Cullifer v. Comm'r, T.C. Memo. 2014-208

• Decision Date: 07 October 2014
• Docket Number: T.C. Memo. 2014-208,Docket No. 20177-11.
• Parties: RICHARD H. CULLIFER, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

RICHARD H. CULLIFER, TRANSFEREE, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2014-208
Docket No. 20177-11.

UNITED STATES TAX COURT

October 7, 2014

R issued a notice of transferee liability to P to collect N's unpaid Federal income tax pursuant to I.R.C. sec. 6901. R argues that under Texas State law: (1) P has transferee liability with respect to a special dividend that N distributed to P and (2) P has transferee-of-transferee liability with respect to P's proceeds from his sale of N stock.

Held: P is a transferee under Federal law principles pursuant to I.R.C. sec. 6901.

Held, further, under Texas State law, P has transferee liability with respect to the special dividend.

Held, further, under Texas State law, P has transferee-of-transferee liability with respect to the proceeds from the sale of N stock.

Page 2

William O. Grimsinger, Renesha N. Fountain, and Rita Renee Huey, for petitioner.

Robert M. Morrison, Joseph A. Peters, Candace M. Williams, Katelynn M. Winkler, Courtney M. Hill, and Julie Ann P. Gasper, for respondent.

MEMORANDUM OPINION¹

LARO, Judge: In a notice of liability, respondent determined that petitioner is liable for $9,030,205 plus interest as a transferee of the assets of Neches Industrial Park, Inc. (Neches or sometimes NIP). The underlying tax liabilities involved in this case are Neches' Federal income tax deficiencies and penalties for the taxable years ending September 30, 2003 and 2004 (years at issue). Petitioner resided in Florida when he filed his petition.

Page 3

The primary issue in this case is whether petitioner is liable for Neches' tax liabilities for the years at issue as a transferee pursuant to section 6901.² For the reasons stated herein, we hold that he is.

Background ³

I. Richard H. Cullifer

Petitioner attended Florida State University for college and graduated with a degree in finance. After graduation petitioner worked at several banks, including in C&S Bank's commercial banking program. While at C&S Bank, petitioner became acquainted with Henry Weitzman, whose business partner was a C&S Bank customer. Mr. Weitzman taught petitioner "the ropes" on real estate development. At some point, petitioner decided to leave the commercial banking business and to go into real estate development. Petitioner stayed in the real estate business and is currently a commercial real estate developer and operator.

Page 4

II. Neches

In 1992 Mr. Weitzman told petitioner about a business opportunity involving Cantex Chemicals, Inc. (Cantex), a company created to hold a chemical storage site that he and two partners had purchased in 1988. The site was in Beaumont, Texas, and included a port facility. Petitioner visited the site but decided not to pursue that opportunity because of personality conflicts with one of Mr. Weitzman's business partners (Texas partner).

In 1993 following the death of the Texas partner, Mr. Weitzman contacted petitioner regarding Cantex. Petitioner visited Cantex, but this time he was given a tour by William (Bill) Castleman, the on-site manager. After inspecting the docks, petitioner realized that Cantex was a unique facility that had potential. At around this time Ken Tummel, executive vice president of Continental Nitrogen Resources (CNR), alerted petitioner to opportunities in the ammonia storage and import business. On the basis of his research into the ammonia business petitioner learned that America's demand for ammonia exceeded its supply. In addition, most American ammonia plants were built in the 1960s, energy inefficient, and located inland. Petitioner therefore concluded that there was an unmet market demand for coastal ammonia import and storage facilities.

Page 5

In 1994 Mr. Weitzman bought out his partners' interests in Cantex. Around that time petitioner became an officer and director of Cantex. The Cantex property was, as petitioner described, "absolutely a disaster". Originally a fertilizer plant built in the late 1960s by the Mobil Chemical Agricultural Division, Cantex was full of asbestos and had concrete retainage ponds full of old chemicals, and its fertilizer production, bagging, and warehouse facilities had not been in use for decades. Petitioner hired an environmental remediation firm to clean up the entire site and disposed of everything on site with the exception of the warehouses, a 10,000-ton ammonia tank built by Chicago Bridge & Iron, pipe racks, rail tracks, a wooden dock, and an office building. Petitioner also built a new dock. Finally, petitioner purchased from Exxon an anhydrous ammonia storage facility with a 35,000-ton ammonia tank in Great Falls, Montana. Petitioner hired an engineering firm to dismantle the Exxon facility and reconstruct it on the Cantex site. Following petitioner's rehabilitation plans, the Cantex site's final storage capacity was approximately 45,000 tons.

Petitioner did not like the name Cantex and renamed the company Neches Industrial Park, Inc., after the Neches River on which it was located. Petitioner was Neches' sole officer and director, and in 1996 he became a 50% shareholder as well. The other 50% shareholder was Furtivus, Inc., a Canadian corporation

Page 6

owned by the Weitzman family. Robert Thomas⁴ served as Neches' longstanding attorney, and accounting firm Funchess, Mills & White (Funchess) served as Neches' accountant. Funchess prepared Neches' quarterly and annual financial statements, employment tax returns, Federal and State income tax returns, and State franchise tax returns.

Although Neches initially offered only ammonia storage services, over time, it provided sulfur, glycol, and liquid asphalt storage services as well. By 2000 petitioner had grown Neches into a business with monthly revenue of $300,000 to $400,000. Neches' tenants included DuPont, A&A Fertilizer, Ltd., CNR, ChemCycle, Inc., and Martin Gas Sales, Inc. (Martin).

Petitioner worked at Neches full time until approximately 1998, returning to Florida every weekend to be with his family. In 1998 petitioner hired more employees to handle the day-to-day operations of Neches and transitioned to a business development role. Since petitioner's business development work could be performed remotely, petitioner began working increasingly from his office in Jupiter, Florida. The office building was owned by Rich International, an S corporation wholly owned by petitioner. Starting around 1996 Rich International

Page 7

began sending Neches monthly invoices for petitioner's "management fees". These management fees included petitioner's travel and office expenses⁵ and were not subject to a written management agreement between Neches and Rich International.

Starting in 2000 petitioner became interested in selling Neches. Between 2000 and 2003, petitioner engaged in discussions with several companies--e.g., Duke Energy, Buckeye Pipeline, Kinder Morgan Liquid Terminals, LLC (Kinder Morgan), and Kaneb Pipe Line Partners L.P.--regarding the possible sale of Neches.

III. MidCoast Investments, Inc.

In June 2003 Jim Lelio, an executive at Kinder Morgan, introduced petitioner to Graham (Paul) Wellington of MidCoast Investments, Inc.

Page 8

(MidCoast).⁶ MidCoast was looking for companies that fit a certain "acquisition profile"--i.e., C corporations that had recently experienced large taxable gain. Mr. Wellington explained to petitioner that buyers prefer to buy assets for a step-up in basis and that sellers prefer to sell stock, thus triggering only a single level of taxation. Mr. Wellington further explained that MidCoast could help buyers and sellers achieve the best of both worlds by buying a company shortly before or after its sale of assets. MidCoast would in turn employ high-basis, low-market-value assets--e.g., charged-off receivables--to offset the taxable gain from the asset sale in their "asset recovery business". In addition, MidCoast would pay sellers a premium calculated on the size of the taxable gain. On July 23, 2003, Mr. Wellington sent petitioner a letter stating:

It was a pleasure speaking with you regarding MidCoast Investments' acquisition criteria. As discussed, MidCoast in [sic] interested in purchasing the stock of certain C-corporations. In instances where a C-corporation has sold its assets, MidCoast may have an interest in purchasing 100% of the stock for a price significantly higher than the shareholders might otherwise realize. MidCoast pursues these acquisitions as an effective way to grow our parent company's asset recovery operations. It is important to note that after MidCoast completes its stock acquisition, the target company is not dissolved or

Page 9

consolidated, but re-engineered into the asset recovery business and ultimately becomes an income producer for MidCoast.

Enclosed was a MidCoast promotional brochure, which described its history,⁷ its target corporation profile, and the benefits that it provides.

Between August 2003 and May 2004 petitioner and Mr. Wellington kept in routine contact. Petitioner kept Mr. Wellington informed about his efforts to sell Neches and even spoke highly of Mr. Wellington and MidCoast to potential buyers Martin Midstream Partners, L.P. and Kaneb Pipe Line Partners, L.P. In January 2004...