
           Fed. R. Evid. 804(b)(3)(A).
      27
           Williamson v. United States, 512 U.S. 594, 600-602 (1994).
                                        - 39 -

[*39] within a broader narrative that is generally self-inculpatory.”28 Thus, we are

required to evaluate admissibility under rule 804(b)(3) of the Federal Rules of

Evidence on a statement-by-statement basis.

      First, we decline to admit Mr. Stevenson’s deposition in its entirety because

rule 804(b)(3) of the Federal Rules of Evidence requires us to evaluate each

statement separately to determine whether it is self-inculpatory, and the entire

deposition as a whole does not meet this standard.

      We further decline to admit any statements from Mr. Stevenson’s deposition

under rule 804(b)(3) of the Federal Rules of Evidence because his statements in

his deposition do not have a “great * * * tendency to * * * expose * * * [him] to

civil or criminal liability”.29 Two relevant statements that petitioners seek to admit

from Mr. Stevenson’s testimony are his testimony (as characterized by petitioners)

that the “Altermans had no reason to know that MidCoast was going to

immediately transfer the Alterman companies to a third party on the same day the

Alterman companies were acquired.” Petitioners further summarize a statement

they seek to admit stating: “Stevenson was unaware that there was going to be a



      28
     Williamson v. United States, 512 U.S. at 600-601; accord Pappas v.
Commissioner, T.C. Memo. 2002-127, 2002 WL 1035454, at *18.
      29
           Fed. R. Evid. 804(b)(3).
                                          - 40 -

[*40] wholesale transfer of the Alterman companies to a third party on the same

day that Alterman companies were acquired.” Neither of these statements exposes

Mr. Stevenson to civil or criminal liability. Indeed, these are statements in which

Mr. Stevenson was distancing himself from the misconduct of others.

Accordingly, we decline to admit the deposition for failure to meet that

requirement of rule 804(b)(3) of the Federal Rules of Evidence.

      Petitioners further argue that Mr. Stevenson’s deposition is admissible

under the residual, catchall exception found in rule 807 of the Federal Rules of

Evidence. The residual hearsay exception requires that

            (1) the statement * * * [have] equivalent circumstantial
      guarantees of trustworthiness;

               (2) * * * [be] offered as evidence of a material fact;

            (3) * * * [be] more probative on the point for which it is offered than
      any other evidence that the proponent can obtain through reasonable efforts;
      and

             (4) admitting it will best serve the purposes of these rules and
      the interests of justice.[30]

      Mr. Stevenson’s deposition does not satisfy the four requirements under rule

807 of the Federal Rules of Evidence. First, we do not have sufficient guaranties

of trustworthiness because we do not know when Mr. Stevenson settled his

      30
           Fed. R. Evid. 807(a)(1)-(4).
                                        - 41 -

[*41] dispute with the Altermans in relation to the time he gave this deposition.

We also do not know whether Mr. Stevenson’s interests were adverse to or aligned

with MidCoast’s at the time he gave this deposition. Next, even assuming that the

evidence is of a material fact and is more probative than other evidence, we have

duplicative evidence on these material facts elsewhere in the record. Finally, on

the issue of whether admitting this deposition would best serve the purposes of

these rules one of the factors that weighs heavily, while certainly not dispositive,

is the fact that the Commissioner was not represented during the deposition.

Accordingly, petitioners have not satisfied the four requirements under rule 807 of

the Federal Rules of Evidence, and thus we will not admit Mr. Stevenson’s

deposition testimony.

II.   Section 6901 Transferee Liability Overview

      Congress enacted section 6901 in 1926 as a procedural tool to allow the IRS

to proceed against transferees in the same way that it could proceed against other

taxpayers under the Code.31 The Commissioner can pursue both initial transferees

and successive transferees under section 6901.32




      31
           Starnes v. Commissioner, 680 F.3d at 425-426.
      32
           Sec. 6901(a), (c).
                                         - 42 -

[*42] A.        The Commissioner Must Prove Two Separate and Independent
                Conditions.

       The Commissioner has the burden to prove that petitioners are liable as

transferees, but he does not shoulder that burden for the underlying liability of the

taxpayer.33 Specifically, the Commissioner must prove two separate and

independent conditions: (1) that petitioners are “transferees” as defined under

section 6901 and (2) that an “independent basis * * * exist[s] under applicable

State law or State equity principles for holding the * * * [transferees] liable for the

taxpayer’s unpaid tax.”34 The Commissioner has this burden because the

“Government’s substantive rights * * * are precisely those which other creditors

would have under [State] law”, and accordingly, the Commissioner must show that

an independent basis exists under State law or State equity to hold transferees

liable for the putative tax.35




      33
        See sec. 6902(a); Rule 142(d). Because petitioners have not argued that
AC does not owe the underlying 2003 tax liability, the only issue for us to decide
is whether petitioners are liable as transferees.
       34
            See Swords Trust v. Commissioner, 142 T.C. 317, 336 (2014).
       35
       See Commissioner v. Stern, 357 U.S. 39, 47 (1958); see also Diebold
Found., Inc. v. Commissioner, 736 F.3d at 185.
                                        - 43 -

[*43] B.       The Commissioner Cannot Recast Using Federal Law When
               Evaluating State Law Substantive Liability.

      It is well established that the Commissioner cannot recast transactions under

Federal law and then apply State law to the transactions as recast under Federal

law. Indeed, “Stern forecloses the Commissioner’s efforts to recast transactions

under federal law before applying state law to a particular set of transactions.”36

The Commissioner continues to argue this theory despite its being rejected twice

in Division Opinions of our Court37 and by the U.S. Courts of Appeals for the

First,38 Second,39 Fourth,40 Seventh,41 and Ninth Circuits.42

      The Supreme Court, citing Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938),

concluded that the two conditions were independent inquiries: “[U]ntil Congress


      36
        Swords Trust v. Commissioner, 142 T.C. at 339 (quoting Starnes v.
Commissioner, 680 F.3d at 429); see also Diebold Found., Inc. v. Commissioner,
736 F.3d at 185-186; Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d
at 604-605; Stuart v. Commissioner, 144 T.C. 235, 253-256 (2015).
      37
     Stuart v. Commissioner, 144 T.C. at 353-356; Swords Trust v.
Commissioner, 142 T.C. at 338-340.
      38
           Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at 604-605.
      39
           Diebold Found., Inc. v. Commissioner, 736 F.3d at 184-185.
      40
           Starnes v. Commissioner, 680 F.3d at 428-429.
      41
           Feldman v. Commissioner, 779 F.3d at 458.
      42
           Salus Mundi Found. v. Commissioner, 776 F.3d at 1012, 1018-1019.
                                          - 44 -

[*44] speaks to the contrary, the existence and extent of liability should be

determined by state law”--specifically the State where the transfer was made.43

The Supreme Court further determined that “Congress has not seen fit to define

that liability and that none exists except such as is imposed by state law.”44

Therefore, the Government cannot be put in a better position than other creditors

and cannot use Federal law to collapse the transaction under State law.45

Accordingly, we decline to do so here.

III.   Procedural Requirements of Section 6901

       The Commissioner has the burden to prove that there was a transfer and that

petitioners are transferees under section 6901. “Transferee” is nonexclusively

defined and includes a “donee, heir, legatee, devisee, and distributee”46 as well as

a “shareholder of a dissolved corporation, the assignee or donee of an insolvent

person, the successor of a corporation, a party to a reorganization as defined in




       43
       Commissioner v. Stern, 357 U.S. at 45; see also Starnes v. Commissioner,
680 F.3d at 426.
       44
            Commissioner v. Stern, 357 U.S. at 47.
       45
     Commissioner v. Stern, 357 U.S. at 47; see Diebold Found., Inc. v.
Commissioner, 736 F.3d at 186.
       46
            Sec. 6901(h).
                                         - 45 -

[*45] section 368, and all other classes of distributees.”47 Further, we have

recently held that “[a] person can be a transferee within the meaning of the section

if he is an indirect transferee of property”;48 “is a constructive recipient of

property”;49 or “merely benefits in a substantial way from a transfer of property”.50

“The determinative factor is liability to a creditor (the Commissioner) for the debt

of another under a State fraudulent conveyance, transfer, or similar law.”51

      Because of these expansive definitions of both “transfer” and “transferee”

under section 6901, we conclude that the Commissioner has shown at least an

indirect transfer and that petitioners were transferees under the procedural

requirements of section 6901.52


      47
           Sec. 301.6901-1(b), Proced. & Admin. Regs.
      48
       Stuart v. Commissioner, 144 T.C. at 272 (citing Stanko v. Commissioner,
209 F.3d 1082 (8th Cir. 2000), rev’g T.C. Memo. 1996-530).
      49
       Stuart v. Commissioner, 144 T.C. at 272 (citing Shartle v. Commissioner,
T.C. Memo. 1988-354).
      50
       Stuart v. Commissioner, 144 T.C. at 272 (citing Cole v. Commissioner,
T.C. Memo. 1960-278, rev’d on other grounds, 297 F.2d 174 (8th Cir. 1961)).
      51
           Stuart v. Commissioner, 144 T.C. at 272.
      52
        Although petitioners argue that procedurally Gumm v. Commissioner, 93
T.C. 475, 480 (1989), aff’d, 933 F.2d 1014 (9th Cir. 1991), lays out elements that
the Commissioner must prove, that case serves to merely give an overview of the
general law in this area and “certain of the elements described in Gumm frequently
                                                                       (continued...)
                                          - 46 -

[*46] IV.       Liability Under State Law or State Equitable Principles

      The Commissioner argues that under FUFTA petitioners are liable

according to: (1) an actual fraud theory;53 (2) constructive fraud theories;54 (3) a

theory that petitioners were persons for whose benefit transfers were made;55 and

(4) a transferee of a transferee theory.56 He is wrong under each. But before we

take each State law liability theory in turn, the Commissioner argues that under a

State common law doctrine of substance over form we should collapse the

transactions.




      52
         (...continued)
are unnecessary under State law” and “section 6901 does not itself impose those
requirements.” Hagaman v. Commissioner, 100 T.C. 180, 184 (1993). Further,
there is no requirement under FUFTA that the Commissioner make reasonable
collection efforts against the transferor. See Kardash v. Commissioner, T.C.
Memo. 2015-51, at *22-*24 n.6, supplemented by T.C. Memo. 2015-197.
“Transferee liability is several.” Alexander v. Commissioner, 61 T.C. 278, 295
(1973).
      53
           See Fla. Stat. Ann. sec. 726.105(1)(a).
      54
           See Fla. Stat. Ann. secs. 726.105(1)(b), 726.106(1).
      55
           See Fla. Stat. Ann. sec. 726.109(2).
      56
       See, e.g., Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at
599-600.
                                         - 47 -

[*47] A.       The Form of a Transaction Should Be Respected.

      The Commissioner argues that we should collapse the transactions under

Florida law. In support of this analysis, the Commissioner cites a case from a

Florida bankruptcy court which explained that some “courts have ‘collapsed’

transactions in order to evaluate an allegedly fraudulent conveyance in context to

arrive at the substance of the transaction.”57 One of the cases relied on by the

bankruptcy court illuminates this process: “In reality, collapsing transactions is

little more than an effort on the part of the court to focus not on the formal

structure of a transaction, but rather on the knowledge or intent of the parties

involved in the transaction.”58 Indeed, the bankruptcy court explained that

      [a]lthough the Court is unaware of any Eleventh Circuit case formally
      acknowledging the propriety of collapsing transactions to determine
      their economic reality, the Eleventh Circuit has stated that consistent
      with equitable concepts underlying bankruptcy law, the court must
      “look beyond the particular transfers in question to the entire
      circumstance of the transactions” in determining whether the debtor
      possessed property recoverable in a fraudulent transfer action.
      * * * [59]


      57
        Dilworth v. Ginn (In re Ginn-La St. Lucie Ltd.), 2010 Bankr. LEXIS 6324,
at *24 (Bankr. S.D. Fla. Dec. 10, 2010) (relying on cases from the Courts of
Appeals for the Second, Third, and Seventh Circuits.
      58
           In re Best Prods. Co., 157 B.R. 222, 229 (Bankr. S.D.N.Y. 1993).
      59
           Dilworth, 2010 Bankr. LEXIS 6324, at *25 (quoting In re Chase &
                                                                     (continued...)
                                        - 48 -

[*48] Because Florida does not have a specific test that courts must use when

applying the equitable doctrine of substance over form, we are instructed by other

cases that have explained the proper evaluation.60 In Starnes, we explained that in

order to “render the initial transferee’s exchange with a debtor fraudulent, that

transferee must have had either actual or constructive knowledge of the entire

scheme.”61 Indeed, “courts generally review whether all of the parties involved

had knowledge of the multiple transactions.”62 Accordingly, we review whether

the Altermans had actual or constructive knowledge.

               1.    The AC Shareholders Lacked Actual Knowledge.

      The Altermans and their advisers did not have actual knowledge that

MidCoast would fail to do what it promised under the share purchase agreement


      59
       (...continued)
Sanborn Corp., 848 F.2d 1196, 1199 (11th Cir. 1988)).
      60
       See Flintkote Co. v. Dravo Corp., 678 F.2d 942, 945 (11th Cir. 1982)
(“Only where no state court has decided the point in issue may a federal court
make an educated guess as to how that state’s supreme court could rule.” (quoting
Benante v. Allstate Ins. Co., 477 F.2d 553, 554 (5th Cir. 1973))).
      61
           Starnes v. Commissioner, T.C. Memo. 2011-63, slip op. at 24.
      62
         Starnes v. Commissioner, T.C. Memo. 2011-63, slip op. at 24; see also
Feldman v. Commissioner, T.C. Memo. 2011-297, slip op. at 43 (“In Starnes,
Griffin, and Frank Sawyer Trust, the facts as found did not establish that the
taxpayers knew that MidCoast intended not to pay the taxes.”). Frank Sawyer
Trust was later reversed, but not on these grounds.
                                       - 49 -

[*49] and immediately sell the AC shares. The Commissioner does not even argue

that they had actual knowledge. MidCoast concealed from the Altermans and their

advisers its plan to immediately sell the AC stock. Indeed, one of the MidCoast

representatives, Mr. Wellington, testified that MidCoast never told the Altermans

that MidCoast intended to immediately resell AC. He admitted that MidCoast

misled the Altermans and their advisers. This is further supported by the fact that

the Commissioner’s own expert at trial testified that after reviewing the evidence,

he believed that neither the Altermans nor their attorneys had any way of knowing

that MidCoast was lying to them and that MidCoast was going to immediately sell

the stock of AC to Sequoia. This is further supported by another of the

Commissioner’s witnesses, the IRS revenue agent who confirmed that MidCoast’s

plan was not reasonably discoverable. In describing her MidCoast investigation,

she stated: “I was unable to uncover any evidence of false and fraudulent

statements. It doesn’t mean it wasn’t there; I just was unable to get my hands on

it.” Finally, the Altermans’ attorneys did not find out about what transpired until

the IRS subpoenaed the Altermans years later in 2006. The attorneys each

expressed surprise at what MidCoast had done.
                                          - 50 -

[*50]            2.    The AC Shareholders Lacked Constructive Knowledge.

        The Commissioner argues that petitioners had constructive knowledge that

AC would be rendered insolvent and as a result petitioners should be held liable as

transferees. He is wrong. In order to collapse the transactions under State law, the

Commissioner must prove that the former AC shareholders had constructive

knowledge that the MidCoast acquisition vehicles would cause AC to fail to pay

its 2003 tax liability.63 Constructive knowledge is either the “knowledge that

ordinary diligence would have elicited” or a “more active avoidance of the

truth”.64 In Starnes, the Court of Appeals for the Fourth Circuit Court explained

there are two inquiries for constructive knowledge: (1) whether the former

shareholders had a duty to inquire and (2) if so, what that inquiry would have




        63
             See Starnes v. Commissioner, 680 F.3d at 433.
        64
        HBE Leasing Corp. v. Frank, 48 F.3d 623, 636 (2d Cir. 1995) (quoting
United States v. Orozco-Prada, 636 F. Supp. 1537, 1543 (S.D.N.Y. 1986), aff’d,
847 F.2d 836 (2d Cir. 1988)); see also Diebold Found., Inc. v. Commissioner, 736
F.3d at 187; Kupetz v. Wolf, 845 F.2d 842 (9th Cir. 1988).

       We note that “[a]lthough HBE Leasing Corp. * * * and Diebold * * * are
analyzed under the Uniform Fraudulent Conveyance Act (UFCA), the predecessor
statute to UFTA, they are nonetheless instructive to our analysis because the
collapsing of transactions is a common law doctrine” that would not have been
changed by Florida’s adoption of UFTA. Cullifer v. Commissioner, T.C. Memo.
2014-208, at *58 n.31.
                                        - 51 -

[*51] revealed.65 As to the former, the court asked whether “the Former

Shareholders have actual knowledge of facts that would have led a reasonable

person concerned about * * * [the transferor’s] solvency to inquire further into

MidCoast’s post-closing plans”.66 If so, then the shareholders are on inquiry

notice and had a duty to follow up. Next, the court analyzed whether “the inquiry

a reasonably diligent, similarly-situated person would have undertaken revealed

MidCoast’s plan to leave * * * [the transferor] unable to pay its 2003 taxes”.67

               3.    The Shareholders Fulfilled Their Duty To Inquire and Required
                     Safeguards To Ensure the Tax Liability Was Paid.

      The AC shareholders took reasonable steps to investigate the red flags they

had initially discovered. The shareholders relied on their tax lawyers and financial

advisers to determine whether MidCoast had proposed a sound purchase of their

shares. MidCoast represented that it had been in the asset recovery business for

many years and that it was “among the top 25 largest purchasers of delinquent

consumer receivables in the United States.” Mr. Polish was previously familiar

with MidCoast. Mr. Morse contacted MidCoast references and got a good



      65
           Starnes v. Commissioner, 680 F.3d at 434.
      66
           Starnes v. Commissioner, 680 F.3d at 434.
      67
           Starnes v. Commissioner, 680 F.3d at 434.
                                       - 52 -

[*52] impression of MidCoast. Mr. Barron drew confidence in MidCoast from the

reputation of MidCoast’s attorneys. Likewise, Mr. Jovanovich was assured by the

fact that the escrow agent was a reputable law firm. The Altermans’ advisers

requested additional information about MidCoast’s business plan, and they all

believed that MidCoast’s business plan to turn AC into an asset recovery business

and defer AC’s taxable gain through this business model was plausible. Indeed,

the Commissioner’s own expert at trial admitted there are no standards for sell-

side due diligence, only basic principles and accepted practices.68 A seller’s main

concern is whether the buyer will be able to close the deal.

      The AC shareholders took reasonable steps to ensure that the MidCoast

acquisition vehicles would honor their promises to pay the putative tax by placing

significant covenants, representations, and warranties in the share purchase

agreement. The Altermans’ advisers negotiated for specific provisions to be

included in this contract, and the Altermans passed on another deal from

Diversified because Diversified would not agree to those terms. Among other

promises the Altermans required from MidCoast, the share purchase agreement

      68
        In explaining his report on sell-side due diligence the Commissioner’s
expert stated: “There are generally accepted procedures, there are no standards out
there for due diligence.” “[T]here is no board or body that sets out standards for
due diligence. However, the financial community, for which I’ve worked in for
over 20 years, have basic principles for doing appropriate due diligence.”
                                         - 53 -

[*53] provided that: (1) MidCoast would cause AC to pay the putative tax

liability; (2) MidCoast would cause AC to maintain a net worth of at least $1.5

million for at least four years (sufficient to pay the tax liability); (3) MidCoast

represented that the combined net worth of the purchasers was greater than $10

million; (4) MidCoast would reengineer AC into an asset recovery business; (5)

MidCoast would not allow AC to be dissolved or liquidated for at least four years

and that it did not intend to do so thereafter; (6) MidCoast would cause AC to

invest at least $1,450,000 in delinquent receivables and would reinvest the

proceeds in more delinquent receivables for at least 10 years; and (7) MidCoast

would indemnify the AC shareholders if MidCoast did not fulfill the terms of the

share purchase agreement.

      It was reasonable for the Alterman shareholders to rely on the covenants in

the share purchase agreement. The MidCoast acquisition vehicles were not mere

transitory entities.69 Similarly, the MidCoast acquisition vehicles were domestic


      69
         Cf. Diebold Found., Inc. v. Commissioner, 736 F.3d at 188 (“The
Shareholder representatives plainly knew that Shap II [the intermediary] was a
brand new entity that was created for the sole purpose of purchasing Double D
[the target corporation’s] stock.”); Frank Sawyer Trust of May 1992 v.
Commissioner, 712 F.3d at 600-601, 609 n.3 (acquisition company was formed to
complete transactions); Tricarichi v. Commissioner, T.C. Memo. 2015-201, at *16,
*24 (intermediary was shell company created for sole purpose of facilitating stock
sale and merged into target corporation day after sale).
                                        - 54 -

[*54] entities against whom the Alterman shareholders could take action to

enforce the covenants.70

      At trial the Commissioner’s expert, Mr. Hastings, presented his conclusion

that the Altermans did not do reasonable due diligence because they did not

“investigate the technical merits” of MidCoast’s plan to offset AC’s upcoming tax

liability and that the stock sale and the associated loan were not commercially

reasonable. However, he admitted on cross-examination that it was “fair to say”

that one of the steps the Altermans took, requesting representations and warranties

from MidCoast, was a key part of sell-side due diligence in his opinion and that

these representations went above and beyond what he has customarily seen. He

also echoed other trial testimony and said that it appeared that MidCoast intended

to defraud the Altermans from the beginning. Yet he opined that he believed the

Altermans should have done more to follow up with MidCoast after the sale of

their stock, such as getting postclosing financial statements and bank statements

and putting more “teeth” in the covenants. Mr. Hastings stated that he had seen

situations where the selling shareholders negotiated for the right to obtain

      70
        Cf. Tricarichi v. Commissioner, at *16-*17 (intermediary had agreed to
indemnify seller if putative tax liability went unpaid but was incorporated in
Cayman Islands; seller’s expert “admitted that ‘there can be problems’ enforcing
warranties and covenants against offshore entities like Nob Hill [the intermediary]
that have no assets in the United States”).
                                         - 55 -

[*55] postclosing financial statements from the corporation they had sold;

however, he could not recall any specific examples or how many times he had

encountered this.

      Mr. Barron, who was also the Commissioner’s witness and served as an

attorney and adviser to the Altermans during the sale, testified that “[p]ost-closing

monitoring is, is very rare in corporate transactions, it’s not typical.” This is so in

part because a buyer will rarely agree to allow a seller to access its books or tax

returns going forward.

      The shareholders and their advisers performed adequate due diligence.

               4.     Further Inquiry Would Not Have Revealed That the Tax
                      Liability Would Not Be Paid.

      As we have already noted, the AC shareholders made a reasonable inquiry.

Had they dug further, they would not have discovered that AC’s tax liability

would not be paid. The Court of Appeals for the Fourth Circuit in Starnes held

that “if the Former Shareholders were on inquiry notice of MidCoast’s plans and

failed to make reasonably diligent inquiry, they are charged with the knowledge

they would have acquired had they undertaken the reasonably diligent inquiry

required by the known circumstances.”71 In Starnes, although the Tax Court found


      71
           680 F.3d at 434.
                                           - 56 -

[*56] that the former shareholders had a duty to make further inquiry that they

failed to satisfy, the Court did not find that the former shareholders had

constructive knowledge because it concluded that further “hypothetical effort

would not likely have revealed MidCoast’s post-closing plans to evade * * * [the

transferor’s] tax liability.”72

       In these cases MidCoast principals were later indicted for defrauding former

target corporation shareholders. Even Mr. Wellington, who was part of the

acquisition team, claimed that he did not know of the MidCoast acquisition

vehicles’ plan to immediately sell AC to Sequoia, which would then cause AC not

to pay AC’s tax liability.

       The Government elsewhere has alleged that MidCoast’s acquisition staff

“was misleading the target corporations’ shareholders and their representatives

about how MidCoast Financial would use the corporations after they were

purchased.”73 Indeed, the Government argued elsewhere that MidCoast

“concealed MidCoast Financial’s actual business model” and this “concealment



       72
        Starnes v. Commissioner, 680 F.3d at 435-436 (“[T]he Tax Court clearly
found that the Former Shareholders would not have learned through further
inquiry so much more of MidCoast’s intentions to justify the court’s imposition of
constructive knowledge.”).
       73
            Veera, No. 12-444, slip op. at 8.
                                          - 57 -

[*57] necessarily caused the MidCoast Financial acquisition staff to describe

MidCoast Financial’s business model falsely to potential selling shareholders of

target corporations and their representatives.”74 And even the Commissioner’s

own revenue agent was unable to establish misrepresentations by MidCoast when

she investigated MidCoast for promoter penalties.

               5.     It Was Not Unreasonable for the Altermans’ Advisers To
                      Believe MidCoast’s Business Plan Was Viable.

      The Commissioner argues that it did not make sense for MidCoast to

purchase AC for a premium and this is another reason that the Altermans should

have known that MidCoast would fail to pay the putative tax. However,

petitioners and their representatives were not unreasonable to believe that

MidCoast had a viable business purpose to buy the stock of AC and convert AC

into an asset recovery business. Even accepting the Commissioner’s argument

that it would have been better for MidCoast to start a new entity than to acquire

AC does not establish that it was unreasonable to use an existing entity.

      The Altermans’ advisers believed that MidCoast’s business plan was

feasible. Mr. Barron generally understood that MidCoast was experienced in

receivable collection and would use this business to defer AC’s putative tax. Mr.


      74
           Veera, No. 12-444, slip op. at 14.
                                          - 58 -

[*58] Jovanovich testified that he believed MidCoast’s business plan to be

“plausible” and described one applicable tax deferral method that had been

available. Similarly, Mr. Polish thought MidCoast’s tax deferral plan “sounded

reasonable”, in contrast to advising the Alterman shareholders to “walk away”

from the Diversified deal.

        We have previously “acknowledged that there are legitimate tax planning

strategies involving built-in gains and losses and that it was not unreasonable, in

the absence of contradictory information, for the representatives to believe that the

buyer had a legitimate tax planning method.”75 Likewise, it was not unreasonable

for the Altermans’ advisers to believe that MidCoast had a legitimate tax deferral

plan.

        Accordingly, further inquiry by the Altermans or their advisers would have

been futile, and it was not unreasonable for the Altermans and their advisers to

believe MidCoast’s business plan was viable.

                 6.    The Transactions Should Be Respected Because There Was an
                       Infusion of Cash, Not a Circular Flow of Funds.

        The Commissioner argues that there was a circular flow of funds in the deal

that served no purpose and that this is another reason that we should collapse the


        75
             Swords Trust v. Commissioner, 142 T.C. at 349.
                                        - 59 -

[*59] transactions. He states that the cash in AC was used to fund the purchase of

the AC shares, but the facts do not support his argument. These cases closely

resemble Starnes, where the Court of Appeals for the Fourth Circuit affirmed the

Tax Court’s holding that: (1) the target shareholders lacked constructive

knowledge and (2) the target shareholders ultimately were not liable as

transferees.76 In Starnes, the shareholders of the target corporation, Tarcon, agreed

to sell their stock to MidCoast, and MidCoast agreed to reengineer Tarcon into an

asset recovery business and pay its tax liability. However, soon after acquiring

Tarcon MidCoast sold the Tarcon stock and then Tarcon transferred its cash to an

offshore account. Tarcon offset its tax liability with loss deductions that the IRS

later disallowed. The IRS eventually pursued the former Tarcon shareholders for

transferee liability. We held in that case that the Tarcon shareholders did not have

any knowledge--actual or constructive--of MidCoast’s plan to sell the shares and

cause the Tarcon taxes not to be paid. Specifically, the Court of Appeals noted

that the Tax Court had applied the correct standard for constructive knowledge

under North Carolina law and that the “Commissioner was required to prove that

no reasonably diligent person in the Former Shareholders’ position would have




      76
           Starnes v. Commissioner, 680 F.3d at 417.
                                        - 60 -

[*60] failed to discover that MidCoast would cause Tarcon to not pay its 2003

taxes.”77 The Court explained that “even though the Former Shareholders might

have conducted further inquiry, such a hypothetical effort would not likely have

revealed MidCoast’s post-closing plans to evade Tarcon’s tax liability.”78

      Because the shareholders in Starnes did not have constructive knowledge of

MidCoast’s plan to cause Tarcon to fail to pay its tax liability, we respected each

of the separate steps of the transaction and did not collapse the transaction.

Indeed, “[i]f all had gone as the Former Shareholders testified they thought it

would, MidCoast would have continued operating Tarcon and in 2004 paid

Tarcon’s 2003 taxes.”79 In the absence of collapsing the steps, there was a clear

infusion of cash by the purchaser MidCoast, and the shareholders were paid not

with funds from the target corporation, Tarcon, but with MidCoast funds. The

Court of Appeals for the Fourth Circuit stated: “As the Tax Court aptly put it:




      77
           Starnes v. Commissioner, 680 F.3d at 434.
      78
           Starnes v. Commissioner, 680 F.3d at 434.
      79
           Starnes v. Commissioner, 680 F.3d at 424.
                                        - 61 -

[*61] ‘Thus, there was an infusion of cash into the transaction, not a circular flow

of cash.’”80

      Similarly in these cases, because the former AC shareholders did not have

constructive knowledge of MidCoast’s plan to sell its AC stock to Sequoia, we do

not collapse the steps. Further, the separate steps of the transaction show that

there was not a circular flow of funds. The purchase of the AC shares was funded

by a loan from Sequoia to the MidCoast acquisition vehicles and not with AC

funds. The AC funds were left untouched. Escrow records confirm that AC

deposited $6,455,772.50 into the escrow account on December 5, 2003, and that

the same $6,455,772.50 was wired to AC’s new Deutsche Bank account before the

close of business that same day. Under the escrow agreement and confirmed by

escrow records, Sequoia deposited the money it lent to the MidCoast acquisition

vehicles into the escrow, and per the escrow agreement the MidCoast acquisition

vehicles then paid what were at that time MidCoast acquisition vehicles’ funds to




      80
         Starnes v. Commissioner, 680 F.3d at 424 n.5 (quoting T.C. Memo. 2011-
63, slip op. at 20), 437 n.12.
                                         - 62 -

[*62] the AC shareholders in exchange for their AC shares.81 Accordingly,

petitioners’ sales of their AC stock to the MidCoast acquisition vehicles should be

respected.

      The Commissioner further argues that we should collapse the transactions

because the loans from Sequoia to the MidCoast acquisition vehicles were shams.

We disagree. First, the Commissioner’s arguments about the loans by Sequoia are

entirely inconsistent. The Commissioner argues that the loans by Sequoia were

shams but at the same time argues that AC’s guaranty of those loans left it

insolvent. While the Commissioner may argue in the alternative, these

inconsistencies reveal the weaknesses of both arguments. We respect these

loans.82 Under the loan agreements and promissory notes the MidCoast


      81
         Of the $5,080,000 that Sequoia deposited as a loan to the MidCoast
acquisition vehicles, $4,549,387 was sent to Alterman Enterprises, $509,944 was
sent to Mr. Alterman, Sr.’s estate, and the remaining approximately $20,000 was
paid to the MidCoast acquisition vehicles to account for the holdback in the share
purchase agreement.
      82
        Cf. Feldman v. Commissioner, 779 F.3d at 456 (affirming the Tax Court’s
finding that a loan to purchase the shares of the target corporation was a sham in
part because “the loan was entirely undocumented; there was no promissory note
or writing setting forth the terms of the loan”). Feldman is distinguishable from
these cases because the Tax Court there found that “it is absolutely clear that all
individuals involved * * * were aware that MidCoast and its representatives had
no intention of ever paying the tax liabilities of * * * [the target corporation] and
also that the source of the approximately $225,000 MidCoast premium to be
                                                                          (continued...)
                                         - 63 -

[*63] acquisition vehicles collectively borrowed $5,080,000 to fund the purchase

of the AC shares, and they agreed to repay $5,105,400. The difference between

the amount advanced by Sequoia and the amount that the MidCoast acquisition

vehicles agreed to repay represented implicit interest.

        We note that in Diebold, the Court of Appeals for the Second Circuit

collapsed the transactions because it found that the shareholders had constructive

knowledge of the entire scheme, including MidCoast’s plan to immediately sell

the target’s assets.83 In Diebold, the target corporation’s shareholders sold their

interests to an intermediary. The intermediary then took the target corporation’s

assets and sold the assets to third parties. The court found that the target

corporation’s shareholders knew that the initial purchaser of its shares was an

intermediary because the target corporation’s shareholders knew of the third-party

ultimate buyers. The court explained that “[t]he Shareholder representatives also

had a sophisticated understanding of the structure of the entire transaction, a fact

that courts consider when determining whether to collapse a transaction and


        82
        (...continued)
received by the * * * [target corporation’s] shareholders was to come from the
unpaid tax liability.” Feldman v. Commissioner, T.C. Memo. 2011-297, slip op. at
14.
        83
             736 F.3d 172; accord Salus Mundi Found. v. Commissioner, 776 F.3d
1010.
                                         - 64 -

[*64] impose liability”.84 Specifically, the shareholders’ representatives knew that

the intermediary planned to sell the target’s securities assets and the target’s real

estate assets after closing because both the securities sale and the real estate sale

were alluded to in the draft agreements between the target shareholders and the

intermediary. This was enough for the Court in Diebold to conclude that the

shareholders “‘should have known’ about the entire fraudulent scheme” and that

“the facts * * * [in Diebold] demonstrate both a failure of ordinary diligence and

active avoidance of the truth.”85 The Court of Appeals found that the Tax Court’s

holding that the shareholder representatives were not required “to make further

inquiry into the circumstances of the transaction” between the target corporation

and the intermediary was “error.”86

      Unlike the target corporation’s shareholders in Diebold, the AC

shareholders and their advisers did not have constructive knowledge that

MidCoast planned to sell the shares to Sequoia and that it would fail to honor the

promises, representations, and warranties it had agreed to in the share purchase



      84
           Diebold Found., Inc. v. Commissioner, 736 F.3d at 188.
      85
           Diebold Found., Inc. v. Commissioner, 736 F.3d at 187-188.
      86
      Diebold Found., Inc. v. Commissioner, 736 F.3d at 188 (quoting T.C.
Memo. 2012-61, slip op. at 33).
                                        - 65 -

[*65] agreement. Because the Altermans lacked constructive knowledge, it is not

appropriate to collapse the transactions.

      B.     There Was No Constructive Fraud Under FUFTA Sec. 726.105(1)(b).

      One way the Commissioner can show fraudulent transfer is under FUFTA

sec. 726.105(1)(b), which is one of the constructive fraud provisions. Specifically,

the Commissioner must prove that the IRS is a creditor of the debtor, regardless of

whether the claim arose before or after the transfer; that a transfer was made by the

debtor; that the debtor did not receive reasonably equivalent value in exchange for

the transfer; and that either: (1) the debtor was engaged or about to engage in a

business or transaction for which the debtor’s assets were unreasonably small or

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

that he would incur, debts beyond his ability to pay as the debts came due.

      The IRS is a creditor of AC, but the AC shareholders did not receive

transfers from AC when they sold their stock to the MidCoast acquisition vehicles.

And at the time AC redeemed a portion of the AC shareholders’ stock, the debtor

(AC) had no intent to engage in a transaction that would leave it unable to pay its

debts. That intent lay hidden within MidCoast; it was not the intent of the debtor.

Accordingly, the Commissioner has not met the requirements of FUFTA sec.

726.105(1)(b).
                                          - 66 -

[*66] C.        There Was No Constructive Fraud Under FUFTA Sec. 726.106(1).

      Alternatively, the Commissioner may establish that a fraudulent transfer

occurred under FUFTA sec. 726.106(1), another constructive fraud provision. To

do so, the Commissioner must prove that the IRS was a creditor before the debtor

made a transfer, that the debtor did not receive reasonably equivalent value in

exchange for the transfer, and that the debtor was insolvent or rendered insolvent

by the transfer.

      Under FUFTA a debtor can be insolvent under what is known as a “balance

sheet test” if the sum of its debts exceeds the fair value of its assets,87 and a debtor

who is not paying its debts as they become due creates a rebuttable presumption of

insolvency.88 A “debt” is a “liability on a claim.”89 Among other things, “asset”

means “property of a debtor”.90

      The Commissioner claims that the IRS was a creditor of AC before AC

made a transfer. This question turns on when a debt to the IRS was incurred. The

Commissioner argues that we should focus on when AC’s assets were first sold,


      87
           Fla. Stat. Ann. sec. 726.103(1).
      88
           Fla. Stat. Ann. sec. 726.103(2).
      89
           Fla. Stat. Ann. sec. 726.102(5).
      90
           Fla. Stat. Ann. sec. 726.102(2).
                                            - 67 -

[*67] which is when the putative tax liability arose. Petitioners instead focus on

when the return reporting that liability was due or filed. FUFTA defines a debt as

a liability on a claim91 and further defines claims broadly to include even

contingent and unliquidated rights to payment.92 Because debts include contingent

rights to payment, the IRS’ unmatured tax liability from AC’s gains on the sale of

its operating assets gave the IRS a claim.93 But that is not all that the

Commissioner must prove under FUFTA sec. 726.106(1).

        The Commissioner must also prove that AC made transfers to the AC

shareholders without receiving reasonably equivalent value in exchange and that

AC was either insolvent at the time of these alleged transfers to the AC

shareholders or rendered insolvent by the transfers. As we have previously

discussed, AC did not make any transfers to petitioners in the stock sale to the

MidCoast acquisition vehicles. But even if there had been such a transfer, AC had



        91
             Fla. Stat. Ann. sec. 726.102(5).
        92
        Fla. Stat. Ann. sec. 726.102(3); Freeman v. First Union Nat’l Bank, 865
So. 2d 1272, 1277 (Fla. 2004) (“Thus, as is universally accepted, as well as settled
in Florida, ‘A “claim” under the Act may be maintained even though “contingent”
and not yet reduced to judgment.’” (quoting Cook v. Pompano Shopper, Inc., 582
So. 2d 37, 40 (Fla. Dist. Ct. App. 1991))).
        93
             See Stuart v. Commissioner, 144 T.C. at 256-259; Freeman, 865 So. 2d at
1277.
                                          - 68 -

[*68] sufficient assets to cover its putative 2003 tax liability both before and after

the stock sale by petitioners. Thus, it is not relevant whether there was reasonably

equivalent value exchanged in the stock sale to the MidCoast acquisition vehicles.

Accordingly, the Commissioner has not shown a fraudulent transfer from AC to

the shareholders under FUFTA sec. 726.106(1).94

      D.        There Was No Actual Fraud Under FUFTA Sec. 726.105(1)(a) and
                (2).

      Another way the Commissioner can establish a fraudulent transfer is by

actual fraud under FUFTA sec. 726.105(1)(a). Under this section the

Commissioner must prove that the IRS is a creditor of the debtor regardless of

when the claim arose and that a transfer was made by a debtor “with actual intent

to hinder, delay, or defraud any creditor of the debtor.”95 Actual intent to defraud

can be shown through several badges of fraud.

      Badges of fraud are factors that a court can consider to determine fraudulent

intent, and FUFTA includes the following 11 factors:




      94
        Although the Commissioner invoked FUFTA sec. 726.106, generally,
neither party specifically addressed FUFTA sec. 726.106(2). That specific
subsection is inapplicable because, inter alia, AC, as debtor, was not insolvent at
the time of a transfer from AC to the AC shareholders.
      95
           Fla. Stat. Ann. sec. 726.105(1)(a).
                                           - 69 -

[*69] 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 of 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.
      11.       The debtors transferred the essential assets of the business to a
                lienor who transferred the assets to an insider of the debtor.[96]

      The Commissioner has the burden to prove that the transfer was made

“[w]ith actual intent to hinder, delay, or defraud” creditors.97 Florida courts have

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

may not constitute the requisite fraud” to set aside a transfer, and “several of them

when considered together may afford a basis to infer fraud.”98 As noted, under

FUFTA the Commissioner bears the burden of proof and must show by the



      96
           Fla. Stat. Ann. sec. 726.105(2).
      97
           Fla. Stat. Ann. sec. 726.105(1)(a).
      98
           Johnson v. Dowell, 592 So. 2d 1194, 1197 (Fla. Dist. Ct. App. 1992).
                                          - 70 -

[*70] preponderance of the evidence that a transfer was fraudulent.99 Further,

“[t]he law presumes the transaction to have been honest, that it was without fraud,

that it was for an honest purpose, and the person who asserts that it was of a

different character must prove it.”100

      In order to determine what the debtor, AC, intended at the time of the

transfer, we look to what the officers, directors, and shareholders of AC and their

advisers intended at the time. Petitioners contend that the debtor, AC, did not

intend to hinder, delay, or defraud any creditor. The Commissioner argues that

there are eight listed badges of fraud101 and additional unenumerated indicators of

fraud present in these cases. We address those in turn.

                1.    Factor 1: Transfer to an Insider

      The Commissioner asserts that as a part of the stock sale to MidCoast AC

transferred its cash to the shareholders, who are insiders. No such transfer

occurred. Petitioners received cash from the MidCoast acquisition vehicles. That



      99
        See Wieczoreck v. H&H Builders, Inc., 475 So. 2d 227, 228 (Fla. 1985);
Mejia v. Ruiz, 985 So. 2d 1109, 1113 (Fla. Dist. Ct. App. 2008); Kapila v. Plave
(In re Paul), 217 B.R. 336, 337 n.2 (S.D. Fla. 1997).
      100
            Tischler v. Robinson, 84 So. 914, 917 (Fla. 1920).
      101
        Specifically, the Commissioner asserts factors 1, 3, 5, 6, 7, 8, 9, and 10
under Fla. Stat. Ann. sec. 726.105(2) are met.
                                        - 71 -

[*71] cash came from Sequoia. The Commissioner has not proven that there was a

transfer by AC of its funds to an insider.

             2.    Factor 3: Transfer Was Disclosed or Concealed

      The Commissioner argues on brief that AC “concealed the transfer of cash

to the AC Shareholders in the MidCoast Transaction by commingling funds in the

Escrow Account.” No such concealment occurred. The escrow agreement clearly

called for the escrow agent, Morris, Manning & Martin, to keep the funds

separate, and the AC shareholders were not paid with money from AC. Rather,

they were paid with funds from the MidCoast acquisition vehicles, which had been

supplied by lender Sequoia.

             3.    Factor 5: Transfer of Substantially All Assets

      The Commissioner argues that AC transferred substantially all of its assets

to the AC shareholders. No such transfer occurred. Although it is true that AC

transferred assets, even after both the redemption and the stock sale, AC had

sufficient assets to pay its 2003 tax liability. After the redemption, AC had cash of

$6,455,690, prepaid taxes of $1,330,321, and a potential tax liability from the sale

of its operating assets of $6,284,675, leaving AC with a net equity of $1,501,336.

After the stock sale, the net equity increased slightly to $1,501,418.50.
                                             - 72 -

[*72]             4.    Factor 6: Debtor Absconded

        The Commissioner asserts that AC absconded because it changed its name

and address after MidCoast purchased the shares, it quit filing tax returns, and it

was eventually administratively dissolved by the State of Florida. The facts don’t

support the Commissioner’s argument. AC notified Florida’s secretary of state of

its name change and new address and continued to file tax returns for 2003, 2004,

and 2005. These are not actions designed to avoid detection.

                  5.    Factor 7: Debtor Removed or Concealed Assets

        The Commissioner argues that AC removed or concealed assets when it

deposited the 2003 tax refund of $1,329,848 it received on April 26, 2004, into its

Deutsche Bank account and then subsequently transferred the same amount to the

MidCoast acquisition vehicle MCC less than a month later.102 But caselaw holds

that the “crucial issue is the intention of the transferor at the time of the

transfer”.103 At the time of the sale on December 5, 2003, AC transferred

$6,455,772.50 into an escrow account, and at the end of the day the escrow agent




        102
              We note that this transfer indicated it was for the benefit of AC.
        103
        Kapila v. WLN Family Ltd. P’shp (In re Leneve), 341 B.R. 53, 61-62
(Bankr. S.D. Fla. 2006).
                                          - 73 -

[*73] transferred AC’s $6,455,772.50 to an AC account with Deutsche Bank.

Therefore, AC’s assets were neither removed nor concealed.

                6.    Factor 8: Value of Consideration Received by the Debtor
                      Reasonably Equivalent to the Value of the Asset Transferred

      The Commissioner argues that AC did not receive reasonably equivalent

value with respect to two separate transfers. The first transfer was the redemption

by AC of a portion of the AC shareholders’ shares in exchange for Alterman

Enterprises’ shares. The second transfer relates to AC’s guaranty of the Sequoia

loan. Petitioners argue that there was reasonably equivalent value exchanged in

the redemption and that AC’s liability under the guaranty of the Sequoia loan was

de minimis.

      Reasonably equivalent value was exchanged in the redemption transaction

because the redemption did not favor any one shareholder over another and the

redemption did not leave AC insolvent. All of the shareholders were redeemed in

proportion to their ownership interests in AC at the same price per share. Further,

the main case the Commissioner cites to support his argument that reasonably

equivalent value was not exchanged in the redemption is distinguishable. In

Robinson v. Wangemann104 a corporation repurchased shares and gave the


      104
            75 F.2d 756 (5th Cir. 1935)
                                         - 74 -

[*74] shareholder a promissory note in exchange.105 At the time that the

corporation repaid the note, it was insolvent.106 The court explained that had the

shareholder been paid with cash at the time of the redemption instead of with a

note, then the transaction would have been valid because at the time of the

repurchase the corporation was solvent.107 However, the problem was that the

corporation was insolvent and did not have “sufficient surplus to prevent injury to

creditors when the payment” on the note was actually to be made.108 In contrast,

AC was solvent at the time of the redemption, and it was not rendered insolvent by

the redemption of the shares. Further, there was plenty of cash left in AC to cover

any putative tax it might owe for 2003.109

      105
            Wangemann, 75 F.2d at 757.
      106
            Wangemann, 75 F.2d at 757.
      107
         Wangemann, 75 F.2d at 757 (“It may be conceded that if Arthur
Wangemann had received cash for his stock at the time he relinquished it the
transaction would have been valid, but that is not the case presented here.”). The
Commissioner also cites In re Behr Contracting, Inc., 79 B.R. 84, 86 (Bankr. S.D.
Fla. 1987), which explains: “A corporation may not validly repurchase it’s [sic]
corporate stock while insolvent and the corporation receives nothing of value in
exchange for the purchase price.”
      108
            Wangemann, 72 F.2d at 757-758.
      109
        AC was incorporated under the laws of the State of Florida. Florida
corporate law provides: “A corporation may acquire its own shares”. See Fla.
Stat. Ann. sec. 607.0631(1) (West 2007). Additionally, there is no longer a
                                                                     (continued...)
                                         - 75 -

[*75] AC’s guaranty of the MidCoast acquisition vehicles’ repayment of the loan

from Sequoia was a contingent liability that did not affect AC’s solvency and was

not an unequal exchange as the Commissioner suggests. “It is well established

* * * that a contingent liability cannot be valued at its potential face amount;

rather, ‘it is necessary to discount it by the probability that the contingency will

occur and the liability will become real.’”110 Indeed, “[t]he ‘fair value’ of a

contingent liability, of course, should be discounted according to the possibility of

its ever becoming real.”111 “[A] contingent liability is not certain--and often is

highly unlikely--ever to become an actual liability.”112

      In order for the Court to count this contingent liability against AC for

purposes of determining solvency and reasonably equivalent value, the

Commissioner must offer evidence of the value of the guaranty and the likelihood


      109
         (...continued)
statutory prohibition against a corporation’s purchasing its own shares at a time it
was insolvent or would be rendered insolvent. Compare Fla. Stat. Ann. sec.
607.0631 (West 2007) with Fla. Stat. Ann. sec. 607.017 (repealed 1989).
      110
        Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904
F.2d 588, 594 (11th Cir. 1990) (quoting In re Xonics Photochemical, Inc., 841
F.2d 198, 200 (7th Cir. 1998)).
      111
       Advanced Telecomm. Network, Inc. v. Allen (In re Advanced Telecomm.
Network, Inc.), 490 F.3d 1325, 1335 (11th Cir. 2007).
      112
            In re Xonics Photochemical, Inc., 841 F.2d at 200.
                                         - 76 -

[*76] that the guaranty would be needed to satisfy the loan repayment.113 The

Commissioner offered none. The loans from Sequoia to the MidCoast acquisition

vehicles were extinguished the same day that they were entered into by the sale of

AC shares to Sequoia. Further, MidCoast had affirmed in the share purchase

agreement that it had a net worth of over $10 million, and had there been an issue

with the loan repayment, the AC shareholders were reasonable in assuming that

MidCoast could fund the debt on its own. Thus, the guaranty had no affect on

AC’s liabilities and did not affect its solvency.114

      Accordingly, the Commissioner’s arguments do not support a finding that

reasonably equivalent value was not exchanged.

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

      The Commissioner argues that AC was insolvent or became insolvent

shortly after it made a transfer. AC was not insolvent. Under FUFTA a debtor can

be insolvent under what is known as a “balance sheet test” if the sum of its debts




      113
            See FDIC v. Bell, 106 F.3d 258, 264 (8th Cir. 1997).
      114
        The Court of Appeals for the Eleventh Circuit explained in Advanced
Telecomm. Networks, Inc. v. Allen (In re Advanced Telecomm. Network, Inc.),
490 F.3d at 1335, that zero “might be an appropriate valuation for some
exceedingly remote or unlikely liabilities”. Accord Bell, 106 F.3d at 264.
                                          - 77 -

[*77] exceeds the fair value of its assets,115 and a debtor is presumed insolvent if it

is not paying its debts as the debts become due.116 Whether a transferor is

insolvent must be separately determined at the time of each transfer in question.117

      AC was not insolvent at the time of the redemption, at the time of the sale of

stock to the MidCoast acquisition vehicles, or at the time AC made the loan

guaranty. Immediately after the redemption, AC had net equity of $1,501,336.

AC further had net equity of $1,501,418.50 immediately following the sale of

stock to MidCoast on December 5, 2003. At either time, there was plenty of

money for AC to pay its 2003 tax liability as it came due.

      The Commissioner argues that we should take into account AC’s guaranty

of the MidCoast acquisition vehicles’ repayment of the loan from Sequoia, but, as

we have already discussed, that loan was a contingent liability that did not affect

AC’s solvency.

      The evidence in the record does not establish that AC became insolvent

shortly after the stock sale. The record is clear that AC had net equity following

the stock sale, even taking into account its putative tax liability. Several days later


      115
            Fla. Stat. Ann. sec. 726.103(1).
      116
            Fla. Stat. Ann. sec. 726.103(2).
      117
            Newcomb v. Commissioner, 23 T.C. 954 (1955).
                                          - 78 -

[*78] AC’s funds were moved into an account in the name of Delta Trading

Partners, but there is no evidence as to who beneficially owned this account.

Without any evidence of who owned the account, we cannot conclude that AC was

insolvent.

                8.    Factor 10: Transfer Shortly Before or Shortly After a
                      Substantial Debt

      This factor turns on when a debt to the IRS was incurred. The

Commissioner argues that we should focus on when AC’s assets were sold, which

is when the putative liability arose. Petitioners instead focus on when the return

reporting that liability was due or filed.

      The IRS’ unmatured tax liability from AC’s gain on the sale of its operating

assets gave the IRS a claim, according to the broad definition of claims under

FUFTA that includes even contingent and unliquidated rights to payment.118 Thus,

in a broad sense, AC had a debt for the putative tax at the time a transfer was

made. But because we have found that the former shareholders did not receive a

transfer from AC that left AC with insufficient assets to satisfy its tax liability, this

factor does not persuade us to find actual fraud under FUFTA either.




      118
            Fla. Stat. Ann. sec. 726.102(3); Freeman, 865 So. 2d at 1277.
                                             - 79 -

[*79]             9.    Additional Badges of Fraud Cited by the Commissioner

        The Commissioner asserts that there are badges of fraud in addition to the

enumerated factors, including unpaid State taxes and other red flags in the

MidCoast transaction. We have already addressed the red flags. And an

assumption that the AC shareholders were responsible for and did not pay State

taxes119 does not establish that the AC shareholders intended for AC to not pay its

Federal tax when due.

        The Commissioner has not established that AC made a fraudulent transfer to

petitioners with intent to hinder, delay, or defraud the IRS.

        E.        Petitioners Are Not Liable as Persons for Whose Benefit AC Made
                  Transfers Under FUFTA Sec. 726.109.

        The Commissioner asserts that petitioners are liable as persons for whose

benefit a transfer was made. In addition to providing a remedy against a

transferee, FUFTA provides creditors a remedy against a “person for whose

benefit the transfer was made”.120 This remedy allows the creditor to “recover




        119
         Mr. Lefcourt, the shareholders’ C.P.A., testified that any failure to pay
State taxes was purely an oversight.
        120
              Fla. Stat. Ann. sec. 726.109(2)(a).
                                          - 80 -

[*80] judgment for the value of the asset transferred * * * , or the amount

necessary to satisfy the creditor’s claim, whichever is less.”121

      In Stuart we explained the distinction between transferees and those who get

a benefit:

      Transferees are those who receive the money or other property.
      Those who get a benefit because someone else received the money or
      property are persons for whose benefit the transfer was made. * * *
      The paradigm ‘person for whose benefit the transfer was made’ is a
      guarantor, who receives no money but is no longer exposed to the
      liability when the underlying obligation has been satisfied. * * * A
      person may also be a benefited person if he receives something
      valuable from the transferee.[122]

      The Commissioner offers many alternative arguments to show that

petitioners are liable as persons for whose benefit AC made transfers either to the

MidCoast acquisition vehicles or to Sequoia. First, the Commissioner argues that

the transfers to the AC shareholders by either the MidCoast acquisition vehicles or

Sequoia were inextricably linked with the transfers from AC to the MidCoast

acquisition vehicles and Sequoia. Second, the Commissioner argues that AC

funds were used to repay the Sequoia loan. Third, the Commissioner argues that

the transfer from AC to the MidCoast acquisition vehicles and Sequoia were



      121
            Fla. Stat. Ann. sec. 726.109(2).
      122
            Stuart v. Commissioner, 144 T.C. at 268 (citations omitted).
                                       - 81 -

[*81] fraudulent. Fourth, the Commissioner argues that the AC shareholders

received a benefit from AC’s transfer to Sequoia by receiving a premium purchase

price for their AC shares. Finally, the Commissioner argues that AC transferred

its cash into the escrow account; AC agreed that its cash could be transferred to

Sequoia; and had AC not transferred its funds into escrow, then the AC

shareholders would not have been paid the purchase price for their shares.

      Petitioners did not receive transfers from AC, and the only transfers from

AC to the MidCoast acquisition vehicles were $169,679 on December 10, 2003,

and $1,329,848 on May 17, 2004.123 Moreover, AC did not transfer funds to

Sequoia. AC transferred $16,780,000 to an account in the name of Delta Trading

Partners on December 9, 2003, and there is no evidence of who beneficially owned

that account or what happened to that money. Accordingly, there is no evidence

linking the transfers of AC funds to the benefit of the shareholders, and the

Commissioner has not proven liability under FUFTA sec. 726.109.




      123
        The Commissioner did not put forth evidence to show that AC was
insolvent at the time of the December 2003 transfer. Even if AC could be
presumed insolvent in May 2004, the AC shareholders did not receive transfers
from AC, and the Commissioner failed to prove that the transfers the AC
shareholders received from the MidCoast acquisition vehicles, or alternatively
from Sequoia, were fraudulent. See infra p. 82.
                                        - 82 -

[*82] V.       Whether the Commissioner Has Proven Liability as a Transferee of a
               Transferee of the MidCoast Acquisition Vehicles or as a Transferee
               of Sequoia

      The Commissioner argues that petitioners are liable as “transferees of a

transferee”. The Commissioner asserts that both the MidCoast acquisition

vehicles and Sequoia were transferees of AC and that petitioners were in turn

transferees of either the MidCoast acquisition vehicles or Sequoia, hence

transferees of a transferee.

      The Court of Appeals for the First Circuit, in Frank Sawyer Trust,

articulated this transferee of a transferee liability theory and added an additional

necessary inquiry to the state of the law in this area.124 The Court of Appeals held

that Massachusetts’ Uniform Fraudulent Transfer Act does not “require, as a

prerequisite for the Trust’s liability, either (1) that the Trust knew of the new

shareholders’ scheme or (2) that the corporations transferred assets directly to the

Trust.”125 Because “[t]he IRS has presented evidence of fraudulent transfers from

the four companies to various acquisition vehicles, and the acquisition vehicles




      124
            Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at 597.
      125
            Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at 599.
                                          - 83 -

[*83] purchased the four companies from the Trust”, there is another possible way

that the Trust can be liable--as transferees of the transferee acquisition vehicles.126

      Specifically, the test that the Court of Appeals for the First Circuit

articulated in Frank Sawyer Trust was:

      (1)      if the Tax Court finds that at the time of the purchases the
               acquisition vehicles did not receive reasonably equivalent
               value and

      (2)      if either the transaction left the acquisition vehicles with
               “unreasonably small” assets, or the acquisition vehicles
               intended to incur a debt beyond its ability to pay,

then the Trust could be held liable for taxes and penalties regardless of whether it

had any knowledge of the new shareholders’ asset-stripping scheme.127

      We must analyze each transfer that was made by AC and then follow those

transfers down the line of successive transfers, evaluating whether there was a

fraudulent transfer at each link in the chain of liability.128



      126
            Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at 599.
      127
            Frank Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at 608.
      128
         In keeping with the instruction of the Court of Appeals for the First
Circuit in Frank Sawyer Trust: “[S]o long as the * * * [shareholders were]
recipient[s] of fraudulent transfers from the * * * [acquisition] vehicles, then the
IRS--as a creditor of (i.e., claimant against) the * * * [acquisition vehicles]--can
recover from the * * * [shareholders].” See Frank Sawyer Trust of May 1992 v.
Commissioner, 712 F.3d at 611.
                                          - 84 -

[*84] The first transfer by AC was in the redemption transaction, and we have

already found that was not a fraudulent transfer because reasonably equivalent

value was exchanged and because AC was not insolvent after the transaction.

        The next transfer AC made was to an account in the name of Delta Trading

Partners, but the Commissioner has not shown sufficient evidence to establish that

AC was insolvent at the time of this transfer. Indeed, there has been no evidence

presented that those funds were not still under the control of, available to, or for

the benefit of, AC.

        The subsequent transfer was from AC to one of the MidCoast acquisition

vehicles, but the Commissioner has not put forth evidence to show that AC was

insolvent at the time of this transfer.

        Indeed, AC cannot be inferred to have been insolvent at the time of these

transfers according to the evidence we have before us. The earliest time we could

infer insolvency is when the presumption of insolvency arises under FUFTA sec.

726.103(2), which provides that a “debtor who is generally not paying his or her

debts as they become due is presumed to be insolvent.” That first occurred when

AC failed to pay its 2003 Federal tax when it became due and owing on April 15,

2004.
                                       - 85 -

[*85] Even assuming AC was insolvent on April 15, 2004, and assuming the

$1,329,848 transferred to the MidCoast acquisition vehicle MCC on May 17,

2004, was a fraudulent transfer, the Commissioner has failed to offer any evidence

about the MidCoast acquisition vehicles’ remaining assets (let alone whether they

were “unreasonably small”) or that the MidCoast acquisition vehicles intended to

incur debt beyond their ability to pay.129 Accordingly, any transfer from the

MidCoast acquisition vehicles to the AC shareholders cannot be fraudulent under

the test outlined in Frank Sawyer Trust and applied under FUFTA.

      Likewise, the Commissioner failed to offer any evidence of Sequoia’s

remaining assets (let alone whether they were “unreasonably small”) or that

Sequoia intended to incur debt beyond its ability to pay. Accordingly, any transfer

Sequoia made to the MidCoast acquisition vehicles cannot be fraudulent under the

test outlined in Frank Sawyer Trust and applied under FUFTA.

VI.   Conclusion

      The Commissioner seeks to impute transferee liability to petitioners for

taxes that went unpaid by a corporation in which they previously owned an

interest. Petitioners took steps to ensure those taxes would get paid. The


      129
       We do not need to address the reasonably equivalent value prong because
the Commissioner has not satisfied the second part of the test.
                                        - 86 -

[*86] corporation itself remained solvent even after the shareholders sold their

interests, leaving the Commissioner to argue that petitioners should be liable under

a “transferee of a transferee” theory. But the Commissioner failed to show that

any of the transferors were insolvent at any of the relevant times.

      Although far greater in complexity, these cases are reminiscent of Terrace

Corp. v. Commissioner.130 In that case we stated:

      It may well be that respondent could have proved that the transfer
      which Aycock and his wife made to petitioner on July 12, 1933, was
      made while he was insolvent or that the transfer itself rendered him
      insolvent, but he did not prove it and we know of no authority for us
      to supply by inference what respondent has failed to prove. The
      statute places the burden of proof to show transferee liability upon
      respondent and that means that he must prove all elements which are
      necessary to make out a prima facie case. * * * [131]

      To reflect the foregoing,


                                                 An appropriate order will be issued,

                                       and decisions will be entered for petitioners.




      130
            37 B.T.A. 263 (1938).
      131
            37 B.T.A. at 267.
