Frank Sawyer Trust of May 1992 v. Comm'r of Internal Revenue, Docket No. 5526-07

CourtUnited States Tax Court
Docket NumberDocket No. 5526-07
Decision Date27 December 2011


Docket No. 5526-07


Filed December 27, 2011

T.C. Memo. 2011-298

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

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


GOEKE, Judge: In four statutory notices of liability, respondent determined that the Frank Sawyer Trust of 1992 is liable as a transferee for the assessed Federal income tax liabilities, penalties, and interest of four C corporations: (1) TDGH, Inc. (Town Taxi); (2) CDGH, Inc. (Checker Taxi); (3) St.

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Botolph Holding Co. (St. Botolph); and (4) Sixty-Five Bedford Street, Inc. (Sixty-Five Bedford) (collectively, the corporations). The issue for decision is whether petitioner is liable as a transferee under section 69011 for the corporations' unpaid Federal income tax liabilities, penalties, and interest. For the reasons stated herein, we find that petitioner is not liable.


Some of the facts have been stipulated, and the stipulated facts are incorporated by this reference. Petitioner is the Frank Sawyer Trust of May 1992 (the trust). At the time the petition was filed, the trust's legal residence was Massachusetts.

On March 20, 2000, Mildred Sawyer, wife of Frank Sawyer, passed away. Her taxable estate, which includes the trust, was reported as $138,480,721 on her estate's estate tax return filed December 13, 2000. This generated Federal and State transfer taxes of $76,600,416. Ms. Sawyer's daughter, Carol S. Parks (Ms. Parks), was the sole trustee of the Trust. The Trust held, among other things, 100 percent of the stock of the corporations. In order to pay the estate tax liability, Ms. Parks decided to sell the stock of the corporations.

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Respondent's assertion of transferee liability arises from the series of transactions that took place in selling the stock of the corporations during the 2000 and 2001 tax years. The stock was sold in the following manner. First, the corporations sold substantially all of their assets to unrelated third parties. Next, the trust sold all of its stock in the corporations to another unrelated third party.2 The trust owned all of the stock of the corporations before the asset sales and at all times leading up to the stock sales.

1. The Taxi Corporations

Town Taxi and Checker Taxi (collectively, Taxi corporations) provided taxicab services in Massachusetts. Their primary assets were taxicab medallions issued by the City of Boston that gave the holder the right to provide taxicab services in Boston. In March 2000 Ms. Parks decided to begin selling the taxicab medallions. Walter McLaughlin, an attorney for the Trust, and James Milone, the CFO of the corporations (collectively, trust representatives), realized that the sales of the taxicab medallions would generate large capital gains for the Taxi corporations because of the low basis and high value of the taxicab medallions.

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A. Midcoast Credit Corp.

Mr. McLaughlin received a promotional letter in October of 1999 from Midcoast Credit Corp. (Midcoast). Midcoast was primarily involved in the debt recovery business, which involved purchasing portfolios of delinquent credit card debt from banks and then trying to collect the debt. They financed their debt recovery business in part through corporate acquisitions. Midcoast had a nationwide marketing strategy that included sending promotional letters to legal and accounting firms. The promotional letter Mr. McLaughlin received included a brief history of Midcoast and described the type of target company Midcoast was interested in acquiring. It stated that Midcoast sought to purchase the stock of C corporations that had taxable gains from asset sales and that Midcoast would pay a significant premium in excess of the amount a shareholder of the corporation would otherwise receive from an asset sale followed by a liquidation, thus enabling the shareholder to maximize the after-tax proceeds from the sale of a business. The material described the following benefits from a sale to Midcoast:

• Significant increase in after-tax proceeds.
• Elimination of exposure to unknown future claims, losses, and litigation.
• Midcoast replaces seller as shareholder of company, receiving standard corporate representations and warranties.

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• Midcoast relieves selling shareholder from unknown corporate liabilities.
• Company is solvent when sold to Midcoast.
• Midcoast represents that it will not liquidate company, but will operate it on a go-forward basis.
• Midcoast will cause the company to satisfy its tax and other liabilities.

The letter was representative of the type of promotion sent by Midcoast to other attorneys and accountants.

B. The Initial Meeting

Mr. McLaughlin contacted Louis Bernstein, a representative of Midcoast, and scheduled a meeting for April 7, 2000, to discuss the potential stock sale of the Taxi corporations. Because Midcoast did not have the financial resources to purchase the Taxi corporations alone, they brought in Fortrend International, LLC (Fortrend). Fortrend represented itself as an investment banking firm that specialized in structuring economic transactions to solve specific corporate and estate or accounting problems. It represented that it had offices in New York, Atlanta, San Francisco, Delray Beach, and Melbourne. Fortrend's relationship with Rabobank Nederland (Rabobank), a major international bank, gave Fortrend access to financing that Midcoast did not have.

At the meeting, Fortrend explained that it was looking to purchase the stock of corporations with capital gains and would reduce the stock purchase price by a percentage of the contingent

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tax liability related to the capital gains. The reduction percentage of the stock purchase price was generally negotiated according to the size of the transaction and associated administrative costs. Fortrend offered to buy the stock of the Taxi corporations, but it wanted all existing and potential liabilities eliminated, except for the contingent Federal and State tax liabilities from the medallion sales, which Fortrend would assume. It is unclear exactly what was discussed at the initial meeting in regard to the propriety of the stock sale and of Fortrend's method of offsetting the capital gains within the purchased corporations. Jeffrey Furman, cochairman of Fortrend, negotiated the terms of the stock sales including the purchase price with the trust representatives.

C. Due Diligence

Fortrend sent a letter to Ms. Parks representing that Fortrend had the financial resources to consummate the stock purchase. The letter included a list of references of several law firms, a "big four" accounting firm, and Rabobank. Rabobank also stated in a letter to Ms. Parks that Fortrend was a valued customer and Rabobank had financed a number of transactions for Fortrend. Ms. Parks decided to go through with the stock sale subject to the performance of due diligence by the trust representatives.

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The trust representatives believed Fortrend's attorneys to be from prestigious and reputable law firms. They assumed that Fortrend must have had some method of offsetting the taxable gains within the corporations. They performed due diligence with respect to Fortrend to ensure that Fortrend was not a scam operation and that Fortrend had the financial capacity to purchase the stock. The trust representatives believed Fortrend assumed the risk of overpaying for the Taxi corporations if they did not have a legal way for offsetting or reducing the tax liabilities. After due diligence was conducted, Ms. Parks decided to sell the stock on the advice of the trust representatives.

Fortrend was represented by independent counsel, Manatt, Phelps; Phillips, LLC; and Chamberlain, Hrdlicka, White, Williams & Martin (collectively, Fortrend's attorneys). Fortrend's attorneys also conducted due diligence of the Taxi corporations mainly to determine that the Taxi corporations had no unknown liabilities.

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

The trust representatives sent a letter dated April 18, 2000, to Fortrend requesting a letter of intent to purchase the stock of the Taxi corporations. On April 27, 2000, Ms. Parks and Fortrend entered into letters of intent for the sale of 100 percent of the stock of the Taxi corporations. The letters of

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intent were conditioned upon the conversion of all of the assets of the Taxi corporations into cash or cash equivalents before the stock sale, as well as the satisfaction of all liabilities except the contingent income tax liabilities. The Taxi corporations were allowed to keep the rights to their respective names. Moreover, the letters of intent stated that the computation of the share purchase prices would be based on the values of the cash and other assets held by the Taxi corporations minus a percentage of the outstanding contingent income tax liabilities. In the event all of the assets were not converted to cash or liabilities paid by the stock closing, the share purchase prices would be adjusted by lowering the percentage of the income tax liabilities assumed by Fortrend.

In July of 2000, the Taxi corporations entered into an asset purchase agreement with a local taxi competitor, Mr. Tutunjian, for most of the taxi medallions. The asset purchase agreement...

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