Weintraut v. Comm'r, T.C. Memo. 2016-142

• Decision Date: 27 July 2016
• Docket Number: Docket No. 6751-12.,Docket No. 6715-12,T.C. Memo. 2016-142,Docket No. 6505-12
• Parties: THOMAS L. WEINTRAUT, TRANSFEREE, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

THOMAS L. WEINTRAUT, TRANSFEREE, ET AL.,¹ Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2016-142
Docket No. 6505-12
Docket No. 6715-12
Docket No. 6751-12.

UNITED STATES TAX COURT

July 27, 2016

Brett J. Miller and Randal J. Kaltenmark, for petitioners.

Stewart Todd Hittinger and Samuel A. Naylor, for respondent.

CONTENTS

FINDINGS OF FACT ............................................. 4

FFI and Petitioners ............................................... 4

FFI, Petitioners, and MidCoast ...................................... 12

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Tax Returns ................................................. 83

IRS Examination With Respect to FFI and Petitioners ................... 86

OPINION ...................................................... 95

Petitioners' Motion in Limine ...................................... 95

Evaluation of Witnesses .......................................... 104

Transferee Liability .............................................. 105

Section 6901 .............................................. 105

Feldman v. Commissioner .................................... 107

Transferee Status for Purposes of Section 6901 ................... 112

Liability Under Indiana UFTA ................................ 154

Transfers for Purposes of the Indiana UFTA ................ 155
Fraudulent Transfers Under the Indiana UFTA .............. 220
Respondent's Claim for FFI's Unpaid 2001 Deficiency Liability ....................... 222
Respondent's Claim for FFI's Unpaid 2001 Penalty Liability .......................... 230
Respondent's Claim for Transferee Interest ................. 237

Conclusion ..................................................... 263

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge: Respondent determined that petitioner Curtis D. Fankhauser is liable as a transferee of ffi Corp. for the unpaid deficiency in

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Federal income tax (sometimes, tax) of $609,037.43² and the unpaid accuracy-related penalty under section 6662(a)³ of $85,482 of that corporation for its taxable year 2001, but only to the extent of the net value of the assets that that corporation transferred to him, which respondent determined in the notice of liability was $1,824,143.99, as well as interest thereon as provided by law.

Respondent determined that petitioner Cynthia A. Fankhauser is liable as a transferee of ffi Corp. for the unpaid deficiency in tax of $609,037.43⁴ and the unpaid accuracy-related penalty under section 6662(a) of $85,482 of that corporation for its taxable year 2001, as well as interest thereon as provided by law.⁵

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Respondent determined that petitioner Thomas L. Weintraut is liable as a transferee of ffi Corp. for the unpaid deficiency in tax of $609,037.43⁶ and the unpaid accuracy-related penalty under section 6662(a) of $85,482 of that corporation for its taxable year 2001, but only to the extent of the net value of the assets that that corporation transferred to him, which respondent determined in the notice of liability was $514,520.35, as well as interest thereon as provided by law.

We must decide whether to sustain respondent's determinations as modified by respondent in the respective answers in these cases.⁷ We hold that we shall to the extent stated below.

FINDINGS OF FACT

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

At the time they filed the respective petitions in these cases, petitioners resided in Indiana.

FFI and Petitioners

On August 28, 1947, certain individuals who were not related to Curtis D. Fankhauser (Mr. Fankhauser), Thomas L. Weintraut (Mr. Weintraut), and Cynthia A. Fankhauser (Ms. Fankhauser) incorporated Ewing Foundry, Inc., under the

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laws of the State of Indiana. On February 6, 1959, the articles of incorporation of Ewing Foundry, Inc., were amended to change its name to Farm Fans, Inc. On March 30, 1990, the articles of incorporation of Farm Fans, Inc., were amended to change its name to ffi Corp. (FFI). At all relevant times, FFI was a C corporation with its principal place of business in Indiana. (We shall refer to the C corporation that was incorporated as Ewing Foundry, Inc., on August 28, 1947, as FFI, even though that corporation operated under different names until March 30, 1990, when its name was changed to ffi Corp.)

From 1960 until 2001, FFI was in the business of designing, manufacturing, and selling equipment used for drying, handling, and conditioning grain. From 1967 until December 20, 2001, FFI had its offices at 5900 Elmwood Avenue, Indianapolis, Indiana (Elmwood property), where it also conducted all of its sales operations and its research and development operations.

In November 1989, Mr. Weintraut, who holds a bachelor's degree in business and accounting from Indiana University and who was licensed as a certified public accountant (C.P.A.),⁸ joined FFI as its chief financial officer (CFO). Mr. Weintraut took tax classes in college and took tax review courses

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while preparing for his C.P.A. examination. Before he joined FFI as its CFO, Mr. Weintraut had worked as an accountant or as the controller for certain companies. As an accountant, Mr. Weintraut worked on the audit staff, where his responsibilities included examining the fairness of company financial statements. Mr. Weintraut's work as an accountant did not include any tax work. Sometime after Mr. Weintraut joined FFI as its CFO, he became and remained at all relevant times FFI's executive vice president, treasurer, and secretary.

In November 1991, Mr. Fankhauser, who holds a bachelor's degree in civil engineering from the University of Missouri,⁹ joined FFI as its president. On January 15, 1996, Mr. Fankhauser purchased all of the outstanding stock of FFI. Richard Thrapp (Mr. Thrapp), who was a partner with the law firm known at the time of trial as Ice Miller, LLP (Ice Miller), represented him with respect to that purchase. After Mr. Fankhauser became the sole stockholder of FFI, he remained at all relevant times its president.¹⁰

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In 1997, Mr. Fankhauser gave 10 percent of the outstanding stock of FFI to his spouse, Ms. Fankhauser. Ms. Fankhauser, who studied art for two years at Kansas State University, was not at any time involved in the operations or the management of FFI.

On December 30, 1997, Mr. Weintraut purchased 20 percent of the outstanding stock of FFI from Mr. Fankhauser. On July 13, 2000, Mr. Weintraut purchased an additional two percent of the outstanding stock of FFI from Mr. Fankhauser.

From July 13, 2000, until December 20, 2001, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser owned 68 percent, 22 percent, and 10 percent, respectively, of FFI's outstanding stock. (During the times Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser owned all the stock of FFI, we shall sometimes refer collectively to them as the FFI stockholders.) At all relevant times until December 20, 2001, the members of the board of directors of FFI were Mr. Fankhauser and Mr. Weintraut. (During the times Mr. Fankhauser and Mr. Weintraut were members of the board of directors of FFI, we shall sometimes refer collectively to them as the FFI directors).

During 1998 and 1999, the sales revenues of FFI declined as a result of a series of dry harvest seasons and deteriorating economic conditions. Conse-

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quently, FFI restructured its operations by cutting costs through significant staff reductions. By 2000, FFI's sales revenues had stabilized.

In 2000, the FFI stockholders decided to sell FFI through the sale of their respective portions of FFI stock or the sale of FFI's assets. On October 2, 2000, FFI retained Banc One Capital Markets, Inc. (Banc One),¹¹ to evaluate the market for the sale of FFI's stock or FFI's assets and to solicit and negotiate with prospective buyers of that stock or those assets. FFI made Banc One its exclusive agent for any transaction in which control of FFI through ownership of its stock or its assets would be transferred for consideration to another entity in a stock sale, asset sale, merger, tender or exchange offer, leveraged buyout, joint venture, recapitalization, restructuring, or other business combination. In October 2000, Banc One contacted numerous potential buyers of FFI's stock or FFI's assets.

In October 2000, the GSI Group, Inc. (GSI), a competitor of FFI in the business of manufacturing grain equipment, approached FFI and expressed an interest in acquiring some of FFI's assets. From October through December 2000,

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FFI, with the assistance of its attorney, Mr. Thrapp, engaged in negotiations for the sale of certain of its assets to GSI (FFI asset sale).¹²

On December 19, 2000, Mr. Fankhauser and Mr. Weintraut, as owners of 90 percent of FFI's outstanding stock, signed an asset sale agreement on behalf of FFI (FFI asset sale agreement). In that agreement, FFI agreed to sell to GSI, and GSI agreed to purchase from FFI, the following assets: (1) all of FFI's inventory, patents, trademarks, trade names, blueprints, orders for products that were to be provided to FFI customers on dates after the closing date of the FFI asset sale agreement, and customer lists and (2) a significant portion of FFI's manufacturing equipment. In the FFI asset sale agreement, GSI agreed to pay to FFI $6,864,018 and to assume certain of FFI's liabilities in return for the assets that FFI agreed to sell to GSI. FFI and GSI agreed in the FFI asset sale agreement that the closing date of the FFI asset sale to GSI was to be January 2, 2001.

On December 19, 2000, the FFI stockholders and the FFI directors held respective special meetings at which they approved a plan to liquidate and dissolve FFI (December 19, 2000 plan of liquidation) in the event and only in the event that the FFI asset sale to GSI closed on January 2, 2001, as required by the

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FFI asset sale agreement. On January 2, 2001, the FFI asset sale closed pursuant to the FFI asset sale agreement. Consequently, on that date, the condition precedent to the December 19, 2000 plan of liquidation...