                       T.C. Memo. 2011-297



                     UNITED STATES TAX COURT



         RAY FELDMAN, TRANSFEREE, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 26737-08,   27386-08,   Filed December 27, 2011.
                 27387-08,   27388-08,
                 27389-08,   27390-08,
                 27391-08,   27392-08,
                 27393-08.



     Robert Edward Dallman, for petitioners.

     George W. Bezold, for respondent.




     1
      Cases of the following petitioners are consolidated
herewith for opinion: Sharon L. Coklan, Transferee, docket No.
27386-08; Jill K. Reynolds, Transferee, docket No. 27387-08; Jan
Reynolds, Transferee, docket No. 27388-08; Carrie Donahue,
Transferee, docket No. 27389-08; Rhea Dugan, Transferee, docket
No. 27390-08; Emma McClintock, Transferee, docket No. 27391-08;
Robert Donahue, Transferee, docket No. 27392-08; and Richard
Feldmann, Transferee, docket No. 27393-08.
                                - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:    In these consolidated cases respondent

determined transferee liability against petitioners relating to

an agreed and unpaid $593,979 Federal income tax liability of

Woodside Ranch Resort, Inc. (Woodside Ranch), for 2002, plus an

addition to tax, penalties, and interest relating to Woodside

Ranch’s unpaid 2002 Federal income tax liability.   The amount of

each petitioner’s respective transferee liability as calculated

by respondent is as follows:   Ray Feldman--$542,514; Sharon L.

Coklan--$117,013; Jill K. Reynolds--$42,550; Jan Reynolds--

$212,751; Carrie Donahue--$95,738; Rhea Dugan--$41,274; Emma

McClintock--$95,738; Robert Donahue--$21,275; and Richard

Feldmann--$309,765.

     The transferee liability determined against each petitioner

is based largely on respondent’s conclusion that a purported July

18, 2002, sale2 by petitioners of shares of stock in Woodside

Ranch constituted a sham transaction not dissimilar from the

abusive tax-avoidance transaction described in Notice 2001-16,

2001-1 C.B. 730 (referred to as an intermediary transaction).




     2
      In our findings of fact, use of the words “sale”,
“purchase”, and similar words generally is for convenience and is
not intended to and does not constitute a finding that the
referenced transactions constituted a valid transaction to be
recognized for Federal income tax purposes.
                                 - 3 -

     The issue for decision is whether petitioners are liable

under section 6901 as transferees for their respective shares of

Woodside Ranch’s $593,979 Federal income tax liability for 2002,

plus the addition to tax, penalties, and interest.3

                         FINDINGS OF FACT

     Many of the facts have been stipulated and are so found.

     At the time of filing their separate petitions, petitioners

resided in Wisconsin, Florida, and Arizona.    Trial was held on

November 17, 2010, in Milwaukee, Wisconsin.

     In the 1920s Woodside Ranch was established and began

business as a Wisconsin corporation with its place of business in

Mauston, Wisconsin.

     From its incorporation until May of 2002 Woodside Ranch

owned and operated a dude ranch resort offering, among other

activities, horseback riding, swimming, boating, hiking, fishing,

snow skiing, and snowmobiling, along with accommodations.

     The historic shareholders in Woodside Ranch were William

Feldman and his five children.    In 2002, at the time of the

transactions before us, Woodside Ranch stock was owned by 10

shareholders, 9 of whom were grandchildren or great-grandchildren

of William Feldman.   They are petitioners herein.    The 10th



     3
      Unless otherwise indicated, all section references are to
the Internal Revenue Code applicable to the year before us, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
                               - 4 -

shareholder, Lucille Nichols, daughter of William Feldman, has

died, and her estate is not involved in these consolidated cases.

     Just before the 2002 transactions involved in these cases,

the officers of Woodside Ranch were:   President--decedent Lucille

Nichols; vice president--Richard Feldmann; secretary--Ray

Feldman; and treasurer--Carrie Donahue.   These same individuals

also were the directors of Woodside Ranch.

     On average, each year 6 to 20 accidents resulting in

injuries to customers occurred at Woodside Ranch.   Only a few of

these accidents resulted in formal claims against Woodside Ranch.

The injuries that occurred at Woodside Ranch typically were not

serious, and personal injury claims were satisfied by Woodside

Ranch with in-kind compensation (e.g., free return visits to the

ranch for the injured customers and their families) plus the

payment by Woodside Ranch of medical expenses.   After the

transactions described below that occurred in the spring and

summer of 2002, only one personal injury claim against Woodside

Ranch resulted in a payment to an injured customer.   That payment

was for $50,000.

     Although the sporting and other activities at Woodside Ranch

involved some risk of personal injury for Woodside Ranch

customers, over the years Woodside Ranch did not obtain

comprehensive personal injury insurance covering potential

injuries.   Such comprehensive insurance was available but
                                 - 5 -

expensive, and management of Woodside Ranch chose not to purchase

it.   Woodside Ranch did carry several insurance policies that

covered some activities at the ranch.4   As stated, for many years

including 2002 Woodside Ranch management was unwilling to pay the

high cost of comprehensive liability insurance covering

participant sports activities.

Sale of Woodside Ranch’s Assets

      In the late 1990s and early 2000s the owners and management

of Woodside Ranch faced significant challenges to the continued

operation of the ranch:   Increased competition from Wisconsin

casinos and water parks; aging of the Woodside Ranch shareholders

and directors; and lack of interest on the part of the

shareholders and the Feldman next generation in continued

operation of the ranch.   As a result, the shareholders of

Woodside Ranch began a search for a buyer of either their stock

in Woodside Ranch or of the assets of Woodside Ranch.

      The shareholders were interested in minimizing the tax

liabilities associated with a sale of their interests in Woodside

Ranch.    A corporate asset sale would trigger significant Federal

and State corporate income tax liabilities.5


      4
      For example, Woodside Ranch carried landlord/tenant-type
insurance relating to the buildings and property.
      5
      In an opinion letter, Woodside Ranch’s accountant estimated
that a sale of Woodside Ranch assets would trigger Federal and
State corporate income taxes of approximately $595,700 and
                                                   (continued...)
                               - 6 -

     In the fall of 2001 negotiations began with an individual

named Damon Zumwalt (Zumwalt) for the sale of Woodside Ranch,

with the expectation on both sides that commercial operation of

the dude ranch would be continued by Zumwalt.   A stock sale was

proposed to Zumwalt, who “just laughed and chuckled and said,

‘not on your life, it’s got to be an asset sale’.”

     On May 17, 2002, after several months of negotiations, the

operating assets and business of Woodside Ranch were sold to

Woodside Ranch, LLC (WRLLC), for $2.6 million in cash

(hereinafter often referred to as the asset sale or the Zumwalt

asset sale).   Zumwalt was the sole owner and sole member of

WRLLC.   On this asset sale, the net cash proceeds received by

Woodside Ranch were $2,301,089.

     In a June 5, 2002, memorandum to the Woodside Ranch

shareholders, petitioner Ray Feldman referred to the above

estimated taxes as posing a “dilemma” for the shareholders.

Also, Woodside Ranch management and shareholders were aware that

under Wisconsin law they might be able to limit their individual

liability relating to potential personal injury claims of

customers arising from ranch activities if the sale of Woodside

Ranch took the form of a stock sale with the new owners of the




5
 (...continued)
$152,000, respectively.
                              - 7 -

Woodside Ranch stock assuming the liabilities of Woodside Ranch,

including risks relating to potential personal injury claims.6

     The total combined Federal and State income tax liability

that Woodside Ranch incurred on the asset sale was approximately

$750,000, of which the officers, directors, and shareholders of

Woodside Ranch at all relevant times were aware.

     After the asset sale to Zumwalt, Woodside Ranch had no

operating assets and ceased to engage in any meaningful business

activity.

Efforts To Avoid Payment of Tax Liabilities

     In the early spring of 2002 Fred Farris (Farris), an

accountant and financial adviser to Woodside Ranch and to some of

the individual shareholders, introduced the Woodside Ranch

officers, directors, and shareholders to MidCoast Credit Corp.

and to MidCoast Acquisition Corp. (collectively MidCoast).

MidCoast was owned directly or indirectly 50 percent by Michael

Bernstein and 50 percent by Honora Shapiro.

     Representatives of MidCoast claimed to have expertise in tax

matters and provided to the Woodside Ranch officers promotional

materials which outlined a potential tax-avoidance transaction as

an alternative to a liquidation of Woodside Ranch.



     6
      If a liquidation of Woodside Ranch occurred, creditors
would be able to bring claims directly against Woodside Ranch
shareholders who received corporate assets on the liquidation.
See Wis. Stat. Ann. sec. 180.1408(2) (West 2002).
                              - 8 -

     Under the transaction presented by the MidCoast

representatives, the shareholders of Woodside Ranch allegedly

would be relieved of a significant portion, if not all, of

Woodside Ranch’s combined Federal and State income tax liability

of approximately $750,000 relating to the Zumwalt asset sale.

     On June 11, 2002, in spite of the MidCoast promotional

materials that had been received, the Woodside Ranch finance

committee, consisting of petitioners Carrie Donahue, Ray Feldman

and Richard Feldmann, met and adopted a resolution recommending

that a plan of liquidation for Woodside Ranch be adopted.

     However, the Woodside Ranch board of directors did not adopt

the recommended plan of liquidation, and the Woodside Ranch

directors chose instead to pursue the alternative tax-avoidance

transaction proposed by MidCoast mentioned above and described

more specifically below.

      As reflected in written notations of petitioner Ray Feldman

of a meeting that apparently occurred later in the day on June

11, 2002, the MidCoast representatives explained that under the

MidCoast proposal MidCoast would purchase bad debts from entities

unrelated to target corporations (such as Woodside Ranch) and

would use the bad debts to offset or eliminate unpaid tax

liabilities of the newly acquired target corporations.   The

MidCoast representatives explained that the “Income comes in tax
                                 - 9 -

free by using NOL”, and “So * * * [you] create * * * [a] loss--

lower deferred tax liability”.    (Emphasis added.)

     On June 17, 2002, MidCoast representatives explained over

the phone to Woodside Ranch officers that if Woodside Ranch was

not liquidated and if the cash Woodside Ranch received on the

Zumwalt asset sale was not distributed directly to the

shareholders, but instead the shareholders agreed to sell to

MidCoast their Woodside Ranch stock, MidCoast would pay to the

MidCoast shareholders a “‘premium’ of approximately $200,000 to

250,000” for their stock (hereinafter sometimes referred to as

the MidCoast premium).

     The MidCoast premium that the Woodside Ranch shareholders

would receive was to be calculated as a percentage (between 25

and 33 percent) of the approximate combined Federal and State

corporate income tax liability Woodside Ranch had incurred as a

result of the Zumwalt asset sale.    Notations reflecting the

MidCoast representations explain:    “The exact figure for the

premium would be set on a percentage formula based upon the

amount of State and Federal tax owed as a result of sale of

Woodside assets to Damon Zumwalt and Woodside Ranch, LLC.”

     Representatives of MidCoast repeatedly explained to the

Woodside Ranch officers that if the Woodside Ranch stock was sold

to MidCoast or to a MidCoast-related entity, MidCoast or its

related entity would obtain bad debt losses from other companies
                              - 10 -

and use those losses to offset or eliminate the tax liabilities

of Woodside Ranch.

     The transaction proposed by the representatives of MidCoast

was also referred to by the MidCoast representatives as a “no-

cost liquidation”.   (Emphasis added.)   In other words, instead of

directly liquidating Woodside Ranch and distributing to the

Woodside Ranch shareholders the cash proceeds from the Zumwalt

asset sale (less the combined Federal and State tax liability

that would have been paid), the MidCoast proposal was designed so

that the cash, in effect, still could be “liquidated” or

transferred to the Woodside Ranch individual shareholders, but

indirectly and via a few additional steps, as follows:   A

purported or nominal sale of the Woodside Ranch stock to

MidCoast; a transfer by MidCoast to the Woodside Ranch individual

shareholders of the cash that would have been distributed to the

shareholders on a direct liquidation of Woodside Ranch (i.e., the

net proceeds available from Woodside Ranch for a liquidating

distribution plus a “premium”--one-third of the taxes owed); and

MidCoast would avoid paying the tax liabilities the Woodside

Ranch shareholders would have had to pay on a direct liquidation.

All this allegedly was to be made possible by MidCoast’s use of

bad debt losses from other companies to offset the reportable

Woodside Ranch gain on the Zumwalt asset sale.
                                - 11 -

     On June 17, 2002, Woodside Ranch’s finance committee met and

adopted a resolution to pursue further with the shareholders the

sale of Woodside Ranch’s stock to MidCoast as proposed in the

MidCoast promotional materials.

     As reflected in minutes of a June 17, 2002, Woodside Ranch

finance committee meeting, the amount MidCoast would pay the

Woodside Ranch shareholders for 100 percent of the outstanding

Woodside Ranch stock would not be based on the value of the

Woodside Ranch stock.   (Such a valuation would have included the

approximate $1.8 million in cash that Woodside Ranch had on hand

from the Zumwalt sale.)   Rather, the minutes state that the

amount to be paid would be based on the premium or a percentage

(approximately 33 percent) of the taxes due on the Zumwalt sale.

The minutes state as follows:

     [T]he sale of 100% of the stock of Woodside Ranch
     Resorts, Inc., shareholders to MidCoast Investments,
     Inc. in exchange for a “premium” of approximately
     $200,000 to $250,000. The exact figure or total
     amount of the payment for the premium would be set
     on a percentage formula based upon the amount of
     State and Federal tax owed as a result of sale of
     Woodside assets * * *.

     As described in the above minutes, the proposal from

MidCoast to pay approximately $250,000 for 100 percent of the

Woodside Ranch stock was not tied to the value of Woodside Ranch

stock or to the $1.8 million in cash that Woodside Ranch had on

hand, but on a split of Woodside Ranch’s tax liabilities intended

to go unpaid or be offset via the use of net operating losses
                              - 12 -

(NOLs).   In the above minutes, no mention is made of the cash

Woodside Ranch held from the Zumwalt asset sale.

     The minutes of the June 17, 2002, finance committee meeting

also state that, upon a purchase by MidCoast, Woodside Ranch

would

     become part of * * * [MidCoast’s] staple of companies
     that they are supervising for the purpose of utilizing
     tax losses which they acquired by buying credit card
     companies bad debts and losses to offset against
     profitable “C Corps” who have a situation like
     Woodside’s wherein a large tax * * * [liability exists]
     * * *.

     The obvious and only benefit to MidCoast and its owners was

that they would end up with cash in their pockets equal to two-

thirds of the amount of Woodside Ranch’s unpaid tax liabilities.

     During the weeks that the Woodside Ranch representatives

were in discussion with the MidCoast representatives, Woodside

Ranch representatives made a number of phone calls and undertook

to find out information about MidCoast.   However, we are not

convinced, and in our opinion the credible evidence in these

cases does not establish, that the Woodside Ranch shareholders

and their representatives undertook a sufficiently in-depth and

thorough due diligence investigation of MidCoast.

     On June 18, 2002, MidCoast sent a letter of intent to

Woodside Ranch in which MidCoast represented that--on the basis

of 30 percent of the Woodside Ranch estimated $750,000 combined

Federal and State tax liability--the Woodside Ranch shareholders
                                - 13 -

together would receive approximately $210,000 more if the nominal

stock sale to MidCoast was used, thereby converting the

liquidation into the referred-to “no-cost” liquidation.     The

following comparison chart was included in the letter of intent

to estimate roughly the promised benefits of the MidCoast

transaction:

                                                 Shareholders
                                                 Sell Stock of
                                                 Company to
                           Shareholders          MidCoast [The
                           Liquidate Company     “No Cost”
                           w/out MidCoast        Liquidation]

  Asset Sales Proceeds         $2,600,000         $2,600,000
  Less: Federal & State
    Income Taxes                (747,704)           (747,704)
  Less: RE Commission           (117,000)           (117,000)
  Less: Title Insurance           (2,000)             (2,000)
  Less: Notes Payable           (318,400)           (318,400)
  Less: Misc. Adjustments         (8,000)             (8,000)

  Net Proceeds Available
    to Shareholders            1,406,896              N/A

  Plus: MidCoast Premium
    to Shareholders                N/A               224,311

  MidCoast Stock
    Purchase Price [or
    “Net Proceeds Available
    to Shareholders”]              N/A             1,631,207

     On June 19, 2002, petitioner Ray Feldman sent a letter to

the other Woodside Ranch shareholders discussing, among other

things, MidCoast’s proposal.    Specifically, petitioner Ray

Feldman noted:

     The assets * * * [were] sold by the deed and bill of
     sale on May 17th to [WRLLC] which of course is owned by
                             - 14 -

     Damon Zumwalt. Therefore, the corporation Woodside
     Ranch Resort, Inc. is basically an “empty shell” but
     which consists of the cash at the time of sale of Two
     Million Two Hundred Seventy Six Thousand eighty-eight
     Dollars and fifty-six cents.

        *       *       *       *       *       *         *

     MidCoast promises * * * to pay Woodside’s taxes because
     the corporation would not be liquidated but instead be
     kept alive as a going concern as part of the MidCoast
     organization. This deal is profitable for MidCoast
     because MidCoast purchases large amounts of defaulted
     and delinquent credit card amounts from the major
     credit card companies * * * and carries forward such
     losses to offset against the purchase of “profitable”
     corporations such as Woodside.

     On the basis of the above evidence we have summarized (and

contrary to some testimony and documentary evidence in these

cases), it is absolutely clear that all individuals involved with

Woodside Ranch and MidCoast were aware that MidCoast and its

representatives had no intention of ever paying the tax

liabilities of Woodside Ranch and also that the source of the

approximately $225,000 MidCoast premium to be received by the

Woodside Ranch shareholders was to come from the unpaid tax

liability.

     On June 27, 2002, a limited liability company was formed

under the name of Woodsedge, LLC (Woodsedge), with the Woodside

Ranch shareholders as its sole members, each having the same

ownership percentage in Woodsedge as they had in Woodside Ranch.

     On July 11, 2002, petitioners Ray Feldman and Richard

Feldmann met with MidCoast representatives and others to discuss
                              - 15 -

further the terms of the proposed purchase of the Woodside Ranch

stock by MidCoast, referred to as a share purchase agreement

(SPA).   During that meeting, petitioners raised a question about

their exposure to transferee liability relating to Woodside

Ranch’s tax liabilities.

     On July 18, 2002, for reasons not clear in the trial record,

Woodside Ranch redeemed 154 of the outstanding shares of Woodside

Ranch stock and distributed therefor to its shareholders $300,326

in cash and other assets (the redemption proceeds).   The parties

explain that the fair market value of the redemption proceeds was

later reduced to $293,728, and the total redemption proceeds were

assigned and transferred by the Woodside Ranch shareholders to

Woodsedge.

     After the above partial redemption and moments before the

effective date of the stock sale to MidCoast, Woodside Ranch had

$1,835,209 in cash on hand from the Zumwalt asset sale and an

approximate combined Federal and State income tax liability of

$750,000.

     Also on July 18, 2002, the Woodside Ranch shareholders and

MidCoast entered into the SPA.   Under the SPA, the stated

purchase price to MidCoast for the Woodside Ranch stock was

“equal to (a) the amount of Cash-on-Hand, less (b) $492,139.20”.

The $492,139.20 represented a percentage (roughly 70 percent) of
                             - 16 -

the estimated “Deferred Tax Liabilities” of approximately

$750,000.

     Still on July 18, 2002, in anticipation of the closing of

the SPA, two escrow agreements were executed:   The first by

MidCoast, Woodside Ranch, the Woodside Ranch shareholders, and

the law firm of Foley & Lardner (Foley) (hereinafter referred to

as the sellers’ escrow agreement); the second by MidCoast, Honora

Shapiro (Shapiro), Shapiro’s attorney, and Foley (hereinafter

referred to as purchasers’ escrow agreement).

     Under both escrow agreements Foley was to act as escrow

agent and all funds involved in the stock sale were to be wired

into and out of the same trust account of the Foley law firm (the

trust account).

     On July 18, 2002, the following steps were taken:

          (1) $1,835,209 (Woodside Ranch’s remaining cash on
     hand from the Zumwalt asset sale and after the $300,326
     cash redemption) was transferred into the trust
     account;

          (2) $1.4 million from Shapiro was transferred into
     the trust account purporting to represent a loan from
     Shapiro to MidCoast allegedly to fund the MidCoast
     stock purchase;7

          (3) the purported sale to MidCoast by the Woodside
     Ranch shareholders of their remaining Woodside Ranch
     stock closed;




     7
      The record does not indicate that the purported Shapiro
“loan” was evidenced by a promissory note, nor that Shapiro
received any security or collateral relating thereto.
                               - 17 -

          (4) $1,344,452 (viz., the $1,835,209 cash less the
     $492,139 portion of the combined Federal and State tax
     liability to be retained by MidCoast) (hereinafter
     sometimes referred to as the Woodside Cash)8 was
     transferred from the trust account into an account of
     Woodsedge in favor of petitioners and which amount
     included the approximate $225,000 MidCoast premium;

          (5) $1.4 million was transferred back to Shapiro
     in return of the purported loan Shapiro had made to
     MidCoast earlier that same day (see (2) above); and

          (6) $38,000 was transferred out of the trust
     account to Foley for legal and escrow fees.9

     Section 7.1 of the SPA states that the above cash transfers

were to be treated as occurring simultaneously.    The schedule

below highlights the reality that the above cash transfers

occurred on the same day and within minutes or hours of each

other:

         July 18, 2002                  Event

          12:09 p.m.     $1,835,209 Woodside Ranch cash
                         transferred into the Foley trust
                         account;

           1:34 p.m.     $1.4 million cash purportedly lent
                         from Shapiro to MidCoast transferred
                         into the Foley trust account;

           3:35 p.m.     $1,344,451 cash transferred out of the
                         Foley trust account into an account of
                         Woodsedge in favor of petitioners;



     8
      Cash of $1,835,209 less $492,139 equals $1,343,070. The
record does not explain why an extra $1,382 was transferred from
the Foley trust account into the Woodsedge account in favor of
the Woodside Ranch shareholders.
     9
      Farris’ accounting firm also received a $25,000 finder’s
fee for introducing MidCoast to the Woodside Ranch shareholders.
                              - 18 -

         3:36 p.m.      $1.4 million cash transferred out of
                        the trust account back to Shapiro.

     Per the sellers’ escrow agreement, both the $1,344,451

(which petitioners received out of escrow on the purported sale

of their stock to MidCoast) and the $452,728.84 (which MidCoast

received) were to be paid, and they were paid from the sellers’

escrow fund into which was deposited the $1,835,209 proceeds from

the asset sale.   In the sellers’ escrow agreement, no express

mention is made of any other funds being deposited into escrow to

be transferred to the sellers.   We quote from the express

language of the sellers’ escrow agreement:

     The Escrow Agent acknowledges receipt of the aggregate
     amount of * * * $1,835,209.08 (such amount, less
     distributions therefrom in accordance with this
     Agreement, being referred to herein as the “Escrow
     Fund”) from * * * [Woodside Ranch].

        *         *      *       *       *        *       *

     The Escrow Agent shall immediately on the Closing Date
     * * * pay over to (A) Woodsedge on behalf of the * * *
     [petitioners] from the Escrow Fund $1,344,451.52 by
     wire transfer of immediately available funds to a bank
     account of * * * [petitioners’] designation set forth
     in the Instructions; (B) * * * [Woodside Ranch] from
     the Escrow Fund $452,728.84 by wire transfer of
     immediately available funds to a bank account of
     * * * [Woodside Ranch’s] designation set forth in the
     Instructions.

     Per the purchaser’s escrow agreement, the purported $1.4

million loan from Shapiro was not to be disbursed until the

$1,835,209 proceeds of the Woodside Ranch asset sale were placed

into the escrow fund, and only then was:     $1,344,351 to be
                              - 19 -

disbursed to Woodsedge on behalf of the Woodside Ranch

shareholders; $452,728.84 to be disbursed to Midcoast; and $1.4

million to be “immediately” returned to Shapiro without interest.

The closing statement shows $1.4 million coming from Shapiro and

going back to Shapiro as part of the very same closing

transaction.

     The $1.4 million from Shapiro came into escrow only

momentarily and went right back to Shapiro without ever serving a

legitimate, economic purpose in this transaction.   Were it a

legitimate loan, the $1.4 million would have been outstanding for

a period of time and would have had some business purpose.

Interest would have been charged.   There would have been a

written promissory note.   The $1.4 million from Shapiro

constitutes a ruse, a recycling, a sham.

     Within 4 days after the SPA closed, the $452,729 balance in

the trust account was transferred out of the trust account into a

SunTrust bank account in the name of Woodside Ranch, which by

that point in time was controlled by MidCoast.

     On or about July 22, 2002, April 2003, and August 8, 2005,

each of the individual Woodside Ranch shareholders received from

Woodsedge his or her respective share of the $293,728 redemption

proceeds and of the $1,344,451 cash that passed through the Foley

trust account as described above.
                              - 20 -

     Included in the SPA was a representation by the shareholders

of Woodside Ranch that, as of the time of the SPA, Woodside Ranch

had no liabilities, direct or contingent, other than the combined

Federal and State tax liability.

     Included in the SPA was a guarantee and release in favor of

petitioners to the effect that, as between petitioners and

MidCoast, the maximum amount MidCoast could seek from petitioners

relating to personal injury claims made by customers of Woodside

Ranch was equal to the $224,311 MidCoast premium (i.e., to the

portion of the taxes that were to go unpaid and that were to be

retained by petitioners).10

     Also, the SPA contained a provision prohibiting MidCoast

from liquidating or dissolving Woodside Ranch within 4 years of

the July 18, 2002, closing of the stock sale.11

Woodside Ranch After the Closing of the Purported Stock Sale

     After the purported stock sale to MidCoast, MidCoast was the

nominal sole shareholder of Woodside Ranch.   Woodside Ranch had

$452,729 cash on hand, a combined Federal and State tax liability


     10
      As stated earlier, after the above transactions with
MidCoast, petitioners made only one payment relating to personal
injury claims arising from activities of Woodside Ranch before
July 18, 2002, which resulted in a payment by petitioners and
others of $50,000.
     11
      Petitioners presumably wanted this provision both as added
protection against potential personal injury claims arising from
Woodside Ranch activities and to protect against petitioners’
personal exposure to transferee liability for Woodside Ranch’s
unpaid income tax liabilities relating to the asset sale.
                              - 21 -

of approximately $750,000, and no operating assets.     Woodside

Ranch was rendered insolvent as a result of the payment by it of

the redemption proceeds, the payment of the Woodside cash to the

Woodside Ranch shareholders, and the return to Shapiro of his

$1.4 million.

     After the above transactions with MidCoast, Woodside Ranch

had no paid employees and no income (other than nominal interest

income).   However, MidCoast charged Woodside Ranch a

“professional service fee” of $250,000, and from August to

December 2002 MidCoast charged Woodside Ranch $30,000 per month

as a management fee, even though there were essentially no assets

to manage.   Woodside Ranch’s SunTrust account records show

withdrawals of $300,000 and $142,000 on July 19 and 22, 2002,

respectively.   As a result of these withdrawals, Woodside Ranch

was unable to pay the July or August 2002 management fees it

nominally owed MidCoast.

     An amount of $1,181,249 was entered on the books of Woodside

Ranch as a loan due from MidCoast to Woodside Ranch.     This

purported loan receivable in favor of Woodside Ranch apparently

was based on the treatment of the $1.4 million in cash that, on

July 18, 2002, was returned out of the Foley trust account to

Shapiro.   Woodside Ranch and MidCoast treated part (i.e.,

$1,181,249) of the $1.4 million returned to Shapiro as if it had
                              - 22 -

been returned to Shapiro not by MidCoast, but by Woodside Ranch

and that MidCoast somehow owed Woodside Ranch $1,181,249.

     In December of 2003 MidCoast purportedly sold all of the

stock of Woodside Ranch to Wilder Capital Holdings, LLC (Wilder),

for no cash and for the “assumption” by Wilder of MidCoast’s

purported $1,181,249 loan obligation to Woodside Ranch.

     Wilder made no payment on this purported loan assumption,

and within 1 month, by January 29, 2004, the purported $1,181,249

loan and a promissory note of Wilder’s relating thereto were

marked “paid”.12

     On September 12, 2003, Woodside Ranch’s 2002 Federal

corporate income tax return was filed showing a tax due of

$454,292, all relating to the Zumwalt asset sale.   By that time,

Woodside Ranch, of course, had no funds, and Woodside Ranch’s

Federal income tax liability was not paid with the filing of the

return.

     On February 22, 2005, Woodside Ranch’s 2003 Federal

corporate income tax return was filed claiming a net operating

loss (NOL).   This claimed NOL was carried back to 2002 and

thereby reduced Woodside Ranch’s reported 2002 Federal income tax

liability to zero.


     12
      Wilder’s obligation on the assumed purported Midcoast debt
to Woodside Ranch should have been, were it legitimate, reflected
in a promissory note running from Wilder in favor of Woodside
Ranch. In fact, however, a promissory note of Wilder relating
thereto was issued in favor of MidCoast.
                                - 23 -

     Woodside Ranch was administratively dissolved on August 13,

2009.

     On audit, respondent disallowed all but $5,432 of the 2003

NOL claimed by Woodside Ranch on the grounds that the NOL was

based on sham loans and was part of an illegal distressed

asset/debt (DAD) tax shelter.    Petitioners have stipulated that

this DAD tax shelter was illegal, that the claimed 2003 NOL was

not allowable, and that respondent properly disallowed the NOL

carryback to 2002.13

     On September 11, 2006, respondent sent to Woodside Ranch a

notice of deficiency setting forth respondent’s determination of

Woodside Ranch’s $594,000 Federal income tax deficiency for 2002

plus an estimated tax penalty under section 6654, delinquency

additions to tax under section 6651(a)(2) and (3), and an

accuracy-related penalty under section 6662(b)(1).   Woodside

Ranch did not file a petition in this Court challenging the



        13
       Generally, in a DAD tax shelter a domestic partnership
claims a loss relating to a purported contribution of a built-in
loss asset. The partnership typically will contribute the asset
to a lower tier partnership, which in turn will sell that asset
to another (sometimes related) entity, thereby purportedly
incurring a significant loss. The reported loss passes through
to the upper tier partnership, which allocates and passes through
the loss to the domestic partners; the domestic partners offset
other income or gain with the purported loss. The overall effect
is that the domestic partner-taxpayers reap the benefits of the
built-in loss asset without ever having incurred the costs
associated therewith. See IRS Coordinated Issue Paper,
“Distressed Asset/Debt Tax Shelters”, LMSB-04-0407-031 (Apr. 18,
2007).
                                    - 24 -

notice of deficiency, nor did Woodside Ranch file a complaint in

any other court relating to its 2002 Federal income tax

liability.

        Petitioners took no actions to ensure that the Woodside

Ranch Federal income tax liability triggered by the Zumwalt asset

sale would be paid14 and, as stated, it remains unpaid.15

     Respondent investigated whether Woodside Ranch had any

available assets from which to collect Woodside Ranch’s unpaid

2002 Federal income tax liability and determined that it had

none.

     On September 15, 2008, respondent sent notices of transferee

liability to petitioners, each notice identifying Woodside Ranch

as the transferor with an unpaid Federal income tax liability of

approximately $594,000 plus additions to tax, penalties, and


        14
             Sec. 2.11 of the SPA provided that

        All Taxes due and payable by the Company on or prior to
        the Closing Date, including without limitation those
        which are called for by the Tax Returns, or heretofore
        claimed to be due by any taxing authority from the
        Company, have been paid, except for the Deferred Tax
        Liability, which liability is assumed by the Purchasers
        hereunder.

Sec. 2.9 of the SPA defines “Deferred Tax Liability” and
apparently limits it to $703,056.
        15
      It should be noted that the Woodside Ranch $153,725
Wisconsin corporate income tax liability for 2002 was paid by
MidCoast when MidCoast representatives learned (apparently to
their surprise) that Wisconsin law did not permit NOL deductions
to be carried back and to offset prior year State corporate
income tax liabilities.
                             - 25 -

interest for a total of $1,057,216.    The transferee notices

indicated the total amount each petitioner received in the stock

redemption and purported stock sale and calculated each

petitioner’s individual transferee liability accordingly.

     An attachment to each notice of transferee liability stated

in relevant part:

     It is determined that the transaction in which
     shareholders of Woodside Ranch Resort, Inc. purportedly
     * * * sold stock of Woodside Ranch Resort, Inc. to
     MidCoast Acquisitions Corporation and MidCoast Credit
     Corporation on July 18, 2002 is not respected for tax
     purposes. This transaction is substantially similar to
     an Intermediary transaction shelter described in notice
     2001-16, 2001-1 C.B. 730 and Notice 2008-20, 2008-6
     I.R.B. 406.

     It is determined that, in substance, Woodside Ranch
     Resort, Inc. ceased business activity on July 18, 2002,
     and that the allocation set forth in Exhibit 1 [showing
     petitioners’ share of the deemed transferred assets] is
     attributable to you in liquidation or distribution of
     assets of Woodside Ranch Resort, Inc. on that date.16

                             OPINION

     In determining whether petitioners are liable under section

6901 as transferees for Woodside Ranch’s unpaid Federal income

tax liability, we first consider whether the July 18, 2002,

purported stock sale between petitioners and MidCoast is, for

Federal income tax purposes, to be recognized as such or is to be

treated as a sham.




     16
      Petitioners do not contest their liability as transferees
relating to the $293,729 redemption proceeds they received.
                               - 26 -

Economic Substance or Sham

     Taxpayers generally are free to structure their business

transactions as they wish, even if motivated in part by tax

reduction considerations.    Gregory v. Helvering, 293 U.S. 465

(1935); Rice’s Toyota World, Inc. v. Commissioner, 81 T.C. 184,

196 (1983), affd. on this issue 752 F.2d 89 (4th Cir. 1985).

     However, a transaction which lacks economic purpose and

substance other than sought-after tax avoidance may be treated as

a sham and disregarded for Federal income tax purposes.      Frank

Lyon Co. v. United States, 435 U.S. 561 (1978); Rice’s Toyota

World, Inc. v. Commissioner, supra at 196.    The economic

substance of a transaction, rather than its form, controls.

Commissioner v. Court Holding Co., 324 U.S. 331 (1945); Gregory

v. Helvering, supra; Amdahl Corp. v. Commissioner, 108 T.C. 507,

516-517 (1997).

     The “labels, semantic technicalities, and formal written

documents do not necessarily control the tax consequences of a

given transaction.”   Houchins v. Commissioner, 79 T.C. 570, 589

(1982); see also Ocmulgee Fields, Inc. v. Commissioner, 613 F.3d

1360, 1368 (11th Cir. 2010), affg. 132 T.C. 105 (2009); Teruya

Bros., Ltd. v. Commissioner, 580 F.3d 1038, 1043 (9th Cir. 2009),

affg. 124 T.C. 45 (2005); Yosha v. Commissioner, 861 F.2d 494,

499 (7th Cir. 1988), affg. Glass v. Commissioner, 87 T.C. 1087

(1986).
                              - 27 -

     As we recently stated, for Federal income tax purposes a

transaction may be disregarded if the transaction was entered

into not for valid business purposes but rather for “tax benefits

not contemplated by a reasonable application of the language and

purpose of the Code or its regulations.”    Palm Canyon X Invs.,

LLC v. Commissioner, T.C. Memo. 2009-288.    Even if a transaction

is not treated as a sham, it still may be recast in order to

reflect its true nature.   Gaw v. Commissioner, T.C. Memo. 1995-

531 (citing Packard v. Commissioner, 85 T.C. 397, 419-422

(1985)), affd. without published opinion 111 F.3d 962 (D.C. Cir.

1997).

     Courts often interpret the Supreme Court’s holding in Frank

Lyon Co. v. United States, supra, as establishing an economic

substance doctrine with two prongs:    Whether the taxpayer had a

nontax business purpose or objective for entering into the

disputed transaction (the subjective prong); and whether the

transaction had economic substance beyond the anticipated tax

benefits (the objective prong).   See, e.g., Karr v. Commissioner,

924 F.2d 1018, 1023 (11th Cir. 1991), affg. Smith v.

Commissioner, 91 T.C. 733 (1988); Bail Bonds by Marvin Nelson,

Inc. v. Commissioner, 820 F.2d 1543, 1549 (9th Cir. 1987), affg.

T.C. Memo. 1986-23; Rice’s Toyota World, Inc. v. Commissioner,

752 F.2d at 91-92; Palm Canyon X Invs., LLC v. Commissioner,

supra.
                              - 28 -

     Some courts use a disjunctive approach and treat a

transaction as having economic substance if the transaction has

either a business purpose or economic substance.    See, e.g.,

Rice’s Toyota World, Inc. v. Commissioner, 752 F.2d at 91-92.

Some courts use a conjunctive approach and treat a transaction as

having economic substance only if the transaction has both a

business purpose and economic substance.   See, e.g., Dow Chem.

Co. v. United States, 435 F.3d 594, 599 (6th Cir. 2006).    Yet

other courts collapse the objective and subjective prongs into

one comprehensive inquiry.   See, e.g., Sacks v. Commissioner, 69

F.3d 982, 988 (9th Cir. 1995), revg. T.C. Memo. 1992-596;

Kirchman v. Commissioner, 862 F.2d 1486, 1492 (11th Cir. 1989),

affg. Glass v. Commissioner, 87 T.C. 1087 (1986).

     The Court of Appeals for the Seventh Circuit has stated

generally that “It is well-established that the Commissioner is

not required to recognize, for tax purposes, those transactions

which lack economic substance.”   Muhich v. Commissioner, 238 F.3d

860, 864 (7th Cir. 2001), affg. T.C. Memo. 1999-192.

“[T]ransactions with no economic substance don’t reduce people’s

taxes.”   Cemco Investors, LLC v. United States, 515 F.3d 749, 752

(7th Cir. 2008); Grojean v. Commissioner, 248 F.3d 572 (7th Cir.

2001), affg. T.C. Memo. 1999-425; Muhich v. Commissioner, supra

at 864 (citing Gregory v. Helvering, supra); see also Coleman v.
                              - 29 -

Commissioner, 16 F.3d 821 (7th Cir. 1994), affg. T.C. Memo. 1990-

99 and T.C. Memo. 1987-195.

     The Court of Appeals for the Eleventh Circuit recently noted

that “Even if the transaction has economic effects, it must be

disregarded if it has no business purpose and its motive is tax

avoidance.”   United Parcel Serv. of Am., Inc. v. Commissioner,

254 F.3d 1014, 1018 (11th Cir. 2001); see also Kirchman v.

Commissioner, supra at 1492 (“The focus of the inquiry under the

sham transaction doctrine is whether a transaction has economic

effects other than the creation of tax benefits.” (citing Knetsch

v. United States, 364 U.S. 361 (1960))).    In Kirchman v.

Commissioner, supra at 1492, the Court of Appeals for the

Eleventh Circuit noted further:

     The analysis of whether a transaction is a substantive
     sham, however, addresses whether a transaction’s
     substance is that which it form represents. That does
     not necessarily require an analysis of a taxpayer’s
     subjective intent. Once a court determines a
     transaction is a sham, no further inquiry into intent
     is necessary.

     The Court of Appeals for the Ninth Circuit has recently

discussed in an unpublished opinion the economic substance

doctrine and its two prongs as follows:    “‘(1) whether * * *

[taxpayers] demonstrated that either of the principals directing

their respective transactions had a business purpose for engaging

in the transaction other than tax avoidance and (2) whether

either transaction had economic substance beyond the creation of
                               - 30 -

tax benefits.’”   Thomas Inv. Partners, Ltd. v. United States, 108

AFTR 2d 2011-5369, at 2011-5371, 2011-2 USTC par. 50,517, at

86,287 (9th Cir. 2011) (quoting Casebeer v. Commissioner, 909

F.2d 1360, 1363 (9th Cir. 1990)).

     The Court of Appeals in Thomas concluded that the

transactions under scrutiny were unlikely to confer a nontax

benefit and that the individuals who engaged in those

transactions did so solely to create tax benefits.   Id. at 2011-

5372, 2011-2 USTC par. 50,517, at 86,287.   Further, the Court of

Appeals has stated that “the consideration of business purpose

and economic substance are simply more precise factors to

consider in the application of this court’s traditional sham

analysis”.   Sochin v. Commissioner, 843 F.2d 351, 354 (9th Cir.

1988), affg. Brown v. Commissioner, 85 T.C. 968 (1985).

     Before us in these cases is a purported stock sale between

petitioners and MidCoast that lacks both business purpose and

economic substance and that we conclude is to be disregarded for

Federal income tax purposes.   In substance, there was no sale of

the stock of Woodside Ranch; rather, Woodside Ranch was

liquidated, and the $1,835,209 cash that Woodside Ranch had on

hand (after the partial redemption that occurred on July 18,

2002) was distributed to the Woodside Ranch shareholders less a

fee of approximately $500,000 that MidCoast retained for

facilitating the sham.
                               - 31 -

     The “no-cost liquidation” terminology used by the MidCoast

representatives is telling.    In substance, it really was a

liquidation, not a stock sale.    The effort, assisted by

MidCoast’s sleight of hand, to reduce the tax cost of the

Woodside Ranch liquidation by cloaking the liquidation in the

trappings of a stock sale is to be ignored.

     We emphasize that at the same time Shapiro transferred $1.4

million into the trust account, $1.4 was immediately returned to

Shapiro.   Inferentially, the approximately $1.3 million the

Woodside Ranch shareholders received out of the trust account

came to them from the $1.8 million in proceeds of the Zumwalt

asset sale--as a corporate distribution.    In substance, Woodside

Ranch was liquidated, and petitioners received the $1.3 million

as liquidation proceeds.

     The $1,181,249 reported loan receivable in favor of Woodside

Ranch from MidCoast obviously was a mere accounting device,

devoid of substance.    As we have emphasized, the $1.4 million

Shapiro placed into the escrow on July 18, 2002, was returned to

Shapiro 2 hours later, and thereafter no portion thereof was owed

by anyone to anyone.    Shapiro had his $1.4 million.   MidCoast did

not owe him anything.   Woodside Ranch did not owe him anything,

and MidCoast did not owe Woodside Ranch anything with regard

thereto.
                             - 32 -

     What was transferred by Woodside Ranch to MidCoast did not

actually represent equity in Woodside Ranch.   See Owens v.

Commissioner, 568 F.2d 1233, 1238 (6th Cir. 1977), affg. in part

and revg. in part 64 T.C. 1 (1975).   On July 18, 2002, Woodside

Ranch’s assets consisted only of cash.   All of the operating

assets and business of Woodside Ranch had been sold to Zumwalt.

After the asset sale and partial redemption, but before the

purported stock sale, Woodside Ranch had $1,835,209 cash on hand

and a combined Federal and State corporate income tax liability

of approximately $750,000.

     From the time of the purported stock sale, Woodside Ranch

carried on no business activity; there was no viable business to

continue, and, on the basis of our evaluation of the evidence and

testimony before us, representations from MidCoast that Woodside

Ranch would be incorporated into MidCoast’s “asset-recovery”

business are preposterous.

     After the July 18, 2002, transaction, Woodside Ranch was

nothing more than a shell, with no employees, no real property,

and no assets other than MidCoast’s share of the unpaid taxes.

     Petitioners argue emphatically that if Woodside Ranch had

been liquidated, Woodside Ranch’s management and shareholders

might have ended up facing unexpected and unknown claims and

lawsuits against them personally under Wisconsin law.   Indeed,

petitioners argue that the Woodside Ranch shareholders’ concern
                             - 33 -

over potential liability claims was dominant and that the

shareholders’ concern over taxes due on the Zumwalt asset sale

was only secondary.

     As we have found, however, whatever the level of perceived

risk the Woodside Ranch management and shareholders actually had

in operating Woodside Ranch, it was not enough of a risk to

convince them to purchase anything more than spotty or discrete

personal injury insurance.

     Over the years, Woodside Ranch had relatively few personal

injury claims brought against it relating to activities of the

ranch and then only in amounts not disclosed in the record.

     On the facts and credible evidence before us, we conclude

that petitioners had little basis for being concerned for their

potential personal liability on unknown claims and lawsuits

arising out of the activities of Woodside Ranch.17

     The June 17, 2002, minutes of the Woodside Ranch finance

committee meeting establish that both the MidCoast

representatives and the Woodside Ranch shareholders knew and



     17
      We also find it remarkable that the Woodside Ranch
shareholders and MidCoast capped the liability of the Woodside
Ranch shareholders for personal injury claims relating to ranch
activities to the amount of the MidCoast premium (i.e., to the
amount the shareholders were to receive from the unpaid taxes).
Apparently, the individuals involved in the transactions before
us thought the unpaid taxes (or a portion thereof) should be the
measure not only of MidCoast’s fee, but also the measure and
limit of the shareholders’ liability for personal injury claims.
The unpaid taxes were to serve dual purposes.
                               - 34 -

understood that the only real payment MidCoast was making to the

Woodside Ranch shareholders was calculated as, and in fact

constituted, nothing more than a split of the projected tax

liabilities that no one intended to pay.

     The real price to be paid by MidCoast for the stock had

nothing to do with the value of Woodside Ranch; rather, the stock

purchase by Midcoast was a sham, and MidCoast was simply

splitting between itself and the Woodside Ranch shareholders the

amount of the taxes that should have been paid.

     The MidCoast representative said it correctly when he stated

that the transaction before us was all about creating tax

avoidance; it was not supported by underlying economic substance

and business activity.   The only entity that was to fund, or

incur, the cost of the transaction before us was the Federal

Government via unpaid taxes.

     Petitioners argue that the SPA provision under which

Woodside Ranch was not to be dissolved for 4 years confirms their

good faith and intent that the tax liabilities would be paid, and

confirms their concern over personal liability for personal

injury claims against Woodside Ranch.   We disagree.   We regard

the SPA provision as essentially meaningless.   While under the

control of MidCoast, Woodside Ranch failed to pay its taxes,

claimed other illegal tax-avoidance tax shelters, and was

effectively given away by MidCoast for nothing.
                              - 35 -

     We conclude that in substance the transaction before us was

not a bona fide sale of Woodside Ranch stock.   The substance of

the transaction was a liquidation to petitioners of Woodside

Ranch’s cash and a fee payment to MidCoast for its role in

facilitating the sham.

Transferee Liability

     Section 6901(a) provides a procedure through which

respondent may collect from transferees of assets unpaid taxes

owed by the transferors of the assets if a legal basis exists

under State law or equity for holding the transferees liable for

the unpaid taxes.   Commissioner v. Stern, 357 U.S. 39, 42-47

(1958); Hagaman v. Commissioner, 100 T.C. 180, 184-185 (1993).

Transferee liability under section 6901 includes related

additions to tax, penalties, and interest owed by the

transferors.   Kreps v. Commissioner, 42 T.C. 660, 670 (1964),

affd. 351 F.2d 1 (2d Cir. 1965).   Respondent bears the burden of

proving that petitioners are liable as transferees of the

property of Woodside Ranch.   See sec. 6902(a); Rule 142(d).

     We apply Wisconsin law in our analysis of whether

petitioners should be held liable as transferees of Woodside

Ranch.

     Wisconsin shareholders of a dissolved corporation may be

liable as transferees to creditors of the corporation (such as

respondent) where the shareholders receive corporate assets as
                               - 36 -

part of a dissolution.   Wis. Stat. Ann. sec. 180.1408(2) (West

2002) provides:

     If the dissolved corporation’s assets have been
     distributed in liquidation, a claim not barred under
     sec. 180.1406 or 180.1407 may be enforced against a
     shareholder of the dissolved corporation to the extent
     of the shareholder’s proportionate share of the claim
     or the corporate assets distributed to him or her in
     liquidation, whichever is less, but a shareholder’s
     total liability for all claims under this section may
     not exceed the total amount of assets distributed to
     him or her. As computed for purposes of this
     subsection, the shareholder’s proportionate share of
     the claim shall reflect the preferences, limitations
     and relative rights of the class or classes of shares
     owned by the shareholder as well as the number of
     shares owned, and shall be equal to the amount by which
     payment of the claim from the assets of the corporation
     before dissolution would have reduced the total amount
     of assets to be distributed to the shareholder upon
     dissolution.

     Income tax liabilities arising from the sale of corporate

assets are “claims” existing at the time of the sale.     See Kreps

v. Commissioner, supra at 670-671.      This Court has held that at

the time of an intermediary transaction asset sale (not

dissimilar from the transaction herein), the Commissioner

qualified as a creditor of the seller for Federal taxes arising

from the sale.    LR Dev. Co., LLC v. Commissioner, T.C. Memo.

2010-203 (discussing Illinois definitions of the terms “debt” and

“claim” which are the same as under Wisconsin’s fraudulent

transfer statute).

     Having found that the transaction before us in substance and

purpose was part of a liquidation and dissolution of Woodside
                               - 37 -

Ranch and that the Woodside Ranch shareholders received, as a

part of that liquidation and dissolution, approximately $1.3

million in cash as a distribution from Woodside Ranch, we

conclude that petitioners are liable as transferees under the

above provision of Wisconsin law for their proportionate shares

of Woodside Ranch’s unpaid 2002 Federal income tax liability.

     Wisconsin also has adopted the Uniform Fraudulent Transfer

Act, codified at Wis. Stat. Ann. secs. 242.01 to 242.12 (West

2009) (Wisconsin UFTA), which provides creditors with certain

remedies where a debtor transfers property and thereby avoids

creditor claims.    If the elements of the Wisconsin UFTA are

satisfied, creditors may obtain an attachment or other remedy

against the property transferred and against the transferees and

their property.    Wisconsin UFTA sec. 242.07.

     Respondent does not argue that petitioners should be liable

as transferees under Wisconsin UFTA section 242.04(1)(a), a

provision that requires a debtor’s actual intent to defraud,

hinder, or delay a creditor.    However, respondent argues that

under two closely related provisions of the Wisconsin UFTA

petitioners should be treated as transferees and as liable for

the unpaid Federal income tax liability of Woodside Ranch.

     Wisconsin UFTA section 242.04(1)(b) is applicable where:

     [T]he debtor made the transfer or incurred the
     obligation: * * * Without receiving a reasonably
     equivalent value in exchange for the transfer or
     obligation, and the debtor: (1) Was engaged or was
                                - 38 -

     about to engage in a business or a transaction for
     which the remaining assets of the debtor were
     unreasonably small in relation to the business or
     transaction; or (2) Intended to incur, or believed or
     reasonably should have believed that the debtor would
     incur, debts beyond the debtor's ability to pay as they
     became due.

Wisconsin UFTA section 242.05(1) is applicable where:

     [T]he debtor made the transfer or incurred the
     obligation without receiving a reasonably equivalent
     value in exchange for the transfer or obligation and
     the debtor was insolvent at that time or the debtor
     became insolvent as a result of the transfer or
     obligation.

     Wisconsin statutes do not define “reasonably equivalent

value”.     The Uniform Fraudulent Transfer Act is a uniform act

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

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

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

Siemon Chems. Co. v. H.L. Blachford, Ltd., 139 Bankr. 436, 445

(Bankr. N.D. Ill. 1992) (“Illinois law on fraudulent conveyance

parallels sec. 548 of the Bankruptcy Code.”).     Whether reasonably

equivalent value was received by the transferor is a question of

fact.     Leibowitz v. Parkway Bank & Trust Co. (In re Image

Worldwide, Ltd.), supra at 576 (citing Heritage Bank Tinley Park

v. Steinberg (In re Grabill), 121 Bankr. 983, 994 (Bankr. N.D.

Ill. 1990)).

        In the bankruptcy context, the Court of Appeals for the

Seventh Circuit has stated that the “test used to determine

reasonably equivalent value in the context of a fraudulent
                              - 39 -

conveyance requires the court to determine the value of what was

transferred and to compare it to what was received.”   Barber v.

Golden Seed Co., 129 F.3d 382, 387 (7th Cir. 1997).

     Under the Wisconsin UFTA, creditors, such as respondent,

have the burden to prove the above elements of transferee

liability by clear and convincing evidence.   Kaiser v. Wood Cnty.

Natl. Bank & Trust Co. (In re Loyal Cheese Co.), 969 F.2d 515,

518 (7th Cir. 1992); Mann v. Hanil Bank, 920 F. Supp. 944, 950

(E.D. Wis. 1996).

     Petitioners do not dispute Woodside Ranch’s liability for

the Federal income taxes arising from the Zumwalt asset sale, nor

the existence of respondent’s claim therefor or respondent’s

creditor status at the time of the transfers in question.

     On the evidence before us, it is clear that in exchange for

the distribution of approximately $1.3 million in cash to

petitioners Woodside Ranch received nothing of reasonably

equivalent value.

     After the Zumwalt asset sale, Woodside Ranch ceased to

engage in any business activity.   There was no viable business to

continue, and regardless of how MidCoast chose to describe its

post-sale intentions for Woodside Ranch, the only “business” left

for Woodside Ranch was to pay its tax liabilities arising from

the asset sale.   The transfer of Woodside Ranch’s $1.3 million to

petitioners left Woodside Ranch with remaining assets of
                                - 40 -

approximately $453,000 in cash, insufficient to pay Woodside

Ranch’s Federal and State income tax liabilities exceeding

$700,000.

     It is clear that as a result of Woodside Ranch’s cash

distribution to petitioners, Woodside Ranch was rendered

insolvent.   See Wisconsin UFTA sec. 242.02(b)(2) (“A debtor is

insolvent if the sum of the debtor’s debts is greater than all of

the debtor’s assets at a fair valuation.”).

     Further, the Woodside Ranch shareholders should have known

that the Federal income tax liability arising from the Zumwalt

asset sale would not be paid.    The credible evidence before us

establishes that petitioners’ interest in the MidCoast

transaction relied almost entirely on the assumption and

calculation that the Woodside Ranch tax liability would remain

unpaid; the impetus for taking the cumbersome route of a nominal

stock sale was the mutual understanding between petitioners and

MidCoast that each party would pocket and retain a portion of the

unpaid taxes.

     MidCoast offered a “no-cost” liquidation as a solution to

the tax “dilemma” in which petitioners found themselves.     In

spite of representations to the contrary in some of the

transaction documents, the record is replete with notice to

petitioners that MidCoast never intended to pay Woodside Ranch’s

Federal income tax liability.
                               - 41 -

     On the credible evidence before us, we conclude that

petitioners knew or should have known that, as a result of the

transactions among Woodside Ranch, MidCoast, and petitioners,

Woodside Ranch had debts beyond its ability to pay.

     We conclude that petitioners herein are liable as

transferees under both of the above provisions of the Wisconsin

UFTA for their proportionate shares of Woodside Ranch’s unpaid

2002 Federal income tax liability.

     Lastly, under what respondent refers to as a common law

“trust fund” doctrine relating to fiduciary duties of corporate

directors and officers, petitioners should be treated as

transferees and as liable for the unpaid Federal income tax

liability of Woodside Ranch.   Respondent cites Beloit Liquidating

Trust v. Grade, 677 N.W.2d 298, 309 (Wis. 2004), which explained

that when a corporation is insolvent and has ceased to be a going

concern and its directors and officers know, or ought to know,

that suspension of the corporation is pending, transfers of

corporate property to the directors or officers in lieu of

payments to creditors of the corporation may be held to

constitute a fraud on the creditors and the directors and

officers may be held personally liable to the injured creditors.

See also Polsky v. Virnich, 779 N.W.2d 712, 714 (Wis. Ct. App.

2010).
                             - 42 -

     Under the above alternate authority, respondent argues that

all petitioners should be held liable under Wisconsin law and

under section 6901 as transferees.    As noted, however, this

Wisconsin common law authority would apply only to petitioners

who were directors and officers of Woodside Ranch (namely, to Ray

Feldman, Richard Feldmann, and Carrie Donahue), not to

petitioners who were neither directors nor officers of Woodside

Ranch.

     In light of our conclusion and holding herein that

petitioners are liable under Wis. Stat. Ann. sec. 180.1407, the

Wisconsin UFTA, and section 6901 for their respective shares of

Woodside Ranch’s 2002 unpaid Federal income tax liability, we

need not, and we do not decide whether any petitioners also

should be held liable under the above common law authority on

which respondent relies.

     In two recent Memorandum Opinions and in a Memorandum

Opinion filed today, this Court has addressed transferee

liability relating to other transactions promoted by Midcoast.

See Frank Sawyer Trust of May 1992 v. Commissioner, T.C. Memo.

2011-298 (filed Dec. 27, 2011); Starnes v. Commissioner, T.C.

Memo. 2011-63 (decision entered Mar. 24, 2011), on appeal (4th

Cir., June 8, 2011); Griffin v. Commissioner, T.C. Memo. 2011-61

(decision entered Sept. 30, 2011).    In the above three cases this
                              - 43 -

Court held in favor of the taxpayers.    Those cases involved

differences from the instant cases.

     Starnes and Frank Sawyer Trust were decided largely on the

basis of insufficiency of and burden of proof.

     In Griffin, after the transaction with MidCoast, the target

corporation retained substantial assets and was not thereby

rendered insolvent.   Additionally, the taxpayer filed a lawsuit

and obtained a State court judgment against MidCoast in an effort

to get the taxes paid.

     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.

     For the reasons stated, we sustain respondent’s

determination that petitioners are liable as transferees with

respect to their respective shares of the 2002 unpaid Federal

income tax liability of Woodside Ranch and the related additions

to tax, penalties, and interest.


                                           Decisions will be entered

                                      for respondent.
