T.C. Memo. 2011-33
UNITED STATES TAX COURT
CHC INDUSTRIES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19627-06. Filed February 2, 2011.
Thomas H. Moreland and Philip R. Weingold, for petitioner.
John R. Mikalchus, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined that petitioner is
liable for $275,800, plus interest as provided by law, as a
transferee of St. Augustine II, Inc. (St. Augustine), in respect
of a deficiency in St. Augustine’s Federal income tax for 2000.
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The issue for decision is whether petitioner is liable as a
transferee of property of St. Augustine under section 6901.1
Background
The parties submitted this case fully stipulated under Rule
122. The stipulations of facts and the attached exhibits are
incorporated herein by this reference. Petitioner’s principal
place of business was in New York at the time the petition was
filed.
Petitioner was incorporated on May 24, 2000. At all times
relevant hereto, Nancy Caldarola (Ms. Caldarola) was petitioner’s
president and sole shareholder. In 1997, a few years before
incorporating petitioner, Ms. Caldarola entered into business
discussions with Jeffrey Furman (Mr. Furman), cochairman of
Fortrend International, L.L.C. (Fortrend).2 She then began
working as an independent consultant to Fortrend.3 Her role in
this capacity was to find companies potentially interested in
entering into a transaction with Fortrend. Pursuant to the
agreement Ms. Caldarola would be paid a finder’s fee if she
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended, and all Rule references are
to the Tax Court Rules of Practice and Procedure.
2
We discuss Fortrend in more detail below.
3
Ms. Caldarola worked as an independent consultant to
Fortrend from 1997 to 2003. She has never been a director,
officer, partner, or employee of Fortrend or any of its
affiliates. Petitioner also has never held an ownership interest
in Fortrend or any of its affiliates.
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introduced a company to Fortrend that ultimately entered into a
transaction with Fortrend or any of its affiliates. The finder’s
fee would be equal to approximately 10 percent of the gross fee
or 25 percent of the net fee realized by Fortrend in the
transaction.
In 1999 Ms. Caldarola introduced Fortrend to MidCoast
Capital Credit Corp. (MidCoast). This introduction led to the
consummation of a transaction in October 2000 (the Taxi
Transaction)4 involving the acquisition by Fortrend or by an
affiliate of the stock of Checker Taxi, Inc. (Checker), and Town
Taxi, Inc. (Town), from the Frank Sawyer Trust of May 1992.
After the closing of the Taxi Transaction on October 12,
2000, Fortrend agreed, pursuant to discussions between Ms.
Caldarola and Mr. Furman, to pay petitioner $275,800 as the
finder’s fee for introducing MidCoast to Fortrend. The parties
have stipulated that this amount represented fair consideration
in exchange for the services petitioner provided.5
On October 19, 2000, petitioner, at Mr. Furman’s direction,
submitted an invoice to CDGH, Inc. (CDGH), for $275,800 for
4
See infra pp. 4-5 for a discussion of the Taxi
Transaction, which was one of the transactions at the focus of
our Opinion in Sawyer Trust v. Commissioner, 133 T.C. 60 (2009).
5
Although Ms. Caldarola introduced Fortrend to MidCoast
before incorporating petitioner, we accept the parties’
stipulation that Fortrend agreed to pay the finder’s fee to
petitioner.
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“consulting services rendered for Checker/Town Taxi deal”.
Petitioner also submitted a second invoice for $275,800 for
“consulting services rendered for St. Augustine, Inc”. Only the
invoice submitted to CDGH was stamped “approved for payment”.
The same day Alice Dill, an employee of Fortrend, wired
$275,800 from St. Augustine’s Golden Gate Bank account to
petitioner’s bank account with Smith Barney, Inc. The wire
transfer did not indicate from what account the payment had been
wired, and petitioner was unaware that the funds had been
transferred from St. Augustine’s account. Petitioner included
the entire amount as income on its Form 1120, U.S. Corporation
Income Tax Return, for 2000.
Fortrend and the Taxi Transaction
Fortrend was formed on February 7, 1996, in the State of
Delaware. Mr. Furman and Frederick Forster (Mr. Forster) were
cochairmen of Fortrend and were responsible for overseeing its
operations. Avanti, Inc. (Avanti), and Forbach, Inc. (Forbach),
each owned a 50-percent interest in Fortrend. Mr. Furman and Mr.
Forster were the sole shareholders of Avanti and Forbach,
respectively, and they controlled Fortrend. Mr. Furman also
owned a 70.79-percent controlling ownership interest in Signal
Capital Associates, L.P. (SCALP), and was SCALP’s general
partner. Larry Austin was an agent of Fortrend.
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On August 7, 2000, Fortrend entered into a stock purchase
agreement with the trustee of the Frank Sawyer Trust of May 1992
to acquire the stock of Town and Checker. On September 18, 2000,
Fortrend assigned its rights to purchase the stock of Checker to
another Furman-controlled entity, Baritone, Inc. (Baritone), by
executing an assignment and assumption of stock purchase
agreement, which Mr. Furman signed as Fortrend’s authorized
representative.6
On October 12, 2000, Baritone purchased all of the
outstanding stock of Checker, changed Checker’s name from Checker
Taxi, Inc., to CDGH, Inc. (CDGH f.k.a. Checker), and merged into
6
Baritone had been incorporated on July 13, 2000, just a
few months before the Taxi Transaction took place. Three Wood,
L.L.C. (Three Wood), also was formed on or about July 13, 2000.
According to the L.L.C. agreement for Three Wood, SCALP and
Regency Resources each owned a 25-percent interest in Three Wood
and Pylae Ltd. owned the remaining 50-percent interest in Three
Wood. Mr. Furman signed the L.L.C. agreement on behalf of SCALP
and Regency Resources as general partner and director,
respectively.
According to a Certificate of Action Taken by the Sole
Director of Baritone, Inc. by Written Consent in Lieu of an
Organizational Meeting, with Alice Dill acting as sole director,
Baritone issued one share of common stock to Three Wood on Sept.
14, 2000. The form also purports to indicate the election of
Larry Austin as president and Alice Dill as vice president and
secretary of Baritone.
A Certificate of Action Taken by the Sole Shareholder of
CDGH by Written Consent in Lieu of a Meeting dated Oct. 11, 2000,
and purporting to indicate the election of Alice Dill as CDGH’s
initial director was signed by Alice Dill as sole shareholder.
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CDGH, with CDGH surviving the merger. Austin signed CDGH’s
Federal income tax return for 2000.
St. Augustine
St. Augustine is a corporation formed under the laws of
Delaware. Its original shareholders were Ziyad Abduljawad,
California Land Co., Ocean Land Co., Pacific Land Co., Sunset
Land Co., and Western Land Co. St. Augustine was formed for the
purpose of holding an interest in St. Augustine II, L.L.C. (St.
Augustine L.L.C.), and has never carried on any other business
activity. St. Augustine held an 81.67-percent interest in St.
Augustine L.L.C.7
On September 5, 2000, St. Augustine L.L.C. fully redeemed
St. Augustine’s interest for $5,255,258. St. Augustine’s only
asset following the redemption of its interest in St. Augustine
L.L.C. was the $5,255,258 in cash it received from the
redemption, which it retained rather than distributing it to its
shareholders.
Apparently, Fortrend had its eye on acquiring St. Augustine.
On October 12, 2000, i.e., the same day Baritone purchased the
stock of Checker, Matthew G. Brown of the law firm of Gibson,
Dunn & Crutcher L.L.P. faxed a copy of St. Augustine’s unaudited
financial statements for the period ending October 12, 2000, to
7
The remaining interests in St. Augustine L.L.C. were held
by PLC Homes, L.L.C. (10 percent), and Christopher Ventures,
L.L.C. (8.33 percent).
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Randolph Whitney Bae (Bae), an attorney for Fortrend. These
financial statements confirmed that St. Augustine retained the
$5,255,258 it had received from the redemption of its interest in
St. Augustine L.L.C. Bae then faxed the financial statements to
certified public accountant Howard Teig.
The next day Alice Dill, as sole director and vice president
of CDGH, executed a Written Consent of the Sole Director of CDGH,
Inc. dated October 13, 2000, and a stock purchase agreement
between CDGH and the shareholders of St. Augustine, allowing CDGH
to purchase all the shares of St. Augustine from the shareholders
for $4,695,200.8 CDGH used $4,683,965 generated from the Taxi
Transaction and a $13,000 loan from Town to finance the purchase
of the St. Augustine stock.9 In October 2000 Alice Dill and
Larry Austin had signature authority over the bank accounts held
by Three Wood, CDGH, and St. Augustine. Alice Dill transferred
$920,164.80 from CDGH’s Golden Gate bank account to each of the
shareholders of St. Augustine pursuant to the stock purchase
agreement.
8
Larry Austin signed a Certificate of Merger of St.
Augustine II, Inc., and CDGH, Inc., dated Oct. 15, 2000, as
president of both corporations. However, the certificate was not
filed with either the Commonwealth of Massachusetts or the State
of Delaware. And St. Augustine’s 2000 Form 1120 signed by Larry
Austin as president on Sept. 12, 2001, indicates that CDGH was
its 100-percent owner. Thus, we presume no merger took place.
9
The $4,683,965 in net cash generated by the Taxi
Transaction for CDGH was wired from a Three Wood bank account to
a CDGH bank account at Golden Gate Bank on Oct. 12, 2000.
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Neither petitioner nor Ms. Caldarola has, at any time,
entered into any contractual relationship with nor performed any
services for St. Augustine.
The parties stipulated that as of the payment date Fortrend,
through Mr. Furman, controlled SCALP, Three Wood, CDGH, and St.
Augustine. But the parties disagree over who actually owned
CDGH; they have stipulated that either SCALP or Three Wood was
the sole shareholder of CDGH as of the date of payment to
petitioner.10
Other Transfers From St. Augustine’s Account
A letter from MidCoast to Mr. Furman dated April 27, 2000,
sets forth the agreement between MidCoast and Fortrend regarding
Fortrend’s proposed acquisition of all of the issued and
outstanding stock of Checker and Town. The letter also provides
details on how MidCoast’s fee would be calculated.
On October 12, 2000, MidCoast submitted two invoices--one to
CDGH and one to St. Augustine for $3,267,505 for “services
rendered” in connection with the acquisition of the outstanding
10
On Oct. 12, 2000, SCALP contributed 5,500 shares of Trex
Communications (basis $13,160,000, FMV $62,000) and 72 shares of
Paclaco Equities, Inc. (basis $3,768,000, FMV $20,000), to CDGH
in a sec. 351 exchange. CDGH did not issue any actual securities
in the exchange because, according to the transferee statement
required by sec. 1.351-3(b), Income Tax Regs., SCALP owned 100
percent of the stock in CDGH. SCALP also executed a Certificate
of Action Taken by the Sole Shareholder of CDGH, Inc. by Written
Consent in Lieu of a Meeting amending the corporation’s bylaws,
which was dated Oct. 13, 2000, and signed by Mr. Furman as
general partner.
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stock of Checker and Town. On October 13, 2000, St. Augustine
received a $3,300,000 loan from Town and immediately used the
funds to pay the purported professional fees to MidCoast--even
though the fee agreement was between MidCoast and Fortrend. On
October 16, 2000, St. Augustine repaid the loan to Town.
Manatt Phelps Phillips L.L.P. submitted an invoice to
Fortrend, “Attn: Alice Dill”, dated November 21, 2000, for
$31,498.90 for “professional services in connection with stock
purchase and asset sale transactions re St. Augustine II.” Alice
Dill directed that the invoice be paid from St. Augustine’s
account.
Alice Dill also directed the following additional wire
transfers from St. Augustine’s Golden Gate bank account: (1)
$175,000 to Equipment Investment Corp. on October 16, 2000, for
“Investment Banking Services Related to Equipment Leasing”;11 (2)
$23,750 to Maxton Financial Ltd. on October 19, 2000, for
“services rendered”;12 (3) $30,000 to Intercapital Associates for
“consulting services rendered”; and (4) $97,500 to Steve Block
for “consulting services rendered”. At least two of the invoices
were faxed directly to Fortrend, and Equipment Leasing Corp.’s
11
The text at the top of the fax says “From: ACCOUNTING
DEPARTMENT * * * To: Frederick A. Forster.” As stated, supra,
Forster was cochairman of Fortrend.
12
The text at the top of the fax says “FORTREND INTL.
LLC”.
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invoice was sent to Mr. Forster’s attention. None of the
creditors performed services directly for St. Augustine.
Petitioner had no involvement with St. Augustine’s other
payments.
St. Augustine’s Tax Liability and Insolvency
On its Federal income tax return for 2000, which Austin
signed, St. Augustine claimed legal fees and professional
expenses as follows:
Payee Amount
MidCoast $3,267,505
Equipment Investment Corp. 175,000
CHC Industries 275,800
Maxton Financial 23,750
Intercapital Associates 30,000
Steve Block 97,500
Manatt Phelps 31,498
Total 3,901,053
On July 13, 2005, respondent in a notice of deficiency disallowed
the deductions and determined a $2,337,499 deficiency in St.
Augustine’s 2000 Federal income tax and a $467,499.80 penalty
under section 6662(a).13 St. Augustine neither paid the
deficiency nor filed a petition with the Court. On November 14,
2005, respondent assessed the deficiency and the penalty. At the
time of the assessment, St. Augustine had no assets from which
13
In the notice of deficiency respondent explained his
adjustments as follows: “It is determined that St. Augustine II,
Inc. has failed to substantiate that the reported legal and
professional fees were ordinary and necessary business expenses,
incurred and paid by the corporation.”
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the liability for the deficiency and related penalty could be
satisfied. To date, this liability remains unpaid.14
The payments to petitioner, MidCoast, Equipment Investment
Corp., Maxton Financial, Intercaptial Associates, Steve Block,
and Manatt Phelps together with respondent’s disallowance of the
claimed deductions rendered St. Augustine insolvent.
Discussion
I. The Parties’ Arguments
Respondent argues that petitioner is liable for $275,800 of
St. Augustine’s tax liability as a transferee of property of St.
Augustine because petitioner received assets of St. Augustine in
a transfer that is fraudulent under State law.
Petitioner argues that Fortrend should be treated as the
transferor for Federal income tax purposes and that petitioner is
not liable as a transferee because petitioner gave adequate
consideration for the transfer.
In making the argument that Fortrend was the transferor,
petitioner invokes the judicial doctrine of substance over form.
Respondent argues that petitioner was complicit in a plan to
avoid paying Federal income taxes and should be foreclosed from
arguing that the transaction was anything but a transfer from St.
Augustine to petitioner. Respondent also contends that
14
Respondent has not attempted to collect St. Augustine’s
outstanding liability from Mr. Furman, Mr. Forster, SCALP, CDGH,
or Fortrend as transferees of St. Augustine.
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petitioner has failed to put forth the “strong proof” necessary
to succeed on its substance over form argument.
II. Transferee Liability in General
The notice of liability issued to petitioner was based on
section 6901(a)(1)(A)(i), which provides:
SEC. 6901(a). Method of Collection.--The amounts
of the following liabilities shall * * * be assessed,
paid, and collected in the same manner and subject to
the same provisions and limitations as in the case of
the taxes with respect to which the liabilities were
incurred:
(1) Income, estate, and gift taxes.--
(A) Transferees.--The liability, at law
or in equity, of a transferee of property--
(i) of a taxpayer in the case of a
tax imposed by subtitle A (relating to
income taxes) * * *
Section 6901(a)(1) does not create or define a substantive
liability but merely provides the Commissioner a procedure to
assess and collect from the transferee of property the
transferor’s existing tax liability. See Commissioner v. Stern,
357 U.S. 39, 42 (1958) (discussing statutory predecessor of
section 6901). Section 6902 provides that the Commissioner has
the burden of proving the taxpayer’s liability as a transferee
but not that of proving that the transferor was liable for the
tax.
The substantive question of whether a transferee is liable
for the transferor’s obligation and the extent of his liability
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depends on State law. See Commissioner v. Stern, supra at 45;
Adams v. Commissioner, 70 T.C. 373, 389 (1978), affd.
without published opinion 688 F.2d 815 (2d Cir. 1982). The
parties stipulated that California law applies.15
III. California Uniform Fraudulent Transfer Act (UFTA)16
Cal. Civ. Code sec. 3439.04(a) (West Supp. 2011) provides:
(a) A transfer made or obligation incurred by a debtor
is fraudulent as to a creditor, whether the creditor's
claim arose before or after the transfer was made or
the obligation was incurred, if the debtor made the
transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or
defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and
the debtor either:
(A) Was engaged or was about to engage
in a business or a transaction for which the remaining
assets of the debtor were unreasonably small in relation to
the business or transaction.
(B) Intended to incur, or believed or reasonably
should have believed that he or she would incur, debts
beyond his or her ability to pay as they became due.
15
The parties in their briefs discuss the general
requirements for establishing transferee liability as set forth
in Gumm v. Commissioner, 93 T.C. 475, 480 (1989), affd. without
published opinion 933 F.2d 1014 (9th Cir. 1991). However, we
need not look beyond California law to determine whether the
transfer was fraudulent. See Commissioner v. Stern, 357 U.S. 39
(1958); Upchurch v. Commissioner, T.C. Memo. 2010-169 n.6.
16
The UFTA applies to transfers made on or after Jan. 1,
1987. Cal. Civ. Code sec. 3439.12 (West 1997).
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Cal. Civ. Code sec. 3439.05 (West 1997) provides:
A transfer made or obligation incurred by a debtor
is fraudulent as to a creditor whose claim arose before
the transfer was made or the obligation was incurred if the
debtor made the transfer or incurred the obligation
without receiving a reasonably equivalent value in
exchange for the transfer or obligation and the debtor was
insolvent at that time or the debtor became insolvent as a
result of the transfer or obligation.
Cal. Civ. Code sec. 3439.04(a)(1) relates to actual fraud,
whereas Cal. Civ. Code secs. 3439.04(a)(2) and 3439.05 relate to
constructive fraud.17
IV. Analysis
Petitioner argues that Fortrend should be treated as the
transferor and that petitioner gave adequate consideration to
Fortrend in exchange for the $275,800 payment it received from
St. Augustine. In doing so, petitioner asks us to apply
substance over form and recharacterize the payment as a series of
constructive transfers from St. Augustine to Fortrend.
The Tax Court and the U.S. Court of Appeals for the Second
Circuit, the court to which this case would be appealable,18
apply the “strong proof” rule when a taxpayer attempts to invoke
substance over form. See Estate of Rogers v. Commissioner, 445
17
Respondent does not suggest that Cal. Civ. Code sec.
3439.04(a)(1) (West Supp. 2011) applies.
18
Under the Golsen rule, we follow the law of the Court of
Appeals to which the case is appealable. See Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971).
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F.2d 1020, 1021-1022 (2d Cir. 1971), affg. T.C. Memo. 1970-192.
Under the strong proof rule, a taxpayer must present strong
proof, i.e., more than a preponderance of the evidence, for the
Court to disregard the form in which the taxpayer cast a
transaction. See O’Malley v. Commissioner, T.C. Memo. 2007-79.
Petitioner has not presented the strong proof necessary to
prevail on its substance over form argument.19 Regardless, we do
not believe that the present circumstances warrant application of
substance over form. Petitioner facilitated the Taxi Transaction
by introducing Fortrend to MidCoast.20 And although petitioner
“disclaims” any knowledge of or participation in the Taxi
Transaction, it is unlikely that petitioner could carry out its
duties as an independent consultant without being aware of the
type of transactions Fortrend intended to carry out. St.
Augustine claimed a deduction to which it was not entitled for
the payment to petitioner. Petitioner offered no explanation as
to why it submitted the second invoice for services provided to
St. Augustine when it in fact had not provided any services to
St. Augustine. Without evidence to the contrary we find that the
payment to petitioner had no purpose other than for St. Augustine
19
The fact that this case was fully stipulated does not
relieve petitioner of this burden, just as it does not relieve
respondent of his burden of proving the elements of transferee
liability.
20
We note that both Fortrend and MidCoast have been the
subject of several tax shelter cases in this and other courts.
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to attempt to claim a deduction. Accordingly, we decline
petitioner’s invitation to apply substance over form under these
circumstances.
Respondent determined a deficiency against St. Augustine of
$2,337,499 plus a penalty under section 6662(a) of $467,499.80.
St. Augustine neither paid the tax nor filed a petition with the
Tax Court. Respondent assessed the liability on November 14,
2005. Thus, St. Augustine owed a debt to the Internal Revenue
Service. See Cal. Civ. Code sec. 3439.01(d) (West 1997).
The payment to petitioner along with the other transfers by
St. Augustine rendered St. Augustine insolvent and unable to pay
its debt to respondent. St. Augustine claimed deductions for
each transfer, all of which were disallowed. St. Augustine
reasonably should have believed that the deductions it claimed
would be disallowed and it would be unable to pay its debt to
respondent.21
St. Augustine transferred the $275,800 without receiving any
consideration, let alone reasonably equivalent value, from
petitioner. Petitioner never provided any services directly to
St. Augustine. Although the parties stipulated that the $275,800
represented fair consideration for services provided to Fortrend,
21
Petitioner does not dispute St. Augustine’s tax
liability or whether St. Augustine should have reasonably
believed it would incur debts beyond its ability to pay as they
became due.
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we shall not attribute the receipt of this consideration to St.
Augustine. See LR Dev. Co. LLC v. Commissioner, T.C. Memo. 2010-
203. Accordingly, respondent has met his burden of proving that
the transfer was fraudulent under Cal. Civ. Code secs.
3439.04(a)(2).22
V. Conclusion
Upon our examination of the entire record before us, we find
that petitioner is liable as a transferee under section 6901.
The transfer by St. Augustine (i.e., the debtor) to petitioner
was fraudulent as to respondent (i.e., the creditor) under
California law.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect the foregoing,
Decision will be entered
for respondent.
22
In the light of this finding we need not provide an
analysis under Cal. Civ. Code sec. 3439.05 (West 1997).